You thought the sub-prime mortgage delinquencies originate from the US hence is contained in the US. You thought wrong. Easy credits were given to less than creditworthy individuals to pay for their property purchases in the few years to 2006. (The Sunday Times, 5 August 2007 by Erica Tay) To help fund the easy credits for these individuals by the financial institutions, they pooled these mortgage loans into a financial instrument known as the Collaterised Debt Obligations (CDOs). They then repackage all these mortgage debts and sell “slices” of the whole CDOs to investors, funds houses, banks and financial institutions round the world as high-yield bonds. It is a classic case of high yield with the associated high risk.
As the CDOs collapsed in value because the underlying mortgage loans were in default, the financial markets holding on to these CDOs suffered huge losses. The global financial markets are now reviewing their investment portfolio and weigh in on their exposure. Two hedge funds worth US$1.5 billion of the Wall Street investment bank Bear Stearns crashed. The American Home Mortgage Investment filed for bankruptcy protection. The French bank BNP Paribas temporarily suspended three investment funds exposed to the sub-prime mortgage problems that were worth more than US$2 billion. (Source: The Straits Times, 11 August) Trying to determine diminution in values of these funds is a difficult task as the episode is still developing.
The Asian stock markets were in jitter. The central banks of EU, US, Japan injected funds into the financial markets to avert global credit squeeze as the investors exited from the stock markets and the investment funds hit by the US problem. This is a case of falling investor confidence and it is not looking pretty.
It will be wise to look at your various unit trusts you have bought and watch them carefully and see whether the problem has impacted your investments. Sure, there will be a drop in value of these investments. You have to weigh how you want to react: to cut loss or to wait out for the financial storm to subside. There will always be contrarian investors in our midst. They will buy investments that are “cheap” while the rest exit by selling out. It is a tough call on how to react.
Written on 8/11/2007 12:05 PM
Copyright © 2007, the author known as LKT in Singapore.
The material presented is intended to be general and written in layman’s language as much as it is possible. The author shall not be liable for any direct or consequential loss arising from any use of material written. Please seek professional advice from your financial advisor or financial institutions on material written covering financial matters.