There’s a grand sale on Dalal St, go buy

Thursday, March 20, 2008 | | |

Normally, in any market, prices and demand share an inverse relationship — when prices are down, demand increases and vice versa. But, the equity market seems to be an exception. Here, customers behave in the opposite manner — they crowd the market place when it is expensive and desert it totally when the prices are down and bargains are available.

More specifically, there is today a sale on Dalal Street, but very few people seem interested — in spite of the fact that such sales do not come very often. The last big one, called the Dotcom Bust Sale, was way back in 2001.
This time it is the Subprime Sale.

What brought about this sale? Well, mortgage companies abroad fell over each other to extend housing loans to questionable borrowers. Not content with this one indiscretion, they went a step ahead and sliced these iffy outstanding loans into small parts to be sold to reckless investment banks, hedge funds, FIIs and a minority of unsuspecting but deep-pocket private investors. In course of time, the inevitable happened. The questionable borrowers lived up to their reputation by defaulting, thereby setting off a domino effect. The housing finance companies couldn’t recover their loans and in turn could not keep up their obligations to the hedge fund guys. Everyone lost and we were deep into what has come to be known as the subprime crisis. Even now, no one knows just how deep the problem is — as per current estimates, the default rates could be upwards of $300 billion. However, as we go along, these numbers may well change.

Yes, there will be collateral damage in terms of tighter fund flows, more expensive credit and a significantly lower participation by FIIs in our stock market.