Why Lehman & Merrill Fell

IT all began with the sub-prime crisis.

If you lost your money in the market crash of January 2008, here's the route to your loss, in chronological order.
2001-2005: House prices in the US begin to rise rapidly. Banks lend aggressively and create a subprime industry.Sub-prime lending refers to lending (at slightly higher interest rates) to people who may not be eligible for a loan under normal circumstances. Maybe they don't have a regular job or income, or have defaulted in the past.Banks traditionally did not lend to such people due to high risk of default. But since these loans were mortgaged against property and property prices were rising continuously, banks started doing so. If customers defaulted, they good sell the mortgaged property.2005: The booming housing market halted abruptly in many parts of the US.2006: Prices are flat, home sales fall.February 2007: Sub-prime industry collapses in the US; more than 25 sub-prime lenders declare bankruptcy, announce significant losses, or put themselves up for sale.While they were lending, banks did not factor in the possibility of a fall in property prices. When the Federal Bank (the US equivalent of RBI) started increasing interest rates, the sub-prime borrowers started defaulting and banks started selling off the mortgaged properties. As more and more properties came into the market for selling, the property prices fell.August 2007: Many leading mortgage lenders in the US filed for bankruptcyMarch 2008: Bear Sterns falls.September 2008: Lehman Brothers file for bankruptcy. Merrill Lynch sells off to Bank of America.Between 2001 and 2006, the US financial markets had developed a new product - a bond securitised against the mortgages.In simple terms it means that the mortgage banks borrowed money against the mortgages on the condition that they would repay to lenders as soon as they recovered their mortgages. The lenders in this case were financial institutions (like Bear Sterns, Lehman and Merrill Lynch) who in turn sold retail bonds to individuals.Sadly, the repayment never happened. And institutions like Bear Sterns, Lehman, Merrill Lynch and AIG were the casualties. Since the mortgages were not honoured, the banks could not repay these financial institutions who in turn could not repay retail investors.

The Stock Market - FAQ

There have been some dramatic events happening in the stock markets recently. The papers are full of news like “Sensex sees largest fall” and similar things that don’t make sense. And so, I’ve applied my higher powers of reasoning to figure out just what is going on.
For your benefit, here’s a short FAQ on the stock market.
Q: What is this SENSEX?
A: SENSEX is short for SENSeless EXperience. It summarizes what that stock brokers and investors feel when they are trading. Trading in the stock market is like putting a rabbit on a roller coaster. It just goes round and round and upside down, and the rabbit has no idea whatsoever of just what the hell is happening. But that doesn’t stop the rabbit from enjoying the whole experience.
Q: OK, then why is this SENSEX falling?
A: This is really a huge cover up by the government. If you ask the regular media, they’ll tell you some weird reasons like the “sub-prime crisis” or “credit market squeeze” or some random thing like that, but let me tell you, all that stuff is not true. The real reason the SENSEX is falling is something else. It’s falling because of an ancient Egyptian mummy curse.
That’s right folks, you heard it here first. The Ancient Mummies were not very big fans of the stock markets. We know this because they built pyramids, and as everyone knows, you can’t trade in a pyramid scheme. It’s illegal. Anyway, so they cursed all the stock markets, and here’s the actual curse: (Translated)
A thousand moons from now, beyond hell’s stairs,
The world will be ruled by the bulls and the bears!
By the power of the sun, I put upon them this curse,
May their stupid stock market one day go in reverse!

And that’s the reason the stock markets are falling.
Q: Is that a bad thing? Does this mean there is a recession? All the stock markets worldwide are falling!
No, not all the markets are falling, only the ones in the Northern Hemisphere.
Everyone knows that stock market movements are cyclical - They go up and down. Much like the seasons - When it’s summer in the Northern Hemisphere, it’s actually winter in the Southern Hemisphere. It’s the same with the stock markets. The Northern Hemisphere is experiencing a recession, but the Southern Hemisphere is all booming. Soon, the boom will return to the Northern Hemisphere (because of the earth’s revolution), and everything will be fine once again.

Q:But what about till then? Am I going to get laid off?
A:Yes, you’re going to get laid off. Because you’re reading this blog instead of working