The wall is cracking, which side are you on?

The wall is cracking. I am not talking about Berlin Wall (that would be nostalgic) though, and I am not talking about Rahul Dravid either. I am referring to the famous Wall Street (Dalal street equivalent of USA). A 158 year old company files chapter 11 bankruptcy in USA. Another company Merrill Lynch merges with Bank of America in a hurry. AIG insurance major asks for help and the US Federal Reserve bails it out. Henry Paulson thinks the world is seeing the worst economy since 1929. All these are a series of unfortunate events happened in the span of 3 weeks. All these companies are dream companies for many B school students.

Lehman Brothers has filed a chapter 11 bankruptcy and left the whole world in despair. Federal Reserve has bailed out almost all the bankrupt companies (Bear Sterns, Freddie Mac, Fannie Mae, and AIG) this year but, will not bail Lehman out. I cannot figure out why. It has definitely sent a shiver down my spine. I am not sure what the heck is happening to USA anymore. If it is 1989 I would not worry about it. But its 2008 and we live in a flat world.

All the major countries are plugged in and they feel the ripple affect. It could be a Tsunami too -1200 employees in Mumbai’s Lehman’s office are stranded. They were asked to leave by the end of September. Indian head hunters are already scouting for them and might hire them at a bargain (at least 30% lower than what they get).

The employees are hoping that either Wipro or Barclay’s will buy them out. Lehman’s employees who are famous for their expensive lifestyle are suddenly jobless.Most Indian IT companies came out and said that the impact of this crisis is minimal. HCL which derives 28% of its revenues from financial services says this crisis will not affect Indian IT.

Their logic, move away from services and sign more fixed price costs or reduce the cost using pricing. Other IT majors has issued same statements.Indian IT industry has an annual exposure of 700 crores (approximate) to Lehman Brothers. A total of 14 Indian IT firms provide services to Lehman including TCS, Wipro and Satyam provide their services. Lehman has also stake in few IT companies. Satyam has fired 4500 employees. Same kind of news is heard from Wipro and other IT companies. The hiring is slowing down. The first two quarters has seen a hiring decline of 20% in BPO sector, compared to same time last year.

It is rumored that ICICI Bank has significant exposure to US financial market. It has $81 mn of Lehman Brothers Senior bonds. Lehman Brothers has invested close to 2000 crores in Indian firms which was wiped out. It has invested in more than 10 companies and has to off-load its entire stake. This is a loss of 2000 crore in market value.

However, all hope is not lost. China has cash to burn and will fuel the world economy. India will chip in too, but it has to be extra cautious and diversify its interests. India should look at India itself and the eastern world to ship its products and services.

There are few things to take away from this:

1. The real estate prices are not real so far. Now they will get real. Even the rents will get real.
2. People will re-think the way they live. They will re-think everything. From the EMI they are paying to the iPhone they just bought recently. ‘Live below your means‘ and ‘save for the rainy day‘ are the two slogans you will hear for at least 2 years from now.
3. Who moved my Paneer: This is one more thing. Employees who stalled their careers without upgrading themselves will say this. Now is the time to invest in you.

The real exposure of the whole industry is yet not clear. So it would be too soon to judge the impact on Indian industry. Only time will tell, what the real impact will be.PS: Get that resume` of yours ready, will ya?