Have we touched the bottom?

Have we touched the bottom? or there is worse to come. This is the question which is in every body's mind.In the begning of this whole scenario of recession it was being estimated that emerging economies would escape lightly from recession but as it is a fact now that even develoing economies are caught in the net and i think it would be really tough for them to get out if this. 

As foriegn reserves of countries are not in the form of currency notes or in the form of gold it is in the  form of US Treasury Bills and in the past decade every emerging economy like India,China etc have increased there foriegn reserves drastically specially China which has approx. 1 trillon $ invested in US Treasury and US is facing the worst ever crises in the past 70 years.The whole scenario has undergone a drastic change as before International investor considered US tresary bills to be the safest option but now develoing countries are worried about the safety of there investment. 

Since decades US has been running on the concept of low saving and high consumption it is running huge trade and current account deficit. For fulfilling there needs they are using the savings of rest of the world because of this developing countries like China are worst hit as suddenly the consumption has declined in US and China are the biggest Exorter to US .

Matters could get worse if developing countries loose there faith and start selling US treasury bills as if this happens then value of dollor will decline sharly and so will the value of there investment

IFRS 3 A breif overview

A business combination is bringing toghether of seperate entities into one reporting entity
scope of IFRS 3 does not cover the following

• Combination in which seperate entities are brought together to form a joint venture
• Combination involving entities under common control
• Combination involving two or more mutual entities
• Combinations in which entities are brought toghether by a contract without any ownership intrest

As in our AS-14 there are two methods of accounting i.e. purchase method , pooling of intrest method but IFRS 3 recognises only one method that is purchase method if we compare both of them the basic diffrences are

1. Method of accounting

IFRS 3-: In this purchase method is used for accounting of all business combinations ,Acquirer is identified for all business combinations and cost of business combination is measured

AS-14-: two methods are prescribed by the standard i.e. pooling of intrest method and purchase method.In purchase method all the identifible assets and liabilities of the acquiree are accounted for at there book value or fair market value

As per IFRS the cost of business combination will be the

• Fair value at the date of exchange of assets given
• F.V. of liabilities incurred
• F.V. of equity instruments issued by the acquirer
• Cost directly attributable to business combination

the standard describes detailed information about the costs which will be included and costs which are not to be considered however no such guidence is available in AS-14

Role of auditors

I want to make a refrence to the audit report of lehman brothers which was audited by E&Y Newyork I am quoting the exact statement made in the audit report"Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances". Lehman Brothers filed quarterly accounts with the SEC for the period of May 31 2008 and on July 10 2008 and still then there was no questions about its financial health Despite the deepening financial crisis, auditors did not express any reservations about the value of investments or any scenarios under which company may be unable to honour its obligations. Just two months later, Lehman collapsed.
Just go through the audit report of lehman brothers and u will find that lehman brothers posted a wooping net income of $4192 millions which was 5% more then the previos year The auditors provided variety of services like risk managment,assesing the efficiency of internal controls.By providing these many services auditors were like a quasi managment and what i think they were not able to objectively evaluate the outcome of the transactions that they themself have helped to create
During 2007, Ernst & Young collected fees of $31,307,000 from Lehman Brothers, compared to $29,451,000 for 2006. The fees for 2005 and 2004 were $25,324,000 and $24,748,000 respectively. Over the last four years, Ernst & Young collected over $110m in fees, of which nearly $14m is for advice on tax and other consultancy services.The scale of fees also raises questions about the independence of the auditors
Already lot of questions are being raised regarding mark to market accounting concept and the bill passed by US goverment has given power to SEC to suspend this concept
I think audit of banks and financial institutions should be done jointly by regulators and audit firms so that a greater transparecy can be ensured and regulators would also be in a better position to address the issues

Faliure of regulatory policies

I think the root of the fall of the 4th largest IB is the ignorance of parallel banking system which existed in US which includes lehman brothers all the regulations kept focusing on the traditional banking systems which allowed devlopment of these unregulated parallel system.These system financed huge amounts to real estate and consumer borrowing without any deposit base it relied on rollover funding from money markets .These loans were converted into financial intruments and traded among the financial firms and when prices started falling they incured huge losses and there capital wiped out and all the rollover funding got freezed up The basic loop holes in the regulatory and accounting policies were

1. As in case of traditional banks there lending was based on custumer deposits and deposits were resonably insured so it provided a kind of shock absorber to them but no such policy exist for parallel banking system
2. Lesser control of the fed reserve over such banking system induced them to engage in risker lending
3. Fed has provided for all the banks a mark to market accounting but most of them are sheilded from it as most of there loans are held by them and are priced at mark to realization basis but if they are converted into instruments there market value tend to be lower because of market conditions
4. Lot of liquidity injections are provided by the fedral reserve to the banks but no such policy exixt for the parallel banking system

so lot of protection is provided to the banks but no such protection exist for parallel banking system so that is what i said that policy need to be reworked for a better financial system

"Hunters getting hunted"

The global crises has left investors feeling drained and devoid of investment options. the phrase "too big to fail"has became a history. the whole scenario has changed at the wall street. The country with the biggest financial system has been under serious ecnomic crises. Hunters are getting hunted at the wall street it all started with the sub prime crises and recently the fall of the 4th largest investment banker added to the panic. I dont remember when I saw my portfolio last gone are the days when we use to watch CNBC,NDTV profit and all those business news channels regularly while taking our breakfast and lunch and saw our share prices soaring up and felt proud of our investment decissions.
US goverment $700 billion bail out fund to save the economy would mean taking over several global investment banks directly or indirectly US would become the largest owner of sovereign wealth fund(SWF) in the world.What I think that this crises is a result of faliure of regulatory policies to guard against exessive risk taking by the financial system.The crises have put a question on the role of credit rating agencies and regulatory policy makers.It has urged for a greater transparecy .The whole arcitecture has to be rebuild so that the economy can resist the load of such crises.There is a need to rethink about the accounting rules ,regulations and transparency