Why are US Banks Failing??
Well, Hi Friends!
You all must be pretty acquainted with how the Wall Street fell down this week! Three out of the four pillars of Wall Street are no more.....Lehman Brothers, Morgan Stanly, Merrill Lynch all have been doomed and the still standing tall Goldman Sachs is in no good shape either. But what has triggered all this crisis and why is it specifically aiming American Banks???
I have one reasonable proposition which explains the root cause. You see that US has a rule which says that If a Bank is investing in your business and supporting you with a loan regarding your property, business, capital etc., It owns the full responsibility for it. That means, lets say, You as an individual, wants to start a company and go to a US Bank and give your proposal and ask for a loan. The bank studies your idea and the market situation and the property rates and stuff like that and finally decides to accept your request. Suppose you take an approved loan of $10 Million.
Now, After running your business successful for say 2 years, you see that the property rates have fallen drastically and you are facing grave loss in your business due to global economic crisis. You calculate that your assets now stand at total of just say $2 Million. Now, You obviously can't run the business and are doomed. You go to the Bank with your keys and have grant them the responsibility saying, "I don't want to continue the business and am forfeiting any control, now its your responsibility!!". Now the bank is in a fix.
The customer, gets free from any responsibility after facing the loss as is and getting no more hassles. But the bank, according to law, must have given the loan with proper consideration and responsibility but now it cannot recover its loan value as the net value of the business (including property rates, assets etc.) itself have reduced.... So, the banks actually are facing this crisis, popularly called Sub-Prime Crisis and have substantially, eroded their capital and assets and are thus getting Bankrupt due to an over burgeoning effect vicious cycle of Global Economic Crisis!
Its nice of US to bail them out by giving whopping amounts of Money, but till when???? Well, as a matter of fact, you may be having a question, that why are Indian Banks immune to this! It actually has two reasons:-
1. Indian PSU Banks have no whatsoever relationship with any of the US Banks and thus are completely autonomous.
2. The other reason is the non-existence of any such, "Bank's Responsibility" rule in India :)
Indian Banks as a matter of fact, will keep asking you for the remaining $8 Million for your entire life and you would have to sell/mortgage your other properties against it, thereby securing the banks. But here, you don't have any security for yourself; This is just a dichotomy of the Coin which we need to handle!
So, Enough Economics, Bye for now :)
