& çâÌæÚUæð´ ·¤è ¥ôÚU Îð¹Ùæ ÁæÚUè ÚU¹ð´ ¥ÍæüÌ ¥ÂÙð ÜÿØ ÂÚU ŠØæÙ ÚU¹ð´Ð ãæÚU Ù ×æÙð´, €UØô´ç·¤ ·¤æ× ·¤ÚUÙð âð ¥æÂ·¤ô ©gðàØ ·¤è Âýæç# ãôÌè ãñ ¥õÚU ÁèßÙ ·¤æ ¹æÜèÂÙ ÎêÚU ãôÌæ ãñÐ ÖÜð ãè ÁèßÙ ×ð´ ç·¤ÌÙè Öè ·¤çÆÙæ§ü €UØô´ Ù ¥æ°, çÁ™ææâæ ¥õÚU ©ˆâæã ÕÙæ° ÚU¹ð´Ð ŠØæÙ ÚU¹ð´, ÜÿØ ã×ðàææ ¥æÂ·Ô¤ Âæâ ãôÌð ãñ´ çÁ‹ãð´ ÂæÙð ·Ô¤ çÜ° ÂýØæâ ¥æÂ ·¤Öè Öè àæéM¤ ·¤ÚU â·¤Ìð ãñ´Ð

COLUMN

Subprime to liquidity crunch: Lessons learnt

MAMUN RASHID
For more than a year we have been hearing about the subprime crisis where predatory lending in real estate sector and its associated leveraged structured products has brought in losses to many global banks, mostly US based though.
The total loss of all the banks from this crisis was reported to be well above US$500 billion. However in last two weeks things fell apart like anything. While multihundred-point gyrations in the US equity market grabbed the media headlines, credit borrowing and lending -- the basic functions of finance, on which the real economy of producing, buying and selling depend to function from day to day - came close to breakingdown.
Nothing compares with what's happened in the past fortnight.
The US government bailout of Fannie Mae and Freddie Mac, as announced on September 7, was no surprise. It had been foretold on another balmy Sunday evening in mid-July, and became inevitable as the government-sponsored enterprises' ability to finance themselves was called into question.
But the Treasury bailout of Fannie and Freddie failed to stop the downward spiral. The following Sunday, Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke declined to help fund a takeover of Lehman Brothers, as the central bank had done with JPMorgan Chase's acquisition of Bear Stearns in March. Lehman was left with no choice but to file for bankruptcy the following day.
Faced with the possibility it could meet a similar fate,
Merrill Lynch rushed to merge with Bank of America. Merrill Lynch had always been fiercely independent, unlike Lehman or Morgan Stanley. (Remember their respective divorces from American Express and Dean Witter?) But getting $29-a share was a lot better than the $10- Bear Sterns got, and the zip Lehman received.
Yet the prospect of failure by American International Group (AIG) posed a bigger risk. AIG has a monstrous $1 trillion balance sheet and its tentacles were everywhere, as New York Governor David Paterson characterised the reach of the nation's largest insurer.
Tuesday afternoon, the Federal Open Market Committee (FOMC) opted to
hold its key target rate for federal funds unchanged, at 2%, confounding expectations of a cut by Fed watchers and the futures market. The reasoning would become apparent that evening. The central bank decided to provide a massive $85 billion loan to AIG at stringent terms, and an equity stake of 79.9%, the same as Treasury got for bailing out Fannie and Freddie.
But even that didn't calm the markets. Strains worsened after a major money market fund "broke the buck" -- that is, saw its ^hare price fall below the sacrosanct $1.00-a share level -- and suspended redemptions.
This was the result of unintended (but foreseeable) con
sequences. The money fund held Lehman paper, which it wrote down to zero, knocking its net asset value (NAV) to 97 cents. Holders, who had assumed they would always get a dollar out for every dollar they put in, bolted for the exits.
This was especially the case of institutional money funds, which yanked $173 billion out in the week ended Wednesday, most of it that day. Instead, these investors fled for the safety of T-bills, sending their yields to virtually nil.
The tide- ultimately was turned Thursday afternoon, after news reports indicated Washington was cooking up a massive scheme: A plan recalling the Resolution Trust Corp., which worked out tile savings-
and-loan failures of the late 1980s and 1990s, was in the works.
By Friday morning, it was official. Treasury Secretary Paulson announced that the plan would involve "hundreds of billions" of taxpayers' dollars to buy up bad assets.
In addition, the Treasury would provide insurance for money funds analogous to FDIC backing for bank deposits. That was aimed at stopping the modern-day bank run on the money funds and thus alleviating the strains on the money market.
The Fed, for its part, also instituted an array of new lending facilities to stop the crunch. And, the SEC called a halt to short sales of financial stocks, unheard of for last several years, if not decades. That came in reaction to the wholesale selling of icons such as Goldman Sachs and Morgan Stanley. But their credit default swaps-derivatives insuring the credits of the investment banks-cratered to levels that implied imminent bankruptcy. Sellers of credit protection hedged their position by shorting the stock. The resulting plunge in the stock further tightened the credit vise.
The government's actions did help address the liquidity crisis, for the time being. Stocks soared Thursday and Friday, and the strains in money markets eased. But the crux of the crisis remains. Lenders can't lend while they're laden with underwater, illiquid assets and can't raise capital.
The US government may have put out the fire. The rebuilding lies ahead. We must also be vigilant of the impact of the global events on Bangladesh finance and econ-
omy. The commercial banks in Bangladesh have about US$500 million worth of foreign currency deposits which are lying with various foreign banks overseas, mostly in the US.
In addition to that, the central bank has about USS 5.5 billion of reserves. Of these reserves, a significant amount is in USD or USD denominated assets (mostly in US Treasury Bonds). Apart from those, Bangladesh financial sector has very little exposure as the instruments used are mostly deposits and US Treasury bills for central banks. We do not hold any US corporate bonds.
However, we may not face severe credit exposure, but in case of systemic failure, we would be exposed to liquidity risk, which may affect our performance in making cross border payments. Acute systematic crisis may also dwindle investor confidence and cause a slowdown to US economy. This might also trickle down to our economy mostly through reduction of exports and remittances.
The lesson for now is that even the freest economy would require intervention to survive. But the thing that needs to be focused is the risk management process of the banking industry as well as the culture where corporate greed and lack of engaged and forward looking leadership can result in such a catastrophe.
Al the same time, all these crises have put the' monoline' investment banks under long term survival threat and made 'universal banking model' die 'life saving drug' for global financial conglomerates.
The writer is a banker and economic analyst