MAF 08. I miss the HC family, the happy and carefree time, the true friends.

Outing with nygg gurls...

Nite bike. More food than cycling actually. I miss cycling!

nygg gathering with ms ng!

Here's my year-end plan! So happy I'm going to visit my sis!

1. Brisbane

2. Gold Coast

3. Melbourne

4. Phillip Island

5. Great Ocean Road

6. Sydney

7. Diving @ Manado!

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Meanwhile the economy is worrying. It's been like this for the past 13 months, but it wasn't over. Lehman Brothers filed for Chapter 11, ML was acquired by BofA. Then it AIG, Morgan Stanley and Goldman Sachs that needed bailout. What irony of free market! Created so much wealth for the bankers, now the government has to step in and the taxpayers are punished for these institutions' behaviours. So what exactly happened?

(1) Waves of panic/ uncertainty/ fear
The sub-prime mortgage crisis that originated in the United States in fall 2006became a global financial crisis till 2008. The origin of the crisis could be dated back to the aftermath of the burst of the dotcom bubble in 2000. The deep recession was compounded by the September 11 terrorist attacks that followed in 2001. In response, central banks around the world tried to stimulate the economy. Capital liquidity is increased through a reduction in interest rates, and in turn, investors sought higher returns through riskier investments. Lenders took on greater risks too, and approved sub-prime mortgage loans to borrowers with poor credit. Consumer demand drove the housing bubble to all-time highs in the summer of 2005, which ultimately collapsed in August 2006.

The end result was increased foreclosure activity, large lenders and hedge funds declaring bankruptcy, and fears regarding further decreases in economic growth and consumer spending. While the dramatic rise in US sub-prime mortgage foreclosure rates in the sub-prime crisis may have been the initial driver of the recent turmoil in global credit markets, as the crisis has intensified, more and more attention has been paid to the market’s poor understanding of risks embedded in the world of structured finance.

The global financial crisis and aggressive write downs of exposures by major banks and brokerages in late October to early November 2007 led to waves of panic and uncertainty among investors. What were supposed to carry little to no risk are now not only seen to be very risky, but in many cases essentially worthless. It would thus be a major task to regain confidence of investors in the aftermath of the crisis.

(2) Ignorance of underlying risks
The losses borne by many investors during the recent financial turmoil have taken many funds and bank executives by surprise, due to their prior lack of knowledge of the extent of the risks. The confusion about these products lies in part in their complexity. Structured products are pooled assets that have been sliced and diced into smaller and specialized pieces.

(3) High leverage
Performances in certain financial instruments observe improbable linkages. One example is Goldman Sachs's flagship Global Alpha Fund, which burned a quarter of its $10 billion value in August 2007. In fact, Global Alpha's problems have not come from mortgages at all, but from a portfolio of stocks.

This is an instance where a hedge fund like Global Alpha is affected by events in markets far removed from its bread-and-butter exposure as a result of high leverage. For example, when this debacle hit, one of Goldman's funds was leveraged 6 to 1, so every dollar of investor capital claimed six dollars of positions. This is the dry kindling for a market firestorm. When things go bad for a highly leveraged hedge fund, it gets a margin call and has to sell assets to reduce its exposure. Naturally, as it sells, prices fall, leading to a further decline in the fund's collateral, forcing yet more selling, and so goes the downward cycle.

Hedge funds that hold the toxic CDOs can easily undermine those that do not. It can be difficult to sell the ones causing the problem; those markets are beyond redemption. Investors end up selling whatever they can sell, due to the inability to select stocks to sell from a fund. The fund looks at its other holdings, focusing on the more liquid positions and reduces its exposure there. This causes pressure on these markets, markets that have nothing to do with the original problem, other than the fact that they happened to be held by the fund that got in trouble. Now that these markets are feeling the heat, other highly leveraged funds with similar exposure will have to sell. This leads to another cycle of selling, but in what was up to that point a healthy market unrelated to the initial turmoil.

It seems, as the sub-prime crisis propagates, it does not matter whether the instruments are fundamentally strong or weak; what matters is who owns what, who is under pressure and what else they own. Hedge funds are constantly shifting their exposure, so it is difficult to predict the course a crisis will take. However, if one is a highly leveraged fund — as Goldman's are today — one becomes part of the game. If one is both highly leveraged and big, the problem that started in one insignificant little segment will now become one’s problem, and a much bigger one. This is the case for crises in the past and will be the case for crises in the future. A world in which highly leveraged hedge funds share similar strategies makes it inevitable that what we are seeing now will occur again.

Yet, despite the risk this poses, no one keeps watch over leverage. Few people are able to value the leverage in the underlying assets and no regulator knows how much leverage the hedge funds have or how that leverage is changing. A lack of knowledge or monitoring over leverage suggests that assumptions on how diversified pools with multiple layers of leverage would react would continue to be faulty. Problems in underlying assets would become like a potent computer virus, leaving many people fearful of something they lack knowledge in.

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Essentially, everything in this world is somehow connected. There are more points like rating methology, integrity of credit rating agencies, untested financial innovation (which is now backfiring). The job market is bleak right now, especially in the investment banking area. And because everything in the world in interdependent, we fear there will be worldwide recession pretty soon. I wonder when all this will end.