WOW, last week was one of the most exciting ever for world economies. Nearly all of the action came from the US.

TNP PHOTO ILLUSTRATION: SIMON ANG

Three huge financial companies teetered on the brink of failure. Two survived. One fell into the abyss. Here is the tally:

1. The one which failed is Lehman Brothers. It was the fourth largest investment banking firm in the US.

Among other things, it is linked to structured products, some of which were sold here through our local banks and brokers.

Investors may lose part or all of their money.

A small silver lining is that many were sold to high net-worth individuals who are, hopefully, better able to absorb the losses.

2. Investment banking and retail brokerage giant Merrill Lynch survived by the skin of its teeth.

Just before the US stock market's crash last Monday, Bank of America made a deal to buy it.

The bank will pay shareholders US$50 billion ($70b) in Bank of America stock.

Our own Temasek Holdings is the largest Merrill Lynch shareholder. It will make a profit of around US$2b ($2.8b) on the deal.

3. Insurance giant American International Group (AIG) needed US$85b ($120b) to avoid the fate of Lehman Brothers.

It couldn't raise the money. Bankruptcy was on the horizon.

US regulators wisely decided the company was too big to fail. It would have left millions of people uninsured.

The US government bought 80 per cent of AIG for a US$85b loan to be repaid in two years.

Will US$85b be enough? It is hard to say, but even if it's not, the US government has signalled its intent to keep AIG alive.

Chances of the firm going bankrupt went from 'likely' to 'zero' when the US government made its support known.

It was a relief to AIA and AIG policyholders here in Singapore.

It meant there was no need for them to redeem or cancel their insurance policies.

The big fix: At week's end, the US government appeared close to an overall solution. It is likely to be in the form of a new government company that will buy home loans from banks at a discount.

It is similar to the resolution trust corporation which did this during the last US banking crisis in the 1970s.

It worked well then.

Governments in our region set up similar companies after the 1998 Asian financial crisis.

The most well-known was IBRA, the Indonesian Bank Reconstruction Agency. Its task was to buy distressed assets from Indonesian banks, resell them and close its operations within six years.

Fire fighting vs fire prevention

HOUSING prices in the US fell 15 per cent in the past year, according to the Case/Shiller housing index. That, plus extreme leverage, led to the financial chaos we are seeing today.

Suppose home prices had not fallen so quickly. Would it have made a difference?

Yes, a big one. So, why didn't the US government do something to deflate the housing bubble slowly?

If prices had declined 3 per cent per year over five years, it would have been far less disruptive than the 15 per cent hit that housing took all at once.

To make this happen, the US could have temporarily boosted home demand by increasing tax reliefs for home ownership.

Our Government does this routinely. It is no big deal for it to head off a home price bubble by increasing development charges.

Then it will reduce them again if the property market cools too quickly.

The US does a good job when it comes to fixing crises. But it doesn't do as well at heading them off.

Singapore's approach has been the opposite. It tries to prevent economic problems from developing in the first place.

Why doesn't the US do the same?

The reason, I think, is the bureaucracy. It would take years for a majority of the US Congress to agree to the suggested boost in tax reliefs.

The US is a big, strong, lumbering elephant. As the current crisis shows, however, that may not be enough.

A quick and responsive tiger may survive longer.  Back to Columnists