Corporate World

okay, a bit of a diversion from my palm oil series as I felt that this is an issue which had been hogging the limelight this week. You may hear of how share market had fell by quite a bit and this is due to subprime.

What is subprime? I asked many people this question and frankly most would stare at the next beautiful girl and conveniently missed my question. I mean, everyone had heard about this term but yet not many people actually knew the whole meaning behind it.

Prime basically means good. Sub prime means no good. So subprime loan means no good loans. These are loans which had been given to marginally financially able people. Meaning any tom, dick or mary can apply for the loan. Even if you had been blacklisted you can apply for subprime loans.

So why do financial instituition still loan these people? Because of the margin. You know by lending to fat4, you need to give good interest rates or I will go elsewhere. But for these subprime people, they have no choice. Most people would not loan them money. But for the instituition that does, they will take the loan no matter what the interest rates are.

So the blow out that we have seen recently are majority from USA. Where the people kept borrowing to the extent they could not pay and the bank will take over their properties. These would eventually lead to a fall in property prices which is eventually the start of a vicious cycle which would cause other loans (even the good ones) to fail.

Why? Because once this cycle start to roll, the interest rates will go up (theorectically). But because caucasians like USA are relatively smart (they asked us Malaysians to raise our interest rates during the financial crisis, only to have Mahathir to go against them and in fact REDUCE interest rates), and saw how Malaysia had done well with the previous methods of overcoming a crisis, and decided to deploy the same technique of reducing official interest rates (or at least maintaining them). This would actually be good IF you allow some to fail nonetheless.

But personally I got a feeling that this crisis is much bigger than anyone has ever thought. I mean you look at those big big financial instituition begging for money, you know something is not right. But don’t say it won’t affect you. Because you people worship all things american, so our economy is linked quite strongly to American economic health. They fall ill, we may die also. It is that contagious.

A recession in America would mean less purchasing power, would mean less purchases from factories around Malaysia, which would mean most Malaysians may not get their bonuses which affects their spending pattern which lastly would affect everything you do.

So beware! It may affect you.