October 2008

By Michael Lim M.H.
Philippines Inquirer
First Posted 00:59am (Mla time) 11/18/2007

Fueled by low interest rates and excess liquidity, the housing boom in the United States lasted for more than a decade during which mortgage firms extended loans to borrowers with poor credit record. Brokers, who were given fat commissions, enticed these borrowers into availing themselves of housing loans with minimal down payment and lax documentation and credit checks.

The loans, known as subprime mortgages, typically charge two to three percentage points more than those with less-risky credit profiles and carry adjustable interest rates that can cause payments to jump in later years.

While the going was good, homeowners saw housing prices escalate, prompting them to take out home equity loans that helped fuel consumer spending.

Banks and other financial institutions repackaged the debts with other less risky debts and sold them to investors worldwide. These financial instruments are called collateralized debt obligations (CDOs).

When the borrowers defaulted on their subprime mortgages, things began to unravel. Holders of the CDOs headed for the exits, pushing the prices of their assets down. As a result, thousands of US homes have been foreclosed and financial firms in the United States and others parts of the globe suffered huge losses. (See list.)

The crisis is not easing up soon and may lead to a slowdown in the United States, the world’s biggest economy.

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By Dr. Michael Lim Mah-Hui
Philippine Daily Inquirer
First Posted 03:32am (Mla time) 09/28/2008

FIFTEEN MONTHS HAVE PASSED SINCE THE financial crisis exploded in the United States with the implosion of two hedge funds managed by Bear Stearns.

Since then Bear Stearns has been acquired by JP Morgan Chase. Two other veritable investment banks—Lehman Brothers declared bankruptcy and Merrill Lynch was bought by Bank of America—have also disappeared, leaving only Morgan Stanley and Goldman Sachs. Both have given up their status as stand-alone investment banks to become bank-holding companies in order to access funding from the Federal Reserve Bank (“the Fed”).

This is indeed a fall for masters of the universe, Wall Street bankers who once commanded the heights of the financial industry and thought they were invincible.

What went wrong and why has the turmoil continued unabated, lunging from one crisis to another?

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By Dr. Michael Lim Mah-Hui
Philippine Daily Inquirer
First Posted 03:04am (Mla time) 03/30/2008

IT has been nine months since the subprime mortgage crisis began. In the initial round of writedowns for the third quarter of 2007, banks placed their losses at less than $30 billion. Four months later, banks and securities houses increased the amount to more than $150 billion. And the end is not in sight.

Like falling dominoes, credit cards, auto loans, student loans, Alt A mortgages, credit default swaps, debt auction markets, monolines (bonds insurers) and leveraged buyouts are beginning to go sour.

We are still counting the costs of the ongoing crisis. Estimates range from $400 billion to $1 trillion as the crisis spreads to other financial products. At $1 trillion, this represents 8 percent of the US gross domestic product (GDP) or the total capital of US banks, (recognizing that a portion of this loss is borne by non-US banks and investors). By comparison, the US government spent some $200 billion or about 3 percent of GDP to sort out the savings and loans crisis of the late 1980s.

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By Dr. Michael Lim Mah-Hui in the THIRD WORLD RESURGENCE #203/204 (JULY/AUGUST 2007) Magazine.

The volatility in the financial markets caused by the sub-prime crisis has been compounded by the speculative trade known as the ‘carry trade’. In the following article, Michael MH Lim explains how this practice of borrowing money in one currency with low or no interest and investing in another currency or financial instrument with a higher yield adds to the turmoil.

Dominance of finance capitalism

THE age of finance capitalism has eclipsed the age of productive capitalism. The amount of financial assets held worldwide and the volume of financial transactions, from currency trades to swaps to equities and bonds etc., dwarf the traditional measures of national capital.  According to the McKinsey Global Institute, the ratio of financial assets to annual world output tripled from 110% in 1980 to 316% in 2005. Even more astounding is the volume of financial transactions: the notional outstanding value of interest rate swaps, currency swaps, and interest rate options reached $286 trillion (about six times the global gross product, and up 82 times from a mere $3.5 trillion in 1990). Today currency rates are determined more by speculative trading than by the underlying movement of goods and services.

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