I Bought A Ticket To the End of the Rainbow

A natural question that comes to mind as the financial crisis gets blown out of proportion.

Sub-prime and credit crunch a year ago led to the nationalization of banks and financial institutions such as Northern Rock
, Fannie Mae & Freddie Mac, enormous bailout packages, increased public stakes in Lloyds TSB and HBOS, introduction of retail banking into pure investment banks, and the collapse of Bear Stearns, and of course recently, Lehman Brothers.

Is this another blip in history? Or does this signal the start of the Great Depression Volume Two?

How did it escalate to such an extent? Complacency? Ignorance? Fear?

Is something wrong with the price mechanism? Why are market forces not working? If even the biggest advocator of free market is intervening, is it time to rewrite our economic theories?

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How did it all start?

Subprime mortgage loans were extended to borrowers who do not qualify for market interest rates due to various risk factors, such as income level, size of downpayment, credit history and employment status. This practice made more social and political sense than economic ones. As home ownership has always been every citizen’s dream, bureaucrats sought to play genie. Before the home is fully yours, there is such a thing called mortgage. In French, mort and gage literally means dead pledge, or paying until death.
Even if the mortgage is paid up, say, after 30 years, the property is technically yours. Is it an asset? When we fill in forms, they tell us to place our property under the asset column. Is it really? In layman terms, an asset has value and puts money in our pockets. If the house is not rented out, but still has to incur expenses to be maintained, is it still an asset?
Property taxes are calculated based on the property’s rental value, if the property had been rented out. Regardless of whether the property is rented out or not, property tax still has to be paid. If you really own it, why should you still pay to live in it? Try missing your tax payments, and see who really owns your property.
For normal borrowers who qualify for market interest rates, there is still a risk of default. When it comes to subprime borrowers, with their high risk profiles, what then is the risk of default?

What started out with good intentions eventually led to people in power cleaning up after their own mess.

Crisis escalation: Blame speculators & short-sellers?

When things got out of hand, short sellers were thought to be the culprits. In my opinion, the two-week ban came too late. Market sentiment is down and fear has been induced. Their work was done long before the ban.

Lehman Minibonds Saga: Misinformed? Or ignorant?

On the one hand, we have bankers miraculously transforming what was thought as a fixed deposit (by elderly folks) into a structured deposit with such high risks. Is it entirely their fault?
To be a salesperson with a bank, lets face it, your quota is high. Ridiculously high, in fact. And while you seek security in a salaried job, your commission structure and terms of employment sucks. Renewals go to the bank, you have to pay if you leave before your contract is up, you still have to pay if you are forced to leave before your contract is up, should i go on?
Since renewals go to the bank and not the banker, naturally the banker does what he or she can to secure and close a deal. After that, whatever happens to the investor is none of the banker’s business. For such a way of doing business, will you think that they are client-centric? And banks are here to make a profit, will you really believe if they tell you they are customer-oriented?
One other classic is the whole deal with fine prints. Like it or not, fine prints are ass-savers. It is the job of the investors to read them. After all, you are parting with your money.

On the other hand, we have the investors. Investors who think they know what they are doing, but in actual fact are being “led by the nose”. To be fair, there may be genuine cases where the investors were misinformed, especially the retired folks who have no business poking their noses in such high-risk investments. But can the same be said for the other 90%? If you bought the minibonds knowing the risks and hoping to earn, will you join the crowd and claim misrepresentation and misinformation when it seems like it is the right thing to do? Right thing meaning that there’s a higher chance that you may get back some money.

As the saying goes, it takes two hands to clap. And the blame is arrowed everywhere. To be honest, if MAS only allowed safe instruments and investment tools, or if everyone was only allowed to hold cash, will Singapore have developed so far? Singapore would have been the most boring place on Earth, and nobody would want to come here.

This crisis makes the need for financial literacy and education even more stark and apparent. This is not a job left to competent financial advisers alone. Like a trip to the doctor, you need to tell him where you are uncomfortable for him to prescribe suitable medicine for you.