Lessons from the US Subprime Mortgage Crisis (28 Nov 2008)

“I and others were mistaken early on in saying that the subprime crisis would be contained,” said US Federal Reserve Chairman Ben Bernanke at the onslaught of the subprime mortgage crisis which crippled even the biggest players in the US financial industry.

Way back in 2007, US President George W. Bush refused to grant bailouts to struggling banks, believing that the mortgage market would self-correct. Months later, Merrill Lynch wrote down $7.9 billion worth of CDOs and incurred $2.3 billion in losses. Its stock price fell uncontrollably as it sought emergency assistance from sovereign wealth funds. Then came the historic demise of Lehman Brothers.

The subprime mortgage crisis can be traced back to the generous housing program of the president. It took a year before the president saw the looming crisis and eventually announced a $700 billion bailout program.

The crisis brought to light the lack of government intervention at the stage where the financial crisis can be prevented the most. When the Singaporean property market suffered a similar fate in the 1980s, the government immediately intervened and asked banks to restructure their loans, delay debt repayments and forgo additional margins – all of which came too late in the case of the US

The second thing to learn from the mortgage crisis is the importance of bailouts. The government must reassure financial institutions that it will shoulder mortgage payments when all other measures have been exhausted in the event of delinquency.

The mortgage crisis has shed light on the importance of restoring business confidence and early government intervention. Every country must learn from the failure of the US government to address financial meltdown in a timely manner.