Steven C.M. Wong

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Steven C.M. Wong stevencmwong_at_gmail.com
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Meditation
Deuteronomy 810-12, 18 10 When you have eaten
your fill, be sure to praise the Lord your God
for the good land he has given you. 11 But that
is the time to be careful! Beware that in your
plenty you do not forget the Lord your God and
disobey his commands, regulations, and decrees
that I am giving you today. 12 For when you
have become full and prosperous and have built
fine homes to live in, 13 and when your flocks
and herds have become very large and your silver
and gold have multiplied along with everything
else, be careful! 18 Remember the Lord your
God. He is the one who gives you power to be
successful, in order to fulfil the covenant he
confirmed to your ancestors with an oath. - NLT
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Outline

• Summary
• How does the Global Financial Crisis affect me?
• What exactly is the Global Financial Crisis?
• Why and how did it start?
• Where are we now and likely to head?

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Summary Takeaway

• This global financial crisis GFC is an
  extremely serious event. It impacts virtually
  everyone, though to different degrees.
• The GFC has five components (1) large drops in
  asset values, capital and wealth (2) failure of
  financial institutions (3) Inability/unwillingnes
  s of financial institutions to lend (4) sharp
  appreciation of safe haven currencies and (5)
  contraction in demand for goods and services
• The full extent of the GFC has not been
  uncovered. The worst is far from over if
  governments cannot or do not act. We will have to
  live with high risks and volatile swings at least
  for the next year.

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Summary Takeaway

• Governments have so far managed to tackle the
  most urgent problems -- financial institution
  failures, dollar financing and short-term
  financing. Will they/can they continue to prevail
  over markets especially in the longer-term?
• They face many problems and have not addressed
  most of them. The most pressing problem is how to
  continue to grow (or not fall into deep
  recession) without adding debt and worsening
  financing imbalances.
• Whole countries (such as Iceland, Pakistan,
  Hungary) have been incapacitated but more are on
  the borderline. If economic conditions
  deteriorate, the chances are that the IMF will
  have its hands full.

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Summary Takeaway

• Malaysia is a small trade-dependent economy. The
  probability that it can escape unscathed from the
  GFC is very small.
• Demand and output growth is likely to slow and
  decline
• Open unemployment may rise only marginally but
  employment demand is likely to be low/negative.
• Interest rates of medium to long-term tenures are
  rising
• Bank loans for businesses and corporate deals may
  be more difficult to secure

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Summary Takeaway

• Investment returns are likely to remain uncertain
  and volatile in the year ahead
• Hard currencies will be in great demand
• Greater social stratification and tensions may
  occur
• More political demands will be made for income
  redistribution

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How does the global financial crisis affect me?
A significant financial crisis has been allowed
to morph into a full-fledged global panic. Its a
very dangerous situation. Kenneth Rogoff,
former IMF chief economist Spectre of deflation
lurks as global demand drops New York Times, 1
Nov 2008 Were entering a vicious circle where
economies are spinning down, financial markets
are spinning lower, and policy makers in my view
- and thats my biggest fear - have lost control
of whats going on in the financial markets.
Nouriel Roubini, Ex-US Treasury advisor,29 Oct
2008
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How does the global financial crisis affect me?

• Being an active responsible citizen
• Counselling those affected
• Reaching out to the unsaved
• Interceding for the country
• Planning church growth
• Giving to missions
• Offering encouragement and support to others
• Discerning Gods will and purposes

• Own a bank account, credit card or bank loan
• Attend a college
• Looking for a job
• Changing a job
• Opening a business
• Expanding a business
• Buying a house
• Starting a family
• Expanding a family
• Investing for the future
• Living out retirement years

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What exactly is the global financial crisis?
The global financial crisis is not one but at
least five distinct and reinforcing components ...
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What exactly is the global financial crisis?
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What exactly is the global financial crisis?
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What exactly is the global financial crisis?
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What exactly is the global financial crisis?
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What exactly is the global financial crisis?
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What exactly is the global financial crisis?
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What exactly is the global financial crisis?
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What exactly is the global financial crisis?
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What exactly is the global financial crisis?
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What exactly is the global financial crisis?
A GFC is one that destroys not just savings and
investment, but also the economy, social
relationships and, often, whole nations. A GFC
both causes and is caused by a crisis of
confidence in people, institutions and practices.
There is no longer faith or trust in ones words,
agreements, legal contracts and so forth. A GFC
is caused by people forgetting the Deuteronomy
88-18 injunction!
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Why and how did it start?

• Accounting irregularities in 2003 at Fannie Mae
  and Freddie Mac highlighted the need for their
  regulation. In order to avoid losing their
  privileges, both sought to win favour with
  Congress by committing to finance affordable
  (i.e. subprime housing). They aggressively bought
  Alt-A and subprime mortgages.
• 2003 The Bush administration (including Alan
  Greenspan) recommends creating new federal agency
  to supervise Fannie Mae and Freddie Mac but
  changes were blocked by Congress. (All
  Republicans voted for regulation and all
  Democrats against.)
• 2004 - The US Department of Housing and Urban
  Development not only loosened regulations but
  even increased affordable housing targets for
  Fannie Mae and Freddie Mac.

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Why and how did it start?

• The competitors to Fannie Mae and Freddie Mac
  for housing mortgage assets were private
  financiers. Housing mortgages were pooled and
  packaged by the investment banks and sold for
  substantial fees and commissions. Apart from MBS,
  products packaged and sold in the US and
  elsewhere were collateralised debt obligations
  (CDO). It is now clear that these were
  incorrectly priced and not well understood by
  investors.
• Oct 2004, Securities Exchange Commission
  suspended net capital rule for Goldman Sachs,
  Merrill Lynch, Lehman Brothers, Bear Stearns and
  Morgan Stanley. They could now increase debt up
  to 40 times equity!

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Why and how did it start?

• Interest rates began moving up from 2006 while
  house prices fell. By 2007, defaults on mortgages
  had increased sharply 1.3m properties were
  foreclosed.
• As mortgage defaults increased and housing prices
  fell, the fair value of CDOs became increasingly
  unclear. Secondary market trades disappeared and
  banks, investment firms, institutional investors
  and others were required to mark down the value
  of their portfolios.
• 17 March Bear Stearns was sold to JP Morgan
  Chase with the US Federal Reserve providing
  US30b of special financing to take up its toxic
  assets.

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Why and how did it start?

• 1 July Countrywide Financial Corp, a large
  mortgage issuer of ARMs, was acquired by Bank of
  America for US27b.
• 8 September Fannie Mae and Freddie Mac were
  taken over by the Federal government. The latter
  provided for US200b in financing although as
  GSEs it is theoretically unlimited.
• 15 September Lehman Brothers filed for
  bankruptcy protection after the US government
  offered no assistance or protection
• 17 September - As a result of AIGs credit
  downgrading, the company was required to give
  more collateral to its credit default swap
  counter-parties. It could not do so and sought
  government assistance. The US Fed Reserve
  provided US85b in loans in return for an 80
  equity stake in AIG.

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Why and how did it start?

• 25 September US authorities seized Washington
  Mutual Savings Bank and placed it under
  receivership owing to a 10-day bank run that saw
  US10b withdrawn.
• 29 September Emergency Economic Stabilisation
  Act defeated 228-205 in Congress. Dow Jones
  plummets 777 points.
• 3 October US President George W Bush signed the
  US700b Troubled Asset Relief Program (TARP) into
  law.
• October First two weeks, DJIA fell by the most
  in its history. Financial contagion spread to
  Europe and counter-measures were quickly
  announced.

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Where are we now and likely to head?

• Governments have wrestled with their failing
  economies over Sept Oct 2008 and have managed
  to address the most urgent and short-term
  problems.
• Large bank failures have stopped for the time
  being.
• Inter-bank, money and commercial paper markets
  and loosening as evidenced by overnight LIBOR
  rates
• Bank borrowing from the Fed discount window has
  eased although still amounts borrowed are still
  high
• Equity markets have bounced off near-term lows
• US dollar swap lines established with 14 central
  banks
• Can governments prevail? Is the worst over? In
  my opinion, Unlikely. Fundamental issues have
  not been addressed. Risks are still very high.
  Markets are very volatile.

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Where are we now and likely to head?

• US public debt is now US10.5t and rising. If
  unfunded liabilities are included (including
  those of Fannie Mae and Freddie Mac) this would
  rise to more than US60t.
• There is still an estimated US30-40t of CDS
  outstanding. In the event of sovereign/corporate
  bond defaults, this is very likely to bring down
  even more financial institutions.
• They have not addressed larger issues such as how
  to reduce national indebtedness (esp. US) while
  maintaining economic growth

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Where are we now and likely to head?

• For this, it is imperative that banks restart
  longer-term lending at easier rates
• The ongoing decline of property markets has still
  to be managed
• The huge global savings imbalances have to be
  redressed and confidence in key currencies (US)
  maintained.
• Faith has to be restored in the international
  monetary system

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Where are we now and likely to head?

• For Malaysia
• Demand will be sluggish and/or decline
• Prices will stagnate and may decline (deflation)
• Open unemployment may not rise much but good jobs
  will be harder to find
• Interest rates will (eventually) have to go up
• Bank loans for business and corporate deals will
  be more difficult to secure
• Hard currencies will be in great demand
• Investment returns will most be likely lacklustre
  
• Greater social tensions may occur
• More political demands for income redistribution

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Notes
Freddie Mac and Fannie Mae buy mortgages from
lending institutions and then either hold them in
investment portfolios or resell them as
mortgage-backed securities to investors. The two
companies play a vital role in providing
financing for the housing markets. ltBackgt Alt-A
mortgages This is a class of mortgages that are
considered below prime but above subprime.
Borrowers have clean credit records but have
inadequate documentary proof of income.
Loan-to-value and debt-to-income are often higher
than standard mortgages. ltBackgt Adjustable Rate
Mortgages Mortgages whose interest rate is fixed
for a set number of years and then floats for the
balance of the tenure. ltBackgt
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Notes
CDO Collateralized Debt Obligations, for e.g.
ABS CDO, which consists of a pool of different
ABS bonds. The payments to the holders of these
trust certificates are derived from the cash
flows of the ABS bonds ltBackgt - Cash CDO Made
up of the standard debt obligations -
Synthetic CDO - A synthesized portfolio of
CDO/Bonds/ABS using Total Returns Swaps and
Credit Default Swaps CDS Credit Default Swaps
are privately negotiated contracts that require
one party to pay another in the event a third
party cannot pay its obligations. It is, in
effect, insurance taken out for non-payment of a
debt by a third party. ltBackgt