This is in a nutshell what took place.
1. Sub-prime market emerges. Banks cannot get involved in the sub-prime space because of regulatory requirement for deposit banks and their traditional risk model that allow them to play only in the A & B prime segments but not the C & D sub-prime segments.
2. Financial companies not banks undertake loan risk for the C & D segments [sub-prime].Not governed by Central Banks
3. Financial companies [Fincos] start servicing the california real estate market. Funds obtain via issuing of commercial notes with a tenure of 270 days and requires roll-over if not securtised.
4. Biggest fincos are Countrywide, WMC who are mortgage originators working with brokers in-house and external who begin to provide loans on stated income known as liar's loan as no income verification takes place.
5. Contracted loans are then securitised by off loading to the Investment Banks which do not have same regulations as deposit taking banks. Ratings agencies step in to grade packages that are bundled with prime and sub-prime loans. Grading is then given to packages, packages are unitised and sold to wealthy investors, financial companies and Banks. Some end with up Tan Kin Lian's favorite people.
6. Everything is hunky dory as the california real estate is on upwards trends since the last bust in the 80s and rest of US follows. Any default is covered by rising house prices over original valuation and defaulting homeowners actually get some money back.
7. Economy is on a roll, slight hiccup with dot.com in the 90s when t-shirt clad nerds realise that not everyone can be Bill. Greenspan starts to move closer to Jesus and Mohammed and knows no wrong
8. Supply of houses begin to outstrip demand in Arnold's patch. Rest of the country shows similar symptoms. Negative equity becomes a looming reality and the rest of world finds out that these are non-recourse loans unlike mortagages in most countries like Singapore and OZ.
9. Securtised loans known as CDOs are thrown back to originators when they default , investment banks still cool until they realise that originators are no longer solvent, nable to handle the throwback. Panic sets in
Bears & Stern slides, CEO of Standard & Poor sacked as a result of complaint by EU. So much for Women leading businessess.
10. Then we find out that insurance were also in the party by issuing credit default swaps which is akin to selling a guarantee to Liberace that he won't die.
11. Loss of confidence in the capiltal markets as bank fear lending to each other as they have no idea how much is the exposure to CDO and related instruments. Commercial Paper disappears since its first appearence in 1952.
12. Liquidity dries up completely. Central Banks around the world begin relentless cash injections. Effort fail.
13. Key is the US and Paulson launches plan with no details. Congress wavers, markets beging to plunge
14. Congress passes bill, signs of backstop emerges, second effort of funding by central banks begins.
15. Commercial Paper Funding Facility by Fed commences on 27th Oct, markets beging a slow and erratic climb
Here are basic features of this crisis
A. Its once in a lifetime event. Its essentially a collapse of the capital model in totality that was built up since 1952.
B. The poison has yet to flow out completely from the system. Note the emergence of Pinnacle notes and expect mor. There are tranches of CDOs that will be classffied as defaults when US housing keeps going down.
C. This is not the time to buy low for equities or properties as the unknown is rather big. Keep cash and preferabbly in SGD as it is small enough to be manipulated by the local government and they will do it to keep their asset value intact.
D. Govts of the world and the press will continue to give positive news and rightlyfully so to prevent total collapse. But do take it with a pinch of salt. The cash injections over the last 3 mthds are taking rather slow to work.
E. Gold is not a safe option. It has a very inverse correlation to USD and so expect swings.
F. Do not get upset with yourself and family members if you purchased any of the instruments that failed. It was not something that was expected.
G. The people that should swing from the gallows are the rating agencies like Standqard and Poor.
H. Just stay put with cash in the bank, delay any investment decisions, watch the US housing foreclosure trends, the unemployements and consumer spending rates.
I. Do not screw yourself over cross rate activity such as parking in foreign currencies or taking a SGD loan for a foreign propeerty and vice versa.
J. Don't acquire collectibles, the value such things are in your head and in the valuation catalogue.
K. Don't visit any financial planner, consultant, private banker except to do taxation and estate planning activity. They were not assigned by god to look after you. They have to make a living and they can only do that if they sell investments. If you think, there is no commission, then Paris Hilton is a virgin
L. Singapore is particularly hit as it is a financial centre and its depends on the world. OZ and Malaysia are 2 there might be hum along.
Once again, its a collapse of a model and this has never happenned before in this manner or scale. Even the great depression was not a collapse of a model.