Reform of the Global Financial System

31 January 2009

Speech by Dr Tony Tan Keng Yam, Deputy Chairman and Executive Director, Government of Singapore Investment Corporation (GIC), on "Scenarios for the Future of the Global Financial System" at the World Economic Forum, Davos, 30 January 2009, 8:30am – 10:00am

In the wake of the huge economic and financial damage caused by the current economic and financial crisis, global policy makers face enormous challenges to formulate and implement fundamental and radical measures to stabilise the world economy and stave off a potentially disastrous economic collapse and protracted global stagnation. Central to the efforts to ensure sustained financial stability will be the need to design and implement a radical overhaul of the existing global financial system and its regulatory architecture.

With policy makers currently focused on containing the financial crisis and engineering an economic recovery, the reform of the global financial architecture itself and its regulatory infrastructure is still in an initial and very fluid state. Nevertheless at an early stage, the efforts of the US, at the epicentre of the current crisis, will set the pace for the reform of the global financial system. The rest of the world, including key partners in Europe and Asia, will also have to participate in restructuring the national and global financial regulatory architecture.

Major central banks will be deeply involved in both designing and managing the new regulatory regimes. Financial stability will likely become a distinctly more important mission for global central banks, together with their traditional primary mandates of maintaining price stability and promoting economic growth.

Hitherto, the shaping of the global financial regulatory architecture has largely been the province of governments, central banks and financial institutions including international and investment banks. However, given the involvement of financial institutions in the current crisis, global institutional investors (like the GIC) – with their potentially significant role in helping to stabilise the current crisis by taking part in the recapitalisation of key financial institutions as well as by providing capital in the post-crisis financial system – will become important players.

Global institutional investors and SWFs should therefore contribute constructive inputs to the design of the new regulatory system and its effective functioning to help guard against the danger of financial protectionism.

Directions for the regulatory architecture and the new emphasis on financial stability

Some commentators have speculated that US regulatory changes are likely to move in a direction more in line with Europe’s more conservative, relationship-based universal banking model, and less encouraging of excessive leverage and financial innovation.

Another possible scenario for the future financial landscape could be one more reminiscent of the Glass-Steagall era. This could be characterised by a tightly regulated, government guaranteed core of commercial banks focused on traditional banking, as well as a periphery of relatively less regulated non-banks, including private equity funds and hedge funds. While investment banks could belong to the non-core banking sector, they would be more tightly supervised than in recent history.

In general, financial institutions would likely be allowed much lower leverage ratios than in the past few years.

The major trends of deregulation, dis-intermediation, and derivative-led securitization that have marked financial sector development over the last two decades are also likely to be reversed, slowed down, or modified severely.

Importantly, following the huge output, employment and fiscal losses due to the global financial crisis, and because of their pivotal importance in stabilising financial crises, the US Fed and other major central banks will play leading roles in both designing and managing the new regulatory regimes. Financial stability will likely become a distinctly more important and active mission for global central banks, together with their traditional primary mandates of price stability.

The current crisis has vividly demonstrated the globalized nature of the current financial system and stability issues. Many key financial institutions are globally interconnected, very large and highly complex organisations. To be truly effective, the reform of the current regulatory system will need to be international in nature. How financial regulatory policies can be co-ordinated on a global level, especially for the non-bank sector, has not been thought through in much depth yet. This is likely to be a complicated, controversial and protracted process. Existing institutions, especially the Financial Stability Forum (FSF), but also the International Monetary Fund (IMF) and perhaps the Bank of International Settlements and Basel Committee would need to be strengthened and made more globally representative to manage international financial stability. They would also be important in leading and shaping changes to the new international financial regulatory landscape.

Greater Government Intervention

Over the near term, stabilising the financial crisis is likely to require extensive government intervention in the financial sector and economy. Governments in the US, UK and parts of Europe have injected capital into financial institutions to stabilise the financial system and to kick-start credit creation. Public recapitalisation of banks and financial institutions may have to be extended to a much greater degree before sustained economic recovery is possible. Nationalisation and equity dilution are thus key near term risks for global investors with respect to their holdings in the financial sector.

Governments and central banks are likely to end up taking over and owning large swathes of assets from distressed holders as part of the de-leveraging process.

A significant section of these assets may be good quality but undervalued due to the inability of de-leveraging financial institutions to continue to hold them.

There may also be government purchases of other strategically important industries to prevent them from failing and exacerbating the economic downturn, although the degree of intervention by government outside of the financial sector would likely be significantly less.

As the financial system and economy stabilise, governments will have to eventually divest their asset holdings, if public debt levels are to be brought back to more sustainable levels. Governments will thus eventually need to re-privatise government-hold assets on a massive scale, not just to reduce debt, but also to get out of businesses that the private sector can manage more efficiently. It is therefore in the interest of governments to retain the confidence of investors in their markets by keeping their economies and markets open, competitive and attractive for private investors.

Thus huge government sector interventions and subsequent privatisations needed to stabilise and normalise the current crisis will inevitably need to involve long-term international institutional investors as key players.

Relative importance of real money investors versus leveraged investors

In the medium to longer term, the importance of the "shadow banking sector", represented by the growth of credit dis-intermediation from commercial banks, arms length securitisation and distribution, leveraged non-bank capital suppliers, as well as widespread use of credit derivatives will likely become markedly less dominant in global capital markets.

Leveraged financial institutions have been significantly damaged by the disruptions in funding markets, and the bursting of the housing bubble, and their ability to provide capital will also be dampened given expected tighter regulations.

Similarly, leveraged investors like hedge funds and leveraged private equity players will find their activity and growth markedly more constrained. In this context, close attention should be given to facilitating the continued smooth flow of global capital to aid the recapitalisation of financial institutions and other businesses.

Real money investors, particularly un-leveraged, global institutional investors, would become relatively more important players in financial markets and the global financial system. In particular, big institutional investors including the Sovereign Wealth Funds (SWFs), given their large and growing total asset size under management, would be an important part of the key global investor community.

With many key debt and equity real estate markets pushed to extreme under-valuations relative to long term fundamental values, institutional investors like pension funds and SWFs will play an important role in the stabilisation and eventual recovery of asset markets. Such institutions, with their long term investment horizons could be important sources of demand for undervalued assets. This would contribute to stabilising financial and household sector losses, thereby helping to restore both credit creation and demand in the real economy.

In this connection, SWFs, in particular, should stand by the generally accepted principles and practices agreed in Santiago to help assuage the concerns of investee countries. Investee countries on their part, need to be equally mindful of adopting common best practices towards foreign investors that prevent a slide into regulatory fragmentation and financial protectionism.

With the relative decline of leveraged capital suppliers and the tightening of supply of capital via securitisation, global institutional investors would also likely become relatively more important sources of long term capital and finance for the global economy.

Conclusion

The coming redesign of the global financial regulatory architecture will be a major and difficult exercise with its share of opportunities and risks.

There are three major risks: First, the major national efforts of governments to stabilise and then regulate the financial system or may not be adequate, or effectively coordinated internationally.

Second, a lack of coordination in regulatory architecture and practice, together with the rising global unemployment in coming years, may lead to the "fragmented protectionism" scenario or the "financial regionalism" scenario as described in the recently released WEF publication: The Future of the Global Financial System.

Third, the swing of the political and policy pendulum towards greater regulation may end up with overregulation which stifles financial sector efficiency, productive financial innovation and helpful market discipline.

In the past, it was mainly governments, central banks and financial institutions who were involved in shaping the global financial regulatory architecture. However, given the involvement of financial institutions in the current crisis, global institutional investors, with their potentially important role both in financial stabilisation as well as capital providers in the post crisis financial system, can contribute constructive inputs to the design of the new regulatory regime. Taking into account the views of global investors in the process of redesigning the global financial system will greatly help the efficient functioning of markets in the world financial system. It will also strengthen global coordination and minimise the risks of protectionism, regional fragmentation and over-regulation.

Reits forge ahead

Business Times - 31 Jan 2009

Most Q4 earnings met analysts' forecasts. Earnings for this year expected to be stable.

ALL but one of the real estate investment trusts (reits) listed in Singapore had reported their quarterly earnings by yesterday - and most met analysts' expectations. And looking forward, reits are set to deliver stable earnings in 2009, analysts say - inasmuch as anyone can predict anything with any certainty at the moment.

Most reits' Q4 2008 earnings announcements so far have been followed by 'buy' and 'outperform' calls from research firms.

Many reits already have a substantial portion of their FY 2009 earnings locked in. Frasers Centrepoint Trust (FCT), for example, says it has 90 per cent of its FY 2009 income locked in. CapitaMall Trust (CMT), on the other hand, says gross rental revenue locked in for 2009 already exceeds 87 per cent of 2008's total gross revenue. And CapitaLand's other trust, CapitaCommercial Trust (CCT), says 79 per cent of 2009 forecast gross rental income has been locked in.

Reit managers also say they have been 'actively engaging' tenants for forward lease planning.

Bearing all of this in mind, analysts expect most reits will post flat growth but meet distribution per unit (DPU) forecasts for 2009.

'Income streams for reits should be all right in the first half of this year,' says CIMB analyst Janice Ding. 'As for the second half, things look less certain.' The impact from the economic slowdown will likely be really felt only in 2010, she said. And that year she expects office reits to take the biggest hit as a large amount of new space comes on stream.

The main area of concern remains the expected fall in office and retail rents. Retail rents, in particular, are expected to be hit as shopper traffic and retail spending gradually taper off following Chinese New Year. As such, tenants' bargaining power could increase, sparking either a fall in retail rentals or a restructuring of existing leases, notes DMG & Partners Securities analyst Brandon Lee.

But even taking rent drops into account, reits are still considered attractive from a valuation standpoint. Following CCT's results announcement, Citigroup analyst Wendy Koh said she is revising CCT's DPU and target price to reflect prime grade A office rental rates at $6 per square foot.

And despite her cautious view on the office sector, she maintained her 'buy' rating on CCT 'for valuation reasons'. 'The shares offer a 13 per cent yield,' she noted in a Jan 20 report.
But refinancing still remains a major area of concern for reits - despite a few major refinancing deals reported over the last few months. While Cambridge Reit, CCT and Ascendas Reit (A-Reit) all recently announced successful capital-raising exercises, this also suggests that the already-limited pool of ready credit has shrunk.

'With several Reits yet to refinance major chunks - such as CMT, CDL Hospitality Trusts (CDLHT) and Frasers Commercial Trust (FCOT) - and the credit markets still not exhibiting distinct signs of ameliorating, we believe the fight for credit will toughen further,' says DMG's Mr Lee.

Suntec Reit, for example, is now looking to refinance $700 million of commercial mortgage-backed securities due in December 2009. At present, the trust's management is talking with several banks to secure finance.

Other than the fact that the pool of ready credit has decreased, Mr Lee thinks another issue will plague Suntec Reit's refinancing - office and retail capital values could head further south from current levels as rents and occupancies taper off amid the weakening macro-economic environment. This implies a rise in loan-to-value (LTV) ratios that could make banks more cautious when it comes to extending credit.

In 2009, more equity issues could be on the cards. During its Q4 results briefing, A-Reit announced an equity fund-raising via private placements and preferential offerings of up to 354 million new units to raise gross proceeds of $400 million.

The trust's equity raising was within expectations, but the timing took some by surprise, as refinancing with bank debt was not an immediate problem. More Reits can be expected to take such pro-active steps to lower their gearing, although at least one - CCT - has come out to say that it has no 'immediate' plans to raise equity.

US Financial Rescue Costs

Business Times, 30 Jan 2009

Apple evolution & share price

Business Times - 23 Jan 2009

Feng shui masters see calmer markets in Year of the Ox

Business Times - 21 Jan 2009

HONG KONG - Stock investors reeling from last year's market mayhem may take some solace from practitioners of the ancient Chinese art of feng shui, who predict a calmer, if subdued, performance in the coming Chinese Year of the Ox.

'This year of the Ox is an 'earth' year, when people will take a breather and reflect on what they should do after a turbulent 2008,' said Hong Kong feng shui master Raymond Lo.

Practitioners of feng shui maintain the universe is made up of five elements - earth, water, fire, wood and metal - that define the collective mood in our environment.

Earth is the calmest of the elements and this year is a 'yin earth' year as well as an Ox year, symbolising a more feminine energy, says Mr Lo.

The Year of the Ox, which starts on Jan 26, will be the most peaceful year globally since 2000, he says, but stock investors don't need to rush into the market yet.

'2009 will be a 'pure earth' year, which means fire will be missing so there will not be a lot of drive to push up the stock market,' said Mr Lo. The economic climate will still be tough and though stock markets might rise in the first half of this year, gains could peter out in the second half, Mr Lo said.

'The market should still be quite low in the second half and that would be a good time to get in ahead of a recovery in 2010 (the Year of the Tiger),' he said.

The global outlook will be helped by the fact that incoming US President Barack Obama was born in a 'yin earth' year, like President Abraham Lincoln. French President Nicolas Sarkozy and Taiwan's President Ma Ying-jeou are also 'yin earth' people.

'This is a new generation of leaders. They are more calm, humane and charismatic,' Mr Lo said.
Leonardo da Vinci, Michelangelo, Charles Darwin, Tchaikovsky and Sigmund Freud, were all born in 'yin earth' years which symbolise harmony and a move to a new order.

The last 'yin earth' year of the Ox, in 1949, saw the birth of Nato and the People's Republic of China.

Mixed record

Vincent Koh of the Singapore Feng Shui Centre agrees that financial markets will be subdued.

'Don't pick high-risk assets this year, be patient and don't expect high returns,' Mr Koh said.

The global economy could start to pick up in the second half of 2009, says Mr Koh, who sees busy merger and acquisition activity, but adds that banks will continue to be reluctant to lend.

A report this month by Japanese research company Daiwa Institute, however, warned that Ox years are usually disastrous for stocks and Japan's Nikkei stock index has fallen by an average 11.4 per cent in each of the past five Years of the Ox.

Feng shui masters have a mixed record when it comes to market predictions. Mr Lo forecast a stock market correction a year ago but also advised investors to put their money into property.
Prof Charlie Chao, a leading feng shui expert in the Philippines, was quoted in a CLSA research note a year ago as warning of a possible global economic crisis in 2008.

But he also forecast a better performance for the Philippine stock market. That didn't happen. Manila stocks slumped 48 per cent last year, reversing a 21 per cent gain in 2007.

Chinese emperors put great faith in advice from feng shui masters as do many business tycoons and politicians in Chinese societies today. Apartment blocks and office buildings as well as furniture are often positioned according to feng shui principles to generate 'wealth'.

Banking giant HSBC's Hong Kong headquarters was built in accordance with feng shui guidelines and Hong Kong Disneyland changed the angle of its main entrance after consulting a feng shui expert.

As fewer people buy property or start businesses during the economic downturn, Michael Teo, a feng shui master at I-Ching Fengshui in recession-hit Singapore, is seeing a drop in business.

However, sales of auspicious feng shui jade carvings, which cost US$2,000-US$3,000 and are believed to bring wealth, are being snapped up every day, he says.

Mr Koh compares feng shui with a reliable weather forecast, saying it can help us anticipate changes in our environment.

'We cannot stop the rain, but knowing it is going to fall we can prevent ourselves from getting drenched,' he says.

But getting wet may be a minor concern in the Year of the Ox. While financial markets should be calmer, Mr Koh foresees the spread of disease and a spate of natural disasters, particularly in the northern hemisphere, with landslides, floods and earthquakes in store. -- REUTERS

Satyam chairman tells all

Business Times - 08 Jan 2009

The following is the text of the letter of Satyam chairman Ramalinga Raju, in which he admitted that he had falsified the company's accounts. References to the Indian numerical system of crores and lakhs have been converted to the western system.

To the Board of Directors

Satyam Computer Services Ltd

From B Ramalinga Raju

Chairman, Satyam Computer Services Ltd

January 7, 2009

Dear Board members,

It is with deep regret, and tremendous burden that I am carrying on my conscience, that I would like to bring the following facts to your notice:

1. The balance sheet carries, as of September 30, 2008,

a. Inflated (non-existent) cash and bank balances of 50.4 billion rupees (S$1.51 billion) (as against 53.61 billion reflected in the books).

b. An accrued interest of 3.76 billion rupees which is non-existent.

c. An understated liability of 12.30 billion rupees on account of funds arranged by me.

d. An overstated debtors position of 4.90 billion rupees (as against 26.51 billion reflected in the books)

2. For the September quarter (Q2) we reported a revenue of 27 billion rupees and an operating margin of 6.49 billion rupees (24 per cent of revenues) as against the actual revenues of 21.12 billion rupees and an actual operating margin of 610 million rupees (3 per cent of revenues). This has resulted in artificial cash and bank balances going up by 5.88 billion rupees in Q2 alone.

The gap in the balance sheet has arisen purely on account of inflated profits over a period of the last several years (limited only to Satyam standalone, books of subsidiaries reflecting true performance). What started as a marginal gap between actual operating profit and the one reflected in the books of accounts continued to grow over the years. It has attained unmanageable proportions as the size of company operations grew significantly (annualised revenue run rate of 112.76 billion rupees in the September quarter, 2008, and official reserves of 83.92 billion rupees). The differential in the real profits and the one reflected in the books was further accentuated by the fact that the company had to carry additional resources and assets to justify higher level of operations - thereby significantly increasing the costs.

Every attempt made to eliminate the gap failed. As the promoters held a small percentage of equity, the concern was that poor performance would result in a takeover, thereby exposing the gap. It was like riding a tiger, not knowing how to get off without being eaten.

The aborted Maytas acquisition deal was the last attempt to fill the fictitious assets with real ones. Maytas' investors were convinced that this is a good divestment opportunity and a strategic fit. Once Satyam's problem was solved, it was hoped that Maytas' payments can be delayed. But that was not to be. What followed in the last several days is common knowledge. I would like the board to know:

1. That neither myself, nor the managing director (including our spouses), sold any shares in the last eight years - except for a small proportion declared and sold for philanthropic purposes.

2. That in the last two years, a net amount of 12.3 billion rupees was arranged to Satyam (not reflected in the books of Satyam) to keep the operations going by resorting to pledging all the promoter shares and raising funds from known sources by giving all kinds of assurances (statement enclosed, only to the members of the board). Significant dividend payments, acquisitions, capital expenditure to provide for growth did not help matters. Every attempt was made to keep the wheel moving and to ensure prompt payment of salaries to associates. The last straw was the selling of most of the pledged shares by the lenders on account of margin triggers.

3. That neither me, nor the managing director took even one rupee/dollar from the company and have not benefited in financial terms on account of the inflated results.

4. None of the board members, past or present, had any knowledge of the situation in which the company is placed. Even business leaders and senior executives in the company, such as Ram Mynampati, Subu D, TR Anand, Keshab Panda, Virender Agarwal, AS Murthy, Hari T, SV Krishnan, Vijay Prasad, Manish Mehta, Murali V, Sriram Papani, Kiran Kavale, Joe Lagiola, Ravindra Penumetsa, Jayaraman and Prabhakar Gupta are unaware of the real situation as against the books of accounts. None of my or managing director's immediate or extended family members have any idea about these issues.

Having put these facts before you, I leave it to the wisdom of the board to take matters forward. However, I am also taking the liberty to recommend the following steps:

1. A task force has been formed in the last few days to address the situation arising out of the failed Maytas acquisition attempt. This consists of some of the most accomplished leaders of Satyam: Subu D, TR Anand, Keshab Panda and Virender Agarwal representing business functions, and AS Murthy, Hari T and Murali V representing support functions. I suggest that Ram Mynampati be made the chairman of this task force to immediately address some of the operational matters on hand. Ram can also act as an interim CEO reporting to the board.

2. Merrill Lynch can be entrusted with the task of quickly exploring some merger opportunities.

3. You may have a restatement of accounts prepared by the auditors in light of the facts that I have placed before you.

I have promoted and have been associated with Satyam for well over twenty years now. I have seen it grow from few people to 53,000 people, with 185 Fortune 500 companies as customers and operations in 66 countries. Satyam has established an excellent leadership and competency base at all levels. I sincerely apologise to all Satyamites and stakeholders, who have made Satyam a special organisation, for the current situation. I am confident that they will stand by the company in this hour of crisis.

In light of the above, I fervently appeal to the board to hold together to take some important steps. Mr TR Prasad is well placed to mobilise support from the government at this crucial time. With the hope that members of the task force and the financial adviser, Merrill Lynch (now Bank of America), will stand by the company at this crucial hour, I am making copies of this statement to them as well.

Under the circumstances, I am tendering my resignation as the chairman of Satyam and shall continue in this position only till such time that the current board is expanded. My continuance is just to ensure enhancement of the board over the next several days or as early as possible.

I am now prepared to subject myself to the laws of the land and face consequences thereof.

B Ramalinga Raju

Quantitative Easing 101 - or the art of creating money

Business Times - 09 Jan 2009

DESPERATELY ill patients are willing to try drugs that have not been shown to be either effective or safe. Even dodgy medicines look better than the alternative. As countries' financial systems remain immobile in the face of standard monetary policy treatment, more are turning to 'quantitative easing' as a therapy of last resort. The US Federal Reserve is already trying it out. The Bank of England is likely to follow. The European Central Bank probably won't because it doesn't seem to have the authority to.

Quantitative easing is the modern way to print money. The central bank doesn't actually have to use a four-colour press to spew out crisp notes. There are more sophisticated ways to boost a nation's money supply. But ultimately the impact is not very different from dropping dollar bills from a helicopter as Ben Bernanke once described this policy before he became the Federal Reserve's chairman.

So what exactly is quantitative easing, what disease is it supposed to cure, how is it supposed to work and what are the possible side effects?

The theory

Quantitative easing is a method of boosting the money supply. Its aim is to get money flowing around an economy when the normal process of cutting interest rates isn't working - most obviously when interest rates are so low that it's impossible to cut them further.

In such a situation, it may still be possible to increase the 'quantity' of money. The way to do this is for the central bank to buy assets in exchange for money. In theory, any assets can be bought from anybody. In practice, the focus of quantitative easing is on buying securities (like government debt, mortgage-backed securities or even equities) from banks.

Where, one might ask, does the central bank get the money to buy all these securities? The answer is that it just waves a magic wand and creates it. It doesn't even need to turn on the printing presses. It simply increases the size of banks' accounts at the central bank. These accounts held by ordinary banks at the central bank go by the name of 'reserves'. All banks have to hold some reserves at the central bank. But when there is quantitative easing, they build up 'excess reserves'.

If banks swap their securities for reserves, the size of their own balance sheets shrinks just as the central bank's balance sheet expands. Assuming they want to keep their own balance sheets static - admittedly a big assumption in the current climate - they will then start lending to end-borrowers and so start putting more liquidity into the economy.

To some extent, central banks have been engaging in quantitative easing for the past year. The Fed, for example, has had a range of programmes and ad hoc initiatives that have resulted in it acquiring securities from the banking system and more recently from the US government. The Fed may not have justified these under the rubric of quantitative easing. But its balance sheet has certainly mushroomed: it is up 18-fold in the past four months to US$820 billion.

Does it work?

Such quantitative easing certainly hasn't yet done the trick so far in this recession. Credit conditions have continued to tighten in the US. Things, of course, could have been even worse if there hadn't been any easing. Equally, although an 18-fold increase in the reserves on the Fed's balance sheet sounds impressive, it is still below 6 per cent of GDP. It may therefore only be once quantitative easing properly gets going that the benefits will flow through.

Similarly, history isn't much use in judging the therapy's effectiveness. There has been only one significant trial - in Japan between 2001 and 2006. Excess reserves held by banks at the Bank of Japan rose from 5 trillion yen to 35 trillion yen (S$552 billion), roughly 6 per cent of GDP.

Scholars cannot agree whether the technique worked. On the positive side, Japanese GDP didn't shrink. On the negative side, GDP growth was moderate and not sustained after quantitative easing ended. Also, the experiment coincided with a big programme of government spending, so no one can tell whether it was the unusual monetary policy or the intense fiscal policy that kept the wolf from the door.

Almost no one would argue that Japanese quantitative easing was an unqualified success. But some economists think the Japanese were too slow and too half-hearted in applying the therapy. What's more, the Japanese record isn't necessarily all that meaningful for the US and the UK. Quantitative easing may work better - or worse - in a country like Japan with a cultural preference for savings and a huge trade surplus than in lands where borrow-and-spend has been the rule for years.

Unintended side effects

Even if quantitative easing isn't necessarily effective, it would certainly be worth a try if it carried no danger. But its safety is far from certain. It could theoretically lead to the debauchment of a nation's currency and inflation.

Again history doesn't provide much of a guide. Japan hasn't suffered any bad side effects - inflation is low and the yen is strong. However, in some more extreme examples of old-fashioned money printing, the results were disastrous. Witness the assignats of the French Revolution, Confederate dollars in the Civil War, Reichsmarks in Germany after World War I, Russian roubles after the fall of communism and the current hyper-inflation in Zimbabwe.

The US and UK are, of course, in a far healthier state than revolutionary France or the Weimar Republic. So there isn't a danger of such alarming consequences. But central banks might lack the will to engage in 'quantitative tightening' when the economy starts to pick up.

In theory, reversing the policy should be quite easy. The central bank could just sell the excess assets on its balance sheet, sucking money out of the system. In practice, the political pressure to keep the party going might be too hard to resist.

This is particularly so because, in order to engage in quantitative easing in the first place, some central banks may well need the permission of their governments. The more they work in cahoots with politicians, the more their independence will come under threat. Already, Alastair Darling, the UK Chancellor of the Exchequer, has made it clear that the government - not the Bank of England - will play an active role if quantitative easing proves necessary.

It is therefore essential that both central banks and finance ministers commit themselves to reverse quantitative easing when the good times return - before they go wild and open the spigots. Quantitative easing is risky. It needs to be practised safely.

Two years of financial mayhem

Business Times - 02 Jan 2009

Since the start of 2007, the world's biggest banks, insurers and mortgage finance companies have collectively reported US$1.01 trillion of asset writedowns and credit losses and slashed 240,000 jobs - more than half of them in the US. Below is a timeline of the key events as the financial crisis unfolded. Compiled by CONRAD TAN

February 2007: In an early sign of the trouble ahead, London-based banking giant HSBC warns on Feb 8 that provisions for losses on its US sub-prime mortgages could exceed analysts' estimates by 20 per cent, reaching almost US$11 billion.

July 2007: Two hedge funds run by US investment bank Bear Stearns collapse on July 17 under the weight of losses from investments linked to US sub-prime mortgages, despite attempts by Bear in June to save them.

August 2007: Bear Stearns co-president Warren Spector is ousted on Aug 5. On Aug 9, France's largest bank, BNP Paribas, halts redemptions on three funds heavily invested in sub-prime mortgage-related securities.

September 2007: The Bank of England provides an emergency loan to UK mortgage lender Northern Rock on Sept 14, triggering the first run on a British bank in 140 years.

October 2007: Swiss bank UBS and US bank Citigroup reveal huge losses on investments linked to US sub-prime mortgages on Oct 1. On Oct 19, US stocks plunge on the 20th anniversary of Black Monday in 1987.

On Oct 30, UBS confirms a third-quarter net loss of 830 million Swiss francs (S$1.11 billion) after writing down US$3.6 billion on its sub-prime mortgage exposure.

The same day, US investment bank Merrill Lynch says its CEO Stan O'Neal is leaving, a week after the bank reported writedowns of almost US$8 billion.

November 2007: Crude oil prices hit a record high of more than US$96 a barrel on Nov 1 after an unexpected fall in US oil reserves. Swiss banking group Credit Suisse writes down US$1.9 billion and reports a 31 per cent drop in Q3 net profit.

On Nov 4, Citigroup chairman and chief executive Chuck Prince is forced to step down. Three days later, US investment bank Morgan Stanley announces a US$3.7 billion hit from its exposure to sub-prime mortgage securities.

On Nov 16, UK's Northern Rock announces the departure of its chief executive Adam Applegarth and most of its board.

On Nov 26, UK-based HSBC says it will provide up to US$35 billion in funding for two of its off-balance-sheet investment vehicles and move them on to its balance sheet to prevent a forced sale of their assets.

The next day, Citigroup announces a US$7.5 billion capital infusion from the Abu Dhabi Investment Authority to shore up its battered balance sheet.

December 2007: UBS writes down a further US$10 billion and, on Dec 10, announces a 13-billion Swiss franc injection of new capital from the Government of Singapore Investment Corporation (GIC) and a strategic investor from the Middle East.

Morgan Stanley becomes the first Wall Street firm to predict the US economy is likely to slip into a mild recession in 2008.

US commercial bank Washington Mutual says it will quit the sub-prime lending business, cutting 3,000 jobs.

French bank Societe Generale announces the US$4.3 billion bailout of an off-balance-sheet investment vehicle. Its move follows similar rescues by HSBC, Standard Chartered and Rabobank since end-November of so-called structured investment vehicles or SIVs to avoid the forced sale of SIV assets as market prices plunge.

On Dec 19, Morgan Stanley sells a US$5 billion stake to China's new sovereign wealth fund, China Investment Corporation, after revealing a Q4 loss of US$3.59 billion due to US$9.4 billion in mortgage-related writedowns.

On Dec 24, Morgan Stanley's Wall Street rival Merrill Lynch announces a US$6.2 billion fund-raising from private investors, including an injection of up to US$5 billion by Singapore's Temasek Holdings.

January 2008: Oil prices start the trading year on Jan 2 by setting a new record, rising above US$100 a barrel for the first time. On Jan 8, US stocks plunge amid speculation that Countrywide Financial, the country's biggest mortgage lender, may be forced into bankruptcy.
Jimmy Cayne, CEO of US investment bank Bear Stearns, says he plans to step down. Three days later, Bank of America says it will buy troubled Countrywide for US$4 billion.

On Jan 15, Merrill Lynch receives a US$6.6 billion capital injection from foreign investors including the Kuwait Investment Authority, Japan's Mizuho Financial Group and the Korean Investment Corporation through the sale of preferred shares.

Citigroup announces a US$12.5 billion injection of new capital to shore up its balance sheet from investors including Singapore's GIC, which pumps in US$6.88 billion. Citi says that it lost US$9.83 billion in Q4 2007 due to writedowns of US$18.1 billion.

Two days later, Merrill Lynch writes off US$11.5 billion of bad debt and reports a Q4 2007 net loss of US$9.8 billion.

On Jan 21, stock indices worldwide tumble as panic grips investors. In Singapore, the Straits Times Index plunges 6 per cent. The US market is closed for a public holiday, but the plunge in equities elsewhere prompts the US Federal Reserve to slash its benchmark interest rate by three quarters of a percentage point to 3.5 per cent in an emergency move one week before a scheduled policy meeting, to relieve pressure before US markets reopen. Eight days later, on Jan 30, the Fed cuts rates again, by half a percentage point to 3 per cent.

On Jan 24, France's Societe Generale shocks financial markets by unveiling a loss of 4.9 billion euros (S$9.85 billion) due to fraud, saying it will have to raise 5.5 billion euros to shore up its capital due to losses related to US sub-prime mortgages. The rogue trader responsible for the losses is later identified as Jerome Kerviel.

February 2008: The UK government formally announces its intention on Feb 17 to nationalise Northern Rock after failing to find a buyer for the troubled mortgage lender.

On Feb 19, Credit Suisse reveals US$2.85 billion of losses on structured credit positions due to mispricing, caused in part by some of its traders inflating the value of investments in mortgage-backed securities. On Feb 28, insurance giant American International Group (AIG) writes down US$11 billion of mortgage securities and reports its worst-ever quarterly loss.

March 2008: The US Federal Reserve leads a group of the world's largest central banks in a coordinated effort to inject at least US$200 billion of fresh liquidity into money markets in North America and Europe on March 11, just four days after the Fed announced a separate US$200 billion intervention.

On March 13, Carlyle Capital, a London-based bond fund affiliated with US private equity firm The Carlyle Group, goes bust after last-minute talks to renegotiate financing terms with its lenders collapse.

The US dollar slides against other major currencies, falling below 100 yen for the first time in more than 12 years. Crude oil hits a record US$111 a barrel and gold exceeds US$1,000 an ounce for the first time.

On March 14, the US Fed extends an emergency loan to investment bank Bear Stearns through its rival JPMorgan, after Bear's access to liquidity suddenly dries up. At this point, Bear, which was not a commercial bank, could not borrow from the Fed directly. Two days later, after a weekend of frenzied talks, JPMorgan says it is buying Bear for US$2 a share in a deal backed by the Fed. The price is a 93 per cent discount to Bear's last traded price of US$30 on March 14 and values the company at a mere US$236 million.

The Fed cuts its discount rate by a quarter of a percentage point to 3.25 per cent, two days ahead of a scheduled policy meeting on March 18, to prevent a run on major banks when markets reopen on March 17. Still, stock markets in Asia and Europe plummet on March 17 on fears that the sale of Bear Stearns at a massive discount could mean that other financial firms are also in serious trouble. The cost of insuring against default on corporate bonds soars, while the US dollar sinks to new lows against other major currencies.

Gold rises to a record US$1,030.80 an ounce, while US crude oil rises to a new high of US$111.80 a barrel. US stocks plunge at the start of trading as worries spread about the health of other financial firms such as Lehman Brothers, but recover by the end the day.

The next day, the Fed cuts its benchmark interest rate by three quarters of a percentage point to 2.25 per cent, the lowest level since December 2004. Although traders had expected a full percentage-point cut, the reduction sparks a surge in US stocks. The rise is helped by stronger-than-expected earnings reports from investment banks Goldman Sachs and Lehman Brothers.
On March 24, JPMorgan raises its offer for Bear Stearns to US$10 a share from US$2 and agrees to finance the first US$1 billion of any losses associated with the target bank. The new offer values Bear at some US$2 billion.

A week later, on March 31, US Treasury Secretary Henry Paulson announces a broad overhaul of Wall Street regulations, creating a set of federal regulators with authority over all players in the financial system. Lehman Brothers says it will raise at least US$3 billion of new capital to shore up its balance sheet.

News spreads that Swiss bank UBS is expected to reveal further writedowns of up to US$18 billion and seek a capital increase of about 13 billion Swiss francs later in the week. Citigroup unveils a sweeping restructure of its global business, separating them into four regions and breaking out its credit card business from its broader consumer banking segment.

April 2008: UBS chairman Marcel Ospel says on April 1 that he will not seek re-election at the Swiss bank's annual shareholders' meeting on April 23. The bank warns that it expects to lose a net 12 billion Swiss francs in the first quarter due to further write-downs of US$19 billion on its US investment holdings. It also says it will make a 15 billion franc rights issue to boost its capital.
On April 8, the International Monetary Fund warns that total losses and write-downs in the financial sector from the credit crisis could reach US$945 billion. The next day, oil futures reach a record US$112.21 a barrel in intraday trading and end at a record closing price of US$110.87, after a surprise drop in US oil inventories.

On April 10, the Chinese yuan rises to a record 6.99 against the US dollar, crossing the seven yuan per US dollar mark for the first time.

The Monetary Authority of Singapore effectively gives a one-time boost to the Singapore dollar to fight rising inflation by re-centring its undisclosed policy band for the trade-weighted Sing dollar or S$NEER at the prevailing level - widely believed to be near the top of the previous tolerated range. The Sing dollar rises 1.8 per cent to a record 1.3567 against the US dollar. Since MAS's previous statement on Oct 10, 2007, the Sing dollar has gained 7.4 per cent against the US dollar.

Rice prices exceed US$1,000 a tonne for the first time on April 17 as panicking importers scramble to secure supplies, worsening disruption already caused by export restrictions in Vietnam, India, Egypt, China and Cambodia.

Citigroup's chief executive Vikram Pandit says the financial group will slash its cost base by up to 20 per cent. Merrill Lynch says it will cut 4,000 jobs after suffering a US$2 billion Q1 2008 loss, bringing to almost 40,000 the number of jobs lost at financial companies since the onset of the credit crunch.

The next day, Citigroup says it suffered net loss of US$5.1 billion in Q1, its second consecutive quarterly loss, after writing down almost US$16 billion of soured investments. Citigroup also says it will cut 9,000 jobs in the next 12 months.

Oil futures close at a record high of US$116.69 a barrel as news about pipeline sabotage in Nigeria pushes up prices. On April 22, the UK's Royal Bank of Scotland unveils emergency plans to raise £16 billion (S$33.3 billion) through a £12 billion rights issue and asset sales. The rights issue is Europe's biggest to date.

Oil prices reach a record US$118.47 a barrel amid strong demand from China, attacks on oil facilities in Nigeria and concerns about the outlook for supplies from Saudi Arabia.
May 2008: America's AIG says on May 9 that it suffered a record net loss of almost US$8 billion in Q1 2008 due to massive writedowns on credit derivatives and losses on its investment portfolio. The insurer says it plans to raise US$12.5 billion in new capital. Standard & Poor's and Fitch both downgrade their ratings of the company.

Crude oil futures close at a record US$125.96 after climbing as high as US$126.25 a barrel during the day. On May 22, oil futures reach a new high of US$135.09 a barrel in intraday trading after repeatedly breaking previous records earlier in the month.

Swiss bank UBS, one of the worst affected by the credit crunch, launches a 15.97-billion franc rights issue to cover its losses on assets linked to US mortgage debt.

June 2008: UK bank Barclays announces a plan on June 25 to raise £4.5 billion from foreign investors including Qatar Investment Authority to bolster its balance sheet.

July 2008: Oil prices reach an all-time high of just over US$147 a barrel on July 11. In an emergency move on July 13, after a weekend of desperate negotiations, the US Treasury and other government agencies say they will provide liquidity and capital support to US mortgage finance giants Fannie Mae and Freddie Mac, which account for almost half of the outstanding mortgages in the US. The share prices of both firms had plunged the previous week as investors feared that falling US house prices and rising defaults on mortgages would drag them into bankruptcy. The same day, US mortgage lender IndyMac Bank collapses, the second-biggest bank failure in US history.

On July 15, stocks in Asia slump as news emerges that some of the region's biggest banks had billions of dollars invested in debt securities issued by Fannie Mae and Freddie Mac.

August 2008: In a settlement with US regulators over the latest scandal to engulf Wall Street, Citigroup and Merrill Lynch announce on Aug 7 that they will buy back a total of up to US$20 billion in bonds known as auction-rate securities from investors, after some claimed that they were misled by the banks' advisers.

A day later, UBS agrees to buy back US$18.6 billion of auction-rate securities to settle charges of misleading investors over the securities.

Other banks including JPMorgan Chase, Morgan Stanley, Goldman Sachs, Deutsche Bank and Wachovia Corp soon follow with their own settlements. Shares in American International Group (AIG) plummet on Aug 7 after the insurer reports a loss of more than US$5 billion on mortgage-related exposures.

Shares in Fannie Mae and Freddie Mac plunge further after both report multibillion-dollar quarterly losses. Fears grow over the fate of both firms, as well as that of Lehman Brothers, which is trying desperately to raise cash from investors in China and South Korea. Oil falls to US$115 a barrel.

On Aug 12, UBS announces plans to separate its wealth management, investment banking and asset management business units, after reporting a fourth straight quarterly loss and massive withdrawals of funds by clients. UK chancellor Alistair Darling warns on Aug 30 that the country faces its worst economic downturn in 60 years.

September 2008: The US government takes over Fannie Mae and Freddie Mac on Sept 7 in one of the biggest bailouts in US history after a weekend of frantic talks, reminiscent of the dramatic attempt to save Bear Stearns in March. Investors' fears turn to the four remaining independent Wall Street investment banks - Lehman Brothers, Merrill Lynch, Morgan Stanley and Goldman Sachs - as well as insurer AIG.

After days of searching frantically for a buyer, Lehman files for bankruptcy protection on Sept 15, while Merrill agrees to be taken over by Bank of America for US$50 billion, capping Wall Street's worst-ever weekend.

On Sept 16, financial markets worldwide plunge into chaos. The US government announces an US$85 billion emergency loan for AIG to save the insurer from bankruptcy, in exchange for a 79.9 per cent stake in the company.

As news of Lehman's collapse and the extraordinary takeover of Merrill spreads, markets in everything from stocks and currencies to credit derivatives strain to cope with the fallout.

Stunned investors flee equities for government bonds and gold, while interbank lending rates jump to record levels as banks jealously hoard cash, causing credit markets to seize up.

A day later, HBOS, the UK's biggest mortgage lender, is taken over by Lloyds TSB in a £12 billion deal after a run on HBOS shares. Stocks worldwide continue to gyrate wildly. In Russia, trading is halted indefinitely by regulators.

On Sept 18, central banks worldwide inject US$180 billion of US-dollar liquidity into money markets in a desperate bid to lower interbank borrowing costs and calm financial markets.

The next day, regulators in the US and UK ban the short-selling of shares in financial companies, blaming it for recent declines in financial stocks. News emerges that the US government is preparing a plan for a mass rescue of the financial sector.

On Sept 21, Goldman Sachs and Morgan Stanley, the last surviving independent investment banks on Wall Street, receive emergency approval to become commercial banks, to avoid the fate of Lehman and Bear Stearns. Australia, Taiwan and the Netherlands join the US and UK in announcing restrictions on short-selling to prevent investors from betting that stocks will decline.

On Sept 24, Hong Kong's Bank of East Asia faces a run by depositors after rumours spread that the bank has liquidity problems. Its shares plunge. The Hong Kong Monetary Authority says it will provide full liquidity support to the bank, if necessary.

In the US, the Fed increases its swap lines with other central banks, adding Australia, Norway, Sweden and Norway to a list that includes the European Central, the Bank of England and the Bank of Japan.

The next day, Washington Mutual is seized by regulators and sold to JPMorgan Chase for US$1.9 billion, making it by far the biggest bank failure in US history to date. A bailout plan for the financial sector is mired in doubt as US lawmakers argue over details including safeguards over the use of taxpayers' money.

On Sept 28, US policy-makers announce a tentative deal that will allow the US Treasury to buy up to US$700 billion in troubled assets from ailing banks.

In Europe, banking and insurance group Fortis is bailed out by the Belgium, Dutch and Luxembourg governments. The next day, US lawmakers reject the bailout plan by a narrow margin, throwing financial markets into disarray. The Dow Jones index plunges a record 778 points or 7 per cent, while the S&P 500 index falls 8.8 per cent.

Wachovia agrees to be bought by Citigroup in a deal backed by US regulators. UK banking group Bradford & Bingley is bailed out, as is Iceland's third-largest bank Glitnir, while the German government announces plans to rescue Hypo Real Estate, one of the country's biggest banks.

On Sept 30, Ireland's government guarantees deposits and debts at six financial institutions after Irish banks suffered the biggest one-day fall in their share price for two decades on Sept 29.

Central banks worldwide again flood interbank markets with money. The overnight US-dollar London interbank offered rate or Libor, the rate that banks charge one another to borrow US dollars, jumps to 6.9 per cent from 2.6 per cent a day earlier, the biggest-ever one-day increase.
European bank Dexia is bailed out by the Belgian, French and Luxembourg governments.

October 2008: US lawmakers approve the sweeping rescue plan aimed at saving the financial sector. Stocks in the US fall after the vote is announced on Oct 3, ending the week with their worst performance since markets reopened after the Sept 11, 2001 terrorist attacks.

Economic data shows the US labour market lost 159,000 jobs in September, the biggest decline since March 2003.

Central banks pump more money into the banking system, lowering overnight Libor. But three-month Libor rates for interbank loans in pounds, US dollars and euros continue to rise. The spread between three-month dollar Libor and three-month US Treasury bills reaches record levels as investors seek the safety of US debt and shun lending in the money market.

US bank Wells Fargo makes a surprise offer for Wachovia, trumping Citigroup's earlier deal to buy the bank. Two days later, on Oct 5, the German government guarantees savings in all German bank accounts to avert panic after a rescue plan for Hypo Real Estate collapses.

The next day, the Danish government guarantees all bank deposits in Denmark.

On Oct24, The Straits Times Index suffers its biggest one-day fall in almost two decades, ending one of its worst weeks in recent memory. The stock benchmark plunges 8.3 per cent - its biggest percentage drop since Oct16, 1989 - to finish the week with a staggering loss of 14.8 per cent.

On Oct 7-8, Iceland's government formally seizes its three biggest banks - Kaupthing, Landsbanki and Glitnir - as the entire country teeters on the brink of economic collapse. On Oct 8, central banks in the US, Canada, UK, eurozone, Sweden and Switzerland cut rates simultaneously in an unprecedented joint effort to stabilise financial markets and to lower borrowing costs. China also lowers interest rates.

The UK government announces plans to pump up to £250 billion into the country's largest banks, including the Royal Bank of Scotland, Lloyds TSB and HBOS, to boost their capital, and provides a further £250 billion in guarantees for new debt issued by UK banks.

Days later, on Oct 14, the US government decides to use the first US$250 billion of US$700 billion in bailout money - originally intended for buying troubled assets from banks - on a similar plan to buy direct stakes in banks in an attempt to restore confidence to the financial sector.

On Oct 15, the Dow Jones index fell 7.9 per cent - its biggest percentage fall since Oct 26, 1987 - as new data shows the US economy slipping into recession. The next day, the Straits Times Index slumps 5.3 per cent, extending its two-day decline to 8.3 per cent.

After trading ends on Oct 16, the Singapore and Malaysian governments say they will guarantee all bank deposits, following similar moves by governments elsewhere, including Hong Kong, Indonesia, Australia and New Zealand.

Switzerland's government announces a sweeping rescue of its entire banking sector, including emergency cash infusions from the public purse for UBS and a toxic-asset dump for removing troubled assets from banks' balance sheets.

Despite the unprecedented efforts to calm financial markets, stocks worldwide continue to fluctuate violently as the damage from the credit crisis spreads to the broader economy.

Analysts grow increasingly worried that the three biggest us carmakers - General Motors, Ford and Chrysler, which have suffered from plunging sales amid a weakening economy - could collapse, causing hundreds of thousands of job losses and triggering further chaos in financial markets.

On Oct 24, The Straits Times Index suffers its biggest one-day fall in almost two decades, ending one of its worst weeks in recent memory. The stock benchmark plunges 8.3 per cent - its biggest percentage drop since Oct 16, 1989 - to finish the week with a staggering loss of 14.8 per cent.

On Oct 29, the US Fed extends temporary swap lines to Singapore, Korea, Brazil and Mexico to ensure sufficient US-dollar liquidity in the respective banking systems.

A day later, the Fed cuts its key interest rate to one per cent from 1.5 per cent.

November 2008: On Nov 5, Barack Obama wins the US presidential election. The next day, the International Monetary Fund (IMF) warns of a global recession in 2009 as the outlook for the world's biggest economies deteriorates further.

The IMF extends a US$16.4 billion emergency loan to Ukraine on Nov 6 to shore up its economy. Later in the month, the IMF approves emergency loans to Iceland on Nov 20 and Pakistan on Nov 25 to stabilise their economies.

On Nov 7, DBS Group says it will slash 6 per cent of its work force or some 900 jobs by the end of the month, as it reports its worst quarterly performance since the end of 2005. Two days later, China announces a four-trillion yuan (S$840 billion) stimulus plan to spur economic growth. On Nov 17, Citigroup announces plans to slash some 50,000 jobs worldwide, aiming to reduce its headcount to 300,000 'in the near term' from 352,000 at the end of September.

On Nov 23, the US government announces a US$20 billion rescue plan for Citigroup after its shares plunge more than 60 per cent in a week.

On Nov 25, the US Federal Reserve says it will inject another US$800 billion into the economy. A day later, the European Commission unveils a 200 billion euro plan to spur economic growth.
December 2008: The US National Bureau of Economic Research confirms on Dec 1 that the US economy is in a recession that started in December 2007.

On Dec 4, Credit Suisse says it will slash 5,300 jobs or 11 per cent of its global work force by the middle of 2009, as it warns of massive losses from its investment banking business. A week later, Bank of America says it will cut up to 35,000 jobs after its takeover of Merrill Lynch.

On Dec 9, the yield on three-month US Treasury bills fall below zero for the first time in history. Yields on other US government securities also reach all-time lows as investors, desperate for safe havens ahead of the year, become effectively willing to pay the US government a fee to safeguard their money for later.

The World Bank warns that international trade volume is likely to contract in 2009, for the first time since 1982.

On Dec 11, Bernard Madoff, a US money manager based in New York, is arrested after confessing to running a US$50 billion Ponzi scheme. The news sends shockwaves through the global financial community as investors ranging from hedge funds to wealthy individuals scramble to estimate their losses from the biggest fraud in history. On Dec 16, the Fed slashes its benchmark interest rate from one per cent to a range of zero to 0.25 per cent, the lowest since records began.

Three days later, Japan's central bank cuts rates to 0.1 per cent from 0.3 per cent, as the government warns that the economy will stagnate in 2009.

In the US, the government agrees to lend up to US$17.4 billion to its biggest carmakers - General Motors, Ford and Chrysler - to keep them afloat until early 2009.

On Dec 22, DBS Group warns that its net profit is expected to slide further in Q4, as it announces plans to raise some S$4 billion in new capital through a rights offer.

On Dec 30, the US Treasury injects US$5 billion into GMAC, the financing arm of General Motors, and lends another US$1 billion to GM to be re-invested in GMAC. The government bailout extends the ability of cash-strapped GMAC to lend to car buyers, which it hopes will boost sales of ailing US carmakers.

2008: Year of failing dangerously

Business Times - 01 Jan 2009

What stands out is not inflation, deflation or recession but the collective failure of regulators, brokers, bankers and analysts. R SIVANITHY takes a look at the year past

WHAT was the central theme in 2008 when the Straits Times Index lost 49.2 per cent over the 12 months? Inflation? For the first six months, yes. But not once the oil and commodity bubble burst in July. And certainly not heading into 2009.

Deflation? That's still a real possibility. But it's probably too early to say definitively that the world economy will suffer deflationary shocks from the US sub-prime fallout and, if so, how bad these will be.

Recession? Yes. But the dreaded "R" word really only started to be uttered in the second half of 2008. And in the US, it was only confirmed in December as having taken root. No, if there is one word that defines 2008, and sets the tone for 2009, it is failure. Not just of US properties, banks, mortgage companies and giant carmakers, but of the entire financial system, investment community and supposedly robust regulatory framework.

Many, quite legitimately, have pointed to former US Federal Reserve chief Alan Greenspan as the prime cause of the entire mess because of his failure to rein in bank lending and his easy money policies after the dotcom recession of 2000.

The US Federal Reserve, US Treasury and the US government failed to take action early enough, preferring instead to believe the hype about how strong the American economy was and how well-regulated the country's banks were.

At the same time, brokers, investment bankers and most research analysts failed to discharge their fiduciary duties properly when they underestimated risk and overestimated their powers of analysis. Most refused to read the writing that appeared on the wall as early as March when Bear Stearns failed. Instead they kept urging clients to buy, demonstrating unforgivable complacency in the face of the worst economic collapse in more than 70 years.

The structured products industry failed when US investment bank Lehman Brothers went bust in September. And although those involved might try to deny it, it's very likely that those who marketed and sold High Notes and Lehman Minibonds to unknowing retail investors failed to adequately apprise their customers of the risks involved.

There's plenty more: Bernard Madoff's shocking US$50 billion Ponzi scandal, which suggests a failure to properly regulate hedge funds; the automakers' failure to convince the US Senate to approve a US$19 billion bailout; the panicstricken liquidity injections by central banks and the interest rate cuts that have so far failed to ease the crisis; and above all, the failure of the free market, disclosure-based model to provide the necessary discipline.

Will 2009 be any different? Let's hope that this time next year we'll be writing about successes - instead of failure after failure.

JANUARY: The old market adage "As goes January, so goes the rest of the year" certainly applied to 2008. Markets everywhere kicked off the New Year on a sombre note with large daily plunges commonplace. In a desperate attempt to prop up a sagging Wall Street, the US Federal Reserve cut its short-term rate by 75 basis points to 3.5 per cent on Jan 22 ahead of its scheduled meeting on Jan 30, and again by 50 points to 3 per cent a week later, citing "risks to growth". It brought some respite but not much.

Despite all the bullish predictions by analysts at the start of the month - one house ventured a target as high as 4,800 for the Straits Times Index - the index plunged 484 points over the course of the month, a 14 per cent loss that was a precursor of worse to come. Index closing: 2,981.

FEBRUARY: US President George Bush signed a US$168 billion rescue package for homeowners which provided some stability to Wall Street and by extension, the rest of the world. Trading throughout the month - and indeed throughout the rest of the year - was volatile, the STI constantly tracking the Hang Seng Index almost on a second-by-second basis as investors sought clarity on where the market might head. The STI flirted with the 3,000-mark almost daily, finally regaining it at month's end. For the month, the index rose 45 points or 1.5 per cent at 3,026.

MARCH: On March 16, the US's fifth-largest investment bank Bear Stearns tottered on the edge of bankruptcy thanks to its exposure to Collateralised Debt Obligations (CDOs), instruments that few investors had heard of beforehand. The acronym CDO would soon take a central place in market nomenclature as investors gained a crash course in how the crashing US housing market was feeding through to the CDO market and, in turn, was sending banks deep into trouble. Bear Stearns was eventually sold to JP Morgan but ominously, rumours surfaced that another venerable Wall Street institution, Lehman Brothers, would be the next. Thanks to the US government-engineered bailout of Bear Stearns and a 75 basis points rate cut to 2.25 per cent, the STI lost just 19 points or 0.63 per cent during the month to end at 3,007. The first quarter's performance was a loss of 458 points or 13.2 per cent.

APRIL: Hope springs eternal. Testifying before the US Senate, Fed chief Ben Bernanke said the US economy "may contract in the first half", clearly unable to see the writing that was on the wall and thus playing a central role in lulling Wall Street into a false sense of complacency.

Nowhere was this better manifested than independent research outfit BCA Research, which said in its secondquarter strategy outlook that the bear market had ended and that investors should start buying immediately.

"Our sense is that monetary reflation may be slowly winning the battle against deflationary pressures coming from the housing meltdown, financial deleveraging and retrenchment in banking activity," said BCA. Meanwhile, an increasingly desperate Fed slashed its interest rate to 2 per cent on April 30, Wall Street did, however, stabilise and so the STI managed a 140-point or 4.7 per cent gain for the month to 3,147. It was to be the STI's best month for 2008.

MAY: Oil takes centre stage. Markets may have enjoyed some relief from talk of CDOs and sub-prime failures - this despite economic data that showed the US housing market continued to be weak - but attention became focused on oil's relentless rise to an all-time high US$135 a barrel in the third week of the month.

Not surprisingly, discussion turned to inflation as analysts, probably carried away by sharp upward momentum (as they usually are) predicted oil could hit US$300 a barrel within the next five years. Daily movements were dictated by US economic data and movements in Hong Kong's Hang Seng Index. For the month, the STI rose 45 points or 1.4 per cent to 3,192.

JUNE: Oil continued to occupy the minds of investors. distracting attention away from a collapsing US housing market. Still, the phrase "credit crunch" entered the market's lexicon, complementing "CDOs" and "sub-prime crisis" as problems lurking behind the scenes seek to derail markets. The US banking sector started to cave in but a stubborn refusal by local analysts to acknowledge a growing problem meant that banks here held firm. The Fed held its short rate steady at 2 per cent at its June 25 meeting, possibly in order to save ammunition if needed later. It did - but as things turned out, interest rates proved irrelevant in stemming the coming tide.

The STI caved in by 245 points or 7.7 per cent over the month to 2,947. It was the last time in 2008 that the index saw the 3,000-mark. For the second quarter the STI lost 60 points or 2 per cent, which brought its loss for the year to 518 points or 15 per cent.

JULY: "Sell into strength and be careful of buying the dips." This was the advice given repeatedly by BT and it proved spot-on as bear trap after bear trap ensnared hapless investors. Early in the month oil hit an unprecedented US$147 a barrel but soon embarked on an almost non-stop downward spiral as oil fears were replaced by a growing realisation that the US sub-prime woes were far from over. Goldman Sachs hit the nail on the head when it said midmonth that "fundamentals have degraded since late-Q1, which implies upside rebound potential may not be as significant as it was four months ago". Not everyone heeded this advice and propped up by a stillcomplacent Wall Street, the STI fell only 18 points in July to 2,929.

AUGUST: Singapore loses its "defensive" or "safe haven" reputation. Sub-prime concerns kicked into second or third gear and the 2,800 level which chartists had thought unassailable was easily breached and the attrition continued. For the third consecutive month the STI fell, this time by 190 points or 6.5 per cent.

SEPTEMBER: Few retail investors here would have heard of Fannie Mae and Freddie Mac before this month but by the end of the month the government-led US$200 billion bailout of the two giant US mortgage providers meant that everyone would have been familiar with the names. US Treasury Secretary Henry Paulson described the two as being too big to fail, prophetic words that would apply to more failures just around the corner. Oddly enough, there was no similar "rescue" of Lehman Brothers, which went bust on Sept 15. Merrill Lynch in the meantime could have shared the same fate but opted to be sold to Bank of America while AIG, another financial institution, had to be bailed out by the US government to the tune of US$85 billion. The fallout here was immediate - structured products sold by Lehman to local investors were found to be largely worthless and thousands of retail investors found themselves staring at millions of dollars of losses. In tandem with Wall Street and the rest of the world, the STI's collapse gathered pace with the index losing 381 points or 14 per cent at 2,358 during the month.

OCTOBER: It's funny how October seems to be one of the worst months for stock markets in history, the crashes of 1929 and 1987 both occurring in October. The selling kicked into full throttle in October, with the STI crashing 564 points or 24 per cent to 1,794 by the end of the month. Needless to say, fears of more bankruptcies and a worsening economic outlook were the main culprits.

NOVEMBER: Another forgettable month for the bulls as investors found it difficult to find reasons to buy stocks. Gone were the urgings to "buy" as the dawning realisation set in that not only would corporate earnings disappear, many companies could follow in the footsteps of the insurers and banks. Citigroup flirted with bankruptcy, seeing its shares which started the year at US$30 crash to US$3.77 on Nov 21. Thanks again to Uncle Sam's boundless largesse (and creaking printing presses), the bank which was deemed "too large to fail" was bailed out. The STI lost 62 points or 3.5 per cent over the month at 1,732.

DECEMBER: Controversy reigned as the bosses of troubled US car companies General Motors, Ford and Chrysler, who had previously flown to Washington in their private jets to beg for bailout money, had the door slammed in their face by a US Senate who vetoed a US$19 billion package because, of all things, an inability to agree on wage demands by the auto unions. Shock and awe in the meantime reigned when it was revealed that respected Wall Street veteran Bernard Madoff is in all likelihood nothing more than a cheap crook, running a "Ponzi scheme" in which he took money from new subscribers to pay high returns to earlier investors. Still, driven by promises of ever-larger rescue packages by the incoming Democrat administration and window-dressing, Wall Street's indices stabilised this month. The STI ended a net 30 points higher for the month at 1,761.56, a loss of 49.2 per cent for the year.

'Believe me, everything's fine ...'

Business Times - 02 Jan 2009

Top execs and officials get mud on their face by giving reassurances that fall through as crisis unfolded

'NOBODY could have predicted this,' Wall Street pros like to say as they seek to absolve themselves for failing to foresee the financial-system meltdown of 2008. Well, almost nobody at the top of the financial industry saw what was coming, that's for sure. Either that, or they were just flat-out lying along the way.

Here, listed chronologically, are nominees for the most infamous pronouncements made as the crisis unfolded this year:

Block that metaphor

At Goldman Sachs Group's annual shareholder meeting in April, chairman Lloyd Blankfein (left) couldn't seem to find the perfect metaphor to pinpoint where we were in the credit crisis. So he used three. 'We're closer to the end than the beginning,' he said. 'I think we're getting to that point where people are seeing the light at the end of the tunnel.'

Then he made a sports analogy: 'Maybe we're at the end of the third quarter, beginning of the fourth quarter,' he said. 'If you watch sports, sometimes there's a lot of timeouts in the fourth quarter. It takes longer to play than any of the other quarters, and sometimes it ends in a tie and goes into overtime.' And sometimes the financial system just implodes, ruining all sports metaphors.

Everything's fine, why do you ask?

With IndyMac Bancorp's shares in the US$3 range on May 1, as Wall Street bet on the mortgage lender's demise, chief executive Michael Perry came out swinging against the bears. In a financial filing, Perry noted that 'given the decline in our stock price, some people have questioned IndyMac's survivability in the current environment'.

'I am here to tell you that I believe we have turned a corner and that our business is improving.'

Next time you imply I shouldn't buy bonds, remind me not to pay attention

Hard to believe now, but as recently as six months ago, Federal Reserve chairman Ben S Bernanke (right, top) and European Central Bank president Jean-Claude Trichet (right, bottom) were talking tough on inflation and interest rates, hinting that they were ready to tighten credit. Doing so can push up yields on long-term bonds, lowering their market value.

The ECB, in fact, raised its benchmark short-term rate to 4.25 per cent from 4 per cent on July 3 - a move now considered to be one of the most boneheaded in central bank history. In their defence, Bernanke and Trichet were staring at soaring commodity prices in June, led by oil.

Whatever their motivation, their hawkish comments helped create the last great opportunity to buy government bonds before their yields plunged and prices soared: The 10-year Treasury note yield reached its high for the year on June 16, at 4.27 per cent. Its yield late Tuesday: 2.08 per cent. The German government's 10-year note yield hit its 2008 high on June 19, at 4.68 per cent. Its yield Tuesday: 2.95 per cent.

Now, who should know better on the dividend, the market or me?

Bank of America Corp chief executive Ken Lewis (right) insisted in spring and early summer that the company would maintain its cash dividend payment, even as many other banks were slashing their payouts amid worsening loan losses.

The market believed otherwise: With BOA's annual dividend at US$2.56 a share and the stock at US$22.06 on July 9, the dividend yield was 11.6 per cent - a sure sign that investors didn't expect the payout level to be sustained.

But Lewis wouldn't cave. 'Given our view of things, we do not expect to cut the dividend nor do we expect to have to raise capital,' he said in an interview on July 9. 'We get investors and analysts calling us saying, 'You've got to cut your dividend because the market is saying you should cut your dividend.' We've reminded them that the market over the short term is not always right.'

Not always, but certainly this time it was: BOA hacked the dividend by 50 per cent on Oct 6, with Lewis citing the 'most difficult times for financial institutions that I have experienced in my 39 years in banking'. The stock closed Tuesday at US$13.24 a share.

Most ironic press release of the year

The Reserve Fund, the nation's first money market mutual fund, positively gushed about itself in a July press release, insisting that its parent firm was 'the world's most experienced money fund manager, expertly qualified to help you address ongoing challenges in the market as well as help address questions your clients may have around the soundness, safety, and security of their cash'.

Less than two months later, the fund became only the second in history to 'break the buck' or the standard US$1 money fund share price, as investors fled after the firm disclosed losses on Lehman Brothers IOUs.

Great sell signals in financial stock history

• July 15: Wachovia Corp, with its stock down as much as 20 per cent in a matter of hours, declared itself 'a fundamentally strong and stable company on solid footing'. A crippled Wachovia has since agreed to be swallowed by Wells Fargo & Co.
• July 16: Fed chairman Bernanke told Congress that troubled mortgage giants Fannie Mae and Freddie Mac were 'in no danger of failing'. Seven weeks later, the Treasury grabbed control of the companies, all but wiping out shareholders.
  
• July 17: From an ABC interview with Fannie Mae CEO Daniel Mudd, Judy Woodruff: 'How likely do you think it is that Fannie Mae would take advantage of what's in the (government bailout) package, this line of credit, or that the Treasury would actually buy stock in the company?'
  Mudd: 'I think it's very unlikely. And I think everybody that has described it - whether secretary Paulson, chairman Bernanke, our regulator, director Lockhart - (says it's) a backstop in case things turn out different than everybody predicts.'
  
• Aug 25: 'They should assess whether it's manageable in terms of financial risks and their corporate structure.' (Jun Kwang Woo, head of South Korea's Financial Services Commission, warning Korea Development Bank about its interest in taking a stake in Lehman Brothers. Three weeks later, Lehman was in bankruptcy.)
  

For once, 'No' really did mean 'No' and the rest is history

Sept 15, the day Lehman Brothers filed for bankruptcy protection, a resolute Treasury Secretary Henry M Paulson (right) told reporters that he 'never once considered it appropriate to put taxpayer money on the line' to save the brokerage. Less than three weeks later, with markets worldwide in a meltdown triggered in large part by panic over Lehman's failure, the Bush administration went to Congress for US$700 billion of taxpayer money to save the financial system.

Treasury's Paulson told NPR that he believed the banking system had been 'stabilised' and he implied that there was no major institution likely to present a problem that would shock regulators.

'I got to tell you, I think our major institutions have been stabilised. I believe that very strongly,' he said.

Two weeks later, the government was forced to stitch together a bailout plan to protect Citigroup from losses on US$306 billion of toxic assets. -- LAT-WP

Dividend Policy of SGX Blue Chips

Business Times, 2 Jan 2009.