It's been tumultous weeks for the U.S. finance industry that began with the packaging of mortgage-related assets.
To take stock, here's what happened so far:
* Lehman Brothers filed for bankruptcy
* Freddie Mac, Fannie Mae and AIG were rescued by the US Fed, making the Fed their largest equity holder
* Bank of America bought Merrill Lynch in an all-stock sale
* Morgan Stanley and Goldman Sachs are no longer investment banks, choosing now to be regulated by the US Fed.
This is driven by a need to borrow money from depositors as short-term LIBOR rates continue to remain high amidst the drying up of liquidity.
* WaMu (Washington Mutual) is the next bank to go belly up. JP Morgan bought their good assets and not their liabilities.
* Wachovia Bank is in early talks with Citigroup, Wells Fargo, and Banco Santander.
Is this the end?
No one really knows, but I think it is still early days. At the very least, confidence is shaken and you will start seeing US domestic consumption and GDP growth slowing, especially as domestic consumption forms the lion's share of GDP in the United States.
The market is jittery, and any rebounds in the past seem to be a result of bears covering their shorts. Regulators have since forbid naked short selling (i.e. selling a share without owning it first) and the market is range-bound with further downside potential.
Wall Street is waiting to see if the US Fed is able to convince Congress to agree to the proposed US$700 billion bailout plan. The nearing Presidential elections has made it seem like a political play, and no one is sure it is going to be a cure-all for the US economy. Critics were everywhere and have tugged the heartstrings of the population - namely why are US taxpayers, themselves in massive (housing mortgage) debts, be liable for additional debt while the banks' CEOs get to pocket the US$'millions they have earned over the years?
Another concern I have is, the US Government already have over US$9trillion in debt. Who is going to continue lending to them? And at what cost? It is likely the USD will continue depreciating against most currencies in the near future.
Ben Bernanke's comment on buying the distressed assets at close to hold-to-maturity value is also cause for worry as it could mean buying the assets at a premium over the mark-to-model values and might mean he could not deliver on the promise where US taxpayers are entitled to capital gains when the assets are held to maturity.
How about emerging markets in Asia?
For Singapore where I am based, I think there are both direct and indirect impacts. Direct impacts will be limited as our main trade flows are intra-ASEAN and inter-Asia. However, we will still be affected as we are a very open economy. Also, indirect impacts are harder to measure and lies unknown. Inter-Asia trade is likely to be negatively affected as US demand falters, thereby affecting demand from other Asia countries because the US continues to be major trading partners of many countries, especially that of China.
What's next?
The market is likely to await to see if Congress passes the Bill on the bailout plan, and it depends on which candidate wins the Presidential election and what steps he will take to steer the US economy back on track (or it could be further off). Unemployment figures are likely to rise as banks continue to retrench and it may start overflowing to other sectors of the economy, including manufacturing.
It is thus prudent to keep cash and maintain liquidity till we have more positive news ahead of us. As for my unrealised losses in mutual funds and equities that is reaching 15-20% of my initial value, I have decided to keep it there as I bought them for the longer-term and will relook at them early next year. I am guessing the economy picks up then when the financial turmoil is over (hopefully by end of this year).
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