There is one famous quote by someone "ALL that mankind has ever learnt is nothing more than a handful of seeds thrown on the field growing into green forests or gardens."
Thing is these famous institutions where greatest brains r said to work r so fragile, all their doom is caused by a single factor i.e Realty Prices dampening. Where all these people talk abt Risk Management, Hedging, Arbitrage were doing all these days. Disbursing 100% Loans for an asset class, so (where does one see any interest of a buyer in the property). Had the prices gone up he cud sell off n clear the mortgage loan.
Moreover they took these mortgages and made them into instrument that cud be sold amongst investors. And again the left overs of subprime mortgaged were dumped into some naive foreign countries.
So, all their exposure was based on ONE ASSET CLASS, THEY DISBURSED THE LOANS AND AGAIN THRU THEIR OWN ASSET MGMT CO.S DEVISED PRODUCTS TO SELL THESE BOGUS INSTRUMENTS. Offcourse some wil say its easy to curse now after the fallout. But these so called great institutions who advise Investors across the globe, who recommend securities to be bought and sold, technical analysis n all complex stuff appear naked.
Now, wht if the realty price moved up in US. THe buyer wud have made some money, by putting none. By all means they shud hav set a limit to wht extent they will repackage a loan. Its baffling to see the doom in Americas most cherished financial institutes. They ignored some basic rules.
As a gen rule Banks in India disburse loans upto 75-80% for any asset or as loan. Thanks to RBI patronage, these banks r not yet allowed to set shop in India, which they r asking for. Recently RBI again extended or questioned the deadline which was 2009, when RBI was to open n allow foreign banks to operate in India.
