Publication date: 5 October 2008 | Covering: July – September 2008
Quarterly Briefing
- Oil peaks then crashes: Crude hits US$147/barrel July 11; collapses to US$90 by September; commodity boom reverses; inflation then deflation risk
- Fannie/Freddie seized: September 7 US Treasury takes GSEs into conservatorship; US$5 trillion in guaranteed mortgages; systemic risk averted briefly
- Lehman Brothers collapses: September 15 (FRESH 20 days) files Chapter 11; US$600bn in assets; largest bankruptcy in history; credit markets seize
- AIG rescued: September 16 US government provides US$85bn emergency credit; insurance giant too interconnected to fail
- WaMu fails: September 25 Washington Mutual seized by regulators; sold to JPMorgan for US$1.9bn; largest bank failure in US history
- Russia-Georgia war: August 8–12; Russia invades South Ossetia; five days of conflict; ceasefire; NATO tensions; energy market disruption fears
- TARP negotiations: Congress initially rejects; markets crash; TARP passed October 3
- Jamaica: High oil import costs; inflation rising; BOJ under pressure; external accounts deteriorating
Lehman Falls; Global Financial System Fractures
The third quarter of 2008 witnessed events that will define a generation’s understanding of financial risk. The quarter began with oil at US$147 per barrel on 11 July — an all-time record that was driving global inflation and squeezing household budgets around the world. By 7 September the situation had shifted dramatically: the US Treasury placed Fannie Mae and Freddie Mac, the government-sponsored enterprises that guaranteed approximately US$5 trillion in US mortgages, into federal conservatorship, effectively nationalising them and providing unlimited government backing for their debt obligations. This was the largest financial rescue in US history up to that point. Eight days later, on 15 September, Lehman Brothers filed for Chapter 11 bankruptcy protection. The Treasury and Federal Reserve, having facilitated emergency rescues of Bear Stearns in March and the GSEs weeks earlier, decided not to backstop Lehman, reasoning that moral hazard had become too great a concern and that the market had had six months to prepare. The reasoning was catastrophically wrong in its assessment of the system’s ability to absorb the shock. Lehman’s failure triggered an immediate global seizure of credit markets, with interbank lending rates spiking, money market funds “breaking the buck,” and financial institutions worldwide refusing to lend to one another. The day after Lehman, AIG — the world’s largest insurance company, whose credit default swap portfolio had become a central node of the global financial system — required an US$85 billion emergency credit line from the government to avoid failure. The contagion was systemic and immediate.
WaMu Fails; Russia-Georgia War; Oil Reverses
On 25 September, Washington Mutual — the largest savings and loan in the United States — was seized by the FDIC after a bank run and sold to JPMorgan Chase for US$1.9 billion, wiping out shareholders and most unsecured creditors. It was the largest bank failure in US history. The financial system’s condition was deteriorating rapidly, and Congress was debating the TARP legislation that would provide authority for emergency bank recapitalisation. The House of Representatives initially rejected the TARP bill on 29 September, triggering a 777-point single-day fall in the Dow Jones — at that time the largest single-day point decline ever — before ultimately passing the legislation on 3 October. Separately, in August, Russia had launched a military incursion into Georgia over the disputed region of South Ossetia, conducting five days of military operations before a ceasefire was mediated. The conflict demonstrated Russia’s willingness to use military force in what it considered its near-abroad and raised energy market anxiety about potential disruption to pipelines transiting the region.
Jamaica: Oil Shock and Inflation; Mortgage Conditions
Jamaica felt the third quarter’s extreme volatility acutely. The oil price surge to US$147 per barrel dramatically increased the cost of fuel imports — Jamaica imports virtually all its petroleum — worsening the current account deficit and driving domestic inflation higher. The Bank of Jamaica tightened monetary policy to contain inflationary pressure, keeping domestic interest rates elevated. The NHT’s subsidised rate structure — 0%, 2%, and 4% on loans up to J$6.5 million individually or J$13 million jointly — continued to be the most accessible form of mortgage finance for Jamaican workers, as commercial rates remained high. The global financial crisis, while centred in the United States, was beginning to transmit to Jamaica through tightening global credit conditions, declining commodity prices for Jamaica’s bauxite and alumina exports, and emerging weakness in tourism demand.
Looking Ahead to Q4 2008
The financial system has experienced a shock of a severity not seen since the 1930s. The TARP framework and bank recapitalisation represent the emergency response, but the extent of deleveraging in the global financial system and the depth of the recession that will follow remain deeply uncertain. For Jamaica, the external environment — reduced tourism, lower commodity export prices, tighter global credit — will determine the macro picture as we enter 2009.
Mortgage & Housing Finance Disclaimer: This publication is for general information only and does not constitute mortgage, financial, legal or investment advice. Mortgage products, lending criteria, interest rates and borrowing costs vary between lenders and may change without notice. Readers should obtain independent advice from a qualified mortgage adviser, financial adviser or legal professional before making financial or property decisions.
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