Sub-Prime Turmoil: Tables Turned

Source : The Straits Times, Dec 15, 2007

Even as the US crisis spills overseas, other markets, including those in Asia, are helping US capitalism stay afloat.

MAYBE some day we shall call this the year Asia got even with the West.

This week, GIC of Singapore bought a 9 per cent stake in UBS, paying 11 billion Swiss francs ($14S billion). The Swiss lender needed the bailout after being hit by a fresh $10US billion ($14S billion) loss from the US sub-prime market collapse. GIC is probably now its single largest stakeholder.

Then, a minute before the US Federal Reserve announced a quarter-point rate cut to stave off what looks increasingly like a recession in the world’s No. 1 economy, Citigroup, which may write off as much as $11US billion in sub-prime losses in the fourth quarter alone, said it has hired Mr Vikram Pandit as its chief executive.
The India-born Mr Pandit’s job is to rescue America’s biggest financial group from its troubles with a basic canon of banking - effective management of risk.

What a turn of events.

Earlier this year, the focus briefly was on sovereign wealth funds, government-owned investment vehicles with names such as Abu Dhabi Investment Authority and Temasek Holdings, that were seen as barbarians ready to crash the gates of the temples of capitalism and steal its riches. Now, the same companies are acting as saviours for thousands of jobs in the United States and Europe.

For years, the so-called ‘emerging’ markets of Asia and South America suffered lectures on financial and corporate transparency, the need for open markets and the perils of moral hazard when governments step in to save companies that should have known better.

These pearls of wisdom from the men in button- down shirts and tasselled shoes rose to a crescendo during the Asian Financial Crisis a decade ago.

Now, it turns out that the big names of global finance such as Citi of America and UBS of Switzerland may not have told us the full extent of the tricky financial manoeuvres they had been up to over the past few years.

SachsenLB, one of the first European banks to hurt from the sub-prime crisis, may be staring at soured investments of as much as 43 billion euros ($91S billion) - much larger than initial estimates - and may even be at risk of closure.

Will the errant institutions in the US be forced to close? Unlikely. The US Treasury’s recent rescue plans - to save the funds as well as to intervene in the mortgage rate-setting process - indicate that Washington thinks these firms are too significant to be allowed to fail.

End lesson: You can get away with anything, you just need to be big enough.

Six months into the sub-prime crisis, it feels incredible to realise that the butterfly whose flapping wings caused all these avalanches so far afield was a 3-percentage point increase in seriously delinquent high-risk US mortgages.

Between April last year and this April, when it began to develop, this translated into $34US billion of soured high-risk loans. That was enough to rock the roughly $60US trillion American financial system to its core.

The first to get into trouble were the German banks Sachsen and IKB Deutsche Industriebank. Today, the Organisation of Economic Cooperation and Development, or OECD, estimates that losses from the sub-prime fiasco could total $300US billion.
Even faraway Singapore felt its rumble. The Monetary Authority of Singapore said on Sept 17 that the three local banks hold $2S.3 billion of collateralised debt obligations, of which 28 per cent contain some US sub-prime loans.

All this is going to make for a very interesting year ahead for Asian financial markets.

Several indicators bear watching. The signals are mixed for now and while there is plenty to be wary of, it may be too early to turn despondent.

Take the No.1 economy. Goldman Sachs predicts a ’substantial recession’. The head of Fannie Mae, the largest mortgage originator in the US, says he does not see the mortgage market recovering before 2010. US consumers have turned a tad cautious.
Yet, Mr Charles Holliday, head of DuPont, says he does not see a recession, only a slowdown. ‘Chad’ as he is affectionately known to friends, should know: His products appear on the covers of golf balls, the paintwork of cars and the stretch fabric of athletes’ garments.

Those mixed signals hold for Asia as well.

Japan, the world’s No.2 economy, is slowing. Japanese producer prices have accelerated, the result of high oil prices. Unable to pass on the higher production costs to consumers, companies have chosen to take a hit on their balance sheets.
Just this week, China, the fastest growing major economy, reported that industrial production last month expanded at its slowest pace in the year. Government measures to cool inflation, including five interest rate increases in the year, are clearly beginning to bite.

Without doubt, a US recession is a nasty jolt to the global economy. Yet, 10 per cent economic growth in China and India totals up to more than $300US billion added to the global economy. This is more than the output the US, with a GDP of $14US trillion, could add by growing at 2 per cent in 2008.

The consensus among economists is that it is too early to say that Asian economies can be decoupled from the US. But just take a look at the orders for Boeing’s Dreamliner and Airbus’ A-380. Such orders from the Asian airlines are providing a good many of those jobs in Seattle and Toulouse. Maybe the phrasing should be reversed: the US cannot be decoupled from Asia any more .

Asian stocks, after a magnificent ride up this year, have been a bit nervous lately on concerns that global growth will ease and that the concerted action by central banks to boost liquidity will not be enough to stem credit-market losses.

But Asian central bankers, many enjoying an excess of liquidity, have not thought it necessary to join that effort by the US, Canadian, European and Swiss central banks.

The message, in short, is: ‘We are watching you, but this isn’t our problem.’

What is the lesson in all this for Singaporeans, especially those eyeing their own property and mortgage markets?

The island’s indicators are generally healthy. The urge to upgrade to better homes persists, combined with a Government policy to boost the island’s population, ensuring continued demand for housing. The rise of China and India will ensure sufficient economic ballast for years to come.

All that should indicate that the property market and the economy as a whole should stay healthy. Still, it will not hurt perhaps to hold off on buying that second apartment - just for a while.

Just do not get too greedy.