3 - Managing Financial Crisis in Singapore

Summary

Introduction

This chapter begins with a brief discussion on the housing bubble in the United States and how the sub-prime crisis caused the collapse of major financial institutions such as Lehman Brothers and AIG. Their collapse severely devalued Lehman-related structured products sold in Singapore and diminished the savings of many retail investors. The crisis also had serious spillover effect on the exports of Singapore. Workers lost their jobs when companies cut costs to remain competitive. The Singapore Government introduced a Resilience Package to save jobs and to minimize the negative impact caused by the crisis. The chapter then discusses the effectiveness of these rescue measures and the lessons to be learnt from the crisis.

Many books, articles and reports have been written by economists, financial analysts, journalists and political observers about the financial crisis caused by the sub-prime housing bubble in the United States.

Beginning around 2000, the demand in the U.S. property market began to rise as house buyers took advantage of the low interest rates. Some banks even offered incentives such as interest only adjustable rate mortgage (IO-ARM) loans. Borrowers only had to pay interest during the initial period. Without the normal due diligence, loans were even offered to sub-prime or “NINJA” borrowers (people with No Income, No Job or Asset). As a result, the share of subprime mortgages to total originations increased from 5 per cent (US$35 billion in 1994) to 20 per cent (US$600 billion in 2006) (Tilson and Tongue 2009).

The crisis started in 2006 when there were signs of inflation. When the Federal Reserve Board increased interest rates to combat inflationary pressures, many Americans were unable to make their mortgage payments. Defaults and foreclosure increased sharply. In 2007, nearly 1.3 million homes were foreclosed, up by 80 per cent from 2006. In comparison, between 2001 and 2005, there were only 650,000 foreclosures (Leong 2008).

The sub-prime housing bubble affected many major U.S. institutions such as Bear Stearns, Lehman, AIG, Bank of America, Fannie Mae and Freddie Mac. On 15 September 2008, Lehman Brothers filed for bankruptcy and its collapse affected the entire financial market in the United States and many other countries.

Global Impact of the AIG Collapse

In March 2009, U.S. insurance giant American International Group (AIG) reported a loss of US$62 billion for the last quarter of 2008, the biggest quarterly loss in U.S. corporate history.