On the Beat | By Wong Chun Wai

Sub-prime woes bother our market

MY STOCKBROKER friend calls me for two reasons – to exchange tips on hot stocks in Bursa Malaysia and, when the prices are rocketing, to heap praise on the Government about what a wonderful job it is doing. 

But business has been a little slow lately. So now he spends time reading the blogs and finding fault with the Government. Nothing seems right to him as the bearish market hits his pocket.  

If the Government had its way, it would certainly like the stock market to have a bullish run, at least until the general election. 

It knows the trickle down effects on the economy. Plenty of money in the people's pockets, especially urban voters, is the only feel good factor that matters. 

But external forces, beyond our control, have come into play with the elections just about six months away. 

The sub-prime mortgage crisis that hit Wall Street and spread across the United States has also affected the global markets. 

It may seem like a complicated financial issue but it is essentially the story of housing loan borrowers with bad credit history being given loans that they can no longer service. 

Those loans, popularly referred to as mortgages in the US, are known as sub-prime because the people they are given to are not prime borrowers. To American bankers, they are regarded as B-grade or second chance borrowers. Or worse, people who would normally not qualify for loans. 

These mostly lower income borrowers, such as the elderly and new immigrants, were told that they could get loans even higher than the value of their houses. 

They were promised low interest rates during the first or second year, and, as the prices of homes were then going up, they were told that they could refinance their homes to keep their payments down. 

But the housing bubble burst and these borrowers were suddenly told that their interest had been reset to double digits. They also found that they could no longer refinance their homes. 

Unable to cope with the number of loan defaulters, many lenders filed for bankruptcy sending shock waves through the economy. 

This crisis hit the United States because, for years, banks, hedge funds and lenders bluffed themselves and everyone else into believing that property prices would go up, borrowers would always service their loans and no financial institutions would go bust. 

It is a sick story of greedy financiers. After lousy borrowers got their loans, the lenders turned around and sold the loans to investment banks that in turn repackaged them for re-sale to investors. 

Working with rating agencies, these B-grade loans became “investment quality securities.” It is very much like a person from Harlem who has his social standing upgraded after moving to Manhattan with a new name and a new suit. 

With the possibility of millions of such B-grade borrowers losing their homes, panic buttons were pressed and it has now become much harder and more expensive to borrow. In economic terms, there is now a financial contagion. 

The US sneezed and the rest of the world caught a cold. 

From rating agencies such as Standard & Poor, Moody and Fitch Ratings, to poor federal regulators, lawyers can be expected to make tons of money filing suits against these agencies. 

The worse part is that no one can predict what will happen next and for the ordinary American Joe, the issue is murky and complex and all the financial jargon makes it difficult for him to fully grasp the great impact on his life.Here in Malaysia, Bank Negara has taken a cautious stand on the crisis, saying it is premature to make a conclusive assessment on its impact to Malaysia while a prominent local banker said he wasn’t worried as his businesses were tied to the Middle East, India and China. 

But what is certain is that Bursa Malaysia is expected to be trading on a “tight range” or in short, stock prices could be weak. 

We can only hope that the subprime mortgage crisis on Wall Street won't drag Main Street USA along.  

Over here in Malaysia, we just want to make a little pocket money for the festive season. Of course, it would be nice if the stock market is hot ahead of the elections.