Thursday, January 29, 2009
In a talk given to the Asia Society Hong Kong Centre entitled “Pitfalls in a Post-Bubble World,” Roach warns that the pain of the global recession caused by the bursting of asset and credit bubbles has only just begun to take its toll on export-dependent Asian economies.
“Obviously we’re in a global recession. It’s a severe one. But it is a unique one. It is a post-bubble recession brought about by the bursting of multiple-asset credit bubbles around the world. So do not go back to your economic history or your textbook to try to figure out how to calibrate this cycle.”
“The cycle, itself prompted by the bursting of asset and credit bubbles, is very much intertwined with the unsustainability of imbalances that have built up over the last decade, in large part between savings-short current account deficit nations like the US and surplus-savings countries like those in Asia, in particular China,” Roach says.
The next couple of years are expected to be a much weaker period for the global economy – Roach estimates average annual growth for at least the next three to five years to be “a number closer to three per cent” – and how quickly the world returns to a stable economic climate will rest largely on two main pieces of the equation: the American consumer driving the demand side and the Chinese producer driving the supply side, he adds.
“Many of the adjustments that are now occurring, especially those in the US and China, I think, will be viewed with a little bit of hindsight as a long overdue and ultimately a constructive rebalancing of an unbalanced world.”
The US, which has spent itself into oblivion, will have to become a saver and China, which has spent too little and saved too much, will need to develop more of an indigenous, autonomous private consumption culture. “Neither of these developments will be easy, but they are essential and, if the world can pull it off, I think there will be a more stable and sustainable global climate than we have today,” he says, noting that US consumption as a share of GDP peaked at 72 per cent in the first half of 2007, as compared to around 67 per cent during the pre-bubble years from 1975 to 2000.
“Unfortunately, the (US consumption) binge was not supported by the economy’s internal income-generating capacity. The consumption binge was supported by the confluence of property and credit bubbles, both of which have now burst.”
The fact that Asian economies are being hit hard by global recession also goes to show that previous talk of ‘Asian decoupling’ was a myth, Roach adds. “With the monster external demand shock, with America, Japan and Europe all in recession simultaneously, external-dependent Asia, much more dependent today than it was 10 years ago, is in trouble,” he notes.
Anyone who is counting on China to lead Asia, or the world, out of recession, will also be in for a nasty shock. “China gets hit by a powerful external demand shock and the economy has hit a wall. Now you don’t know this from the numbers because they publish numbers on a year-over-year basis. The last number was 9 per cent (growth) in the third quarter. Our guesstimate is maybe 6.5 per cent. If you back out, the quarter-to-quarter comparison from the year-over-year changes …. tells you that growth in China in the second half of 2008 basically went to zero.”
Roach sees little room this time for proactive fiscal stimulus, a tool used by the Chinese government during 1997-98 and 2001-2002 to boost the economy. “It worked because the external environment was much more supportive and constructive to the Chinese export machine than the case today. So it’s much more of an uphill battle,” he notes.
The second option for China and other Asian countries, Roach says, will be to push ahead hard in developing internal private consumption.
“I think that will be an important outcome of this global crisis. But it won’t be easy, and it won’t be quick because what’s missing throughout the region, especially in China, is the absence of a safety net. Given the massive lay-offs that have occurred in China through the reform of state enterprises, a safety net is really important to temper the fears of income and job insecurity that have resulted in … excessive levels of fear-driven precautionary savings.”
Asia also needs to be mindful of one wild card, Roach says. “The risk is that Washington, especially the US Congress, believes that one way to obtain that fair share (of labour compensation in national income) is to impose trade sanctions on America’s largest trade deficit nation, China. It’s emotional politics of a Congress with broad bi-partisan support to take action that would shelter beleaguered middle-class American workers.”
“The big challenge for Barack Obama will be to move to the centre of this debate, and resist the Congressional efforts to use trade protectionism to shield workers. The consequences of him not doing it are severe and very worrisome for all of us here in Asia.”
Stephen Roach was speaking at a luncheon organised by the Asia Society Hong Kong Centre on January 15, 2009.
Sunday, January 18, 2009
And, Asia may yet see a recovery ahead of developed markets as monetary stimulus is likely to show benefits sooner. 'Easier monetary policies have the best chance of working probably in Asia where the financial system is under less pressure and the banking system is less leveraged. At some stage Asian equities could start to do better (than developed markets).'
Earlier, Blackrock vice-chairman Bob Doll issued his predictions for 2009, markedly more muted than his predictions for 2008 which had been off the mark. The deterioration in markets and economies since the Lehman Brothers' failure has taken most strategists and analysts by surprise.
Mr Urwin told journalists yesterday that the macro environment is 'very challenging' and while a recovery will ensue later this year, it will be 'pretty subdued'. 'This leads us to a world which by the end of the year begins to improve, but slowly, painfully and erratically. We're not going back to normal cyclical conditions for two years. But there are investment opportunities that beat putting money in the bank.'
One opportunity, he says, is in non-US government bonds and another is investment-grade corporate debt. Government bonds are expensive, he says, but interest rates cuts are expected to be significant even in emerging markets. Hence low government bond yields may not be unreasonable 'in an environment of zero interest rates, recession and subdued growth and with the emphasis on deflation risk, investors are not content to earn nothing in the bank'.
Treasuries will begin to sell off when conditions become 'more cyclically normal'. Ten year Treasuries are yielding around 2.3 per cent. 'We are some months from that, maybe not this year. When there are more signs of a sustainable upturn, bond yields will rise. Outside the US, there is scope for yields to fall further.'
Investment-grade credit spreads have tightened from 320 basis points to about 270 over the past few weeks. 'Credit spreads at this magnitude discount an incredibly high default rate...You are being offered an extraordinary opportunity to buy corporate credit as measured by the spreads.
'We're in an environment where people lost money last year. They will reach for yields.' He adds that while it is consensus opinion that investment grade credits are attractive, few have moved to invest. 'It's not a crowded trade.' Bonds, however, remain fairly illiquid with a substantial liquidity premium built into the spreads.
As for high yield or sub-investment- grade bonds, he believes it is not yet time to invest even though yields are at fairly high double digit levels. This is because default rates are expected to escalate. Equity markets, on the other hand, are expected to be weak on the back of earnings weakness. Earnings, he says, may 'collapse' by 30 to 50 per cent. Valuations, however, are already almost at historical lows. The Hong Kong market is at all-time lows; the US market values are at 1980 levels.
'Equities are as cheap as they have been for 20 to 30 years. But that does not tell us there will be an immediate strong rebound. What this tells us is the equity investor is expecting earnings to collapse. These are the valuations we get in a steep cyclical downturn. The good news is I think they are widely expected.'
He adds that markets may have hit bottom - with a '60 to 70 per cent degree of probability. 'It's feasible to revisit the lows but our best guess is we do not break them.' He expects equity markets to end 2009 higher than current levels. On alternative assets, he likes the global macro hedge fund strategy and gold. The latter is a hedge against two events, which he says are not in Blackrock's base case scenario. One is a collapse of the US dollar, and the second is that the financial system continues to struggle to a greater extent than expected.
To some extent, deflation, he says, is beneficial as it lowers costs for households. 'What we have to worry about is an environment where price cuts are more widespread, deep and sustained. That is a genuine deflationary environment.'
Meanwhile, Mr Doll, in his 2009 forecast, said 2009 is likely to see a 'slow but noticeable' return to risky assets over safe assets. An equity bottoming process began in October, he wrote. 'Bottoming processes typically take months to complete with re-tests of lows possible. However, increasingly attractive valuations coupled with high degrees of scepticism, supported by massive sideline cash, lead us to believe that equities will have a positive, albeit volatile, year.
By GENEVIEVE CUA
Here are Blackrock vice-chairman Bob Doll's predictions for 2009:
The US economy faces its first nominal GDP decline in 50 years.
Global growth falls below 2 per cent for the first time since 1991.
Inflation falls close to zero in many developed countries, but widespread deflation is avoided.
The US Treasury curve ends 2009 higher and steeper than where it began.
Earnings fall by double digit percentage again in 2009, the first back-to-back drop since the 1930s.
High yield, municipal and investment grade bond spreads narrow in 2009.
US stocks record double digit percentage gain.
US stocks outperform European stocks, while emerging markets outperform developing ones.
Energy, healthcare and information technology outperforms utilities, financials and materials.
Stock market volatility remains elevated as periodic double digit percentage rallies and declines occur.
Oil and other commodities bottom and move higher by year-end as emerging market economies begin to recover.
The US federal budget deficit soars past US$1 trillion as the government continues to grow.
Wednesday, January 14, 2009
From a market perspective, this backdrop suggests investors should continue to expect 2008-style volatility in the early part of this year. Looking further ahead, though, downside risks to economic growth are expected to dissipate as global fiscal stimulus efforts gather speed and de-leveraging pressures ease. When this happens, the extreme valuations in equity and credit markets seen today should provide attractive opportunities for investors. For more tactically oriented investors, as we observed in our December column, a global recession does not preclude bear market rallies, even as markets continue on an underlying trend of decline. Such rallies, as seen in previous downturns, may be big, providing opportunities for more trading-oriented investors.
The Japanese experience of the 1990s has served us well so far in navigating the current crisis, and our experience with the latest global equity rally has been no different. During the 1990s when the Japanese market declined to below 1.5x book value, sizeable fiscal stimulus proposals tended to coincide with bear market rallies. On three occasions, prices rose as much as 45 per cent.
Likewise, after global equities fell to 1.2x book value in mid-November last year, and sizeable fiscal stimulus plans were announced around the same time, global markets rallied 25 per cent at their peaks last week. Fiscal stimulus proposals to date have come up relatively short of the stimulus delivered by Japan in the 1990s, which came up to 4-10 per cent of GDP. As a result, it is no surprise then that the recent rally was less robust.
Looking forward and with this sizeable rally behind us, investment returns are expected to shift from a focus on valuation and fiscal stimulus back towards the trends of economic contraction and earnings risk, as seen last September to October. Once again, drawing on Japan's experience in the 1990s, investors should find that, just as signs signalling the start of bear market rallies existed, a similar set of signs signalling their end existed. In particular, the Japanese bear market rallies of the 1990s tended to end near valuation peaks before the start of the valuation bubble years, or near 2.3x book value. Going back to the 1970s, Japanese equities tended to trade in a relatively stable range between 1.5x and 2.3x book value before they were dramatically re-rated during the Japanese asset bubble in the late-1980s. So, coincidentally or not, as the Japanese asset bubble burst, valuations proceeded to return to their pre-bubble valuation ranges of 1.5x to 2.3x book value. Putting the Japanese framework into the context of global equities, the equivalent pre-bubble range was about 1.0x to 1.6x book value. At last week's highs, global valuations, as measured through the MSCI World index, stood at near 1.5x to 1.6x book value, close to the high end of their pre-bubble range. This suggests that the supportive backdrop for a bear market rally, prospective fiscal stimulus notwithstanding, has eroded with the market rally.
For longer-term investors, Citi analysts believe further progress in the current downcycle is needed to create attractive opportunities to enter the accumulation phase for long-term equity exposure. In particular, moderation in expectations for global equity markets, such as 14 per cent year-on-year consensus earnings growth for global equities in 2010, is likely necessary before markets begin to bottom out in coming quarters.
Driving this troughing process, we anticipate, should be an easing of de-leveraging pressures in the global financial system. While large-scale capital raisings took place among global financials in the fourth quarter of 2008, to a large extent these fund-raisings have served only to stabilise balance sheets following losses earlier in the year. In 2009, we anticipate further capital-raisings and asset sales to drive the needed de-leveraging. Only as these catalysts emerge do we expect to see an increase in the historically extreme valuations and a sustained rally in equity and credit markets.
By NORMAN VILLAMIN
Norman Villamin is head of investment analysis & advice, global wealth management & global consumer group, Citi, Asia Pacific.
The 64-year-old co-chief investment officer at Pacific Investment Management Co is urging investors to anticipate which assets will benefit as the government struggles to boost the economy. Last week he recommended municipal bonds, inflation-protected Treasuries and debt the US government plans to buy. In the past six months, Mr Gross bought senior bank debt, agency mortgage securities and preferred shares in financial companies, all before the government did the same.
Mr Gross, who keeps the attention of investors through a combination of performance, monthly commentaries and television appearances, navigated through the worst credit crisis since the Great Depression, said Lawrence Jones, a senior mutual fund analyst with Morningstar Inc. Mr Gross's US$128 billion Total Return Fund, the world's largest bond fund, returned an average 5.4 per cent annually over the past five years, in part by avoiding riskier debt and asset-backed securities as early as 2005.
'If you are beating the competition, some people will idolise you,' said Mr Jones, who is based in Chicago. 'And some people will hate you and envy you. That's a natural thing.' Morningstar named Mr Gross manager of the year three times, including for 2007.
Newport Beach, California-based Pimco's Total Return Fund rose 4.8 per cent in 2008, while corporate and government bond funds tracked by Morningstar declined an average 8.1 per cent, according to data compiled by Bloomberg. The US$128 billion fund's five-year return was better than 99 per cent of its peers.
Mr Gross, a yoga enthusiast, credits a brainstorm that emerged while meditating with helping him steer clear of the credit market debacle that sent returns on high-risk, high-yield bonds down 26 per cent in 2008. Mr Gross wasn't available for comment, Pimco spokesman Mark Porterfield wrote in an e-mail.
Now, Mr Gross says debt sold by cities and states and some investment-grade companies is attractive. In early 2008, he started buying securities of New York-based JPMorgan Chase & Co and Charlotte, North Carolina-based Bank of America Corp, viewing them as getting protection from the Federal Reserve.
'It was a bold move,' Mr Jones said. 'Now we're seeing a rebound in various risky assets. Pimco is placing its bets by sticking to companies at the top of the economy's capital structure.' Mr Gross had his share of misses in the past year. Pimco held Lehman Brothers Holdings Inc bonds in at least 12 of its funds, including the Total Return Fund, and Mr Gross was buying the debt as recently as June 2008, data compiled by Bloomberg show. Lehman filed the world's biggest bankruptcy in September.
He started loading up on high-quality mortgage-backed securities guaranteed by Freddie Mac and Fannie Mae in 2008, while easing on Treasuries. Last year was the best for US government debt since 1995, with a 14 per cent gain, while municipal bonds lost 3.95 per cent and Treasury Inflation- Protected Securities, or Tips, lost 1.13 per cent, according to data compiled by Merrill Lynch & Co.
Mr Gross's decision to back out of a US$38 billion bond swap for GMAC LLC debt last year also helped drive his performance. The debt soared as much as 83 per cent to 80.5 cents on the US dollar after the auto financing company won approval to become a federally backed bank. Other holders participating in the exchange accepted as little as 60 cents on the dollar.
Pimco's prominence provides Mr Gross with opportunities that aren't available to all his rivals, said Geoff Bobroff, a mutual fund consultant in East Greenwich, Rhode Island. The firm, a unit of Munich-based Allianz SE, has about US$790 billion in assets under management.
The Total Return Fund has 81 per cent of its assets in mortgage-related securities and 16 per cent in investment-grade corporate debt, two of the fund's biggest positions as at Nov 30, according to information posted on the company's website.
The fund's biggest holding as at September was a 6 per cent Fannie Mae mortgage bond, according to data compiled by Bloomberg. 'A lot of his comments can be viewed as self-serving,' Mr Bobroff said. 'That's the problem of a manager who is so visible in the marketplace. Is he touting current advice or is he touting what he's already done?'
'Pimco's view is simple: shake hands with the government,' Mr Gross wrote in his commentary this month. 'Make them your partner by acknowledging that their chequebook represents the largest and most potent source of buying power in 2009 and beyond.'
Mr Gross, born in 1944 in the Ohio steel-company town of Middletown, graduated from Duke University with a psychology degree in 1966. He spent three years in the Navy and served in Vietnam.
Mr Gross joined Pimco after earning a master of business administration degree from the University of California in Los Angeles in 1971. He began using yoga more than a decade ago and credits his meditation sessions with clearing his head and helping him absorb unexpected news, such as a Fed half-point interest rate cut in January 2001. -- Bloomberg
Tuesday, January 13, 2009
This categorization is a kind of verbal shorthand for describing the shape of the ups and downs of the gross domestic product and the broader economy. It’s not an exact science, which is part of the reason there’s so much debate  about which type the United States is experiencing. There’s no governing body or think tank tasked with crunching the numbers and officially declaring a recession one letter or another.
In general, V-shaped recessions are those that last for a few quarters, while the more unpleasant U-shaped recessions can drag on for up to a couple of years. It’s the difference between a head cold that clears your system in a week and a case of bronchitis that leaves you hacking into tissues all month.
V-shaped recessions are also considered to be shallower and less devastating in their scope, although this isn’t reflected in the letter-labeling. (No one’s asking about uppercase versus lowercase U’s and V’s, at least not yet.) V-shaped recessions are those in which GDP and correlating metrics like employment and sales don’t slide as much.
A V-shaped recession is what happened after the tech bust earlier this decade: GDP bounced back in a period of months rather than years. A U-shaped recession, on the other hand, is what the United States saw between November 1973 and March 1975: a 16-month slog the 1975 Economic Report of the President  characterized as “severe.” In describing U-shaped downturns, MIT economics professor and former IMF chief economist Simon Johnson used the visual  of a bathtub with steep, slippery sides.
Since World War II, the U.S. economy has tended more toward U-shaped recessions. Out of 11 recessions since 1945 (not counting this one), we’ve had six U’s, three V’s, and a W, which we’ll get to in a minute.
So, where are we now? Given that, as per the National Bureau of Economic Research’s recent announcement , we’ve officially been in recession for a year already and that prominent economists don’t think the big picture’s going to improve until at least the middle of next year, it’s safe to say we’ve already missed the boat for a quickie V-shaped recession.
There may be a silver lining to this gloomy prospect, though. Anirvan Banerji, director of research for the Economic Cycle Research Institute , points out that following the last two recessions, there was no large-scale domestic job creation (in fact, outsourcing spiked). By contrast, when the United States came out of its last two big U-shaped recessions—in 1975 and again in 1982—new jobs were created. While past results are no guarantee of future performance, as the disclaimer goes, there’s historical precedent to be hopeful.
Economists’ big worry is whether we could be headed for yet another letter of the alphabet: L. An L-shaped recession is when the economy falls off a cliff—and stays there for as long as several years. If this happened, it would more closely resemble the Depression or the Japanese economy during the 1990s (the only true L’s within the past century). NYU economics professor Nouriel Roubini puts the probability at one-third, with the greater likelihood being a U-shaped recession. But don’t start breathing into a paper bag just yet. L-shaped recessions are very rare; economists point out  that the Fed is policing the current economic downturn much more aggressively than its Japanese counterparts did in the 1990s, and Fed Chairman Ben Bernanke is well-known for his study of the government’s missteps in the 1930s.
There’s also yet another alphabetical term used to characterize recessions: W-shaped, which is a pair of back-to-back V’s. Think of them as “oops” recessions, since they happen when a nascent recovery is derailed—usually by poor monetary-policy decision-making—and the economy hits another trough before turning up again. For instance, the twin V-shaped recessions of the early ’80s are more properly considered a single W. In this case, the economy was collateral damage in the Fed’s battle against inflation. While cartoonists have a field day  with this, it’s not actually a Dubya-specific phenomenon.
Friday, January 2, 2009
Since the start of 2007, the world's biggest banks, insurers and mortgage finance companies have collectively reported US$1.01 trillion of asset writedowns and credit losses and slashed 240,000 jobs - more than half of them in the US. Below is a timeline of the key events as the financial crisis unfolded. Compiled by CONRAD TAN
February 2007: In an early sign of the trouble ahead, London-based banking giant HSBC warns on Feb 8 that provisions for losses on its US sub-prime mortgages could exceed analysts' estimates by 20 per cent, reaching almost US$11 billion.
July 2007: Two hedge funds run by US investment bank Bear Stearns collapse on July 17 under the weight of losses from investments linked to US sub-prime mortgages, despite attempts by Bear in June to save them.
August 2007: Bear Stearns co-president Warren Spector is ousted on Aug 5. On Aug 9, France's largest bank, BNP Paribas, halts redemptions on three funds heavily invested in sub-prime mortgage-related securities.
September 2007: The Bank of England provides an emergency loan to UK mortgage lender Northern Rock on Sept 14, triggering the first run on a British bank in 140 years.
October 2007: Swiss bank UBS and US bank Citigroup reveal huge losses on investments linked to US sub-prime mortgages on Oct 1. On Oct 19, US stocks plunge on the 20th anniversary of Black Monday in 1987.
On Oct 30, UBS confirms a third-quarter net loss of 830 million Swiss francs (S$1.11 billion) after writing down US$3.6 billion on its sub-prime mortgage exposure.
The same day, US investment bank Merrill Lynch says its CEO Stan O'Neal is leaving, a week after the bank reported writedowns of almost US$8 billion.
November 2007: Crude oil prices hit a record high of more than US$96 a barrel on Nov 1 after an unexpected fall in US oil reserves. Swiss banking group Credit Suisse writes down US$1.9 billion and reports a 31 per cent drop in Q3 net profit.
On Nov 4, Citigroup chairman and chief executive Chuck Prince is forced to step down. Three days later, US investment bank Morgan Stanley announces a US$3.7 billion hit from its exposure to sub-prime mortgage securities.
On Nov 16, UK's Northern Rock announces the departure of its chief executive Adam Applegarth and most of its board.
On Nov 26, UK-based HSBC says it will provide up to US$35 billion in funding for two of its off-balance-sheet investment vehicles and move them on to its balance sheet to prevent a forced sale of their assets.
The next day, Citigroup announces a US$7.5 billion capital infusion from the Abu Dhabi Investment Authority to shore up its battered balance sheet.
December 2007: UBS writes down a further US$10 billion and, on Dec 10, announces a 13-billion Swiss franc injection of new capital from the Government of Singapore Investment Corporation (GIC) and a strategic investor from the Middle East.
Morgan Stanley becomes the first Wall Street firm to predict the US economy is likely to slip into a mild recession in 2008.
US commercial bank Washington Mutual says it will quit the sub-prime lending business, cutting 3,000 jobs.
French bank Societe Generale announces the US$4.3 billion bailout of an off-balance-sheet investment vehicle. Its move follows similar rescues by HSBC, Standard Chartered and Rabobank since end-November of so-called structured investment vehicles or SIVs to avoid the forced sale of SIV assets as market prices plunge.
On Dec 19, Morgan Stanley sells a US$5 billion stake to China's new sovereign wealth fund, China Investment Corporation, after revealing a Q4 loss of US$3.59 billion due to US$9.4 billion in mortgage-related writedowns.
On Dec 24, Morgan Stanley's Wall Street rival Merrill Lynch announces a US$6.2 billion fund-raising from private investors, including an injection of up to US$5 billion by Singapore's Temasek Holdings.
January 2008: Oil prices start the trading year on Jan 2 by setting a new record, rising above US$100 a barrel for the first time. On Jan 8, US stocks plunge amid speculation that Countrywide Financial, the country's biggest mortgage lender, may be forced into bankruptcy.
Jimmy Cayne, CEO of US investment bank Bear Stearns, says he plans to step down. Three days later, Bank of America says it will buy troubled Countrywide for US$4 billion.
On Jan 15, Merrill Lynch receives a US$6.6 billion capital injection from foreign investors including the Kuwait Investment Authority, Japan's Mizuho Financial Group and the Korean Investment Corporation through the sale of preferred shares.
Citigroup announces a US$12.5 billion injection of new capital to shore up its balance sheet from investors including Singapore's GIC, which pumps in US$6.88 billion. Citi says that it lost US$9.83 billion in Q4 2007 due to writedowns of US$18.1 billion.
Two days later, Merrill Lynch writes off US$11.5 billion of bad debt and reports a Q4 2007 net loss of US$9.8 billion.
On Jan 21, stock indices worldwide tumble as panic grips investors. In Singapore, the Straits Times Index plunges 6 per cent. The US market is closed for a public holiday, but the plunge in equities elsewhere prompts the US Federal Reserve to slash its benchmark interest rate by three quarters of a percentage point to 3.5 per cent in an emergency move one week before a scheduled policy meeting, to relieve pressure before US markets reopen. Eight days later, on Jan 30, the Fed cuts rates again, by half a percentage point to 3 per cent.
On Jan 24, France's Societe Generale shocks financial markets by unveiling a loss of 4.9 billion euros (S$9.85 billion) due to fraud, saying it will have to raise 5.5 billion euros to shore up its capital due to losses related to US sub-prime mortgages. The rogue trader responsible for the losses is later identified as Jerome Kerviel.
February 2008: The UK government formally announces its intention on Feb 17 to nationalise Northern Rock after failing to find a buyer for the troubled mortgage lender.
On Feb 19, Credit Suisse reveals US$2.85 billion of losses on structured credit positions due to mispricing, caused in part by some of its traders inflating the value of investments in mortgage-backed securities. On Feb 28, insurance giant American International Group (AIG) writes down US$11 billion of mortgage securities and reports its worst-ever quarterly loss.
March 2008: The US Federal Reserve leads a group of the world's largest central banks in a coordinated effort to inject at least US$200 billion of fresh liquidity into money markets in North America and Europe on March 11, just four days after the Fed announced a separate US$200 billion intervention.
On March 13, Carlyle Capital, a London-based bond fund affiliated with US private equity firm The Carlyle Group, goes bust after last-minute talks to renegotiate financing terms with its lenders collapse.
The US dollar slides against other major currencies, falling below 100 yen for the first time in more than 12 years. Crude oil hits a record US$111 a barrel and gold exceeds US$1,000 an ounce for the first time.
On March 14, the US Fed extends an emergency loan to investment bank Bear Stearns through its rival JPMorgan, after Bear's access to liquidity suddenly dries up. At this point, Bear, which was not a commercial bank, could not borrow from the Fed directly. Two days later, after a weekend of frenzied talks, JPMorgan says it is buying Bear for US$2 a share in a deal backed by the Fed. The price is a 93 per cent discount to Bear's last traded price of US$30 on March 14 and values the company at a mere US$236 million.
The Fed cuts its discount rate by a quarter of a percentage point to 3.25 per cent, two days ahead of a scheduled policy meeting on March 18, to prevent a run on major banks when markets reopen on March 17. Still, stock markets in Asia and Europe plummet on March 17 on fears that the sale of Bear Stearns at a massive discount could mean that other financial firms are also in serious trouble. The cost of insuring against default on corporate bonds soars, while the US dollar sinks to new lows against other major currencies.
Gold rises to a record US$1,030.80 an ounce, while US crude oil rises to a new high of US$111.80 a barrel. US stocks plunge at the start of trading as worries spread about the health of other financial firms such as Lehman Brothers, but recover by the end the day.
The next day, the Fed cuts its benchmark interest rate by three quarters of a percentage point to 2.25 per cent, the lowest level since December 2004. Although traders had expected a full percentage-point cut, the reduction sparks a surge in US stocks. The rise is helped by stronger-than-expected earnings reports from investment banks Goldman Sachs and Lehman Brothers.
On March 24, JPMorgan raises its offer for Bear Stearns to US$10 a share from US$2 and agrees to finance the first US$1 billion of any losses associated with the target bank. The new offer values Bear at some US$2 billion.
A week later, on March 31, US Treasury Secretary Henry Paulson announces a broad overhaul of Wall Street regulations, creating a set of federal regulators with authority over all players in the financial system. Lehman Brothers says it will raise at least US$3 billion of new capital to shore up its balance sheet.
News spreads that Swiss bank UBS is expected to reveal further writedowns of up to US$18 billion and seek a capital increase of about 13 billion Swiss francs later in the week. Citigroup unveils a sweeping restructure of its global business, separating them into four regions and breaking out its credit card business from its broader consumer banking segment.
April 2008: UBS chairman Marcel Ospel says on April 1 that he will not seek re-election at the Swiss bank's annual shareholders' meeting on April 23. The bank warns that it expects to lose a net 12 billion Swiss francs in the first quarter due to further write-downs of US$19 billion on its US investment holdings. It also says it will make a 15 billion franc rights issue to boost its capital.
On April 8, the International Monetary Fund warns that total losses and write-downs in the financial sector from the credit crisis could reach US$945 billion. The next day, oil futures reach a record US$112.21 a barrel in intraday trading and end at a record closing price of US$110.87, after a surprise drop in US oil inventories.
On April 10, the Chinese yuan rises to a record 6.99 against the US dollar, crossing the seven yuan per US dollar mark for the first time.
The Monetary Authority of Singapore effectively gives a one-time boost to the Singapore dollar to fight rising inflation by re-centring its undisclosed policy band for the trade-weighted Sing dollar or S$NEER at the prevailing level - widely believed to be near the top of the previous tolerated range. The Sing dollar rises 1.8 per cent to a record 1.3567 against the US dollar. Since MAS's previous statement on Oct 10, 2007, the Sing dollar has gained 7.4 per cent against the US dollar.
Rice prices exceed US$1,000 a tonne for the first time on April 17 as panicking importers scramble to secure supplies, worsening disruption already caused by export restrictions in Vietnam, India, Egypt, China and Cambodia.
Citigroup's chief executive Vikram Pandit says the financial group will slash its cost base by up to 20 per cent. Merrill Lynch says it will cut 4,000 jobs after suffering a US$2 billion Q1 2008 loss, bringing to almost 40,000 the number of jobs lost at financial companies since the onset of the credit crunch.
The next day, Citigroup says it suffered net loss of US$5.1 billion in Q1, its second consecutive quarterly loss, after writing down almost US$16 billion of soured investments. Citigroup also says it will cut 9,000 jobs in the next 12 months.
Oil futures close at a record high of US$116.69 a barrel as news about pipeline sabotage in Nigeria pushes up prices. On April 22, the UK's Royal Bank of Scotland unveils emergency plans to raise £16 billion (S$33.3 billion) through a £12 billion rights issue and asset sales. The rights issue is Europe's biggest to date.
Oil prices reach a record US$118.47 a barrel amid strong demand from China, attacks on oil facilities in Nigeria and concerns about the outlook for supplies from Saudi Arabia.
May 2008: America's AIG says on May 9 that it suffered a record net loss of almost US$8 billion in Q1 2008 due to massive writedowns on credit derivatives and losses on its investment portfolio. The insurer says it plans to raise US$12.5 billion in new capital. Standard & Poor's and Fitch both downgrade their ratings of the company.
Crude oil futures close at a record US$125.96 after climbing as high as US$126.25 a barrel during the day. On May 22, oil futures reach a new high of US$135.09 a barrel in intraday trading after repeatedly breaking previous records earlier in the month.
Swiss bank UBS, one of the worst affected by the credit crunch, launches a 15.97-billion franc rights issue to cover its losses on assets linked to US mortgage debt.
June 2008: UK bank Barclays announces a plan on June 25 to raise £4.5 billion from foreign investors including Qatar Investment Authority to bolster its balance sheet.
July 2008: Oil prices reach an all-time high of just over US$147 a barrel on July 11. In an emergency move on July 13, after a weekend of desperate negotiations, the US Treasury and other government agencies say they will provide liquidity and capital support to US mortgage finance giants Fannie Mae and Freddie Mac, which account for almost half of the outstanding mortgages in the US. The share prices of both firms had plunged the previous week as investors feared that falling US house prices and rising defaults on mortgages would drag them into bankruptcy. The same day, US mortgage lender IndyMac Bank collapses, the second-biggest bank failure in US history.
On July 15, stocks in Asia slump as news emerges that some of the region's biggest banks had billions of dollars invested in debt securities issued by Fannie Mae and Freddie Mac.
August 2008: In a settlement with US regulators over the latest scandal to engulf Wall Street, Citigroup and Merrill Lynch announce on Aug 7 that they will buy back a total of up to US$20 billion in bonds known as auction-rate securities from investors, after some claimed that they were misled by the banks' advisers.
A day later, UBS agrees to buy back US$18.6 billion of auction-rate securities to settle charges of misleading investors over the securities.
Other banks including JPMorgan Chase, Morgan Stanley, Goldman Sachs, Deutsche Bank and Wachovia Corp soon follow with their own settlements. Shares in American International Group (AIG) plummet on Aug 7 after the insurer reports a loss of more than US$5 billion on mortgage-related exposures.
Shares in Fannie Mae and Freddie Mac plunge further after both report multibillion-dollar quarterly losses. Fears grow over the fate of both firms, as well as that of Lehman Brothers, which is trying desperately to raise cash from investors in China and South Korea. Oil falls to US$115 a barrel.
On Aug 12, UBS announces plans to separate its wealth management, investment banking and asset management business units, after reporting a fourth straight quarterly loss and massive withdrawals of funds by clients. UK chancellor Alistair Darling warns on Aug 30 that the country faces its worst economic downturn in 60 years.
September 2008: The US government takes over Fannie Mae and Freddie Mac on Sept 7 in one of the biggest bailouts in US history after a weekend of frantic talks, reminiscent of the dramatic attempt to save Bear Stearns in March. Investors' fears turn to the four remaining independent Wall Street investment banks - Lehman Brothers, Merrill Lynch, Morgan Stanley and Goldman Sachs - as well as insurer AIG.
After days of searching frantically for a buyer, Lehman files for bankruptcy protection on Sept 15, while Merrill agrees to be taken over by Bank of America for US$50 billion, capping Wall Street's worst-ever weekend.
On Sept 16, financial markets worldwide plunge into chaos. The US government announces an US$85 billion emergency loan for AIG to save the insurer from bankruptcy, in exchange for a 79.9 per cent stake in the company.
As news of Lehman's collapse and the extraordinary takeover of Merrill spreads, markets in everything from stocks and currencies to credit derivatives strain to cope with the fallout.
Stunned investors flee equities for government bonds and gold, while interbank lending rates jump to record levels as banks jealously hoard cash, causing credit markets to seize up.
A day later, HBOS, the UK's biggest mortgage lender, is taken over by Lloyds TSB in a £12 billion deal after a run on HBOS shares. Stocks worldwide continue to gyrate wildly. In Russia, trading is halted indefinitely by regulators.
On Sept 18, central banks worldwide inject US$180 billion of US-dollar liquidity into money markets in a desperate bid to lower interbank borrowing costs and calm financial markets.
The next day, regulators in the US and UK ban the short-selling of shares in financial companies, blaming it for recent declines in financial stocks. News emerges that the US government is preparing a plan for a mass rescue of the financial sector.
On Sept 21, Goldman Sachs and Morgan Stanley, the last surviving independent investment banks on Wall Street, receive emergency approval to become commercial banks, to avoid the fate of Lehman and Bear Stearns. Australia, Taiwan and the Netherlands join the US and UK in announcing restrictions on short-selling to prevent investors from betting that stocks will decline.
On Sept 24, Hong Kong's Bank of East Asia faces a run by depositors after rumours spread that the bank has liquidity problems. Its shares plunge. The Hong Kong Monetary Authority says it will provide full liquidity support to the bank, if necessary.
In the US, the Fed increases its swap lines with other central banks, adding Australia, Norway, Sweden and Norway to a list that includes the European Central, the Bank of England and the Bank of Japan.
The next day, Washington Mutual is seized by regulators and sold to JPMorgan Chase for US$1.9 billion, making it by far the biggest bank failure in US history to date. A bailout plan for the financial sector is mired in doubt as US lawmakers argue over details including safeguards over the use of taxpayers' money.
On Sept 28, US policy-makers announce a tentative deal that will allow the US Treasury to buy up to US$700 billion in troubled assets from ailing banks.
In Europe, banking and insurance group Fortis is bailed out by the Belgium, Dutch and Luxembourg governments. The next day, US lawmakers reject the bailout plan by a narrow margin, throwing financial markets into disarray. The Dow Jones index plunges a record 778 points or 7 per cent, while the S&P 500 index falls 8.8 per cent.
Wachovia agrees to be bought by Citigroup in a deal backed by US regulators. UK banking group Bradford & Bingley is bailed out, as is Iceland's third-largest bank Glitnir, while the German government announces plans to rescue Hypo Real Estate, one of the country's biggest banks.
On Sept 30, Ireland's government guarantees deposits and debts at six financial institutions after Irish banks suffered the biggest one-day fall in their share price for two decades on Sept 29.
Central banks worldwide again flood interbank markets with money. The overnight US-dollar London interbank offered rate or Libor, the rate that banks charge one another to borrow US dollars, jumps to 6.9 per cent from 2.6 per cent a day earlier, the biggest-ever one-day increase.
European bank Dexia is bailed out by the Belgian, French and Luxembourg governments.
October 2008: US lawmakers approve the sweeping rescue plan aimed at saving the financial sector. Stocks in the US fall after the vote is announced on Oct 3, ending the week with their worst performance since markets reopened after the Sept 11, 2001 terrorist attacks.
Economic data shows the US labour market lost 159,000 jobs in September, the biggest decline since March 2003.
Central banks pump more money into the banking system, lowering overnight Libor. But three-month Libor rates for interbank loans in pounds, US dollars and euros continue to rise. The spread between three-month dollar Libor and three-month US Treasury bills reaches record levels as investors seek the safety of US debt and shun lending in the money market.
US bank Wells Fargo makes a surprise offer for Wachovia, trumping Citigroup's earlier deal to buy the bank. Two days later, on Oct 5, the German government guarantees savings in all German bank accounts to avert panic after a rescue plan for Hypo Real Estate collapses.
The next day, the Danish government guarantees all bank deposits in Denmark.
On Oct24, The Straits Times Index suffers its biggest one-day fall in almost two decades, ending one of its worst weeks in recent memory. The stock benchmark plunges 8.3 per cent - its biggest percentage drop since Oct16, 1989 - to finish the week with a staggering loss of 14.8 per cent.
On Oct 7-8, Iceland's government formally seizes its three biggest banks - Kaupthing, Landsbanki and Glitnir - as the entire country teeters on the brink of economic collapse. On Oct 8, central banks in the US, Canada, UK, eurozone, Sweden and Switzerland cut rates simultaneously in an unprecedented joint effort to stabilise financial markets and to lower borrowing costs. China also lowers interest rates.
The UK government announces plans to pump up to £250 billion into the country's largest banks, including the Royal Bank of Scotland, Lloyds TSB and HBOS, to boost their capital, and provides a further £250 billion in guarantees for new debt issued by UK banks.
Days later, on Oct 14, the US government decides to use the first US$250 billion of US$700 billion in bailout money - originally intended for buying troubled assets from banks - on a similar plan to buy direct stakes in banks in an attempt to restore confidence to the financial sector.
On Oct 15, the Dow Jones index fell 7.9 per cent - its biggest percentage fall since Oct 26, 1987 - as new data shows the US economy slipping into recession. The next day, the Straits Times Index slumps 5.3 per cent, extending its two-day decline to 8.3 per cent.
After trading ends on Oct 16, the Singapore and Malaysian governments say they will guarantee all bank deposits, following similar moves by governments elsewhere, including Hong Kong, Indonesia, Australia and New Zealand.
Switzerland's government announces a sweeping rescue of its entire banking sector, including emergency cash infusions from the public purse for UBS and a toxic-asset dump for removing troubled assets from banks' balance sheets.
Despite the unprecedented efforts to calm financial markets, stocks worldwide continue to fluctuate violently as the damage from the credit crisis spreads to the broader economy.
Analysts grow increasingly worried that the three biggest us carmakers - General Motors, Ford and Chrysler, which have suffered from plunging sales amid a weakening economy - could collapse, causing hundreds of thousands of job losses and triggering further chaos in financial markets.
On Oct 24, The Straits Times Index suffers its biggest one-day fall in almost two decades, ending one of its worst weeks in recent memory. The stock benchmark plunges 8.3 per cent - its biggest percentage drop since Oct 16, 1989 - to finish the week with a staggering loss of 14.8 per cent.
On Oct 29, the US Fed extends temporary swap lines to Singapore, Korea, Brazil and Mexico to ensure sufficient US-dollar liquidity in the respective banking systems.
A day later, the Fed cuts its key interest rate to one per cent from 1.5 per cent.
November 2008: On Nov 5, Barack Obama wins the US presidential election. The next day, the International Monetary Fund (IMF) warns of a global recession in 2009 as the outlook for the world's biggest economies deteriorates further.
The IMF extends a US$16.4 billion emergency loan to Ukraine on Nov 6 to shore up its economy. Later in the month, the IMF approves emergency loans to Iceland on Nov 20 and Pakistan on Nov 25 to stabilise their economies.
On Nov 7, DBS Group says it will slash 6 per cent of its work force or some 900 jobs by the end of the month, as it reports its worst quarterly performance since the end of 2005. Two days later, China announces a four-trillion yuan (S$840 billion) stimulus plan to spur economic growth. On Nov 17, Citigroup announces plans to slash some 50,000 jobs worldwide, aiming to reduce its headcount to 300,000 'in the near term' from 352,000 at the end of September.
On Nov 23, the US government announces a US$20 billion rescue plan for Citigroup after its shares plunge more than 60 per cent in a week.
On Nov 25, the US Federal Reserve says it will inject another US$800 billion into the economy. A day later, the European Commission unveils a 200 billion euro plan to spur economic growth.
December 2008: The US National Bureau of Economic Research confirms on Dec 1 that the US economy is in a recession that started in December 2007.
On Dec 4, Credit Suisse says it will slash 5,300 jobs or 11 per cent of its global work force by the middle of 2009, as it warns of massive losses from its investment banking business. A week later, Bank of America says it will cut up to 35,000 jobs after its takeover of Merrill Lynch.
On Dec 9, the yield on three-month US Treasury bills fall below zero for the first time in history. Yields on other US government securities also reach all-time lows as investors, desperate for safe havens ahead of the year, become effectively willing to pay the US government a fee to safeguard their money for later.
The World Bank warns that international trade volume is likely to contract in 2009, for the first time since 1982.
On Dec 11, Bernard Madoff, a US money manager based in New York, is arrested after confessing to running a US$50 billion Ponzi scheme. The news sends shockwaves through the global financial community as investors ranging from hedge funds to wealthy individuals scramble to estimate their losses from the biggest fraud in history. On Dec 16, the Fed slashes its benchmark interest rate from one per cent to a range of zero to 0.25 per cent, the lowest since records began.
Three days later, Japan's central bank cuts rates to 0.1 per cent from 0.3 per cent, as the government warns that the economy will stagnate in 2009.
In the US, the government agrees to lend up to US$17.4 billion to its biggest carmakers - General Motors, Ford and Chrysler - to keep them afloat until early 2009.
On Dec 22, DBS Group warns that its net profit is expected to slide further in Q4, as it announces plans to raise some S$4 billion in new capital through a rights offer.
On Dec 30, the US Treasury injects US$5 billion into GMAC, the financing arm of General Motors, and lends another US$1 billion to GM to be re-invested in GMAC. The government bailout extends the ability of cash-strapped GMAC to lend to car buyers, which it hopes will boost sales of ailing US carmakers.
Source: Various news reports, bank statements
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