Tuesday 16 September 2008

The Perfect Storm, Part 2?

September 15 would be remembered for a long time due to the collapse of few long standing financial institutions in the US. Lehman Brother, one of the largest investment bank in the world, filed for Chapter 11 bankruptcy protection on that day. At the same time, another investment bank, Merrill Lynch, was taken over by the Bank of America, still at a significant premium, while AIG, one of the largest insurance company in the world would have to raise something like US 70 billion to stay afloat. 

Were all these companies hit by Hurricane Ike?

The answer is a big NO!

There were the casualties of the collapse in the US housing industry, which caused the sub-prime bubble to burst. Lessons learnt? Perhaps, there is limit to everything, including lending to people who could not afford to pay back the loan and rely on the value of the houses kept high due to easy credit.

How far would the effect of the storm in the US financial market would go?

As the saying goes, when the US sneezes, the world would catch the cold. The capital markets around the world went down significantly, having heard the news about the demise of Lehman and acquisition of Merrill Lynch over the weekend. It would be interesting to observe the development today! Some commentators are predicting the worse is not over yet and are guessing who is next to fall?

If the recent sudden increase of fuel and commodity prices could be considered as the Perfect Storm 1, the present development could develop into Perfect Storm part 2. What are the implications to you and me?

First, the development in the US would have contagious effect around the world and at the minimum would affect market confident. This would cause companies and businesses to hold back expansion and new investment.

Second, depending on the reaction from banking and capital market regulators, availability of credit may be affected, although in Malaysia, Bank Negara seems to be comfortable with the present interest rate level and it expects inflation would moderate, going forward.

This is where the expected spending as indicated by the Malaysian government is important to provide some lifeline to businesses and to ensure the economy keeps on growing.

For directors and leaders of business, a clear strategy in managing the challenging economic environment is very critical in ensuring the sustainability of your business. Understanding the risks around the present business climate and ascertaining responses to manage these risks would reduce the downside potentials. At the same time, continue to look for opportunities which may appear, including potential value for money business acquisition.

As history has demonstrated, the mankind has survived various disasters, and those who are well prepared would have higher chance to survive.