Global Credit Crunch: NOT a Crisis of Confidence!

Stephen Chung

Managing Director

Zeppelin Real Estate Analysis Limited

October 2008

At the time of writing this article, the global credit crunch crisis (or whatever name one likes) is still ongoing and no corners of the Earth appear untouched. Stock markets have reportedly lost US$ trillions and more banks could fail, thus prompting some to contemplate their de facto nationalization. 

Your humble author does not intend to dwell on the why, what, where, when, and how the event has unfolded, is unfolding, and will unfold. There are more than sufficient analyses, views, and reports on these already.

Instead, while some (or many) commentators have described the event as a “crisis of confidence”, your humble author begs to disagree with such a description. Why? A few reasons are listed below:

A)    Saying it is a “crisis of confidence” appears to imply that investors, stakeholders, shareholders, or simply people, are over-reacting and panicking for nothing = but that is NOT the case. The loss of confidence is NOT unjustified and mortgages issued to mortgagors incapable of taking them out financially in the first place are bad assets irrespective of how the various banking, ratings, and financial gurus slice and dice them up. The same applies to the financial derivative products which spring from such (sub*) mortgages.

B)    It is more a “crisis (because) of common sense” = i.e. people finally realizing that they have been ‘had’ in the sense that the risk elements (e.g. the inabilities to service the debts) might have been understated while the return elements (e.g. ever rising house prices) might have been overstated, whether unintentionally or otherwise, not to mention probable inflated asset prices due to then easy credit. Moreover, owing to the complexities of the related financial derivative products which even experts have a hard time in deciphering, can one really blame people when they seek to minimize their losses via unloading suspected, even if only slightly, assets?

C)    Business-Finance-Investment confidence relies on trust which has been breached = and it may take years to rebuild that trust in business, finance, and investment between various stakeholders. Yes, there now appears to be a shortage of trust yet this was not induced out of thin air. There is a good reason for its lack as someone somewhere somehow sometime ago had, unknowingly or otherwise, abused it.

In short, people have not lost confidence for no apparent good reason. While it may be admirable to demonstrate continued confidence, it is also prudent to adopt certain loss mitigation measures.

To use an analogy, confidently following a brave army general into battle does not mean no ducking from bullets and shells. Suicidal bayonet charges could look impressive but are usually futile exercises.   

*Sub-prime is a misnomer as there is nothing prime about such mortgages. Sub is sufficient as an adjective.

Notes: The article and/or content contained herein are for general reference only and are not meant to substitute for proper professional advice and/or due diligence. The author(s) and Zeppelin, including its staff, associates, consultants, executives and the like do not accept any responsibility or liability for losses, damages, claims and the like arising out of the use or reference to the content contained herein.

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