New US crisis brewing: mall, hotel foreclosures

The full scope of the US housing meltdown is not clear and already there are ominous signs of a new crisis - one that could turn out the lights on malls, hotels and storefronts across the country.

Even as the holiday shopping season begins in full swing, the same events poisoning the housing market are now at work on commercial properties, and the bad news is trickling in. Malls around the United States are entering foreclosure. Hotels in Tucson, Arizona, and Hilton Head, South Carolina, also are about to default on their mortgages.

That pace is expected to quicken. The number of late payments and defaults will double, if not triple, by the end of next year, according to analysts from Fitch Ratings Ltd, which evaluates companies' credit.

'We're probably in the first inning of the commercial mortgage problem,' said Scott Tross, a real estate lawyer with Herrick Feinstein in New Jersey.

That's bad news for more than just property owners. When businesses go dark, employees lose jobs. Towns lose tax revenue. School budgets and social services feel the pinch.

Companies have survived plenty of downturns, but economists see this one playing out like never before. In the past, when businesses hit rough patches, owners negotiated with banks or refinanced their loans.

But many banks no longer hold the loans they made. Over the past decade, banks have increasingly bundled mortgages and sold them to investors. Pension funds, insurance companies, and hedge funds bought the seemingly safe securities and are now bracing for losses that could ripple through the financial system.

'It's a toxic drug and nobody knows how bad it's going to be,' said Paul Miller, an analyst with Friedman, Billings, Ramsey, who was among the first to sound alarm bells in the residential market.

Unlike home mortgages, businesses do not pay their loans over 30 years. Commercial mortgages are usually written for five, seven or 10 years with big payments due at the end. About US$20 billion will be due next year, covering everything from office and condo complexes to hotels and malls.

The retail outlook is particularly bad. Circuit City and Linens 'n' Things have sought bankruptcy protection. Home Depot, Sears, Ann Taylor and Foot Locker are closing stores. Those retailers typically were paying rent that was expected to cover mortgage payments. When those US$20 billion in mortgages come due next year - 2010 and 2011 totals are projected to be even higher - many property owners will not have the money. Some will survive, but those property owners whose loans required little money up front will have less incentive to weather the storm.

Refinancing formerly was an option, but many properties are worth less than when they were purchased. And since investors no longer want to buy commercial mortgages, banks are reluctant to write new loans to refinance those facing foreclosure.

California, New York, Texas and Florida - states with a high concentration of mortgages in the securities market, according to Fitch - are particularly vulnerable. Texas and Florida are already seeing increased delinquencies and defaults, as are Michigan, Tennessee and Georgia.

The worst-case scenario goes something like this: With banks unwilling to refinance, a shopping centre goes into foreclosure. Nobody can buy the mall because banks will not write mortgages as long as investors will not purchase them.   -    2008 Novmeber 29 AP

‘extensive and ongoing’ economic turmoil this FINANCIAL TSUNAMI Worst is yet to come says HSBC boss  Lehman Fallout : Chinalco's RioTinto stake Tycoons take a bath as markets run dry Asia, too, feels the pain Children displaced Weddings delayed

 
As at 2008 September 20 - BUSINESS TIMES

• US Senate passes bill   >>  Historic Bailout
• Vicious circle in the US & abroad
• Bank of England warns no quick fix
• US gov't rescue of Fannie Mae & Freddie Mac
• Li Ka-Shing Says `Worst Is Yet to Come' in Global Economy Slump
• World economy shows strain
• Global economy now at point of Maximum Danger
• Australia faces worst crises than America
• Credit crunch fallout will hamper homebuyers until at least 2010
• The economic crises:  When everything seemed to go wrong at once
• Luxury Goods Weather the Storm in the US
• Concern grows in US over Fiscal Crises
• US home prices still in freefall
• Foreclosure numbers detail more pain to come
• Is Commercial Real Estate Mortgages next?
• Housing chills hit Apartments
• Credit Environment biting the UK more than in the US
• Retailers suffer worst month in 25 years in UK
• Shift of retail powers to consumer
• US Financial Report
• Facts & Figures
• Home Equity Frenzy Was Bank Ad Come True
• Loan application
• China owns $1 trillion of US debt
• What Happens if a major US bank fails?
• Liquidity Issues

• More than 10,000 local investors holding Lehman Minibonds are affected by the New York-based bank's collapse, with most losing between HK$500,000 and HK$3 million.  >> BLOOMBERG
• Value Partners, (one of HK's top fund managers - V-nee Yeh [Mira's hubby] &  Cheah Cheng Hye) are down $1 bln USD since July  >>  Reuters

Anxious Depositors Withdraw Cash From Asian Bank

• Nerves on Edge for Asian Savers
• Hong Kong Has First Bank Run in Decade as Bank of East Asia
• Li Ka-Shing props up BEA
• Rebuffs Rumors For the first time since the Asian financial crisis more than a decade ago, Hong Kong has faced a bank run.
• Central Banks take coordinated action

NEWS ANALYSIS
US$900b aftershock seen hitting US, Europe banks
They face rising premiums as debts mature amid frozen primary market

(NEW YORK/LONDON) The financial earthquake that shook Wall Street last week may be followed by a US$900 billion aftershock as bank debt comes due in the next year.

US and European banks face soaring premiums as a mountain of debt matures at a time when the primary market remains frozen. As much as 150 billion euros (S$313.7 billion) in euro-denominated debt is due in the next six months, according to Barclays Capital, and US$673 billion of US dollar-denominated financial debt is set to mature through the end of 2009, based on Morgan Stanley data.

That means banks, already suffering from the worst credit conditions since the Great Depression, will be forced to re-issue bonds at a steep price to roll over borrowings and raise fresh capital or seek other options including reduced loan growth.

'Either they will have to pay up to get it done or they will have to do other things, such as asset sales, which is also difficult,' said Olivia Frieser, a bank credit analyst at BNP Paribas, in London.

In Europe, there is cash to be put to work and investors are expecting hefty discounts on senior debt. A 1.75 billion euro UBS five-year bond was launched at the end of August, for example, at a 19-basis-point premium over secondary spreads and 125 basis points over its credit default swaps.

'We're underweight on the financial side, but senior paper is one area we would be looking into in the medium term,' said Christian Doppstadt, head of corporate credit investment at WestLB Asset Management, in Dusseldorf, Germany.

Wall Street's landscape changed dramatically last week with the US government's US$85 billion loan to AIG, once the world's largest insurer based on market value; the bankruptcy filing of Lehman Brothers Holdings Inc, the parent of the fourth-largest US investment bank, and the fire sale of Merrill Lynch, the largest US retail brokerage, to Bank of America.

Uncertainty about how and when the US government's planned US$700 billion rescue of the financial sector, announced last weekend, will be implemented also means that credit spreads remain near record wide levels.

'You've got to look through the short-term uncertainty and put this in the context of what it is: It may not be the end game but it's certainly a step in the right direction for risk and for reopening the primary market,' said Simon Ballard, senior credit portfolio manager at Fortis Investments, in London.

'When the market can stabilise and get some confidence will be key to getting liquidity going, and that will become a self-fulfilling prophecy as the new issuance will garner confidence,' Mr Ballard said.

But ultimately higher borrowing costs in the banking sector will be passed on to corporates.

The extra yield, known as the spread, that investors demand to hold risky high-yield bonds over US and European government bonds, also widened to record levels on Sept 18, a sign of rising risk for those securities. Spreads narrowed the next day, which was last Friday, on optimism over the federal mortgage bailout plan.

Those costs have deterred some borrowers from issuing debt, but some may not have a choice now as the terms of existing cheap bank credit facilities, negotiated before the credit crisis, get used up or need to be renegotiated.

Global investment-grade corporate bond sales fell to US$1.67 trillion, year-to-date, versus about US$2 trillion for the same period last year and compared to a record US$2.6 trillion in 2006, according to Thomson Reuters data.

Global high-yield bond sales dropped to US$37 billion year-to-date, versus US$131 billion for the same period last year and a record US$185 billion for all of 2006, Thomson Reuters data shows. There have been no high-yield deals in Europe for well over a year.

'High-yield issuance is on track to be down 50 per cent from last year,' said Martin Fridson, chief investment officer of New York-based Fridson Investment Advisors, during the Reuters 2008 restructuring summit in New York on Tuesday. 'If anything, the year-over-year decline will be a bit greater than that, as the issuance has slowed to a trickle recently.'

Mr Fridson noted that financial paper is not a material factor in the high-yield new-issue market, so refinancing for those companies has more to do with how the investment-grade market for new issues holds up.

In Europe, Barclays estimates that 50 billion euros worth of non-financial redemptions are due over the next six months. -   2008   September 26      Reuters

Impact of US crisis could worsen: Wen
He also said that China would aid any international bid to defuse turmoil

(UNITED NATIONS) Cash-rich China weighed in on the US financial crisis on Wednesday, with Premier Wen Jiabao warning that its international impact could become 'more serious' and stressing the need for concerted efforts to contain the turmoil.

He indicated that China, the world's biggest holder of foreign reserves and second-biggest holder of US treasury bills, was ready to help in an international bid to defuse the turmoil that has rocked financial markets around the globe.

'The ongoing financial volatility, in particular, has affected many countries and its impact is likely to become more serious,' Mr Wen told the UN General Assembly.

'To tackle the challenge, we must all make concerted efforts,' he told the UN meeting at the tail end of his address, which touched on various issues, including a pledge to push ahead with reforms to fuel growth in the world's most populous nation.

US president George W Bush, who is also attending the UN General Assembly, had telephoned Chinese president Hu Jintao on Monday to brief him about the financial turmoil and his administration's bid to stage a US$700 billion Wall Street bailout to stem the crisis.

Mr Hu told Mr Bush that China welcomed Washington's efforts to stabilise the US financial markets and hoped that they succeed, according to Beijing's state media.

But as Mr Wen spoke on Wednesday at the United Nations, the Bush administration remained locked in a dispute with the US Congress over the massive bailout package aimed at buying distressed mortgages and mortgage-related securities from financial institutions.

Mr Wen hinted that China would help in any international bid to defuse financial contagion arising from the US crisis, saying that this was not the time for 'hostility' or 'prejudice'.

'So long as people of all countries, especially their leaders, can do away with hostility, estrangement and prejudice, treat each other with sincerity and an open mind, and forge ahead hand in hand, mankind will overcome all difficulties and embrace a brighter and better future,' he said. 'China, as a responsible major developing country, is ready to work with other members of the international community to strengthen cooperation, share opportunities, meet challenges and contribute to the harmonious and sustainable development of the world.'

Mr Wen said that given the global nature of issues threatening the world, including environmental problems, terrorism, diseases, natural disasters and financial troubles, 'no county can expect to stay away from the difficulties or handle the problems all by itself'.

The premier also touched on global concerns about China's direction after hosting the Olympics last month, saying that Beijing would remain committed to 'peaceful development' and 'unswervingly pursue reform and opening-up'. He said 'only continued economic and political restructuring, and reform in other fields can lead to sustained economic growth and social progress, and only continued opening up in an all-round way can lead the country to greater national strength and prosperity.' -   2008 September 26     AFP

Beijing steps in to Boost Markets

China's government announced plans to buy shares and take other measures to halt its plummeting stock market, a program analysts said will surely boost investor sentiment, but at the cost of reintroducing other long-term risks.

An arm of China's $200 billion sovereign-wealth fund intends to increase its shareholding in three of the nation's largest banks with direct purchases on the market, while other government entities will be encouraged to load up on stock in listed companies that they control, according to Chinese government statements Thursday. In addition, authorities canceled a 0.1% tax on stock purchases, although sellers will still have to pay the tax.

Already the principal shareholder in three of China's largest banks, Central Huijin Investment Co., will buy additional stock in Industrial & Commercial Bank of China Ltd., Bank of China Ltd. and China Construction Bank Corp., according to the state-run Xinhua news agency. The report said the buying began Thursday and aims to "shore up their share prices amid stock market slumps." No specifics on the planned purchases were announced.

"It is absolutely a market-rescuing message from the government," said Mao Nan, a strategist at Orient Securities Co. in Shanghai.

The announcement came on a day when other Asian governments were taking more technical and less blunt steps to support their financial systems, such as adding cash to money markets. But that policy option would have limited impact on China's economy given the immaturity of its financial system.

By buying shares directly, Beijing will employ its most powerful tool to halt a painful market decline that has erased 64% this year from the benchmark Shanghai Composite Index. The move also marks perhaps a last chance to resuscitate the confidence of tens of millions of investors, and appears to reflect a recognition in Beijing that its strategy to carefully phase in market-oriented policies hasn't convinced the public that stocks are a suitable place to put their $4 trillion in savings.

A sixfold gain in the Shanghai Composite Index between 2005 and late last year made Chinese companies among the most valuable on the planet. The Chinese market at its height was capitalized at almost $5 trillion. Much of that value vanished in less than a year, as the index fell about 70% from last year's all-time high of 6124.04 to Thursday's low point of about 1816.

The purchases will deepen China's government ownership of a market that by some estimates is still about two-thirds controlled by state interests. That state of affairs threatens to sustain a decade-long fear that big shareholders will ultimately dump their stock, a factor that many blame for this year's collapse and a previous grind earlier in the decade that erased more than 40% of market value.

It is unclear whether the stock-market intervention suggests Beijing will suspend its hunt for investments overseas. Chinese entities haven't entered the fray to shore up Wall Street firms in recent weeks. Still, even as the market bailout was being announced on Thursday, Bank of China said it would pay 2.3 billion yuan ($336 million) to buy about 20% of Cie.   Financière Edmond de Rothschild, the French arm of the LCF Rothschild Group headed by Baron Benjamin de Rothschild. Word also emerged Thursday that China Investment Corp., Huijin's parent, was negotiating to possibly increase its investment in Morgan Stanley.

Policy makers debated for months whether to pull the trigger and buy shares, a person with knowledge of the situation said Thursday.

For much of the year, proponents of freer markets appeared to be winning with their argument that authorities shouldn't target price levels. They advocated instead building a credible trading system of fair rules, robust infrastructure and trustworthy participants that would make the stock market a base on which to build a fuller financial system.

But as the market rout continued, Beijing's credibility was on the line. Investors, who had opened more than 100 million trading accounts, said the market's biggest investor -- the government -- had a duty to defend it.

Others argued that authorities should invest at home, in what remains the world's fastest-growing major economy, rather than gambling government money with investments in overseas firms like Blackstone Group LP and Morgan Stanley that so far appear unwise. More recently, the unprecedented bailouts by the U.S. government of its financial companies have provided ammunition to those calling for official stock buying by Beijing.

As part of the new effort to boost stocks, the central-government entity that indirectly controls a vast array of major state-owned companies indicated Thursday that repurchases of shares in listed companies would soon begin. Among the companies in its stable is oil giant PetroChina Ltd., the largest stock on the Shanghai exchange.

Gao Lingzhi, an analyst at Great Wall Securities in Shenzhen, said if the market doesn't sustain the now widely expected rally when government entities start buying stocks, investors will clamour for more support.

Key in the process will be five-year-old Huijin, established to hold chunks of China's state-owned banks at the start of a complex restructuring process that transformed them from deeply indebted institutions into some of the biggest and most profitable publicly listed lenders in the world.

Huijin owns about 68% each of Construction Bank and Bank of China. Together with China's Ministry of Finance, it holds 70% of ICBC.

Huijin's buying is likely to have a significant impact, because financial stocks are the biggest companies on the market. Only a small percentage of the banks' shares are listed on the stock markets, giving any purchaser outsize ability to boost the share price. ICBC is the second-largest stock on the Shanghai Stock Exchange, while Bank of China is No. 4. The banks all trade on the Hong Kong stock exchange, too.   - 2008 September 19    WALL ST JOURNAL

"We seem to be in the midst of a 'perfect storm' leading to more bankruptcies: high levels of debt, high energy and raw materials costs and weakness in the U.S. economy,"

An end to credit crisis: focus on how, not when
It's time to look back to the Asian crisis for a road map to the current crisis

The most consistent question I've encountered with clients over the past year has been: 'When is it going to be over?' Unfortunately, the answer to that question remains uncertain. However, a question as important for investors to understand, we believe, is: 'How will the credit crisis come to an end?'

The answer to this question provides investors with not only a time window for action but also a road map that they can follow as the next stages unfold in coming months. 

Fortunately, for those of us who experienced the Asian crisis in 1997-98, this question is one in which we have specific insights into the answer.

While the credit crisis in the United States began with words and acronyms that were foreign to many of us (including sub-prime, CDOs, CLOs, leveraged loans, and auction-rate securities), the nature of the crisis shares many similarities with the Asian crisis.

Banks and borrowers over-leveraged themselves, with borrowers purchasing over-valued assets (real estate), which, when their prices stopped going up and eventually began falling, resulted in declining collateral for loans and large losses among banks.

The situation in the US today is very similar, albeit the leverage of the securities and the size of the US and, increasingly, the European financial system involved greatly outstrip that seen during the Asian crisis. So, looking back to the Asian crisis for a road map to the current crisis, the keys to the end of the Asian crisis centred on three areas: recapitalisation of the banking system, de-leveraging of borrower balance sheets, and recovery in a demand source.

In the case of Thailand, Korea and Indonesia in 1998, recapitalisation and demand recovery were external events with the International Monetary Fund and local governments providing capital to the local banking system, while the US rate cuts of 1998 provided a catalyst for accelerating export growth to support demand in Asia while domestic economies repaired themselves.

De-leveraging of Asian balance sheets proved to be a longer-term project with debt-to-equity ratios, which peaked at 200-400 per cent in 1997-98, taking six years before stabilising in the 30-50 per cent range.

The US appears to be following a similar path to recovery. According to Bloomberg, global banks have raised US$354 billion in new capital since July 2007, beginning the recapitalisation process among global banks. However, losses to date among the same banks have totalled over US$500 billion, according to Bloomberg, suggesting that ongoing recapitalisation through new equity issues or asset sales will continue to be needed in the months ahead.

While potentially painful for existing shareholders in some banks, the pools of capital at sovereign wealth funds, private equity, hedge funds, and a handful of banks untouched from the global credit crisis bring confidence that funding for this recapitalisation process exists globally.

Like in the Asian crisis, a key component to the recapitalisation process was banks selling distressed loans to 'workout funds' or distressed asset managers. In the current crisis, we expect this process will be key as well. As important as recapitalising the financial system will be a return of a demand driver for US/global growth. During 1998-99, distressed Asian economies benefited from a re-acceleration in US growth allowing the export sector of local economies to grow while domestic sectors (real estate and banks) could de-leverage and repair balance sheets.

Indeed, this is the path the US economy is currently following, according to colleagues in the US. Since the onset of the credit crisis, US exports have been a key offset to declines in residential construction (see chart), much like seen in Asia during its crisis.

With the European and Japanese economies more recently succumbing to the global slowdown, global demand drivers increasingly rely on developing economies. Even with the expected slowing in growth in developed economies, Citi expects emerging markets growth to remain strong, though decelerating to a forecast GDP growth of 6.1 per cent in 2009. As a result, fiscal stimulus in global economies appears to be a key component to the recovery path from the global credit crisis. This will serve as a stabilising factor for slowing export demand in emerging economies while supporting developed market export demand.

With this support from emerging market demand, developed economies will still need to do their part as well. Fiscal stimulus in developed economies will be important to stabilising domestic demand (like seen in Japan post-1989), especially given the size of developed domestic economies relative to their exports.

With recapitalisation of global financials looking set to continue and a rebalancing of growth within economies ongoing, we expect one last similarity to emerge between the current period and those seen in the post-Asian crisis and post-tech bubble periods. During these other periods of repair, a persistent increase in volatility characterised the market environment, creating opportunities for traders capable of trading a variety of asset classes on both the long and the short side.

So, for investors navigating the current environment, while the answer to the 'when' question remains difficult, clarity on the question of 'how' leads us to believe that attractive opportunities for investors looking forward are focused on taking advantage of the recapitalisation of global bank balance sheets via distressed asset funds.

Indeed, historically, distressed asset funds have provided attractive returns in difficult market periods in the light of their role in repairing US bank (as in 1990-1992) balance sheets and US corporate balance sheets (as in 2001-2003).

Looking longer term, investors will have an opportunity to capitalise on the fiscal stimulus that we expect to emerge in developed and emerging economies, in particular focused on upgrading infrastructure globally. Private equity opportunities in this area appear best suited to match the long-duration nature of the opportunity and to mitigate the impact on investor returns of downward, cyclical pressure on construction exerted by the current global economic slowdown.

Lastly, while we expect growth in emerging economies to outpace those in developed markets, valuations and earnings risk in emerging markets leave near-term cyclical risk ahead for investors. Investors may wish to capitalise instead on opportunities that are emerging as a result of the current, high volatility environment.

However, given the limitations that most individual investors encounter, especially trading on the short side of the market and in non-traditional asset classes, global macro funds present an attractive opportunity in the current environment.   - 2008 September 3   BUSINESS TIMES   The writer is head of research & strategy, investments, Citi Private Bank, Asia-Pacific

Asian market fallout set to get far worse
Property, stocks will be hit bad as foreign capital is pulled

Fallout in Asian financial markets and institutions from the sub-prime crisis could become more serious now as foreign capital, from the US and other leading markets, is withdrawn, speakers at a symposium in Tokyo predicted yesterday. Asian property markets - in China and Vietnam especially - are likely to be hit hard while stock markets could take a battering, along with banks and other financial institutions, they suggested.

'There may be a sudden shift in capital flows as a result of fallout from the sub-prime crisis,' warned South Korea's former commerce minister Duck Koo Chung at the conference organised by the Asian Development Bank Institute (ADBI) and the North East Asia Research Foundation (NEAR).

'Coming weeks will be crucial' in this regard, Mr Chung later told Business Times.

ADBI dean Masahiro Kawai, who told the conference that 'global financial turmoil may continue longer than hoped for', suggested to BT that a flight from Asian property market investment by banks, investment funds and various stock market vehicles could damage these institutions as the property boom unwinds.

The warnings came as a sobering counter to the widely held view that Asian markets and institutions are likely to escape relatively unscathed from the sub-prime credit crunch that has wrought havoc upon major investment banks and others in the US and Europe. The theory of a 'decoupling' of Asian economies from outside problems has similarly been shattered by recent events.

Recent weeks have seen the collapse of a series of property development firms in Japan as US and other investors pulled funds from them. The most recent collapse - developer Urban Corp - marked Japan's biggest corporate bankruptcy this year and the implication of yesterday's warning at the conference was that firms elsewhere in Asia could be facing a similar fate.

Mr Chung told BT that property markets in China and Vietnam are especially vulnerable, while South Korea's property market is also facing problems along with those of other East Asian economies. 'There will be another round of credit crisis in developing economies', as money is 'pulled', he said. Foreign direct investment as well as portfolio investment in many Asian economies has been directed into property, added Mr Chung, who is now chairman of NEAR.

The cause of the US dollar's strength in recent weeks has been partly to do with the repatriation of investment funds from overseas, and this process could accelerate now as a fresh credit crunch threatens, in spite of injections of financial liquidity by the US Federal Reserve, Mr Chung commented. 'This will lead to a further correction in asset markets' in Asia and elsewhere, he suggested.

'We have been planting the seeds of the current crisis for many years,' said Mr Chung, who noted that Asia had supplied much of the financial liquidity that fed asset bubbles in the US and elsewhere. Now that US credit markets have seized up, the Fed is having to pump liquidity but this 'can only jeopardise the anchor position of the dollar' in global financial markets.

Recent Fed actions 'imply an expectation of continuing stress in financial markets', and meanwhile, economic slowdown has hit both Japan and Europe, Mr Kawai noted at the conference.  - 2008 August 29   BUSINESS TIMES

Lessons for financial regulators

The most recent issue of The Economist has an article titled 'Confessions of a Risk Manager'. It provides an insight into how US financial institutions built up so much exposure to collaterised debt obligations (CDOs) and other asset-backed securities.

First, the risk managers were lulled by the most benign risk environment in 20 years; they couldn't see where the problem could have come from. Second, while default risk was priced in, liquidity risk was not. Thus, that the price of an AAA asset with virtually no default risk could fall by 20 per cent seemed inconceivable - but it eventually did. Third, CDOs and other asset-backed securities were fairly new concoctions. Hitherto, risk managers had focused on loan portfolios and classic market risk. Rigorous credit analysis was done on loan portfolios to minimise loan loss provisions. Meanwhile, equities, government bonds and foreign exchange, and their derivatives, were well managed in the trading book and monitored on a daily basis. CDOs and other asset-backed securities sat between market and credit risk. In the words of the risk manager: 'The market-risk department never really took ownership of them, believing them to be primarily credit-risk instruments, and the credit-risk department thought of them as market risk as they sat in the trading book (which are marked to market).' Finally, the explosive growth and profitability of these structured credit products cowed the risk department into continuing to approve these transactions. To the bankers and traders, risk managers don't bring in the dough, yet they have the power to say no and prevent business from being done. They were seen as obstructive and a hindrance to bankers' ability to earn high bonuses. So risk managers came under tremendous pressure to not spoil the party.

All this happened in many financial institutions. In due course, their books were overflowing with CDOs and asset-backed securities. Through it all, the US Federal Reserve was more a cheerleader than a stern enforcer of standards.

Time and again, we have seen how financial institutions and markets - lured by the prospect of instant riches - have built up excesses that eventually posed systemic risks. This is not unlike a wayward child who gorges himself on sweets until he gets sick; hence it is the parents' duty to set a limit. Likewise for financial institutions and the markets, it is the job of risk managers and regulators to be firm and put their foot down to curb the exuberance of money-grabbing bankers.

The global financial shock sparked by the US sub-prime mortgage crisis is far from over, according to leading international financial experts. There is still a major risk of a 'meltdown' as economies battle what is shaping up as the worst slump since the 1930s, a group of them - including financial guru Marc Faber and investment veteran Mark Mobius - warned at a symposium organised by The Business Times.

Total losses suffered by financial institutions worldwide in the wake of the sub-prime debacle will run into trillions of dollars - possibly as much as US$10 trillion, rather than the billions envisaged originally, some suggest. And the US budget deficit could 'explode' as Washington seeks to stem a real estate haemorrhage and restore confidence

The experts' analysis (which appears inside on Page 13) is a far more sobering assessment of the dangers facing the world economy than has generally been presented so far. It comes as markets are again suffering tremors - with the US Federal Reserve once more forced to pump confidence-boosting liquidity into the financial system.

Equity markets are threatened with an 'avalanche' as financial system aftershocks continue, the expert panel warns. And according to Mr Faber, this could turn into a drawn-out process or 'water torture' bear market.

Former Wall Street executive and one-time World Bank group official Ernest Kepper reckons stock valuations could fall as much as 40-50 per cent from their peaks a year or so ago.

And Mr Mobius says: 'There is a big risk of a meltdown of the (US) financial systems brought on by a lack of confidence.'

Lehman Brothers' New York managing director and chief US economist Ethan Harris rejects any suggestion that US government debt is 'not safe' amid the crisis at mortgage giants Fannie Mae and Freddie Mac.

But Mr Faber suggests: 'We are in the midst of an unprecedented credit growth slowdown that will hit all asset classes one after the other as liquidity tightens and deleveraging becomes the order of the day.

'First, home prices came down. Then financial stocks. And now, commodities, material and energy stocks. Bonds will eventually tumble too. Even art prices will fall.'

Inflation is seen as the immediate threat as food, fuel and other commodity prices soar. But governments may soon find themselves battling deflation, the experts warn.

Mr Kepper says: 'As the financial avalanche builds and recession hits oil-importing countries, the combination of a severe US recession and a global slowdown will shift the focus away from inflation to the slipping demand for real goods.

'This will lead to a reduction in prices when supply exceeds demand. There will be downward pressure on labour markets and rising unemployment, while at the same time, commodity prices fall in accordance with reduced demand.'

William Thomson, a former vice-president of the Asian Development Bank and now head of a financial advisory group, says the sub-prime crisis is 'undoubtedly the worst in the developed world since the 1930s'.

He reckons the only period remotely similar is the bear market of 1973-75, which was driven by surging oil prices and stoked annual inflation rates to around 20 per cent. 'That has not yet arrived but may well be in the pipeline,' he says.

But he believes the situation is far worse this time because the US financial system is extraordinarily stretched and stressed.

'Last time, we only had the minor bankruptcies of Franklin National Bank and Continental Bank to contend with,' he says. 'Then, there were no derivatives. But now, they amount to more than 10 times world GDP and a greater multiple of bank capital. Within that total, the most toxic ones are those of unlisted, opaque, over-the-counter variety amounting to over US$50 trillion - again multiples of US bank capital.   - 2008 August 1  BUSINESS TIMES

Making sense of the bear market

PARTICIPANTS

Moderator:   Anthony Rowley, Tokyo correspondent for The Business Times.

Panellists:

• Marc Faber, an investment adviser and publisher of the Gloom, Boom and Doom Report.
• J Mark Mobius, president of Templeton Emerging Markets Fund Inc, and director and executive vice-president of Templeton Worldwide Inc.
• Ethan Harris, managing director and chief US economist at Lehman Brothers, New York.
• Ernest Kepper: A former official of the International Finance Corporation and Wall Street investment banker who now heads an Asian financial consultancy.

OVERVIEW

Since the sub-prime mortgage crisis burst upon the US a year ago, there have been market rallies and claims that the worst is over, only to be followed by fresh plunges in values and sentiment. Are we near the bottom now, or just at the start of a long, slow meltdown? Our experts take the latter view.

Where can investors find a safe haven in this sea of trouble and uncertainty? Gold is still a good refuge, suggests one expert, who expects the price go as high as $2,500 an ounce.

More fundamentally, our experts see developing markets in Asia and beyond as the promised land that will emerge relatively strong from a potentially massive destruction of wealth in the old world. The needs of these emerging markets for food and natural resources will be strong, so farmland and plantations could be good investments.

Anthony: I'm delighted to welcome such a strong panel - a mark of how seriously you gentlemen view the current global financial and economic situation. It's especially pleasing to welcome back some old friends - Marc Faber, Mark Mobius and Ethan Harris.

Marc, let's start with you. Are we looking at a financial system "avalanche" rather than a technical bear market, in equities and bonds?

Marc: I believe that the secular bull market in equities and bonds, which lasted from 1981/82 to anywhere between 2000 and 2007 has come to an end and that a water torture bear market has begun. If an enormous quantity of money is printed by central banks equities may avoid a severe bear market of say 40% to 50% but a trading range would still follow and no net gains - certainly not in real terms - would be achieved.

Mark: This may become the case in the US where there is a big risk of a "meltdown" of the financial system, bought on by a lack of confidence. However, emerging markets, equities have corrected more due to poor market sentiment and contagion from what is happening in the US, rather than any major deterioration in fundamentals.

Ernest: I say this is an 'avalanche.' I am anticipating a fall in equity prices in the range of 40 to 50% relative to the peak--- much more severe than the 25% fall which we see in a recession.. Two main reasons are that major economies other than the US will have severe interruptions in growth and that the consumer - especially US. consumers who most likely have gone further into debt than their credit cards would allow by making a home equity loan or taking on the second mortgage will most likely be under pressure to repay. It appears that the U.S. consumer's debt burdened situation will put him in a "no way out" financial quandary with a fall in home prices, fall in equity prices, rising inflation and a reduction in jobs. I expect this scenario to unfold over the next 12 to 18 months.

Bill: In no way can this be seen as a normal bear market. This is undoubtedly the worst financial crisis in the developed world since the 1930s. The only period remotely similar was the bear market of 1973-75, which was itself a part of the extended 1966-82 bear market in US shares. That bear market was driven in part by a 13 fold increase in oil prices from 1972 to 1980. This time we have had a 14 fold increase in oil prices from the $10 low of 1999. Last time we had massive inflation of 20 percent per annum. That has not yet arrived but may well be in the pipeline.

However, in my view, the situation is far worse this time since the US financial system is extraordinarily stretched and stressed. Last time we only had the minor bankruptcies of Franklin National Bank and Continental Bank to contend with. Then there were no derivatives. This time, they amount to more than 10 times world GDP and a greater multiple of bank capital. Within that total the most toxic ones are those unlisted, opaque, over the counter variety amounting to over $50 trillion, again multiples of US bank capital.

The revolution in market finance that began with the deregulation of the 1980s may be about to eat its young, as we have seen with the putative bailouts of Fannie Mae and Freddie Mac; if nationalization goes ahead the US visible national debt increases by $5 trillion and is effectively double. The US would no longer qualify to join the Euro!

The US budget deficit could be on the verge of exploding upwards. Including war costs, it is already over 4 percent of GDP. The economic slowdown and Presidential candidate Obama's plans for healthcare, whist noble and justifiable, even after tax increases, could send the deficit north of $1 trillion or 7 percent of GDP by 2010.

Anthony: What do you think the total "wealth loss" might be as a result of recent crises (in terms of falls in market cap, sub-prime losses and other losses by banks and investment banks, derivatives market losses in general)? Does anyone really know - or is the whole thing too opaque to estimate?

Ethan: Estimating the losses of financial institutions is extremely difficult, but something in the $500 bn to $1 trillion range makes sense. The good news is that much of that has already been revealed at the major money center institutions and they have been able to recapitalize. It is also important to not double count--when a mortgage defaults the loss is the difference between the loan size and what is recovered, and we should not add to that the individual pieces at each stage of ownership of the loan. To put the loses in perspective, the total value of assets owned by US households is $72 bn and the net worth of US households is $56 billion. Moreover, many of the losses are borne outside the US. Thus the second round losses--the drop in the stock and housing market--is larger and a bigger threat to global growth.

Bill: When Chou En-Lai was asked by Henry Kissinger if he thought the French Revolution had been a success he responded 'it's too soon to tell'. That applies to the current situation. But we could be looking at $6 trillion in mark downs of housing wealth, $3-4 trillion in stock market losses if we get a 25-35 percent mark down in the market - and it could be worse - and then we have the losses of the banking system. So we are talking about possibly $10 trillion as compared with a GDP of $13 trillion. Proportionally, I would look for the UK to suffer similarly. It's not chicken feed.

Marc: Right from the start my estimate of the losses was about USD 1 trillion in the US alone. However, if we add the losses from a decline in housing wealth and stock market wealth the losses are a multiple of that.

Ernest: Overall, the fallout could easily be in the many trillions of dollars. No-one really knows (especially central banks and finance ministries) -- but if we quickly add some basic financial areas where there are already are losses to those we can expect it is easily 2-3 trillion.

The two US mortgage backers losses are in the trillions -- the loss to the 10 million privately owned real estate homeowners is also in the trillions. When you estimate in the range of a US$ 250 billion loss in each of the following sectors -- equities, consumer debt instruments (such as car loans, credit cards and student loans which have also been repackaged and sold as asset-backed securities), corporate bonds, specialized insurance companies which guaranteed bonds and mortgages to collateral mortgage instruments, the loss in tax revenue to states from real estate taxes, the bankruptcy of a major broker whose revenue has been based on charging fees rather than earning income from addressing and dealing with credit risk, the bankruptcy on one or more hedge funds, construction company losses and bankruptcies of and derivatives, it will be a multi trillion dollar loss.

Anthony: Do you think that inflation or deflation is the greatest threat facing the global economy - i.e. commodity price inflation versus the collapse in asset values (real estate and stocks etc).

Marc: We are in the midst of an unprecedented credit growth slowdown and this will hit all asset classes - one after the other, as liquidity tightens up and as de-leveraging becomes the order of the day. First home prices came down, then financial stocks and now commodities, material and energy stocks, and art prices will follow. Bonds will eventually also tumble. In the meantime it is likely that consumer price inflation will accelerate.

Mark: In view of aggressive monetary expansion by the US, the risk of inflation is probably greater. In emerging markets, another big risk is also the abandonment of the market economy philosophy and a cessation of privatization of state owned companies.

Bill: This is the great debate. The losses are deflationary but the monetary and fiscal policies are hugely inflationary. So far the secondary effects of wage inflation are the dogs that have not barked yet, but the unions are clearly getting restive in Europe and the pressures are so intense on US wage earners that it surely must just be a matter of time before they try and restore some of their lost incomes.

Ultimately, governments never repay their debts in real terms. I look for the US to try and inflate its way out of its mess whilst, all the time, denying it is happening and quoting the manipulated inflation data. But one only needs to look at the private estimates of M3 growth to see that it has been growing at 18 percent per annum, double what it was when they stopped publishing the information and double the worst time in the stagflationary 1970s.

Ernest: Probably inflation initially. But as the avalanche builds and recession hits oil-importing countries, the combination of a severe US recession and a global slowdown will shift the focus away from inflation to the slipping demand for real goods which will lead to a reduction in prices when supply exceeds demand. There will be downward pressure on labour markets, rising unemployment, while at the same time commodity prices fall in accordance with reduced demand. Equity market prices are presumably based on value, while commodity market prices are the result of supply and demand.

As the Fed approaches a zero interest rate policy, its ability to have an impact on the economy will be reduced. This is because the Fed has been playing a bigger role in financial stability issues rather than growth issues.

Anthony: How safe is US government debt as an investment now, given the stress of financing financial system bail-outs?

Ethan: It is absurd to think that US government debt is not "safe." The potential liabilities the government is taking on are small relative to the size of government debt and even in a worst case scenario, debt as a share of GDP is unlikely to approach the highs of the US 15 years ago or in other major economies such as Japan and Italy. Moreover, the Fedlearned its lesson from the 1970s and is very unlikely to allow a sustained inflation acceleration.

The big challenge for US debt is not new: it is the huge surge in costs as the baby boom generation retires. In terms of the dollar, it is also wrong to focus on US government liabilities. What matters to the dollar is the overall borrowing requirement of the economy--that is the current account deficit. The current account deficit is improving as exports surge and imports stagnate. The deficit is still too big, but at least it is moving in the right direction. Looking ahead, further improvement is likely as Americans rediscover the virtues of conventional saving, rather than relying on asset price appreciation to accumulate wealth.

Marc: Since the government can print money US debt is 100% safe. What is, however, not safe is the US dollar. So, investors may eventually get their money back in a currency - the US dollar - which will hardly be worth anything.

Mark: Looking at the U.S. fundamentals, the perceived safety of U.S. government debt is under stress which is why central bankers have been diversifying their reserves. Of course in a general loss of confidence then such debt could become risky.

Bill: You will be repaid in US dollars with less purchasing power than when you subscribed. Whilst this crisis continues and the management of the White House and the Fed remain unchanged, the US dollar is a poor bet and a worse investment.

Ernest: While US. Treasuries have not been particularly rewarding buys, mainly because of excessive debt loads, it is default swaps and derivative products plus counter-party risk management instruments and arrangements on the market by foreign countries that raise concern.

Anthony: What is the safest thing to "hold onto" in this avalanche - gold, other commodities, cash etc?

Marc: For the next three months the US dollar should be fine. On weakness physical gold should be bought as it is the only "honest" currency. I would avoid industrial commodities. Farmland and plantations should also be relatively attractive.

Mark: I would still maintain that the best strategy would be to have a diversified portfolio between equities, bonds, commodities and cash. We continue to find fundamentally stock companies trading at attractive prices as a result of the global market correction.

Ethan: Investors should remain conservative in this environment. Even commodities are not a panacea. For example, the surge in oil prices in the face of a clear weakening in oil demand, suggests part of the run-up this year is unsustainable.

Bill: Gold, in my opinion, is the asset of last resort. It is no one else's liability and has shown its value in crises over the millennia. That situation remains unchanged. It is still cheap relative to oil on a historical basis and is only 40 percent of its all time high on an inflation adjusted basis. New supplies coming onto the markets are constrained by high costs and a lack of mining skills after a generation when no new graduates entered the sector.

Given the global geopolitical tensions added to the banking crisis, gold remains a superb insurance policy. Before the present cycle exhausts itself I would not be surprised to see gold reach all time highs on an inflation adjusted basis i.e., $2500. Silver is also interesting here since it is a minor precious metal with expanding industrial applications. On an inflation adjusted basis it is even cheaper than gold. There are an ever expanding range of instruments to tap the commodity space with ETFs and ETNs - long and short. There are also natural resource funds of hedge funds.

Anthony: Amongst equities and bonds, what (if anything) is there to go for now? Emerging markets versus advanced markets?

Marc: I think for the next three months the US will continue to outperform emerging markets - as it has done already this year - and this not because the US market went up but because it went down less than emerging markets. I also think that Japan will outperform the US and other markets. High yielding equities in Asia, including Singapore REITs, should be okay but up-side potential is limited.

Mark: There's always something to buy. While global growth is slowing down and inflation has been increasing, emerging markets are still expected to grow at a much faster rate than developed markets. They, thus, representing an investment opportunity. Moreover, 'frontier' markets [those at an earlier stage of development than established 'emerging' markets] are also looking interesting.

Bill: I believe we are entering a new phase in the global economy, one with increased government regulation, controls and spending. The old Thatcher-Reagan supply side revolution is likely to take a breather and a return to modified Keynesian policies is a possibility.

This is driven by the increased scepticism in developed economies about globalization, largely because the rewards have not been adequately distributed. This accords with the likelihood that the 36 year cycle in US Presidential elections will probably make the Democrats the leading party of government in the coming years with all that means for interference in the economy - and inflation.

The extent to which the growing scepticism of globalization in developed economies affects the future growth of emerging markets cannot be determined at this time. At the margins growth may be reduced slightly but the fundamental factors changing the shape of the global economy are too strong to be derailed. Emerging markets remain a field of great opportunity, especially after recent declines in countries like China, India and Vietnam. Others with essential commodities are exciting. Powered by Chinese and Indian investment, Africa could have a renaissance. Those with financial imbalances like those in Eastern Europe should be avoided.

KEY POINTS

• This is the worst financial crisis since the 1930s and equity prices have more room to fall.
• All told, the total losses could run into trillions of dollars.
• High inflation is likely to persist, at least for some months.
• Investors can seek refuge in precious metals and selected emerging markets.

- 2008 August 1    BUSINESS TIMES

Market crash: Hold on to your hats 
For the patient and disciplined investor such trying times also represent excellent opportunities to pick up bargains

Most people in the investment world hate the words 'market crash'. It's everything that investors want to avoid. But because markets move in cycles, bear markets are inevitable - and we are in a bear market right now. The US financial crisis that started with the sub-prime problems has reached a new level, with the US Federal Reserve having to assemble a rescue plan for Fannie Mae and Freddie Mac, two of the largest mortgage lenders in the US.

The continued rise in oil and commodity prices has caused inflation to surface as an additional problem, especially in Asia. Markets have corrected sharply since October 2007, when some were at or near historic highs. As at July 8, all markets shown in Table 1 have crashed by more than 20 per cent over the eight-and-a-half months. Some markets, like China and India, have fallen more than 40 per cent. What should investors do?

A good idea is to look back at history - to keep things in perspective. There have been massive sell-downs and crashes in the past, caused by some event or another. Table 2 shows some notable market crashes and the recoveries that followed.

Panic and risk missing out on the recovery

Investors looking at Table 2 will note that during most of these market crashes, economies were going through recessions, the Asian financial crisis, and in the case of the US, World War II. But despite how gloomy things might have seemed at the time of the crashes, the markets recovered, and the subsequent recoveries resulted in those markets going up 100 per cent or more.

Therefore, it is important that investors do not panic and dump everything they hold when they are caught up in a market crash. The impulse to sell in such circumstances is understandably high. In all the cases mentioned here, some major crisis/war/recession that had happened. It gave common investors all the reason they needed to scream 'sell', resulting in massive drops.

However, a very important point to note is that the crash has already happened. Markets are already down by more than 20 per cent, some as much as 40 per cent. If investors sell out now, they will be selling at market lows.

Furthermore, psychologically, it would be very difficult to re-enter the market any time soon if investors sell out now. Such investors who choose to quit now are likely to stay in cash until markets are well into their recovery phase - when most of the best buying opportunities would have already passed them by.

While it may seem difficult, investors need to be prepared to withstand market volatility, and it is during uncertain times that volatility is highest. But for the patient and disciplined investor, such trying times represent excellent opportunities to pick up bargains.

When everyone is so worried or panicky over something - in this case, the Fannie Mae and Freddie Mac saga and the ongoing US financial crisis - fear overrides reason. It no longer matters that stocks are undervalued or markets cheap, because the overriding desire is to unload everything you own.

As such, the buyer has all the power and the seller is powerless. In times like these, stocks and equity unit trusts are all available at bargain prices. But investors are no longer considering whether companies (and indeed the stock market) will recover and how they will fare one or two years later. They are simply concerned about the huge drop in the value of their investments - which they cannot avoid in any case because it has already happened. Panic selling crystalises any losses that you have already incurred. Three months later, or even one year down the road, if stock markets have stabilised, investors may still be fearful and put off re-entering the markets, though by then, markets may have fully recovered all previous losses.

Seize the buying opportunities

The US is the largest economy in the world and its financial markets are the biggest. As such, any time the US sneezes, all other markets are affected. But the impact of the fallout may not be uniform across global markets. The ongoing US financial meltdown and economic decline are a good example. Most Asian financial institutions are not holding massive, potentially bad loans on their books, nor are they facing the kind of credit crunch that some of the US financial institutions currently face. In fact, investors who have experienced such crashes before will know the current situation may throw up good buying opportunities.

Most Asian markets have been beaten down severely and are trading at very attractive valuations. For example, at the start of 2008, Asian markets, as represented by the MSCI Asia ex-Japan index, were trading at almost 17X forward PE ratio for 2008. As at July 18, that forward 2008 PE ratio had dropped to 12.7X.

On a historical basis, this is at the lower end of the forward PE valuations for Asian markets, and investors who choose to buy into Asian markets (via Asian equity funds) during times of low valuation have historically made very good returns when recovery comes about..

It is easy to forget in the midst of all the negative sentiment that in reality, Asian economies are fundamentally sound and that many economies are expected to post healthy growth rates this year, even with a possible US recession. For example, the Singapore economy is still expected to grow 4 to 6 per cent this year and at a similar, if not higher, rate over the next five to 10 years.

Even in the US, investors can pick out selective bargains, despite the doom and gloom surrounding the economy and the market. The average price-to-book value (PB/V) of US financials has fallen from a PB ratio of more than 2.0X to around 1.0X. The situation we are seeing now is similar to what happened during the peak of the Asian financial crisis, where many Asian financials fell to similar PB levels. But when economic recovery took place, the surviving financials delivered substantial gains to those who dared to pick them up during the 'bad' times. While it may be too risky to select individual financial stocks currently, a global financial fund that holds dozens of financial stocks would be well-positioned to benefit when the current US financial crisis blows over - which it eventually will.

Investors can expect plenty of near-term volatility in the coming days. There will likely be more bankruptcies, bailouts, and write-offs ahead as the US financial crisis unfolds. However, the entire US financial system is too large and too important to simply collapse completely. Eventually, the market recovery will occur. And when it does, the US financials and banks that survive the current crisis will post significant gains.

In conclusion, hold on to your hats and don't panic. Be disciplined and remain diversified in your investments. Making an investment decision in a moment of panic or haste will probably lead to regrets later on.

History shows that stock markets have always experienced big crashes due to various crises - and have always bounced back again. Despite all the recent volatility, or perhaps even because of all the worries and fears the stock market is currently experiencing, now is not the time to quit from the market. It is the time to stay in it.  - 2008   July 23  BUSINESS TIMES

Risk & Return :  The sub-prime debacle and Asia

Ernst & Young's (EY) country managing partner Steven Phan encapsulates recent developments as such: 'The current global economic fallout was sparked off by the sub-prime mortgage crisis in the US. The credit crunch that followed caused the market to become more cautious and lending became more stringent.'

'The weakening US dollar, coupled with housing issues, rising commodity prices and market volatility, dampened general consumer confidence and sense of job security and, as a result, curtailed consumer spending. This has had a wide impact on the global economy, given that the US is undoubtedly a major consumer market,' he adds.

Despite the crippling effect of the sub-prime crisis, experts are divided as to whether the US is headed for a recession.

A US recession?

'Some have argued that the US is already in a mild recession. Nonetheless, clearly, consumer confidence has been declining amidst the global slowdown and rising oil and food prices,' says Mr Phan.

Tham Sai Choy, head of audit at KPMG in Singapore, says: 'Whether technically a recession or not, there is clearly a marked slowdown in many of the economic indicators in the US.'

Peter Baldock, chief operating officer at Deloitte Global Corporate Finance, based in Singapore, believes that 'the reality is that the US is moving into a period of stagflation where the economy moves sideways, probably not steeply downwards but at best zero to very modest growth'.

Goh Mui Hong, president and CEO of ST Asset Management, says: 'Our view is that the US economy is still expected to experience a period of protracted weakness and possibly a recession under the weight of falling home prices, tight credit, rising unemployment and growing inflationary pressures.'

UOB economist Jimmy Koh believes the world's largest economy could avoid slipping into a recession. 'Our take is that while growth will remain weak, it should be able to avoid a recession. The question is the recovery process. Given that banks are still repairing their balance sheets, and the sub-prime effect is still working through the real economy, the recovery path is likely to be a fairly long U-shape.'

CIMB-GK Research head Song Seng Wun agrees that the US is unlikely to slip into a recession this year but warns it could happen next year. 'The US economy this year is still being supported by contributions from net exports and private consumption. But it could slip into a recession next year, once the lift from the tax rebates have worked through. Consumer spending may fall, if oil and food prices stay high against a backdrop of a weak labour market. US exports may fall off more meaningfully going into 2009, if global demand is hit by high inflation.'

The impact on Asia

Asia, however, is likely to be shielded - to a certain extent - even if the the world's largest economy does slip into a recession.

'One reason is that Asian banks have very reasonable exposures to such assets,' says UOB's Mr Koh. 'Thus, the effect is likely to be via the real sectors of the economy. Also, we have seen emerging new economies - the likes of China and India. The ample global liquidity has also helped to mitigate extended downside.'

Deloitte's Mr Baldock says: 'Asia, particularly China, is not wholly dislocated from the state of the US economy but to the extent that the Asian domestic economies now have greater relative importance than in the past, they are not so dependent on their exports to the United States and Europe.'

CIMB-GK's Mr Song says: 'Asia is not protected if global demand were to slow sharply. But Asian governments and companies are generally in a stronger position now to ride through any slowdown because most companies' and countries' balance sheets are quite decent - for example, they have high forex reserves, low debt gearings, etc.'

ST Asset Management's Mrs Goh says: 'Another possible reason Asia could survive is that the bulk of borrowing needs could be supported by Asian banks. While global banks have been cutting down on investments and lending, the region has been fortunate that the Asian banks could continue to finance and support the local companies.'

KPMG's Mr Tham believes the slowdown in the US could even present opportunities for this region. 'Asia's developing economies are seeing a strong momentum of growth,' he says. 'Compared to the last time the US was in recession, they also have stronger reserves to buffer themselves against external shocks and are seeing improvements in governments, infrastructure, markets, education and security.'

'In addition, slower growth in US markets may push along the development of new trade flows within the Asian region, and increase the economic opportunities for countries in Asia,' Mr Tham adds.

This doesn't mean, however, that Asia is out of the woods. The full extent of the sub-prime crisis has yet to play itself out, and new challenges are threatening the stability of global markets.

Mak Yuen Teen, director of the Asia-Pacific Research and Innovation Centre of Watson Wyatt, believes the still-unravelling sub-prime debacle poses significant risks: 'A key challenge is that the sub-prime crisis is very different and the full effects are still anybody's guess. Its impact may be more severe, systemic and global than many other crises. And we now have issues of high inflation, high oil prices and high food prices. So, it may require a lot of stamina and resources to get through this one.'

New threats

EY's Mr Phan notes: 'Inflation has increased, reaching an all-time high and, in some parts of Asia, these escalating costs have caused certain levels of socio-political tension.'

He also points out that foreign exchange rates, market volatility and rising costs of raw materials will create additional burden and threats to businesses.

Deloitte's Mr Baldock believes the greatest challenges for most Asian economies will come from inflation and access to basic resources - ie oil and gas, minerals and food. 'To contain inflation and rocketing real estate prices, interest rates will rise and that will impact on their relative exchange rates to the US dollar. Hence, there will be a loss of cost competitive advantage with regard to the US.'

CIMB-GK's Mr Song warns that Asia is also facing increasing competition, as trade barriers are being lowered.

UOB's Mr Koh believes the new threats will pose significant challenges for the region's economies. 'Some are worried Asia could be walking into stagflation. So far, most economies are running negative real interest rate. And, many are assuming inflation, oil and commodities prices, should eventually ease. The worry is, what if prices do not correct? Asian central banks could be forced to hike rates significantly, which would be detrimental to asset prices.'

The new threats will not only affect economies as a whole, but individual businesses as well.

Need to be vigilant

KPMG's Mr Tham cautions: 'Businesses will need to be more careful in analysing the risks that they are exposed to, and be better prepared for them. They may have to be prepared that banks might fail, high-quality rated investments might lose their value overnight, and historical patterns might not even apply any more.'

'Moving forward, organisations should be more vigilant in their risk management procedures, paying attention to risk identification, and embark on a strategy to diversify and manage these risks,' Mr Tham adds.

Deloitte's Mr Baldock says: 'At the corporate level, the key risks are the volatility of supplies of inputs, both in terms of quantities available and prices paid, including forex volatility exposure. This uncertainty makes business planning and investment very difficult. Corporates will therefore attempt to take control of their supply chains.'

ST Asset Management's Mrs Goh warns that the slowdown in US consumer spending will affect companies that cater to the consumer sector. She also cautions: 'US and European property markets have been negatively impacted by debt re-pricing. This will affect real estate developers and agents.'

'Businesses will also have to find cost-efficient ways to move from obsolete technologies to new technologies that are more energy efficient or use alternative sources of energy. And employers will have to handle wage expectations given current food and property price pressures,' she adds.

EY's Mr Phan believes new threats will also throw up new opportunities for businesses which are well-equipped to seize them. 'Companies who continue to focus on empowering their people and attract and retain the right talent will be the ones who are able to execute and perform better during trying times.'   - 2008 July 23   BUSINESS TIMES

Real-Estate Woes of Banks Mount - No End in Sight
Lenders Dumping Bad Loans at Discount;
Regulators See Losses Continuing

THE WALL STREET JOURNAL
June 6, 2008; Page A1

Federal regulators warned Thursday that banking-industry turmoil would continue as financial institutions come to terms with piles of bad loans they made to finance the construction of homes and condominiums.

Until now, most of the damage to banks from the housing crisis has come from homeowners defaulting on their mortgages. But amid a dismal spring sales season for new homes, loans to home and condo builders are looking increasingly shaky. Banks have begun to dump them at what will likely be steep discounts, setting the stage for billions of dollars in fresh losses.

"As long as the housing market is on a downward path, as long as those prices continue to fall, I think there's a risk that the losses could continue to mount on a variety of loans," Federal Reserve Vice Chairman Donald Kohn told the Senate Banking Committee Thursday.

At the same hearing, Federal Deposit Insurance Corp. Chairman Sheila Bair said banks that aren't diversified, or those with high exposures to residential construction and development, are of particular concern. "That's where we are really seeing the delinquencies spike," she said.

The surprisingly gloomy outlook is at odds with the sentiment of investors, who appear to have moved on from worrying about the health of the financial system to obsessing about gasoline prices and consumer spending. The Dow Jones Industrial Average rose 213.97 points, or 1.7%, on Thursday on the back of surprisingly strong retail-sales data.

The health of the economy is heavily dependent on the willingness of banks and other financial institutions to lend to consumers and businesses. Many banks have already taken substantial losses, and either will have to pare their lending or raise new capital to rebuild their safety nets. The Federal Reserve and Treasury Department have been pressing banks to raise capital so as not to further reduce lending.

Banks with swelling portfolios of troubled loans tied to land and housing are struggling to unload some of their real-estate debt. IndyMac Bancorp Inc., a Pasadena, Calif., lender, is trying to sell $540 million in loans made to finance land purchases and housing construction projects. Winning bids on many of the loans were, on average, about 60 cents on the dollar, according to people familiar with the matter. But some winning bids were only about 20 cents on the dollar.

Cleveland-based KeyBank, a unit of KeyCorp., is trying to unload $935 million in loans tied to land and residential developments, while Wachovia Corp. is shopping a $350 million loan portfolio, according to two people who have seen the offerings. Representatives of the banks declined to comment.

The sales are a response to a growing problem: Home builders are falling behind on loan payments, and the value of the land and housing developments that serve as loan collateral is plummeting. Over the next five years, U.S. banks could "charge off" as bad debt between 10% and 26% of their loans tied to residential construction and land assets, which would amount to about $65 billion to $165 billion, according to a report sent to clients Thursday by housing research firm Zelman & Associates. That compares with charge-offs of about 10% of construction-related bank assets, totaling $31.6 billion, when adjusted for inflation, during the last housing downturn in the late 1980s and early 1990s. In 2007 and the first quarter of this year, banks wrote down just 0.7% of such assets, according to Zelman.   - 2008 June 6   WALL ST JOURNAL

Will learning these three R's
prevent another panic of '08?

Before we replace angst about housing, mortgages and credit markets with anxiety about rising oil prices, consider what we've learned in the past several months. The U.S. had a housing bubble; that's now obvious. But how did it happen? Why was its bursting so painful? Without answers, we can't hope to reduce chances of a repeat.

Boil it down to the three R's: rocket scientists, regulators, and ratings agencies.

The rocket scientists are the wizards of Wall Street who invented securities that supposedly dispersed risk widely but actually created much more leverage than proved wise. There is a good case that the savings-and-loan mess of the 1980s was made in Washington, the inevitable result of government deposit insurance that led to tails-you-lose, heads-I-win banking. The current mess was made on Wall Street.

A bubble so large also required aggressive mortgage originators, imprudent home buyers and myopic investors. But it wouldn't have been as bad if not for the paper factories that sliced up individual subprime mortgages and assembled the pieces into securities, each with its own acronym, that were deemed safer than the underlying loans. They behaved as if they were taking a little poison and diluting it in a big reservoir; instead, they poisoned the whole water supply.

A lot of risk wasn't dispersed, as we now know. It ended up in banks like Citigroup and UBS. To the extent it was dispersed, that posed a different problem.

"The idea of risk dispersion is nice in theory but in practice it depends on who it gets dispersed to," says Peter Fisher, a former Federal Reserve Bank of New York official now at money manager BlackRock Inc. "It turned out we weren't dispersing it to strong hands who could hold it through the volatility. Rather, we were dispersing it to weak hands who couldn't hold it, and ended up adding to the volatility."

The cost of delinquency, default and falling house prices often was passed to entities (some linked to brand-name banks) that lacked the financial strength to weather a storm. As the entities couldn't bear the burden for long, they had to sell mortgage-linked securities into a hostile, illiquid market, pushing down already depressed prices.

In a a modern capitalist system, regulators provide guardrails to keep markets from driving the economy off a cliff. The regulators failed. Whether regulators should or could have restrained innovation on Wall Street or prohibited business deals between consenting sophisticated adults is a tough question.

But the regulators failed to protect unsophisticated consumers from mortgage loans that they simply couldn't afford or didn't understand; they're now fixing that. And regulators misunderstood the risks that banks were taking and failed to stop lenders from lowering standards too far in their frenzy to attract business; fixing that will be tougher.

Among their many failings, the regulators allowed lenders to make a fundamental mistake: To lend not against the borrower's cash flow and income, but instead to lend against the seemingly inexorable increase in the value of the collateral. Mortgages were made to people who couldn't afford the payments because the lender (or investor) figured that if the borrower defaulted, the house would always be worth more than the loan.

"It is the hallmark of a credit bubble when lenders think that because collateral is going up in price they can ignore the borrower's ability to pay," says BlackRock's Mr. Fisher. "Collateral should only be a backstop." When lenders forget that, regulators must step in. "Lenders need someone to prevent them from competing their way to the bottom," he says. Let's put those words on a laminated card and hand it to every banking supervisor."

THEN THERE is the rating agencies, mainly Moody's and Standard & Poor's. "Credit-rating agencies assigned high ratings to complex structured subprime debt based on inadequate historical data and, in some cases, flawed models," the Financial Stability Forum, a collection of regulators and central bankers, said in an April report. "As investors realized this, they lost confidence in ratings of securitized products more generally."

The flaws of rating agencies are a melange of conflicts of interest, misleading grading systems that classified complex securities as if they were much like simple corporate bonds and a backward-looking approach that proved particularly useless. They were the enablers. They are atoning and changing their ways, as they should. Their business model will change; government oversight will be strengthened.

But investors who relied on the rating agencies -- particularly supposedly sophisticated pension funds and other institutions -- are at fault, too. Rating firms became a crutch for investors who simply didn't want to spend the time and money required to be prudent investors at a time when low interest rates had everyone reaching for higher returns without contemplating the higher risks.

A little "back to basics" in banking and investing would go a substantial way toward avoiding a repeat of the Panic of '08.   - 2008 May 29    WALL ST. JOURNAL   David Wessell

• US Foreclosure Activity Map
• Japan next?
• UK Real Estate losses may be biggest in 25 years
• New York Crunch
• Centro Australia
• Wall St Exodus:  Fear, Panic, Anger

US mortgage market staring at US$112.5b loss: study

US homeowners, lenders and investors may lose as much as US$112.5 billion through 2014 as mortgage payments go up on adjustable-rate loans, triggering defaults and foreclosures, according to a study.

The study by mortgage-risk data provider First American CoreLogic said that an estimated US$2.3 trillion of adjustable first mortgages were originated from 2004 to 2006 and many of which will begin to reset in two to three years.   As they reset at higher rates, about 1.1 million loans amounting to US$326 billion may go into foreclosure, the study said.

'The big years for reset are 2007 and 2008,' said Christopher Cagan, director of research and analytics for First American CoreLogic. 'Until recently, the investment community wasn't giving a sufficient risk discount' for the potential losses, he said.

US sub-prime borrowers fell behind on their mortgage payments at the highest rate in four years in the fourth quarter and foreclosures on all types of home loans rose to a record, according to the Mortgage Bankers Association. New Century Financial Corp, the second-biggest US sub-prime mortgage lender, has said that it may not be able to stay in business unless it can find new capital. Some adjustable loans reset in two or three steps, said Mr Cagan. 'At full reset, it's going to be about US$40 billion a year' of additional interest  payments, or an average of US$1,500 a month per loan, he said. To avoid reset, borrowers often try to refinance before the higher rate kicks in.

Mr Cagan estimated that sub-prime borrowers would face an average increase of US$400 a month, 'but these people are credit-impaired and already having difficulty' paying. Sub-prime loans were the largest portion of the 8.37 million mortgages that Mr Cagan analysed, accounting for 3.8 million loans representing US$1.1 trillion. Sub-prime and so-called teaser loans, which offer the lowest initial interest rates, face resets sooner than market-rate loans, he said. -    2007 March 20   Bloomberg

Act fast or face deep recession: Tony Tan
World could see worst recession in 30 years unless policymakers intervene urgently

(SINGAPORE) The global economy will run into even more turbulence if policy makers don't act quickly and decisively to ease the credit crunch spilling over from the United States, says the Government of Singapore Investment Corp (GIC).

But the sovereign wealth fund is standing by its substantial investments in UBS and Citigroup after the sub-prime crisis ravaged the two mega banks.

Speaking to some 1,000 employees at the inaugural GIC Staff Conference yesterday, GIC deputy chairman and executive director Tony Tan warned that the world may face a recession 'longer, deeper and wider than any we have encountered in the past 30 years'.

'We are entering a period of extreme uncertainty in the world economy and global financial markets. As banks continue to de-leverage, cutting their lending activities and causing a contraction in credit supply, the prospects for the US economy - and possibly the world economy - are fraught with downside risks.'

But Dr Tan believes the economic downturn can be mitigated if the authorities in the US and elsewhere take decisive and timely action. 'If policymakers respond strongly and appropriately, investment markets and sentiments can turn around sharply.

'However, if such actions by the authorities are not taken within the next 3-4 months, it will be left to the market forces of supply and demand to stabilise the US housing market before we can see the light at the end of the tunnel. This will be a considerably more painful and long-drawn process.'

Despite the uncertainty, GIC is standing by its decision to invest billions of dollars in troubled banks UBS and Citigroup.   (they have lost $1.2 bln so far on these investments) 

'We regard our investments in UBS and Citicorp as long-term investments that will give us good returns when markets stabilise and economic conditions return to more normal levels,' Dr Tan said.

GIC pumped 11 billion Swiss francs (S$14.7 billion) into UBS last December via a convertible bond issue that would eventually give it a stake in the bank. It has also not ruled out injecting more cash into UBS, which is looking to raise 15 billion Swiss francs through a rights issue, after reporting a second straight quarterly loss this month. GIC has said that it would examine the terms of the rights issue before deciding.

GIC also invested US$6.88 billion in Citigroup in January this year through a private offering of convertible preferred securities.

Dr Tan yesterday reiterated that GIC was able to make such investments because it was well prepared for the current credit crisis.

'We had moved to a more conservative posture in our portfolio by liquidating a portion of our equity holdings in the third quarter of 2007 and moving into cash - a measure we had not taken for quite some time. This provided us the liquidity to make substantial investments in UBS and Citicorp when these opportunities arose.'

He added, however, that financial and investment markets would be nervous and volatile over the next 1-2 years.

'Instead of the rising tide that broadly benefited financial and investment markets for the past 10-20 years, we are now facing choppy seas that could engulf the broader economy globally. Policymakers, business managers and investors will require fortitude and nimbleness to navigate safely through the turbulence.'

Still, he expressed optimism for GIC's future. 'Working together as a team and with the right policies, we will successfully navigate the treacherous currents that lie ahead with sufficient ballast to be able to take advantage of opportunities as they arise. When this turbulent period is over, I am confident that GIC will emerge stronger and more resilient and take its place as one of the most competent and respected investment organisations in the world.'

Dr Tan's speech yesterday to staff and the media, at Swissotel The Stamford, is seen as part of GIC's efforts to be more open about its investments. Set up in 1981 to manage Singapore's foreign reserves, the company is not required to give the same level of detail about its activities as a publicly listed company. But it has made overtures in recent months to be more transparent, without compromising its competitiveness.

GIC is the world's third- largest sovereign wealth fund, with US$330 billion in assets under management, according to Morgan Stanley in February. It ranks behind the Abu Dhabi Investment Authority with US$875 billion and Norway's Government Pension Fund with US$380 billion.   - 2008 April 22    SINGAPORE BUISNESS TIMES

East Asia and Pacific economies will be hardly deflected from their growth path this year by fallout from the US sub-prime mortgage crisis, the World Bank says in its latest Global Economic Prospects report published today.

It also maintains an upbeat tone about prospects for the global economy, arguing that developing country growth in Asia and elsewhere is robust enough to pull advanced economies along. This optimism echoes that expressed by the Organisation for Economic Cooperation and Development (OECD) last month in its latest Economic Outlook, and in the World Bank's East Asia and Pacific Update last November.

But the bank does acknowledge growing risks, such as that of a sudden collapse of the dollar or even the failure of a 'key' financial system. So far, the sub-prime crisis and related financial market distress have taken only a slight toll on the world economy, the latest report says.

Global growth slowed 'modestly' last year to 3.6 per cent from 3.9 per cent in 2006 and should decline gently again this year, to 3.3 per cent, it argues. 'World output should pick up in 2009, expanding by 3.6 per cent as the US economy regains momentum.'

GDP in East Asia and the Pacific is expected to grow about 10 per cent in 2007, with China set to grow by more than 11 per cent. Growth for the region should ease to 9.7 per cent in 2008 and 9.6 per cent by 2009.  

'Effects from turmoil in world financial centres may be small in most economies in the region. Except in China, direct exposure of financial institutions in the region to mortgage-based securities or the sub-prime crisis is limited,' says the report.

Growth in South Asia edged down slightly in 2007 to 8.4 per cent, with industrial production and GDP growth driven by strong domestic demand. 'An expansion of credit, rising incomes, and strong worker remittances are buoying private consumption.'

Meanwhile, 'improvements in business sentiment along with rising corporate profits are providing a further boost', the World Bank says. Growth in Latin America should also ease only slightly this year while output is predicted to expand in 2008 in the Middle East and much of Africa, owing to high oil prices and to strong domestic demand.

'Overall, we expect developing country growth to moderate only somewhat over the next two years,' commented Uri Dadush, director of the World Bank's development prospects group.

'Strong import demand across the developing countries is helping to sustain global growth,' said Hans Timmer, manager of the global trends team in the development prospects group. 'As a result, and given a cheaper US dollar, American exports are expanding rapidly. This is helping to shrink the US current account deficit and contributing to a decline in global imbalances.'

The World Bank admits, however, that 'a much sharper US slowdown is a real risk that could weaken mid-term prospects in developing countries'. A US recession, or an excessive easing of US monetary policy could contribute to further sharp declines in the dollar, it notes.

'A weaker dollar would benefit developing countries with dollar debt but impose losses on those holding dollar-denominated assets. It would hurt the competitiveness of firms exporting to the US.

However, 'the main impact of a precipitous decline in the dollar would likely stem from the increased uncertainty and financial market volatility it would provoke'. Recent financial turbulence has shown how 'sudden and pervasive adjustments in financial markets can be', the report says.

'Because the dynamics of financial behaviour are inherently difficult to control, and new securitised instruments have made identifying the location or magnitude of underlying risk difficult, the possibility of a breakdown in a key financial institution or system cannot be fully discounted.'

To date, the rep