Tan Kin Lian's Blog: Financial Crisis

Saturday, March 15, 2008

Financial Crisis

The current financial crisis in USA is similar to the Asian Financial Crisis, exactly ten years ago.

In the Asian financial crisis (1998), corporates borrowed on short term loans in USD to fund long term property and business projects. When the USD increased sharply, they could not repay their debts.

In the current financial crisis (2008), many special investment vehicles and hedge funds borrowed money on the short term to invest in other assets, such as equities, to earn the margin between their cost of borrowings and the higher return on risky asssets.

The defaults of subprime mortgages started the crisis. It spread beyond the subprime mortgages. When the short term borrowings of the SIV and hedge funds fall due, the lenders refused to refinancing the loans. The borrowers could not refinance their debts. They had to sell equities and other assets to repay the loans. This caused the collapse of the stock markets.

Lesson: It is very risky to borrow on short term to invest for the long term, or to invest on borrowed money (i.e. leveraging).

6 comments:

Anonymous said...: Dear Mr Tan, any advice on what to invest in during this turmoil. And Many Thanks for your blog. It is always entertaining, very informative and thought provoking.

I always look forward to reading it every day. :) :) :); March 15, 2008 9:27 AM
Anonymous said...: Thank you for sharing your insightful comments.

Indeed, this is a crisis that has been worsening everyday, exposing the pitfalls of leverage financing. The bond markets are not spared either.

People simply do not want to live within their means and trying to take a short cut to make a quick buck. It is the era of instant gratification instead of hard work and toil.

It is my belief that the banks are the main culprits. There are no good banks. They are all legalized loansharks. Rotten to the core. They are always encouraging people to borrow money to buy things. Put it simply, if you have to borrow from the bank, then you are living beyond your means.

Yes, that means living in a 3 or 4 room HDB and taking public transport. There is nothing shameful. Instead, it will bring better financial security, family togetherness and well being.

For me, there are no such thing as good debt or bad debt. It is a terminology. A debt is a debt. Period. Being in no debt is the best.

Have a great weekend.

R.; March 15, 2008 3:00 PM
Anonymous said...: Leverage is a two-edged sword; March 16, 2008 7:25 AM
Anonymous said...: I would agree with you that the the US financial crisis bears a strange resemblance to the 1997 Asian crisis. The big problem is that leverage is basis for all the major world economies. Is there any more security in the EU or AsiaPac? I don't see it.; March 17, 2008 11:33 PM
Anonymous said...: to anon 7:26 am: i agree leverage is a two-edged sword. the banks and financial institutions should just use it to cut off their lifeline and admit their folly and greed. now they are dragging the rest of the world with them. the world is a better place with less of the types of Bear Sterns, Lehman Bros, Goldman Sachs, Citigroup, Merril Lynches. Millions of businesses and homes are lost because of their unscrupulous business ethics. All of these businesses should just close down one by one so that they don't create another havoc ten years down the road.; March 18, 2008 1:59 AM
Anonymous said...: Small and medium enterprises from Northen China is facing cash crunch badly. They borrow short term money from prawnshop at 36% p.a.

Singapore Ah Long may consider to expand business in PRC to start a legal prawnshop at S$2m capital. Never do it illegally. Death penalty if convicted !; March 27, 2008 10:25 PM