The below is extracted from my email conversation with my friend, it is about his comment related to the recent world recession. Yes, his feedback has surprised me and I wish to publish here and to share it with you all.
As far as the financial tsunami and credit crunch are concerned it sounds very complicated. It has all started quite a long time ago basically and most importantly from the rapid uprisings and subsequent rapid collapse of real estate markets in the United States:
<<1>> The real estate markets in the United States had NEVER significantly fallen in the last 2-3 decades which had made everybody believed this MYTH and were putting monies in the real estate markets which they thought were COMPLETELY safe and profitable. To worsen the matter all buyers could easily get ONE HUNDRED PERCENT mortgage of the properties they would purchase at any price they were paying. Unlike many places in the world the mortgagees DID NOT have to reveal and prove their qualifications, careers, incomes and ability for repayments in order to get the loans which were called the SUBPRIME loans. When the myth vanished and the reality prevailed the real estate markets collapsed, some of the properties are now worth as low as 10 percent of their prices at the peak. Ironically the mortgagees are NOT required to take any responsibility in repayments of the full loans. All they need to do is to give back their properties to the mortgagors, usually the banks and other financial institutions. This process is called FORECLOSURES.
<<2>> In these few years there was a trend of “SECURITIZATION”. What did it mean? Well, all loans (including above) plus debts to be SECURITIZED into package of SECURITIES (stocks) and BONDS for sale to investors, no matter big or small.
<<3>> It’s not an end. The banks (mostly the investment banks like Lehman Brothers etc) and other financial institutions issued BONDS (just like IOUs – the issuers as borrowers and the investors as lenders) by using the properties mortgaged in above 1 and the securities in above 2 as BACK-UP (categorically called Assets Backed Papers).
A lot of investors including banks, insurance companies and individuals etc had put their monies in above and sustained/suffered big loss. The value of their PAPERS they are holding is evaporating, if not totally lost which in some cases were worth ZERO, i.e. total loss. The consequences are affecting globally. Warren Buffet, for example, is said to have lost US$ 10 billion personally.
All above have will result:
(1) Because of big monetary loss globally there is NOT sufficient liquidity (cash) supply, which will hamper all commercial activities and investments. Even people (including banks and wealthy parties) have monies they will hesitate to lend to anybody feeling the borrowers have no ability to repay. It is called CREDIT CRUNCH;
(2) Global economics are so bad that one way or other, people have less money to spend; demand of everything is less; cutting jobs make more people jobless. People will save more money to prevent and face the uncertainty and unexpected eventuality.
(3) Technically if the GDP grows negatively for consecutive 2 quarters (6 months) the recession starts. For instance, Singapore’s last 2 quarters GDP have grown negatively. Technically Singapore has entered the ERA of RECESSION.
During the last GREAT DEPRESSION (very much worsen than RECESSION) of United States in the middle twenties of last century more than half of the working force was JOBLESS.
As far as the financial tsunami and credit crunch are concerned it sounds very complicated. It has all started quite a long time ago basically and most importantly from the rapid uprisings and subsequent rapid collapse of real estate markets in the United States:
<<1>> The real estate markets in the United States had NEVER significantly fallen in the last 2-3 decades which had made everybody believed this MYTH and were putting monies in the real estate markets which they thought were COMPLETELY safe and profitable. To worsen the matter all buyers could easily get ONE HUNDRED PERCENT mortgage of the properties they would purchase at any price they were paying. Unlike many places in the world the mortgagees DID NOT have to reveal and prove their qualifications, careers, incomes and ability for repayments in order to get the loans which were called the SUBPRIME loans. When the myth vanished and the reality prevailed the real estate markets collapsed, some of the properties are now worth as low as 10 percent of their prices at the peak. Ironically the mortgagees are NOT required to take any responsibility in repayments of the full loans. All they need to do is to give back their properties to the mortgagors, usually the banks and other financial institutions. This process is called FORECLOSURES.
<<2>> In these few years there was a trend of “SECURITIZATION”. What did it mean? Well, all loans (including above) plus debts to be SECURITIZED into package of SECURITIES (stocks) and BONDS for sale to investors, no matter big or small.
<<3>> It’s not an end. The banks (mostly the investment banks like Lehman Brothers etc) and other financial institutions issued BONDS (just like IOUs – the issuers as borrowers and the investors as lenders) by using the properties mortgaged in above 1 and the securities in above 2 as BACK-UP (categorically called Assets Backed Papers).
A lot of investors including banks, insurance companies and individuals etc had put their monies in above and sustained/suffered big loss. The value of their PAPERS they are holding is evaporating, if not totally lost which in some cases were worth ZERO, i.e. total loss. The consequences are affecting globally. Warren Buffet, for example, is said to have lost US$ 10 billion personally.
All above have will result:
(1) Because of big monetary loss globally there is NOT sufficient liquidity (cash) supply, which will hamper all commercial activities and investments. Even people (including banks and wealthy parties) have monies they will hesitate to lend to anybody feeling the borrowers have no ability to repay. It is called CREDIT CRUNCH;
(2) Global economics are so bad that one way or other, people have less money to spend; demand of everything is less; cutting jobs make more people jobless. People will save more money to prevent and face the uncertainty and unexpected eventuality.
(3) Technically if the GDP grows negatively for consecutive 2 quarters (6 months) the recession starts. For instance, Singapore’s last 2 quarters GDP have grown negatively. Technically Singapore has entered the ERA of RECESSION.
During the last GREAT DEPRESSION (very much worsen than RECESSION) of United States in the middle twenties of last century more than half of the working force was JOBLESS.
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