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The Rising Risk of Systemic Financial Meltdown
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Arbitrager
Senior |
12-Feb-2008 15:30
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SINGAPORE: Minister Mentor Lee Kuan Yew believed Asia will not go into recession, citing not only strong growth in China and India (no doubt they will be continue to grow, however even analyst cut their growth rate to single digit growth and more imptly is China and India able to creat enough demand to supercede the fallshort of demand from US, Europe and Japan??) , but also the strength of commodity prices boosting growth in Malaysia, Brunei and Indonesia (take note, MM Lee never mention Singapore, as in actual fact, we are a victim of the rising commodity prices, anyone notice that most prices has increase since Jan??. On the home front, Mr Lee said higher food and energy prices, and a widening income gap are cause for concern and must be addressed. (interestly, how are they going to address these problem?? by having more ERP gantries, Higher ERP rates and higher Public Transport costs??) I think we shouldn't be listening too much into what politician says... cos' they have their own political agenda to fulfill.. Do more indepth studies on the economic health of the country. Rem during last election, all the promises made.. any of them materialised? wat i see are higher and higher cost of living yet none of the widening income gap are being address.. some points worth pondering over. |
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jasonfaxingliu
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12-Feb-2008 14:43
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yes indeed we are in the 2 fastest and biggest population countries but the problem is they (China and India) are not a net buyer but net exporter (seller)... so when US is down, they will be somewhat greatly affected the situation can only be save if India and particually China to induce domestic spending to balance up the downside of US consumer spending economy |
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hybridvestor
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12-Feb-2008 13:31
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ET88888, I don't think you read my post probably. If you did, you will realise this article was not written by me, but an article I read from the net (I even provide a link for your access to the source, if you notice) which I find it quite insightful, so decided to share it here. Like I said earlier, to each his own. You can choose not to believe, while others may find it useful. If you find that this article is rubbish, just ignore, while others may want to be cautious about their investment in time to come ...... :) . |
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ET88888
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12-Feb-2008 11:56
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Asian Stocks Gain, Led by BHP and Inpex; Japan's Millea Drops By Chen Shiyin Feb. 12 (Bloomberg) -- Asian stocks advanced, led by BHP Billiton Ltd. after oil and metals prices climbed. BHP gained after copper prices rose to a three-month high. Inpex Holdings Inc., Japan's largest oil and gas explorer, jumped the most in five months after raising its profit forecast. Esprit Holdings Ltd. led Hong Kong retailers higher on speculation a reported increase in tax relief will boost consumer spending in the city. Millea Holdings Inc. led a decline among Japanese insurers on concern credit-losses may widen. ``We still prefer the resources and energy-related sectors because there is a window of opportunity there,'' said Beat Lenherr, who helps oversee about $20 billion as Singapore-based chief global strategist at LGT Capital Management. ``The aftershock of the credit crisis will be felt on the companies' balance sheets, and the insurance industry will obviously be affected.'' The MSCI Asia Pacific Index rose 0.5 percent to 139.93 at 12:37 p.m. in Tokyo, after earlier dropping 0.4 percent. The measure declined 2 percent in the previous two sessions. All Asian benchmarks gained apart from Taiwan. The Nikkei 225 Stock Average gained 0.1 percent to 13,032.25 in Japan, where markets were closed yesterday. Hong Kong's Hang Seng Index surged 1.6 percent, snapping a three-day, 9.7 percent decline. The city's government will cut income tax and boost tax- free allowances in this year's budget, the Hong Kong Economic Times reported, citing sources it didn't identify. Millea and Mitsui Sumitomo Insurance Co., Japan's two biggest insurers, dropped after American International Group Inc.'s auditors said faulty accounting may have understated losses. Sega Sammy, Asics Sega Sammy Holdings Inc. was the biggest decliner on the MSCI Asian index after the amusement center operator forecast a full-year loss. Asics Corp. plunged by the daily 15 percent limit after cutting its profit forecast. U.S. stocks climbed yesterday, led by energy shares. The Standard & Poor's 500 Index added 0.6 percent, recouping part of last week's 4.6 percent decline. AIG fell the most since 1987 as auditors said they found weakness in the insurer's accounting for credit-default swaps. BHP, the world's largest mining company, rose 1.9 percent to A$36.53. Mitsui & Co., Japan's second-biggest trading company, jumped 5.1 percent to 2,180 yen. Crude oil for March delivery climbed 2 percent in New York yesterday to $93.59 a barrel, a one-month high. Futures jumped 5.3 percent in the previous two sessions. Copper futures rose in New York to as much as $3.599 a pound, the highest for a most- active contract since Oct. 22. Rio Tinto Group, the third-biggest mining company, climbed 3.6 percent to A$126.16, snapping a five-day, 5 percent drop. Rio Tinto may say tomorrow second-half profit climbed 9.4 percent, according to the median analyst estimate in a Bloomberg survey. Inpex jumped 6.7 percent to 1.05 million yen, poised for its biggest advance since Sept. 19. The Tokyo-based company predicted net income of 153 billion yen ($1.4 billion) for the year ending March 31, compared with a November forecast of 127 billion yen. |
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ET88888
Member |
12-Feb-2008 11:21
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Hybridvestor, u sound like a prophets of doom. Our MM Lee last night think otherwise. What u see today, is orchestrated. There is a silver lining at the end of the day. Anyway, all losers but who is the winner in your case ? MM Lee says S'pore at centre of world's highest growth region
SINGAPORE: Minister Mentor Lee Kuan Yew believed Asia will not go into recession, citing not only strong growth in China and India, but also the strength of commodity prices boosting growth in Malaysia, Brunei and Indonesia. Speaking to some 1,200 people at the Tanjong Pagar Lunar New Year dinner on Monday night, Mr Lee said Singapore is at the centre of the world's highest growth region, and is in a period of steady growth. Mr Lee is also positive that Singapore can maximise its chances to reach a higher quality of development in the coming five to ten years. "This is quite remarkable, for it will be the first time that when the American economy slows down and reduce imports from Asia, Asia will not go into recession. The reason is the dynamics of the domestic growth momentum in China and in India - two very huge countries. Furthermore, our neighbours are doing well. Singapore is in the centre of the world's highest growth region," he said. While some may be lamenting the financial crisis, Mr Lee said he sees a blessing as property prices have cooled down for the time being. He added that Singapore's Government of Singapore Investment Corporation (GIC) and Temasek have also been able to increase the value of their assets, especially during such downturns. The two companies recently invested some S$22 billion into UBS, Citigroup and Merrill-Lynch. "When the share prices of these banks recover (the) S$22 billion investments, it will be worth S$50 to S$70 billion. But never believe that assets will always go up. There will be downturns. And so we must have these reserves to see us through these troughs. Singapore has got to this level through hard work and thrift. We must continue in this mode," Mr Lee pointed out. On the home front, Mr Lee said higher food and energy prices, and a widening income gap are cause for concern and must be addressed. He also said that while there are massive investments, such as the Marina Barrage, to develop Singapore into a global city, those living in the heartland housing estates will not be left behind. All estates will be upgraded and beautified to ensure all Singaporeans can benefit from the growth, Mr Lee added. - CNA/ac |
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Farmer
Master |
12-Feb-2008 10:49
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Come on, dun feel so dishearten, lighten up a bit lah! I believe the fall of one great power will almost certainly lead to the rise of the same...just take the guide from human history. If vacuum is created somewhere, air will rush to fill it up in a split of a sec. The current financial havoc is largely created by the US, it will take times for it to repair/reconcile but should it become worsen, the east will fight back and dominate eventually. |
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ten4one
Master |
12-Feb-2008 10:25
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To Sum it up : The World Financial Systems are Finished and BEYOND REPAIRS (because The Author didn't offer any alternative solutions) !!!!!!! Just like NATO!!!!!!!!!!!!!!!!!!!!!! Cheers! | |||||||||||||||||||||
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winsontkl
Elite |
11-Feb-2008 21:28
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hybridvestor, very interesting article but a bit long to digest...kudos... more investors should read this before putting their money on the table... |
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Ucrano
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11-Feb-2008 14:17
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Well, what comes up must go down and what goes down must also come up. It's the nature of the law. It's about time the economy heads south. Some see it as a threat. I see it as an opportunity. As always, the world's biggest economy has went through worse situations/problems/viruses before. Each time, they rebounded and grew stronger. It shows how resilient they are. There are many other options to make money apart from stocks and shares. And when one loses, another gains. |
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ten4one
Master |
11-Feb-2008 13:57
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You're damed rite though - to each his own! The result will be known soon (in about 10 days time) when the Leading Banks present their 1st audited A/Cs since the crisis erupted. The only crisis I see is only a slower growth in world economy and huge write-offs by Banks! Cheers! |
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hybridvestor
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11-Feb-2008 11:20
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To each his own. Sit back and watch this crisis unfolds and then come back to check against these 12 steps to see if it tallies .... ;) . |
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ten4one
Master |
11-Feb-2008 10:34
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The world's financial problems cannot be totally resolved. They only could be diverted and counter with newly ' invented' tools or measures to prevent them from 'spreading' like common colds. Just like common colds, people are aware of it and they try not to catch it. Once caught, it could be easily treated unless a new 'virus' surface which would require new 'ways' to deal with it. It just goes on and on with new systems taking over the old without the common people knowing it - it happens all the times. The march of times are all created by men and men solved them as they march on. Cheers! | |||||||||||||||||||||
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hybridvestor
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11-Feb-2008 08:13
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Dear Hulumas, I am not that optimistic. Unless the underlying and the cause of the problem is totally resolved, we shall see this crisis turn from bad to worse in due time. |
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Hulumas
Supreme |
11-Feb-2008 07:03
Yells: "INVEST but not TRADE please!" |
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Dear Hybridvestor, Fortunately, every Government concerned has taken prudent measures offsetting or avoiding suck risks in order to restore still on going globalization economic sustainable growth path, though somehow in a few months before the negative distorted news might have effected to global capital market performance. However, the market will restore confidence soon, the negative impact due to the risks mentioned below will subside and solve within this month. |
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hybridvestor
Member |
11-Feb-2008 02:45
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The Rising Risk of a Systemic Financial Meltdown: The Twelve Steps to Financial Disaster 1. This is the worst housing recession in US history and there is no sign it will bottom out any time soon. At this point it is clear that US home prices will fall between 20% and 30% from their bubbly peak; that would wipe out between $4 trillion and $6 trillion of household wealth. While the subprime meltdown is likely to cause about 2.2 million foreclosures, a 30% fall in home values would imply that over 10 million households would have negative equity in their homes and would have a big incentive to use "jingle mail" (i.e. default, put the home keys in an envelope and send it to their mortgage bank). Moreover, soon enough a few very large home builders will go bankrupt and join the dozens of other small ones that have already gone bankrupt thus leading to another free fall in home builders' stock prices that have irrationally rallied in the last few weeks in spite of a worsening housing recession. 2. Losses for the financial system from the subprime disaster are now estimated to be as high as $250 to $300 billion. But the financial losses will not be only in subprime mortgages and the related RMBS and CDOs. They are now spreading to near prime and prime mortgages as the same reckless lending practices in subprime (no down-payment, no verification of income, jobs and assets (i.e. NINJA or LIAR loans), interest rate only, negative amortization, teaser rates, etc.) were occurring across the entire spectrum of mortgages; about 60% of all mortgage origination since 2005 through 2007 had these reckless and toxic features. So this is a generalized mortgage crisis and meltdown, not just a subprime one. And losses among all sorts of mortgages will sharply increase as home prices fall sharply and the economy spins into a serious recession. Goldman Sachs now estimates total mortgage credit losses of about $400 billion; but the eventual figures could be much larger if home prices fall more than 20%. Also, the RMBS and CDO markets for securitization of mortgages - already dead for subprime and frozen for other mortgages - remain in a severe credit crunch, thus reducing further the ability of banks to originate mortgages. The mortgage credit crunch will become even more severe. Also add to the woes and losses of the financial institutions the meltdown of hundreds of billions of off balance SIVs and conduits; this meltdown and the roll-off of the ABCP market has forced banks to bring back on balance sheet these toxic off balance sheet vehicles adding to the capital and liquidity crunch of the financial institutions and adding to their on balance sheet losses. And because of securitization the securitized toxic waste has been spread from banks to capital markets and their investors in the US and abroad, thus increasing - rather than reducing systemic risk - and making the credit crunch global. 3. The recession will lead - as it is already doing - to a sharp increase in defaults on other forms of unsecured consumer debt: credit cards, auto loans, student loans. There are dozens of millions of subprime credit cards and subprime auto loans in the US. And again defaults in these consumer debt categories will not be limited to subprime borrowers. So add these losses to the financial losses of banks and of other financial institutions (as also these debts were securitized in ABS products), thus leading to a more severe credit crunch. As the Fed loan officers survey suggest the credit crunch is spreading throughout the mortgage market and from mortgages to consumer credit, and from large banks to smaller banks. 4. While there is serious uncertainty about the losses that monolines will undertake on their insurance of RMBS, CDO and other toxic ABS products, it is now clear that such losses are much higher than the $10-15 billion rescue package that regulators are trying to patch up. Some monolines are actually borderline insolvent and none of them deserves at this point a AAA rating regardless of how much realistic recapitalization is provided. Any business that required an AAA rating to stay in business is a business that does not deserve such a rating in the first place. The monolines should be downgraded as no private rescue package - short of an unlikely public bailout - is realistic or feasible given the deep losses of the monolines on their insurance of toxic ABS products. Next, the downgrade of the monolines will lead to another $150 of writedowns on ABS portfolios for financial institutions that have already massive losses. It will also lead to additional losses on their portfolio of muni bonds. The downgrade of the monolines will also lead to large losses - and potential runs - on the money market funds that invested in some of these toxic products. The money market funds that are backed by banks or that bought liquidity protection from banks against the risk of a fall in the NAV may avoid a run but such a rescue will exacerbate the capital and liquidity problems of their underwriters. The monolines' downgrade will then also lead to another sharp drop in US equity markets that are already shaken by the risk of a severe recession and large losses in the financial system. 5. The commercial real estate loan market will soon enter into a meltdown similar to the subprime one. Lending practices in commercial real estate were as reckless as those in residential real estate. The housing crisis will lead - with a short lag - to a bust in non-residential construction as no one will want to build offices, stores, shopping malls/centers in ghost towns. The CMBX index is already pricing a massive increase in credit spreads for non-residential mortgages/loans. And new origination of commercial real estate mortgages is already semi-frozen today; the commercial real estate mortgage market is already seizing up today. 6. It is possible that some large regional or even national bank that is very exposed to mortgages, residential and commercial, will go bankrupt. Thus some big banks may join the 200 plus subprime lenders that have gone bankrupt. This, like in the case of Northern Rock, will lead to depositors' panic and concerns about deposit insurance. The Fed will have to reaffirm the implicit doctrine that some banks are too big to be allowed to fail. But these bank bankruptcies will lead to severe fiscal losses of bank bailout and effective nationalization of the affected institutions. Already Countrywide - an institution that was more likely insolvent than illiquid - has been bailed out with public money via a $55 billion loan from the FHLB system, a semi-public system of funding of mortgage lenders. Banks' bankruptcies will add to an already severe credit crunch. 7. The banks losses on their portfolio of leveraged loans are already large and growing. The ability of financial institutions to syndicate and securitize their leveraged loans - a good chunk of which were issued to finance very risky and reckless LBOs - is now at serious risk. And hundreds of billions of dollars of leveraged loans are now stuck on the balance sheet of financial institutions at values well below par (currently about 90 cents on the dollar but soon much lower). Add to this that many reckless LBOs (as senseless LBOs with debt to earnings ratio of seven or eight had become the norm during the go-go days of the credit bubble) have now been postponed, restructured or cancelled. And add to this problem the fact that some actual large LBOs will end up into bankruptcy as some of these corporations taken private are effectively bankrupt in a recession and given the repricing of risk; convenant-lite and PIK toggles may only postpone - not avoid - such bankruptcies and make them uglier when they do eventually occur. The leveraged loans mess is already leading to a freezing up of the CLO market and to growing losses for financial institutions. 8. Once a severe recession is underway a massive wave of corporate defaults will take place. In a typical year US corporate default rates are about 3.8% (average for 1971-2007); in 2006 and 2007 this figure was a puny 0.6%. And in a typical US recession such default rates surge above 10%. Also during such distressed periods the RGD - or recovery given default - rates are much lower, thus adding to the total losses from a default. Default rates were very low in the last two years because of a slosh of liquidity, easy credit conditions and very low spreads (with junk bond yields being only 260bps above Treasuries until mid June 2007). But now the repricing of risk has been massive: junk bond spreads close to 700bps, iTraxx and CDX indices pricing massive corporate default rates and the junk bond yield issuance market is now semi-frozen. While on average the US and European corporations are in better shape - in terms of profitability and debt burden - than in 2001 there is a large fat tail of corporations with very low profitability and that have piled up a mass of junk bond debt that will soon come to refinancing at much higher spreads. Corporate default rates will surge during the 2008 recession and peak well above 10% based on recent studies. And once defaults are higher and credit spreads higher massive losses will occur among the credit default swaps (CDS) that provided protection against corporate defaults. Estimates of the losses on a notional value of $50 trillion CDS against a bond base of $5 trillion are varied (from $20 billion to $250 billion with a number closer to the latter figure more likely). Losses on CDS do not represent only a transfer of wealth from those who sold protection to those who bought it. If losses are large some of the counterparties who sold protection - possibly large institutions such as monolines, some hedge funds or a large broker dealer - may go bankrupt leading to even greater systemic risk as those who bought protection may face counterparties who cannot pay. 9. The "shadow banking system" (as defined by the PIMCO folks) or more precisely the "shadow financial system" (as it is composed by non-bank financial institutions) will soon get into serious trouble. This shadow financial system is composed of financial institutions that - like banks - borrow short and in liquid forms and lend or invest long in more illiquid assets. This system includes: SIVs, conduits, money market funds, monolines, investment banks, hedge funds and other non-bank financial institutions. All these institutions are subject to market risk, credit risk (given their risky investments) and especially liquidity/rollover risk as their short term liquid liabilities can be rolled off easily while their assets are more long term and illiquid. Unlike banks these non-bank financial institutions don't have direct or indirect access to the central bank's lender of last resort support as they are not depository institutions. Thus, in the case of financial distress and/or illiquidity they may go bankrupt because of both insolvency and/or lack of liquidity and inability to roll over or refinance their short term liabilities. Deepening problems in the economy and in the financial markets and poor risk managements will lead some of these institutions to go belly up: a few large hedge funds, a few money market funds, the entire SIV system and, possibly, one or two large and systemically important broker dealers. Dealing with the distress of this shadow financial system will be very problematic as this system - stressed by credit and liquidity problems - cannot be directly rescued by the central banks in the way that banks can. 10. Stock markets in the US and abroad will start pricing a severe US recession - rather than a mild recession - and a sharp global economic slowdown. The fall in stock markets - after the late January 2008 rally fizzles out - will resume as investors will soon realize that the economic downturn is more severe, that the monolines will not be rescued, that financial losses will mount, and that earnings will sharply drop in a recession not just among financial firms but also non financial ones. A few long equity hedge funds will go belly up in 2008 after the massive losses of many hedge funds in August, November and, again, January 2008. Large margin calls will be triggered for long equity investors and another round of massive equity shorting will take place. Long covering and margin calls will lead to a cascading fall in equity markets in the US and a transmission to global equity markets. US and global equity markets will enter into a persistent bear market as in a typical US recession the S&P500 falls by about 28%. 11. The worsening credit crunch that is affecting most credit markets and credit derivative markets will lead to a dry-up of liquidity in a variety of financial markets, including otherwise very liquid derivatives markets. Another round of credit crunch in interbank markets will ensue triggered by counterparty risk, lack of trust, liquidity premia and credit risk. A variety of interbank rates - TED spreads, BOR-OIS spreads, BOT - Tbill spreads, interbank-policy rate spreads, swap spreads, VIX and other gauges of investors' risk aversion - will massively widen again. Even the easing of the liquidity crunch after massive central banks' actions in December and January will reverse as credit concerns keep interbank spread wide in spite of further injections of liquidity by central banks. 12 A vicious circle of losses, capital reduction, credit contraction, forced liquidation and fire sales of assets at below fundamental prices will ensue leading to a cascading and mounting cycle of losses and further credit contraction. In illiquid market actual market prices are now even lower than the lower fundamental value that they now have given the credit problems in the economy. Market prices include a large illiquidity discount on top of the discount due to the credit and fundamental problems of the underlying assets that are backing the distressed financial assets. Capital losses will lead to margin calls and further reduction of risk taking by a variety of financial institutions that are now forced to mark to market their positions. Such a forced fire sale of assets in illiquid markets will lead to further losses that will further contract credit and trigger further margin calls and disintermediation of credit. The triggering event for the next round of this cascade is the downgrade of the monolines and the ensuing sharp drop in equity markets; both will trigger margin calls and further credit disintermediation. http://209.157.64.200/focus/f-news/1967520/posts |
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