the global financial crisis

I was thinking about the global financial crisis over the past few weeks, and i think it has become evident that the 700billion rescue package have not solved the root of the problem. yes, it did result in a revival of global stock markets, temporarily, until news of a major german lender, collapsed shortly after, in 6 october 2008. wall street, along with major stock exchanges worldwide, plunged rapidly, and it got so bad that Russia suspended its stock market trading for a day after it fell over 15% in just a few hours.

since the U.S has to handle its own downward spiralling economy, the EU, as the representative of 20+ European nations, has to take the lead to prevent another great depression. recently, in an EU meeting, European Union leaders pledged to protect depositors from losing their savings and to support the financial system. However, the only decisive action that the EU took was for their central banks, including the bank of England and Switzerland, together with the U.S federal reserve to cut interest rates in a collective effort to solve the financial crisis. Despite the calls for the EU to put together a bailout plan, U.S style,and provide limited coverage for deposits across Europe, the plan failed as the economic powers could not agree on a plan. it is no wonder, for the last major financial decision was the establishing of a common currency across Europe, the euro, in 1999. France, as the current president of the European Union, has failed to call for decisive action in Europe, and Gordon Brown, in the face of declining popularity, has called for a radical plan to shore up ailing banks with billions of taxpayer's money in exchange for shares, which most European nations, especially Italy, are reluctant to do, after the apparent failure of the U.S bailout.

so, what exactly is the root of the problem behind the crisis? Even the most eminent financial institutions do not seem to learn from their past mistakes. the fundamental problem is moral hazard coupled with imperfect corporate governance. Risky assets are so toxic that the 10-year bonds of US financial institutions are currently pricing in almost a 70% chance of default, higher than anything in 40 years.Investors, lenders and other stakeholders look to the rating agencies for objective and independent info about financial institutions and the securities they issue. as their names suggest, rating agencies assess financial institutions and make an assessment of the likelihood of default. they assign a rating accordingly. however, it is beset with a moral hazard. it is the financial institutions that issue the securities that pay the agencies to rate them. ' he who pays the piper calls the tune'. institutions are known to negotitate with the agencies to optimize the ratings of the securities.they would pay to squeeze through the riskiest( most profitable looans) and derivatives without affecting their credit ratings.Also the board of most investment banks is elected by shareholders to oversee and handle management.however, studies have shown that corporate boards are ineffective, as shown by the inability of lehman brothers to prevent its collapse, even when they realised the threat a year ago.

Also, the fear among investors now is nearly impossible to remove. When bear stearns collapsed, most investors thought nothing of it. it was a few noobs who new nothing about the rules of the game anyway. however, when lehman brothers collapsed and the U.S govt did nothing to help, it was the trigger point for the panic selling. richard fuld, the CEO and chairman was a respected man in the investment field. the fact that he could not prevent the collapse of a 100+ year old bank that survived 2 world wars and the great depression, was shocking.

The best example to show the fear of investors is this:
Goldman Sachs had been the shining star in the financial crisis. together with Morgan Stanley, they had been the two giants that survived the bloodshed, thanks to its team of financial analysts who saw the threat and extricated it by selling of its toxic assets long way before the crisis. it was debt free and had no liabilities. however, when merril lynch collapsed, there were rumors everywhere that goldman sachs was next, exacerbating the crisis. this showed the extent of the fragility.

A British man interviewed in the straits times recently said that he had over 300k in savings over at washington mutual. however, he saw that it was on the verge of collapse. in a panic, he withdrew everything, turning to wachovia. a few days later, wachovia was sold to JP morgan chase in a quick fire sale. what is the best place to deposit money now? ' in your pillow', he said.


anyway, hope u enjoyed reading this. im blogging about this tmr again, but im focusing more on debates haha =]