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[ MONEYWISE ] The Route to Financial Meltdown “How did this all start again? Haven’t we learned any lessons from history? Is this just another boom bust cycle? Or is it something far worse? Finally, what do we do right now in these tumultuous times?” [ BY BOB ParkEr ] Never in 30 years of financial planning have we in this industry experienced anything like it. In fact unless you are over 80 you cannot possibly remember the 1929 Great Depression. Louise McKenzie a US citizen now 91 can. She hears echoes of her past in the economic turmoil of late, which many analysts have described as the worst since the “Black Tuesday” stock market crash of 1929. At the height of the Depression that spanned the 1930s, unemployment rates reached almost 25 percent. The common adage of the time, McKenzie recalled, was: “Use it up. Wear it out. Make it do. Do without.” The ethic of conserving money – and avoiding credit – stuck with many in her generation for the rest of their lives. Some have never used a charge card or rarely allowed a balance due. How did this all start again? Haven’t we learned any lessons from history? Is this just another boom bust cycle? Or something far worse? Finally, what do we do right now in these tumultuous times? It all started in the early part of this century with the George Bush government fuelling a consumer led economy. The whole house price rise excitement led to more and more unregulated bad risk lending as lenders chased after a burgeoning market for mortgages. As the market grew and house prices spiralled upwards lenders started to sell mortgages to people with bad credit histories and started putting products together that were simply unsustainable in a crisis. That crisis started in 2007 when this lending (the sub prime) started to unravel. But not before a whole new industry created a new financial instrument known as “Credit Default Swaps” that took the derivative that took the derivative industry to new heights and cloaked the whole mess in secrecy – who knows who the lender of last resort now is? In the USA in April 2007 (aptly named) New Century Financial, disappeared in a blaze of bankruptcy. This triggered the crisis which led to losses being reported at bigger and better banks too. In September 2007 the crisis crossed the Atlantic Ocean with the astonishing news that a UK lender – Northern Rock was suffering and there was a run on the bank. The UK government bailed them out by nationalising the bank. Desperate times desperate measures. Then the catastrophe, on 14th March 2008 Bear Stearns falls, but the Fed moved quickly to arrange a sale to JP Morgan Chase. To allow Bear Stearns to go under would have created widespread devastation in the banking industry and yet on September 15th – 6 months later the Fed allowed Lehmans to file for the world’s largest ever bankruptcy – where was the logic? If we wind right up to date and following Lehmans and AIG and other major disasters its worth taking a quick look at the 10 days leading up to Black Friday the 15th of October to remind ourselves how fast things were unwinding and how perilous is the current situation. September 30th 2008 The London market opens to carnage with all the banking shares clobbered following the Asian markets weak response to the failed Wall Street bailout. October 1st 2008 Warren Buffett decides to buy $3bn worth of General Electric whilst Fortis shelves plans to sell 3bn Euro of its shares as no one wants them. October 2nd US Senate votes in favour of the Wall Street bailout whilst European leaders discuss a $400bn bailout. October 3rd US jobs data are worse than expected and the UK government authorises an increase of the bank compensation scheme from 35,000 to 50,000 sterling per depositor. October 4th Europeans leaders attend an emergency 76 THE INTERNATIONAL INDIAN
[ MONEYWISE ] summit in Paris. October 5th German Chancellor announces deposits in German Banks will be secure. October 6th The London FTSE market has its largest one day fall. October 7th Iceland Bank, Icesave, blocks savers from withdrawing funds. October 8th Icesave accounts declared in default, FTSE drops to lowest levels since 2004 and UK announces £500bn banking rescue package to the public. October 9th The IMF announces emergency plans to bail out governments affected by the crisis and warns no country will be immune. October 10th BLACK FRIDAY A global stock market rout starts in Asia as recession fears deepen, the Nikkei falls by 10% the biggest drop for 20 years. So here I am sitting at my computer in these astonishing times deciding how to advise you, dear reader, on how to best handle your financial situation. It is possible that you are one of the thousands whose portfolio has dropped by 60% this year, you may be a Middle East property speculator and have lost a fortune, you may be about to retire and all your life savings have sunk like a stone, you may be Mr average like me and wonder if you can ever trust the investment world again. In my opinion we may now be facing 3 or 4 years of a very deep recession with the next 12 to 18 months being extremely volatile and uncertain but unlike Louise Mckenzie, I do not think we are heading for a Great Depression. The world today is a very different place to the late 1920’s – for a start India and China are talking about 6%+ growth in 2009 – those are incredible plans and yet they are achievable because of their internal economies – over 80% of the Indian economy feeds on itself and it is not export led. The US economy which took us into this mess and will have to take us out is much more integrated into the rest of the world than in 1929. They hopefully have elected the right leader in Obama and he will like his democratic predecessor, Clinton, restore some sanity to the US economy. In the meantime, what do we poor mortals do? In times like these it is more about holding on to your job, your income and hopefully your assets. Certainly when it comes to your investments, assuming like me, you have huge losses then you should just hang in there! Do not sell – these losses are only on paper, and one day they will bounce back. In my case I will probably be pushing 70 but it's better than crystalising a 60% loss! Get rid of your debt – especially expensive debt like credit cards. If you are saving every month in medium to long term savings, this is a great time to increase the savings because you are buying cheap! Finally, the first priority in a financial crisis is do a full review of everything ( a qualified financial adviser can help you here). Check your basics are in order – Life assurance, disability cover, health cover, pension savings and if you are one of the fortunate people who have cash to invest then this is going to be a time for bargains. My big tip for a 2009 bargain hunter expat is to buy into the Greater London residential real estate market – we in the Middle East have the double whammy of massive drops in value by desperate people and a very weak pound. If you are a dollar (or equivalent) earner you will not do much better than to buy and let an apartment in London next year and you can still borrow 75% on mortgage! Bob Parker is a seasoned UK qualified Independent Financial Adviser. He formed Holborn Assets in 1999, which is now a pre-eminent financial advisory service with over 35 qualified advisers and staff. Email: robert@holbornassets.com personal insurance ? click, pay and get it delivered Motor, Home or Travel you can now buy these insurances online and get the documents couriered to you free of cost www.gargashinsurance.com Delivering Excellence www.gargashinsurance.com DUBAI-SHARJAH-ABU DHABI 04-3379800 – 06-5754848 – 02-6717100 corporate insurance ? you need the best available professional advice on your insurance exposure and liabilities to understand and avoid fine prints, warranties and exclusions you need professional insurance advice For the best available advice Speak, login or write to: Holder of the prestigious “Chartered Insurance Brokers” title from Chartered Insurance Institute, London Gargash Ad.indd 1 12/3/2008 5:07:32 PM THE INTERNATIONAL INDIAN 77
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