ONE word made nil the nesting egg of Wilson Ramirez, one of many Filipino and American workers who lost their pension funds when the Lehman Brothers Holdings Inc. uttered: Bankrupt.
“It was the day we started to lose everything”, Ramirez told the BusinessMirror on the condition of anonymity. He requested so since the filing on September 15, 2008, in a New York court for bankruptcy by Lehman Brothers involved “personal matters.”
While “the events of September 15, 2008…were not unexpected, we were surprised that the [United States] government did not rescue Lehman Brothers and simply allowed it to collapse,” Ramirez, a Fil-Am editor of a financial newsletter in Washington, told the BusinessMirror.
Why the US government allowed one of the largest American investment banks to collapse when it saved several others before was the reason for the scratching of heads.
But Ramirez said that was a sign the US treasury was no longer willing to spend taxpayer money “to rescue failing financial institutions.”
“We were all staring at a gaping, bottomless black hole,” Ramirez recalled. “Working stiffs began to worry about their 401(K)s.”
401K is a retirement savings fund made up of dividends from the stock investments of American workers using a portion of their salaries before it is taxed by the US government.
Ramirez was among those who were forced to postpone their retirements after their 401Ks were almost wiped out in the days after the US commemoration of the 2001 terrorist attacks.
Repeal
THE bankruptcy filing by Lehman Brothers triggered what is referred to as a global financial meltdown, or global financial crisis (GFC).
However, as cited by Ramirez, the collapse of the financial industry began years before when the US government repealed in 1999 a law separating commercial banking and securities.
Thus, banks were allowed to offer certain mortgage as safe and low-risk securities to potential investors.
When the Federal Reserve of the US decided to lower interest rates in the early years of a new millennium, many investors opted to bet on mortgages as a way to gain profit. Making this kind of investment even more attractive for investors that time were endorsements from large credit-rating agencies, which would later be blamed for knowingly giving superior tags even to assets they knew were risky.
The demand for mortgages grew as investments gave banks more incentives to provide home loans even to those who cannot afford them.
Such unsustainable practice eventually reached its critical point in 2008 with many American homeowners defaulting on payments for their homes.
Real estate
Thousands of Americans were left homeless as the banks foreclosed their houses to raise funds by selling them in the market. But with so many homes being sold that time, house prices plummeted.
Ramirez said he was only able to keep his home by getting a second loan to pay off his mortgage.
“Though I lost more than 30 percent in home equity during the crisis, I was still able to meet my mortgage obligations,” Ramirez explained.
Many of his friends were not as lucky and had to abandon paying for their homes.
Ramirez said living in the US at that time was like being forced into a corner of life-and-death decisions. Everyone became desperate.
“Our company was forced to lay off two employees. We downsized our office space by relocating to another floor. I have never seen so many CEOs and high-level executives unemployed at any single time as during the crisis,” Ramirez said. “Executives were leaping out of high-rise windows in sheer desperation. Fear and panic permeated Wall Street as banks collapsed for lack of capital.”
Ripples
The collapse of the US financial system didn’t stop within the Northern American border but sent ripples across the globe, affecting economies connected to the US umbilical cord.
Several European countries were forced to seek aid from international financial institutions to pay debts.
According to the International Labor Organization (ILO), global unemployment rate also soared in 2009 to 212 million from 178 million in 2007.
However, the impact of the “subprime crisis” in the US was not as significant in other countries, according to the Asian Development Bank (ADB).
An ADB study in 2010 added that, nonetheless, the crisis affected the country’s manufacturing subsector, particularly those involved in electronics, automobiles and furniture.
Likewise, Bangko Sentral ng Pilipinas (BSP) Deputy Governor Diwa C. Guinigundo has noted that after the collapse of Lehman Brothers in 2008, investments in emerging Asia were reduced since global investors limited their exposure to emerging markets in line with heightened concerns over counterparty risks.
From July 2007 to August 2009, Asian stock markets fell at around 38 percent to 62 percent, with the Philippines falling at 21 percent, Singapore with 27 percent and Thailand at 21 percent during the crisis, Guinigundo wrote in his paper titled “The Impact of the GFC on the Philippine Financial System: An Assessment.”
Resilience
FINANCE Undersecretary Gil S. Beltran told the BusinessMirrror the impact of the crisis was muted in the Philippines “because our banking system is strong and well-capitalized.”
“At that time, we have [already] learned our lesson from the Asian crisis,” Beltran added.
He explained that in 2008 the country’s capital adequacy ratio (CAR) of 14.74 percent during that year was even higher than what the Basel accords prescribed.
Beltran was referring to a set of international banking regulations that came from the Basel Committee on Bank Supervision (BCBS), which prescribes the minimum capital requirements of financial institutions with the goal of minimizing credit risk.
The accords also provide recommendations with regards to capital risk, market risk and operational risk under banking regulations. The total capital should represent at least 8 percent of the bank’s credit risk, according to the Basel I accord.
Beltran added that nonperforming loans (NPL) were also at a minimum as the global financial system underwent a meltdown with the present gross NPL-to-total-loan portfolio ratio at around 2 percent or lower.
“Also, our fiscal position is strong with debt ratios at low levels and our fiscal space sufficient to allow us to go into stimulus spending to offset the decline in exports arising from depressed export markets,” he added.
Reforms
BELTRAN added that the Arroyo government’s implementation of austerity measures strengthened efforts to raise more revenues through the reformed value-added tax (RVAT). He said these helped reduce the deficit to less than 1 percent of gross domestic product.
That move resuscitated the economy so that when 2008 came around, the country’s debt-GDP ratio fell to less than 47 percent, according to Beltran. In 2004, the Philippines’s debt-to-GDP ratio reached almost 75 percent.
The measures implemented by the government provided ample fiscal space for the country, enabling the government to implement a massive counter-cyclical fiscal policy in 2009, he added.
“The fiscal side has been the Achilles’ heel of the country. With prudent macroeconomic management, we were able to turn around the country’s precarious position into a source of strength. One lesson that we should always keep is that we should always maintain stability in the economy—banking, fiscal and external stability,” Beltran, who is also the current chief economist of the Department of Finance (DOF), said.
In comparison, the Asian financial crisis, aka “Asian Contagion,” was a sequence of currency devaluations that began in 1997 while the crisis that happened from 2007 to early 2009 is when financial markets and banking systems around the world were faced with extreme difficulties especially in terms of accountability.
Responses
BSP Governor Nestor A. Espenilla told the BusinessMirror the 2008 global financial crisis, which originated from the US subprime mortgage market, eroded confidence in financial institutions globally, causing heightened concerns over liquidity, as well as a plethora of bankruptcies, forced mergers and massive monetary intervention from financial authorities.
“Despite these temporary disturbances, the Philippine economy expanded; though by a modest 1.1 percent in 2009 coming from 4.2 percent in 2008 and 6.6 percent in 2009, this is still considered decent given that only a handful of economies escaped recession in 2009,” Espenilla noted.
Asian Institute of Management (AIM) Associate Professor Emmanuel A. Leyco concurred, saying the Philippines felt the negative effects of the global financial crisis only a year after the Lehman Brothers bankruptcy filing.
“Although there was no considered direct impact of the subprime crisis, the economy felt its impact in 2009 when it slowed down to just around 1 percent,” Leyco said.
Data by the Philippine Statistics Authority (PSA) showed the country’s GDP for the fourth quarter of 2008 was at 4.5 percent, while that of 2009 hit a low 1.8 percent.
UnionBank President and CEO Edwin R. Bautista told the BusinessMirror it was the relationship of regulators and local banks that helped keep the crisis at bay.
“In the Philippines, the regulators and the local banking industry have worked together to strengthen safeguards to prevent and detect any signs of an impending financial crisis,” Bautista said. “Whether it may be a domestically sourced or externally sourced financial instability, the regulatory agencies and other stakeholders are deemed ready to respond.”
Reserves
BELTRAN explained the country has learned to maintain a strong fiscal and foreign exchange (forex) reserve as well as keeping a healthy banking system as just some of the ways that can help the country minimize the effects coming from impacts on financial crises.
“Lessons are the same as what we learned earlier from the Asian [financial] crisis: to build strong forex reserves, build fiscal reserves, maintain manageable debts, increase savings and ensure a healthy banking system,” Beltran added.
Leyco’s thoughts are along the same line.
“The major lesson from the crisis was to deal with credit quality very seriously. Mark-to-market practice became a regular practice to make sure that assets are reflected in their immediate current values,” he said.
Currencies within emerging Asian countries weakened since investors sought the US dollar, with the slowdown in world economic growth also limiting export earnings of member countries.
To note, the country’s legal tender fell between a range of 4 percent and 15 percent against the greenback during the GFC.
Regulation
FOR Espenilla, another “important lesson learned is that while monetary policy may successfully maintain price stability, it does not necessarily guarantee financial stability.”
“Financial imbalances may develop even in an environment of low inflation and small output gaps. Monetary policy, therefore, must be well-calibrated,” the BSP governor said. “There may be instances that it may need to lean against potential credit-driven bubbles, but it must be complemented by appropriate macroprudential policies, fiscal and financial sector policies, and be supported by strong supervision and sound regulatory framework and effective enforcement.”
Espenilla noted the country was lucky during the financial meltdown.
“At the heart of the Philippines’s better fortune during the crisis is a banking system that continued to manifest resiliency.”
He explained that throughout the global financial meltdown, “Philippine banks recorded solid performances in terms of asset quality, capital position and profitability.”
“The Philippines avoided a credit freeze as domestic liquidity remained ample and banks continued to lend to the productive sectors of the economy,” Espenilla added. “The country’s external position likewise remained robust during the GFC years, with the balance of payments registering surpluses, gross international reserves continuing to increase and remaining more than adequate, and the portfolio of external debt remaining manageable.”
Bautista is all-yes to Espenilla’s thoughts, noting the importance of accountability and regulation after being witness to the crisis in 2008.
“Two things: accountability and regulation. No amount of financial gain can justify the need for more responsible action and adherence to rules that can somehow prevent instability in financial markets,” Bautista added.
Resonance
BUT Espenilla admits difficulty in ascertaining if a crisis on the levels of what disrupted world banking in 2008 could happen again.
The GFC in 2008 was deemed as a result of the conflation of many factors, including high foreign borrowing, excessively loose monetary policies, reckless lending practices, lax regulation especially on new and complex financial instruments, as well as poor corporate governance and risk management, he explained.
“After the GFC, many experts claim that it was already foreseen and could have been avoided but a number also say that it was a painful correction waiting to happen,” Espenilla said. “Better regulation would have reduced the severity of the financial crisis. Appropriate regulation can counter the build-up of financial imbalances and reduce the probability that a negative event will trigger a severe financial crisis.”
“In hindsight, it may be easy to identify the actions that should have been done to prevent the GFC,” he added. “However, in order to prevent a crisis, it may not be sufficient that regulations must keep pace with developments that may threaten financial stability. Instead, regulations must be a step ahead of these risks.”
Leyco said a financial crisis may happen again but not necessarily in the same way as that of the GFC. He emphasized the Central Bank remains vigilant in looking out for warning signs that point out a crisis is looming.
“Yes, it could happen again, but not necessarily in the same way as it did. It may involve aggressive lending and concentration in specific areas, like the property sector,” Leyco said. “Fortunately, the BSP remains vigilant monitoring and supervising banking practices.”
Response
In response to the GFC, the country’s Central Bank considered opportunities for monetary policy easing. This included a policy rate reduction, implementing liquidity-enhancing measures, instilling regulatory forbearance, and enhanced cooperation and communication with the local banking industry.
During the turmoil, the BSP moved to cut policy rates by 200 basis points beginning December 2008, which brought the reverse repurchase rate to 4.0 percent and the overnight lending rate to 6.0 percent.
Guinigundo said in his assessment that the rate reductions were intended to help stimulate economic growth as well as minimize the slowdown in economic activity by reducing the cost of borrowing, thereby reducing the financial burden of firms and households.
In line with liquidity-enhancing measures, the BSP helped infuse dollar liquidity into the domestic financial system by opening a US dollar repo facility to augment dollar liquidity in the forex market, and ensure the ready availability of credit for imports and other legitimate funding requirements.
In response to the BSP’s call for a coordinated domestic response to the global financial turmoil, it moved to strengthen its relationship with its regional peers in line with the sharing of information, discussions on emerging developments, and pooling resources, if necessary.
“As a policymaker, the BSP is forward looking. Simply hoping that the next crisis will not happen is imprudent. If the next global financial crisis cannot be averted, what the BSP can do as a policymaker is to at least attempt to minimize the adverse impact of the next crisis on the domestic economy by implementing regulations now that would increase the capability of the Philippine financial system to withstand direct and spillover effects. The saying ‘even as we hope for the best, it is better to prepare for the worst’ may be a bit of a cliché, but is worth pondering,” Espenilla added.
Rating
CREDIT rating agencies played major roles in fanning the crisis into a contagion after 2008.
However, Beltran said credit rating agencies are now stricter in terms of their analysis of companies including financial institutions or banks, pointing out that they too learned their lessons well after the GFC.
“Credit rating agencies became very strict in their analysis of sovereigns and companies. Note that they don’t upgrade emerging economies that quickly, they look at longer-term indicators,” he told the BusinessMirror. “They also began to look at advance economies’ numbers with magnifying lenses, downgrading them even if they issue reserve currencies. They learned their lessons well.”
Leyco said credit rating agencies still play a key role in the various international markets. He concurs with Bautista’s view that their assessments are still being taken into consideration.
“I think the credit rating agencies have recovered as they continue to play an important role in the US and international capital markets,” Leyco added.
According to Espenilla, credit rating agencies are meant to provide investors with objective information on the riskiness of various kinds of debt.
During the GFC, debt watchers were accused of defrauding investors by offering overly favorable assessments of insolvent financial institutions and approving extremely risky mortgage-related securities, exacerbating the financial crisis.
“In response to these accusations and critics, credit rating agencies vowed to carry out reforms but maintained their view that their ratings were always independent and an opinion,” Espenilla said. “Their ratings give valuable information. Nonetheless, investors should not base all their investment decisions solely on ratings. A prudent investor will look at all information available, including evolving macroeconomic conditions, when making a decision.”
Recurrence
A decade after the crisis, the US economy has shown signs of recovery in its GDP and employment growth.
This was after Washington completed bailing out ailing financial institutions affected by the GFC and passing the Dodd-Frank Act, which imposed stricter monitoring measures for its housing market.
“It took the mortgage industry about seven years to get near to where it was before the crisis,” Ramirez said.
While it took some years, Ramirez said he is also finally nearing his much needed retirement after being able to save enough for it.
All of these gains, however, are once again being threatened by the administration. President Donald Trump is once again relaxing loan regulations.
Ramirez said he hoped the lessons from the 2008 global financial meltdown will guide Trump to reconsider the policy direction and enforce the Dodd-Frank Act as it is meant to be.
“Legislative protective measures are now geared toward one thing: protect taxpayers against the next financial disaster,” Ramirez said.
Image credits: Carlo Gabuco?Bloomberg