Financial Turmoil caused by Subprime

Satu artikel yang singgah ke kotak emel ku.. dari kawanku yang bercerita mengenai subprime...


"Let me try to explain with whatever little Financial Services knowledge I have from the experience with GE Money and GE Commercial Finance.

In a nutshell, when an investment bank syndicates a loan to the big companies, they never keep these loans in their books, they will package it and then sell it (just like Loan Securitization that GE does)…normally these are collateralized against an Asset which predominantly have been mortgages….when the SubPrime crisis exploded, people could not afford to repay their mortgages, the values of these Asset-backed securitized loans plummeted and when you have to do a Mark-To Market valuation every quarter (remember Wall St companies need to report every quarter) that's when the impact is felt, huge write offs are made and the banks make big losses.

The losses will decrease their EPS ( earning per share) which eventually will affect their share price (the lower the EPS, the lower is the PE ratio)…but when the share price tumbles down, the equity of the bank shrinks. But the banks need to have a certain amount of equity (its Called Tier 1, Tier 2 requirements by Basel Regulations) and that's why they go around asking for Capital Injection from Private Equities / Sovereign Wealth Funds (since they are normally the richest ones)…..So Temasek invested in Merril Lynch, Middle East Funds pumped money to Citigroup, Singapore Government Inc invested in UBS etc. When the credit crunch happened, the liquidity in the market has been so low that Private Equities and Pension Funds are also dried up.

When these banks cannot find someone and the prices keep falling, this is when they refer to as the banks being in DISTRESSED situation and that's what happened to Lehman who eventually had to declare Chapter 11 (i..e. under protection until they can recover). GE too is affected because 50% of our Income (about US$8 Billion) comes from GE Commercial Finance / GE Money.

Btw how does this affect the consumers? When there is a liquidity crunch in the market, it is more difficult for companies to raise Bonds or Commercial Papers or for Banks to lend amongst each other. This will result in the Cost of Fundings for these banks to go up which will eventually be passed on to the consumers which will then trigger an inflation.

Setakat ini je lah fahaman hamba….since the US Fed has announced a Bail Out package yesterday, the Dow Jones has been rallying like crazy (market just opened 30 minutes ago) and GE stock price is up 10%, Goldman up 24%, Citi up 25%.

Obviously only time will tell when this whole craziness will end."