Tan Kin Lian's Blog: Dhanabalan: Bubble in bets on events

Sunday, January 10, 2010

Dhanabalan: Bubble in bets on events

Dear Mr Tan
In today's straits times, Dhanabalan said "the financial crisis is not the result of bankers making ill-judged loans to the real economy; it is the result of a bubble in bets on events in the real economy"

I do not know why he used the unusual word "ill-judged loans" but i believe he is talking about the subprime loans existing prior to the crisis of 2009. According to many internet articles I have read, and also a YouTube video explaining the Financial Crisis, the crisis was caused by sub-prime loans which are chopped and repackaged to CDOs etc. to spread the risks to the unwary investors. As a layman, I can understand this.

But Dhanabalan said it was nothing to do with these. He said the Financial Crisis was due to "a bubble in bets on events in the real economy". The Straits Times writer also added that it was a bubble "formed from bets on how events in the economy would pan out". I have absolutely no idea what Dhanabaln or the writer is saying about "bubble in bets on events".

REX

REPLY
This is how I interpret Mr. Dhanabalan's views. By real economy, he meant lending to companies to manufacture products, distribute goods, employ people. By taking bets, he meant that they were speculating on the asset prices through sub-prime, collateralized debt obligations (CDOs), credit default sways (CDS), and other derivatives.

If the housing prices continue to go up, they all win their bets. When the housing prices fall, the financial system collapse.

15 comments:

Anonymous said...: Going back further, this whole thing was started by the US gahment some years back to help the lower income people own properties for political reasons. But greed creep in, along the way. and it got out of hand. Just hope it don't happen it S'pore.; January 10, 2010 4:12 PM
Anonymous said...: Dear Mr. Tan

If USA banks repackaged sub-prime loans into CDOs and sold it to unwary investors, pension funds, university endowment funds …, then when the sup-prime loans defaulted, it should be these investors, pension funds, university endowment funds (not banks) loss a lot of money. Why many USA banks still went bankrupt?; January 10, 2010 8:30 PM
Anonymous said...: hello anonymous 4.12 pm

That's exactly how i see it, this cause the financial crisis, when the loans started to default, anybody - including big banks - who bought (or "bet" as used in the article) products containing risk elements of the bad debts, will be badly affected when the default starts. Therefore, is it not true that the real reason is still traced back to the huge number and amount of ill judged loans which we also call as "subprime" loans?

It's not so much the people or banks, who were misled to invest in disguised products (or "bet" as used in the article), it wasn't their fault but rather it was the fault of the greedy bankers and politicians in USA that supported the subprime loans for their own selfish reasons.

So i actually dont quite agree with the honorable Chairman of Temasek Holdings, though i am a mere peasant and not even a finance expert.

In my opinion, USA gives us some of the best things in life (e.g invention of Internet) and USA often also gives us the worst things in life (2008 Finance Crisis perpetrated by subprime loans policy of bankers and politicians in Wall Street and in Washington!!)

Check out this video, i learned a lot from it more than a year ago when the crisis first started.

http://www.youtube.com/watch?v=Q0zEXdDO5JU

REX; January 10, 2010 9:10 PM
Tan Kin Lian said...: It is difficult to reply to an "anonymous" posting (8:30 pm), so I hope that people who ask questions should sign off with their name.

Although the banks were able to repackage and sell of some of the loans, they also kept those that they were not able to sell, so they were also affected by the fall in their assets.

Some banks were counter-party to AIG, which offered the credit default swaps. If AIG fell, these banks, including Goldman Sachs, would also suffer large losses. So, if AIG was not rescued, even GS would have fallen.; January 11, 2010 6:52 AM
Anonymous said...: Dear Mr. Tan

Thank you for your reply.

If the banks managed to re-package substantial part of the sub-prime loans and sold it to other parties (investors, pension funds….), the impact of the sub-prime loans collapsed should not be so great that causes many banks went bankrupt.
I believe that the real causes of many banks failed are the bets (such as credit default swaps) they entered with the counter-parties, which could be many times the amount of sub-prime loans.

Pang; January 11, 2010 11:25 AM
Anonymous said...: Rex comments as follows,

re. post from Pang at 11.25
If i may ask a reverse question: supposing subprime loans didnt exist, and the USA banks and Politicans did not permit an aggresive policy of liberal loans granting to people with no full time jobs or with reasonable credibility. In such a case, would these "bets" with counterparties, (whatevr it means), still result in Financial Crisis?
The point i wanted to make is, it ALL started with the poison,the subprime loans. Then people take bets, as you say, many times the value against the poison, knowing or unknowingly i dont know.

If there had been no subprime loans and the bets are taken in the normal course of a robust system, the Financial Crisis wouldn't have happened? Yes?

rex; January 11, 2010 12:31 PM
Anonymous said...: Hi Rex,

I agreed with you that the financial crisis is caused by the sub-prime loans.

The point I want to raise is that the bets (such as CDS...), which could be many times the amount of sub-prime loans, make it worst.

Pang; January 11, 2010 1:13 PM
Anonymous said...: Hello Pang, here is REX again,

Great, I am glad you agree with my logic! That means we are agreed that Dhanabalan's statement is at best shaky, and, personally because of this i have lost my respect for this otherwise respectable old-timer politician.

Just study the Youtube video which URL i provided. It is so clear to me the americans started the whole crisis and later used good words like "tsunami" to give the impression it was a natural disaster not deeds of intentional evil. And the media in Singapore just copy and used tsunami. I frown everytime i hear the words financial tsunami.
Now even politician try to water down the evil deeds of the subprime saga.. and worst still spread the blame to investors by using words like "bubble on bets" that is just as bad as "tsunami".

Yes, the whole worldwide financial crisis of 2008 can be traced back to the subprime loans, at least the YouTube video was very very honest about it. For that honesty, it is also only americans can give. Very ironic, among them you find the most dishonest people in the world, yet among them you find the most honest people in the world.....

Yes, the subprime loans, ill judged loan as some politician called it, started the worldwide financial meltdown in 2008.

However, if there are any one who thinks otherwise after watching the youtube video, and following this thread, please let's discuss it, the subject is never closed so long as someone has a worthy point of view.

REX; January 11, 2010 5:19 PM
Anonymous said...: Rather than us second guessing the learned gentleman, Mr Dhanabalan should have been more specific in his choice of words.

Or the Straits Times reporter should have done what all good reporters do in USA; ask more pointed questions rather than act as an overpaid tape recorder.

In any case, it's best to ignore folks who obfuscate rather than clarify. Go spend more time with your family instead. Mr Dhanabalan can't help you anyway.; January 11, 2010 7:30 PM
Anonymous said...: REx comments again,
thanks Pang your advice is well noted. Problem with me is i'm a purist and perfectionist, i won;t let go till i see the logic clearly, just like solving rubik cube. Life is a rubik cube, one has to make sure to position it the right way, no one however learned, should ever twist things around, mess it up and run away.

Cheerio
REX; January 11, 2010 9:02 PM
Anonymous said...: This is 4.12 pm.

Rex, what this tells us is don't copy or worship the Americans, they are not perfect. They have some policies that led to disaster. From some gahment investments, it's obvious to me that our gahment like to copy them. What they do must be good, so we also do. Afterall, America is the home of most of the world's greatest inventions. The new decade belongs to China. Let's see our gahment copy them or not. Let's review in 2020.; January 12, 2010 10:13 PM
Anonymous said...: Hi Rex,

Are you referring to the advice from anonymous 7:30pm?

I also would like to thank him for his advice.

Pang; January 12, 2010 10:21 PM
Anonymous said...: REX comments as follows,
Yes Pang, indeed i was referring to the advice from 7.30pm.

I am still, very passionate about this subject of the "Cause of the Financial Crisis"
I feel that it is a very very important matter not to be taken lightly. We (as in, the World) need to know what went wrong so that we will never make the same mistake again. that's why i hope everyone who reads this thread also spend some time to watch the Youtube video http://www.youtube.com/watch?v=Q0zEXdDO5JU

If our goverhment does not encourage people to find out the real reason, I hope they could at least keep quiet rather than proclaim a statement which does not bear the whole truth.

What worries me is that numerous 30year loans on housing could develop into our own version of SubPrime Loans which could default in future and collectively cause our banks to collapse some years down the road. If there is a lesson to be learned from the Financial Crisis, let's learn it well and be careful never to replicate the mistake into our shores.

REX; January 13, 2010 9:24 AM
Anonymous said...: Rex comments "If there is a lesson to be learned from the Financial Crisis, let's learn it well and be careful never to replicate the mistake into our shores."

One lesson we learned is that should not pay bankers sky high bonuses as this will encourage them to create 'innovative" ideas (such as sub-prime loans, CDOs, CDS, Minibond, Pinnacle notes, High notes ....)to make huge and quick profit.

Pang; January 17, 2010 12:13 AM
Anonymous said...: REX comments as follows,

Well actually it is hard not to pay bankers sky high bonuses. Their bonuses are determined by the Board of Directors of their own banks. They are all inner circle. You scratch my back i scratch yours. Ka Ki Nang. so they reward each other as they please, playing with statistics of the company. It reminds me of a certain political party.

REX; January 17, 2010 9:02 AM