 Panel Discussion Too much money chasing too much risk SATURDAY 13 OCTOBER 2007
The subprime mortgage crisis, which sent shockwaves through the financial world and filtered down to the ordinary person in the street was blamed on a massive over-supply of money in banking system, a panel of experts and investment bankers agreed. The sudden meltdown in the US property market earlier this year and its dire consequences for banks, capital markets and small investors across the globe was a 'disaster waiting to happen', according to Bloomberg's managing editor Janet Guyon. She told participants at an intense panel discussion on money and risk: "The crisis came about because there was so much pressure from investors for an increase in their returns, and the bubble finally burst. But the surprise for me is not that there is a crisis, but how long it has taken for it to emerge.” She added: "When we stopped having housing inflation, assets like houses stopped increasing in value, and I for one, have been talking about when the housing market was going to fall apart four or five years ago." She told how her online financial news service sent investigators out to talk to ordinary people in Las Vegas who saw soaring house prices and virtually 'free' loans as a double opportunity to make cash quickly. "They realised they could borrow free money, buy a house, sell it soon afterwards and make some money. They thought housing was a liquid asset, but we know it's not,” she said. "Then the housing market crashed, people didn't make their repayments because they had always intended to sell. Then they found that they couldn't sell the house either, so no money went back to the lenders." "What really went wrong here was that mortgages were given to people who had no intention of ever paying them back." Christina Mohr, a managing director at global financial giant Citi, explained how this dearth of money being returned to lenders then filtered through the whole financial system because it wasn't just the banks that had put up the money in the first place. She said: "In the early 1990s, banks provided 50 per cent of the loans, but now it's just 15 per cent. You think you're borrowing from your friendly local bank, but in fact the money's coming from a whole range of other institutions too. "There is an enormous amount of liquidity out there and corporate balance sheets are the best they have been for years,” she added. “But in our search for returns, we began to see assets of lower and lower credit quality added to global assets. So the loss of value in the US housing market created a corresponding loss of capital elsewhere." Professor Ron Anderson, a finance and risk management expert at the London School of Economics, explained that the liquidity and credit crunch triggered by the subprime crisis had exposed the weak points in the world's financial system. "It has shown us that long-term instruments like mortgages have a tight link to short-term factors," he said. Paresh Shah, Managing Director of London's Stargate Capital, blamed the crisis on the excessive supply of money in the economy, with billions more banknotes being churned out by central banks everywhere from the UK and Australia to India and the Far East. He said: "The busiest industry over the past ten years has been the printing industry, and here I mean the printing of money. The money supply has increased everywhere." The former US Federal Reserve chairman Alan Greenspan had a key list of 'don’ts', Shah said. One of the most important was not to let the money supply get out of control, and ignoring this advice would send global finances spiralling into chaos. "There is too much money chasing too few goods, which causes inflation, and with that it's the poor man in the street that suffers,” Shah added. "The subprime crisis might have started in the US, but a UK bank almost failed, and that's because when ordinary people see queues outside the bank where they have their life savings, they panic. There is a herd instinct and that's what we've got to avoid." Finally he cautioned that there could be “problems still out there in the financial system that nobody even knows about yet." __________________________ |