By Sarmad Qazi
FOR every QR3.65 issued by the Qatar Central Bank, it has almost $3 in reserves. Qatar as well as other Gulf states have emerged as saviours in the current financial crisis, Adhip Chaudhuri, an economy professor said yesterday.
With the exception of Kuwait – where people participated in the ‘derivative dance’ that preceded the current economic meltdown, Qatar, Saudi Arabia and UAE have huge dollar surpluses that they can use as a cushion, according to Prof Chaudhuri of the Georgetown University, Washington DC.
“The world will now look towards the Gulf for help,” added Prof Chaudhuri, who came to Doha to teach at the Georgetown University’s School of Foreign Service (SFS-Q) last year.
His lecture ‘Globalisation of the Financial Crisis’ yesterday at the Texas A&M University at Qatar (TAMUQ) focused on why the negative impact of a housing bubble that burst in the US, spread globally.
“It all started with mortgage loans in the US, where the whole price of a house can be loaned,” Prof Chaudhuri explained.
In Qatar the cap on mortgage loan is 65%; the buyer must pay the rest of 35%, while its 50% in the UK.
“Then few commercial banks started ‘sub-prime’ mortgage and investment banks jumped on the spree,” he added.
Sub-prime mortgage (lending) is the practice of making loans to borrowers who do not qualify for the best market interest rates because of their deficient credit history. They even lent money to illegal immigrants in the US.
“Soon these people were defaulting on monthly payments. A total of three missed payments and the house are up for foreclosure,” he said.
In other words, the buyers were busted and houses taken back by the lender (the bank, the investment house etc).
“Now investment banks like Bear Stearns, Lehman Brothers and others never dealt with mortgages before 2002. They essentially picked on the mortgage lending as the number one instrument to make profits,” he added.
And the best way for the mortgage sellers to get more income was to increase the price of houses.
The idea, Prof Chaudhuri said, was to “create a price ladder”.
“It is crucial to understand here that most of these loans were made by mortgage companies and not the banks,” Prof Chaudhuri pointed out.
Then came Fannie Mae and Freddie Mac; securities issues by the Federal National Mortgage Association and secured by a pool of federally insured and conventional mortgages.
“Because the US Congress limited the overall capital of Fannie & Freddie, they went to overseas markets for more funds,” Prof Chaudhuri said, while adding “this is where the problem went global”.
According to him, the investment banks bought a lot of mortgages in bundles or baskets which consisted of other securities like US government bonds and started selling these bundles to the European investment banks such as Barclays and Credit Suisse.
“Then they got into derivatives (something extremely synthetic) and started credit default swaps (CDSs) that acted as the final nail,” the academician said.
Currently the worldwide CDS is estimated at $56tn while the outstanding mortgage in the world is only $9tn.
“As the mortgage defaults in the US started, ruining the portfolios of European banks, the bigger and richer countries’ governments started bailing out their national banks,” he added.
But for countries like Iceland, Poland, Romania and others the governments could not pump anything leaving them at the “mercy” of International Monetary Fund (IMF).
Chaudhuri hoped that while “the recession is going to be very deep and will hurt a lot” economies like China’s are a “bright light”.
The event was organised by TAMUQ’s Liberal Arts Programme. |
