During the summer of 2007, while most of us were busy interning or enjoying a perfect holiday at an exotic location somewhere in Asia, there was trouble brewing in the other part of the world the United States of America. The trouble this time was expected to be bigger and to engulf more stakeholders compared to the 2001 recession. This trouble was later termed the credit market crisis.
In a loose sense, most of the world knew that there were a group of people who were not able to repay their housing mortgage loans. This had a knock-on effect on the investment banks and had left Ben Bernanke, Chairman of Federal Reserve, scratching his head on how to deal with the problem.
The sub-prime crisis soon became a hot topic that was discussed in many Finance and Accounting classes at SMU. However, a clear understanding of the underlying issues is necessary. What is securitisation? What are conduits? Why are write downs appearing on statements of investment banks, when the loans were made by commercial banks/mortgage companies? Why are global equity markets tumbling?
This is perhaps where an initiative from SoA benefited many of us. SMU students had the privilege to hear an expert's opinion on the sub-prime issue "What Happened in the Summer of 2007 and What is the Impact?" The talk was conducted by Mr Ananth Ramachandran, Executive Director of Debt Capital Markets at JPMorgan and the session was moderated by Ong Zhi Qi (Accountancy and Business 2004). The interest in this talk was overwhelming 20 days before the talk, its venue had to be changed from a seminar room to the Ngee Ann Kongsi Auditorium 3 times its size! As expected, on the day of the talk, the auditorium was packed.
 
Mr Ramachandran (above left) speaking to the audience About 150 students attended the talk held in Ngee
Ann Kongsi Auditorium
Mr Ramachandran talked about the credit market crisis collapse of the sub-prime mortgage market and the unravelling of the leveraged finance market how it all started and the current situation. He also discussed the impact of the credit market crisis on the global economy, capital markets and the hardest hit participants of the financial system. He had a clean finish with some thoughts on what lies ahead.
Accountancy 2006 student, John Brendan Lim, describes the talk, "Mr Ramachandran systematically shed light on the notable actors and stagehands involved in the sub-prime crisis, ranging from Special Purpose Vehicles ("SPVs") funding the purchase of collateral, to Structured Investment Vehicles ("SIVs") that make profit from borrowing money by issuing short-term securities at low interest rates and subsequently lending that money by buying long-term securities at higher interest."
Indeed, as a member of the audience, I must say that the talk was nothing short of enlightening. There was not a moment of boredom but only eager anticipation. The audience's thirst for knowledge was further evident when they raised pointed questions which also left the speaker impressed! At the end of the talk, one could see enlightened faces in the audience, appreciative of the chance to understand the nitty-gritty of the sub-prime crisis. Some of their key takeaways were as follows:
"It reminded me that banks are still ultimately risky businesses, being highly leveraged institutions and require more conservatism. However, the "Institutional Imperative" ("I need to do that because others are doing it too") leads them to take positions where the risk does not justify the returns. These instances can help us to assess the conservativeness of a bank's decision-making process. Through the talk, I also realised that it is important to dig deep into the financial notes in a bank's annual report to understand the exposures it has..."
- Lee Xin Hong, Accountancy 2006
"The post dot com bust had led to a period of low interest rates that led to excessive liquidity which drove up US property prices. Coupled with the ingenuity of bankers and financial innovators, the credit derivatives market picked up its pace, further building up the speculative bubble that eventually burst as sub-prime borrowers defaulted on loans with the economic slowdown. The risk associated with these credit derivatives went somewhat hidden, unpredictable and unnoticed as it stayed underneath the multiple layers of derivatives, became diversified across investors and geographies and became increasing difficult to value as the credit derivatives market became increasingly illiquid."
- Simon Jong, Accountancy 2004
"Financial innovation per se is not bad. Using it to mask poor quality or pushing customers to purchase unduly complex products are the practices that typically result in systemic pain. At the end of the day, both banks and customers have to play a role in ensuring that all products and the underlying risks are well-understood before loading their portfolios with the latest financial gadgets."
- Ong Zhiqi, Chairman for the SoA Value-Added Talk, Accountancy and Business 2004
Undoubtedly, this talk was certainly a value-adding' talk and I am sure the 150-strong audience would agree! |
