Various factors were at play during the crisis and it is likely that a confluence of factors were responsible for

the events that occurred. The various causes presented below are not meant to be taken in isolation but have been identified as some of the more significant components that may have led to the emergence of the crisis.

Prior to the crisis, the emerging economies of East Asia recorded real GDP growth rates that were among the highest over a sustained period for any region in the world. Nominal GDP per capita increased at a rapid and steady rate while unemployment rates dipped to historical lows. This rapid and sustained growth was achieved with relatively modest levels of inflation (see table below).

However, during the period immediately prior to the crisis, some imbalances began to appear in the external sectors of the East Asian economies. These were characterised

by, among other things, real-exchange-rate appreciation, slowing export growth, large current account deficits, and increasing short-term external debt.

MACROECONOMIC ISSUES

2.1.2 Capital Flow Surges

In the early 1990s, a cyclical downturn in global interest rates coupled with the search by international investors for higher yields and diversification opportunities, among other factors, led to the start of the most recent episode of private capital flows to developing economies. Global capital flows afforded developing countries the opportunity to smooth their consumption and investment patterns and also brought along with them the accompanying benefit of "knowledge spill-over" and improved resource allocation. The East Asian crisis appears to suggest that initial conditions not only matter but are crucial in ensuring that developing countries can successfully tap the benefits of private capital flows while shielding themselves from the accompanying risks. It has been argued that capital flows can be related to economic vulnerability along the following lines. Specifically, according to this analysis wweak initial conditions-among them, poor governance, inadequate supervision and regulation-as well as inappropriate policy responses to initial surges in capital flows-for example, lax fiscal policies and non-sterilised inflows-can result in a credit boom in the recipient economy. Existing structural weaknesses (see next section) allow this credit boom to be sustained and can also lead to the mis-channelling of capital inflows towards non-tradable and speculative sectors such as the real-estate and equity markets. On the macroeconomic front, it is argued that capital invasion in a regime of relatively rigid exchange rates-regimes that tend to be favoured by many developing countries as a means of providing a nominal anchor for the domestic price level and/or maintaining a competitive export position-can cause, in the absence of sterilisation, monetary aggregates to increase. This can feed economic activity, inflationary expectations and real exchange rate appreciation. Moreover, excess liquidity may well be channelled into asset markets and, thus, fuel an asset price bubble. This combination of a credit boom, mis-allocated funds, careless monetary policy and an asset price bubble, driven by a surge in capital inflow, can increase the local currency denominated wealth of the economy. However, the vulnerability of the macroeconomy to sudden reversals in capital flow also increases significantly. Hence, a "virtuous" cycle continues until some "trigger-event" occurs-some exogenous shock such as the baht devaluation-causes investors to reassess and readjust their portfolios across a number of markets, geographically and by asset. However, at this stage, the macroeconomy is in no shape to absorb the adverse shocks associated with this portfolio readjustment and a crisis ensues (see figure below). Figure 9: Capital flows, lending booms, and potential vulnerability

Source: World Bank The figures in table 3 lend support to the framework above. Recent episodes of private capital flows have indeed resulted in significant credit booms in recipient economies. In most of these cases, structural weaknesses and implicit public sector guarantees (see the next section for further elaboration) are thought to have allowed the easy credit to channel resources to non-tradable sectors. What this seems to suggest is that the economies receiving capital inflows were, in essence, borrowing foreign exchange and investing them in projects with significant gestation periods which earned domestic currency because they were in non-tradable sectors. This would have given rise to significant currency and maturity mismatches which significantly increased the vulnerability of the recipient economies to adverse external shocks. In one jurisdiction over-investment occurred in sectors which, even though they were traded, were experiencing declining demand. Therefore, there was significant excess capacity in those sectors.

2.1.3 Monetary policy that led to overheating economies

At the same time, capital inflows would have led to an expansion of monetary aggregates given the fixed or highly managed exchange rate regime that had been adopted by most of these economies. Many emerging markets that received large capital inflows in the early 1990s appear to have experienced a concurrent expansion in their monetary aggregates, and tried to sterilise inflows, although in many cases this was either incomplete, given the high implied quasi-fiscal cost associated with sterilisation, or it

encouraged further short-term inflows.

A direct consequence of the monetary overhang, along with the credit boom and resultant high rates of investment rates, appear to have been rapid and sustained economic expansion. In some emerging markets, the output gap-defined as the excess of actual output over potential as a percentage of potential output-has been positive for sustained periods and which has in turn led to inflationary pressures. A substantial proportion of these pressures, however, appear to have been channelled into the stock market and also non-traded sectors with fixed supply. The rapid expansion of the economies also led many of these countries to run significant current account deficits.

2.3.2 OTC and off-balance-sheet activity

The response of several emerging market authorities, among other factors, suggests that the use of overthe-counter instruments (in particular, derivatives) and off-balance-sheet items, while in itself unlikely to have triggered market disruption, may have contributed to the severity and dynamics of the current financial crisis. For example, financial authorities in certain Eastern European and East Asian jurisdictions are reported to have taken or have considered taking measures against a form of OTC currency derivative known as non-deliverable forwards (NDFs) that are said to have played a role in heightened volatility of domestic currencies and securities. Moreover, it has been suggested that the use of such products exacerbated both the European exchange-rate mechanism crisis of 1992-93 and the Mexican peso crisis of 1995-96, and that their use may have had a similar effect on the recent crisis in Asia. Survey responses have suggested that OTC products may have played a significant role in the massive build-up of private short-term foreign debt in several emerging-market jurisdictions. One survey respondent acknowledged that, with the crisis, financial institutions under its jurisdiction were exposed to greater risks from their off-balance-sheet transactions. Moreover, in at least one other jurisdiction, OTC instruments were responsible for an accumulation of official short-term foreign debt. It was reported that in this jurisdiction, the central bank had eventually built up significant short-term foreign obligations which had arisen from forward contract positions taken in defending the currency during the crisis. While some have argued that much OTC and off-balance-sheet activity is, in fact, prudent and proper, others have raised specific concerns relating largely to the difficulty in monitoring such activity-compared to that which takes place on-exchange for example. These concerns tend to stem from the relative ease with which such instruments can provide leverage, and hence amplify risks; their ability to facilitate complex speculative positions; and the fact that they are, by and large, opaque to accounting recognition, measurement and disclosure. First, there is some concern that their use can exacerbate short-run price volatility. A recent report by the Basle Euro-currency Standing Committee identifies several ways in which this may occur. The continuous revision of hedge positions ("dynamic hedging") of short options exposures, which requires the purchase of underlying assets when markets rise and their sale when markets fall, can accentuate an initial priceshock through positive feedback effects. Related to this, so-called "hedging overhangs", in which hedging transactions are undertaken by many market participants simultaneously, may trigger large price movements. Volatility may also beget volatility: in times of heightened price fluctuations, margin and collateral calls on derivative-based positions may force the liquidation of both derivative and underlying positions; moreover, the strict assumptions underlying derivatives pricing and trading can become invalid during times of severe market stress, and this can lead to a reduction in market liquidity and can generate valuation uncertainties. Second, there is some concern that certain OTC instruments facilitate excessive risk-taking by market participants. While there is some debate as to whether they encourage market participants to assume too much risk, it is generally accepted that such instruments make it relatively easy for users should they wish to do so. This is because, by affording leverage and low transaction costs, they facilitate the taking of speculative positions. Thus, they amplify the risks associated with holding them for the potential of much higher rewards. Moreover, it has been argued that if designed in particular ways, such instruments might also enable market participants to circumvent prudential regulations or controls, and thus allow them to assume more risk than they otherwise could have. A third area of concern that has also been identified is that OTC instruments, through particular features such as complex pay-off structures and cross-border components, can be opaque to on-balance-sheet accounting techniques. It is argued that this makes it easier for market participants to circumvent (or at least only partially comply with) domestic capital controls, reporting requirements and prudential regulations, thus effectively hiding the financial system's true exposure to market and liquidity risk from authorities. It has also been suggested that the use of such off-balance-sheet products has complicated

the distinction between traditional measures of long- and short-term foreign debt exposure, as well as of 46,47 direct and portfolio investment from abroad.

2.3.3 Financial contagion

If nothing else, the sequence and breadth of events in 1997 underlined a consequence of an increasingly globalised and integrated financial system. Indeed, 1997 provided striking evidence of the power of financial contagion in today's environment. While there have been various factors identified as potentially specific causes of the crisis, the scope and the extent of the East Asian crisis cannot be adequately addressed without examining the role of financial contagion.

The financial turbulence may be traced through a chain of financial events that include, as a major link, the collapse of a speculative real estate bubble in Bangkok which surfaced in the guise of the default of the Somprasong Land Euro-convertible in January 1997. The countries of East Asia have experienced numerous financial crises in the modern era, but the notion of defaults on Thai property loans rocking the currencies of, among others, Korea, Estonia, and Brazil would have been regarded as fanciful less than five years ago. The issue of contagion can be addressed at two levels. Firstly, contagion can be addressed at the crossmarket level, ie, how volatility in one market is transmitted to another market within the same economy. For example, from the currency market to the securities market. Secondly, contagion can be addressed at a broader level, that is, cross-country contagion effects and the channel(s) through which it occurs. At the cross-market level, the speculative pressure in the currency markets of some EMC jurisdictions were so severe that central banks there resorted to imposing restrictions on swap transactions. However, this inadvertently translated the demand for domestic currency to selling pressure in the equity market as currency speculators-in a bid to circumvent the central banks' restrictions-used the equity market to raise the funds needed to cover their respective short-currency positions. Another channel through which the volatility in the currency markets spilled over onto equity markets was via central banks' operations to defend the domestic currency by raising interest rates. The rapidly collapsing currencies and rocketing interest rates coupled to erode the portfolio values of equity investors. In terms of cross-country contagion, a clear consensus which appears to be emerging is that bilateral trade links and investment shares alone cannot account for the scope and the scale of the contagion. In an effort to understand the reasons for cross-country contagion effects and the channels through which it occurred, various views have been advanced. One view is that the troubles in Thailand which began in the second half of 1996 and culminated in the floating of the baht on July 2nd 1998 acted as a "wake-up call" to investors who had been excessively euphoric over the fundamentals of emerging market economies. Weaknesses that had been overlooked, ignored or justified on the basis of expected returns were from then on viewed with greater scrutiny. In essence, investors' risk aversion jumped by quite a few points higher and, as a consequence, any situation in Indonesia, South Korea, Malaysia and the Philippines which bore the slightest resemblance to that in Thailand came to be viewed in the worst possible light. A second view is that the differences in liquidity over time and across markets also led to what the BIS has termed "proxy hedging". This occurs when equity funds, in response to a market crisis in a particular geographical region, liquidate positions in markets which are barely affected and geographically removed in order to raise liquidity in anticipation of margin calls of a significant wave of redemptions. This can aid in the transmission of the selling pressures across geographical markets which, on the face of things, would otherwise seem totally unrelated. The third view concerning the mechanism of transmission has been defined as the "dynamics of devaluation". The initial devaluation of the Thai baht and some other currencies within the East Asian region resulted in real exchange rate depreciation of these economies. This however, resulted in an increase in the relative competitiveness of these economies vis--vis other emerging market economies. As a consequence, the currencies of other emerging markets became increasingly over-valued vis--vis the economies which have undergone a devaluation and hence, it is thought, came under pressure themselves to depreciate. The fourth view of cross-country contagion is the so-called "demonstration effect" of profits and losses on speculative positions. The realisation of profits and losses from speculative positions in the past can lead to shifting in such positions that increases the probability of another depreciation. The first wave of exchange rate volatility awakened domestic corporations with unhedged foreign currency exposure to their speculative positions and the urgency of hedging. However, it has been argued that this rush to

hedge only caused further depreciating pressures on the respective currencies. A widening of bid-ask spreads on the indicated prices of currency options in Asia suggested that the availability of such hedges diminished rapidly just when they were most in demand. Last is the question of why some economies proved more resilient than others to the East Asian crisis. Many observers credit this to the presence of stronger financial sectors and better banking supervision in these economies. For example, their banking sectors, while competitive, tended to have little directed lending. Implicit guarantees were perceived to be minimal and supervision more effective. Credit booms, while not altogether absent, were not fuelled to the extent that they were in other more affected economies. Lastly, institutional strength and governance in these economies are generally accepted to be stronger and more established compared to the worst afflicted economies. Table 6: Key banking sector indicators in East Asia NonBank capital as a performing Property lending percentage of loans ratio, as a percentage of total assets, % % total lending, % Affected economies Indonesia Thailand South Korea Malaysia Philippines Hong Kong, SAR Taiwan Singapore China n.a. n.a. 10.9 8.7 6.2 3.4 7.7 13.7 9.2 18 17 9.1 5.3 Unaffected economies 10.2 n.a. 3.8 25 n.a. 2.1 n.a. 16 21.6 n.a. 8 37.4 6.4 19.7 12.6 8.5 26.2 13.7 n.a. 3.7 2.6 8.9 23.6

Country

Vacancy rate for office space, %

Source: Goldman Sachs

CHANNEL OF CONTAGION Distinguishing among the channel of contagion can be hazardous. In an emerging market, selloff many channels seem to be working at once particularly when new information hits the market. Nevertheless, it is useful to identify the different ways by which contagion can spread. It is also worth recognizing that sometimes what appears to be contagion is just separate markets reacting to a common externality shock, for example, to the 1994 rise in US interest rates or to the oil prices increases of the 1970s. Trade Links Trade links provide a natural channel for financial contagion. Consider the Thai devaluation. In the year 1997 the fall in the Baht made Thai exports cheaper to foreign buyers. For countries such as Indonesia that compete in export markets with Thailand,

that means foreign demand for exports falls as importers in the US and Japan switch to the now cheaper Thai goods. Lower exports imply an increase in Indonesiaa current account deficit a fianancing gap that Indonesia must make up by borrowing more overseas. If foreign investors are unwilling to expand Indonesia implicit line of credit, Indonesia must cover the financing gap out of its foreign reserves. But a reduction in reserves leaves Indonesia with fewer dollars to defend the Rupiah, which reduces confidence in the currency and makes Indonesia an easier target for currency traders betting on a Rupiah devaluation. The Bahts devaluation also raises the cost of imports in Thailand which reduces Thai imports from, for example, Laos. This situation raises the Lao current account deficit and puts pressure on the Lao currency. Also, because the Thai devaluation was accompanied by a Thai recession, Thai import demand fell by even more than the devaluation along would suggest, reinforcing the contagion effect. Of course, even though Thai exports did not rise immediately after the baht devaluation. Indonesia was quickly affected. From the perspective of financial markets, it is not actually necessary for Thai exports to rise. It is sufficient for investors to expect that they will rise, which will cause prices for Indonesias export to fall; increasing Indonesias trade deficit. Investors who expect the Indonesian currency to depreciate rapidly in the future will sell Rupiah that they hold. Those sales can precipitate a sudden devaluation right away. Financial Channels Liquidity Effects Even when trade links to the crisis country are insignificant, contagion may spread through financial channels. That occured in October 1997 when US investors in emerging market mutual funds sold their shares in response to falling markets in Asia. Fund managers in turn sold appreciated Latin American stocks to meet redemption orders rather than selling depreciated Asian shares. In Latin Americas relatively thin markets, the impact of such actions by foreign asset managers can be dramatic. Global investors within crisis countries also spread bear markets. In December 1997, as Republic of Korea came under attack, Korean investors liquidated holdings of Latin American Eurobonds in order to cover their dollar obligations. As prices on Brazilian and Argentine dollar-denominated bonds fell, Brazilian banks that had purchased the bonds on borrowed funds were forced to sell Brazilian local currency denominated assets for dollars, reducing the Brazilian Central Banks stock of foreign reserves and making Brazil a target for attack. These episodes show how sudden drop in liquidity brought about by falling prices for one kind of asset may induce a fire sale of other assets, even with no change in fundamentals.

Asian Financial Crisis and Subprime Crisis: A brief comparative study

By andrewanalysis

Introduction:

Economic crises are similar to occurrence of cancer in the human body. Different cells emerged from the same zygote, it is calledmosaicism. Cancer occurs when cells from the same genotype mutate. The Asia Financial Crisis (AFC) and the Subprime Crisis (SPC) exhibit Mosaics type Propagating Mechanism. They shared similar characteristics but are unique on their own.

SPC started with the investment banks and securities firm buying the mortgages from lenders, rating them with the credit rating agencies, packaging and eventually selling them to investors as collateral debt obligations (CDOs), with the poorly rated and highly risky ones parked in their warehouses that are known as Special Investment Vehicles. At the same time, they also sold related derivatives to the market on the CDOs. Here they took on the long term CDOs as assets and acted as counterparties to insure the value of the CDOs by keeping the short term premium as liabilities. This eventually parallel a maturity mismatch like that of commercial banks which resulted in the Great Depression in 1930s.

AFC started with ASEAN countries opening up their market to attract foreign capital that eventually flow to build up asset bubbles that burst when their economies were not competitively overtime to sustain the high interest rates to support their fixed exchange rates.

For more details on the respective mechanism, please refer to theappendix A1 and appendix A2 as this paper attempts to focus on understanding the genotype of both crises by finding looking for the originator and the source of contagion. After that, it attempts to understand the rise of both crises by understanding the effectiveness of regulation, the presence of moral hazard and the triggering mechanisms. Last but not least, the paper attempts to discover the phenotype by understanding the unique expression of the crises in terms of their spread pattern and spillover effects.

US: the originator for both crises.

The US seems to be the originator for both crises. The consequence of the Plaza Accord of the 1985 where US pressured Japan to appreciate Yen against the dollar to relieve the trade deficit with Japan lead the massive inflow of capital from Japan to ASEAN countries. Along the timeline, the American Mutual funds also started pouring in capital into the same region.(World 1997)This is the new beginning of the miracle economic growth in the ASEAN region and also the start of the AFC. In 1999, under pressure from the Clinton administration, Fannie Mae, the nations largest home mortgage underwriter, relaxed credit requirements on the loans it would purchase from other banks and lenders, hoping that easing these restrictions would result in increased loan availability for minority and low-income buyers and that time was the birth of securitization. (Altman 2008) The unintended consequences of both these events started to unveil the beginning of the subprime crisis. The US kick-started the build up of both these events but the bank was the common source of contagion for the spread.

Bank: the common source of contagion

However, the manner of spread for each crisis is unique. SPC began with the deteriorating quality of lending and rating of the mortgages while the AFC began with the intermediation of borrowing foreign currencies and lending local currencies to local enterprises who are not utilizing these loans effectively. (Tai 2004)empirically proved that bank is a major source of contagion during the AFC. The bank could not have become the medium of both economic pandemic if regulation promptly comes in to reduce risk and contain the spread.

Effectiveness of Regulation

Both crises present a situation that the government intention to improve welfare stirred unintended disasters. The US policy goal for increase homeownership is getting everyone to get a home by allowing low interest rates and liberating the financial market. By having consistent low interest rates and lax regulation on the derivative markets, the US policies was promoting asset value rather than promoting affordability which could be the alternative definition for increase homeownership. Prior to the AFC in 1990, Thailand in particular liberated its exchange controls in the midst of attracting foreign capital inflow to boost economic growth.

Moreover, authorities did not impose effective regulation to anticipate their policy implementations. In the US, the existing consumer protection legislation is not effectively enforced to ensure loans are given to informed borrowers who are aware of their loan payment capability. (LP) data indicates that aggregate delinquency and foreclosure rates on subprime mortgages indicate that the default rates on the 2006 and 2007 vintages far exceed the rates observed on the earlier vintages. This probably implies that the lenders are getting more lax in issuing loans. (Demyanyk 2008) data indicate that the debt service to income ratio is increasing over time, the combined loan to value ratios is rising and the falling share of fixed rate mortgages. These ratios basically mean that the lax lending practice lead to increasing risk which move from the main street to the wall street and institutional investors. Eventually the risk escalated into realized losses that cause the financial market panic that affect enterprise, which eventually lowered investment and ignited staff redundancies. In addition, the lax regulation also occur upstream of the value chain in this industry. Credit standard is a key factor for creating the SPC bubble. The US system was growing on eroding credibility of the value that the investors are buying into. (Demyanyk 2008)result indicate that a significant and systematic decline in the implicit credit standards remain after controlling other factors. The complexity of the mortgage drives inadequate borrowers to take up these loans. The structure of the mortgage bankers incentive is skewed to cheaply supplying the loan. Adverse selection cost is not imposed on the loan underwriter. Although the federal trade commission is there to enforce the consumer protection laws[1] , no one was actively policing the occurrence of fraud on the mortgage market and that also reinforced the distortion of the value of these mortgages to the investors. It was after the subprime crisis, that the US Treasury proposed creating the mortgage origination commission.

Prior to AFC, Commercial banks were later allowed to authorise foreign exchange transactions without the approval of the Bank of Thailand (Rao 1998). In addition, the SEA countries did not actively monitor and regulate the capital inflow & outflow when they allowed foreign players to be significant participants in the domestic banking operation. Prior to floating the exchange rate, the SEA countries set up high interest rates to keep & attract foreign

investments. Given that the ASEAN government giving high interest rates & liberating the financial sector without properly regulating the allocation of foreign investment in the private sectors, such actions prompted short term investment horizon & eventually led to the creation of asset bubble in the financial asset market. Had the government guided the direction of these capitals into sectors such as education, technology and manufacturing, the country will be able to stay competitive by offering high value added goods as competition heats up for commodity goods among China and Vietnam.

One could argue that there will be no perfect regulation and water tight supervision to guard a dynamic and evolving financial market because there will always be the moral hazard.

Moral hazard

Moral Hazard occurs prior to SPC when Investment Banks were paying the credit agencies to rate their products. The rating of these agencies affected the value of the potential revenue of their customers so indirectly affecting their revenue given that this industry is an oligopoly. Hence there is still greater doubt on whether the agencies are impartial and independent. On the other hand, if the credit agencies get investors to pay for their rating, there would be free riding issues. This is because the bank can buy and distribute on behalf of their clients and potentially limit the earning capacity of these profit-driven agencies. Credit rating agencies can seek payment from the government or central bank but there will be market efficiency issues. Therefore this presents a dilemma for the financial market to be efficient in term of pricing risk and return of these fixed income products.

Moral Hazard also occurs prior to AFC when bank managers were lending based on political or personal interest rather than proper evaluation of risk and return (Rao 1998). Unlike the previous moral hazard dilemma, adverse selection effect can be minimised with stronger surveillance policy and audits.

With moral hazard, adverse selection and uncertainty in place, a trigger is just needed to ignite market panic.

Triggering Mechanism:

The triggering mechanisms of these crises differ in their impact and manifestation.

Thailand Budget deficit during the AFC was significantly lower than the US during the SPC. Yet Thailand experience significant devaluation and foreign capital flight during the AFC and that was not seen in the US during the SPC. The situation is unique for US during the SP crisis because the bulk of US Treasury bonds and foreign investment belong to China who not only depend heavily on US consumers economy but also has yet to develop strong domestic consumption behaviour.

The moment, investor sustain a confidence crisis that their investment are not getting expected return upon considering that the Central Bank cannot sustain high interest rate for its fixed exchange rate given excessive real

estate supply and defaulting loan. Eventually a currency crisis occurred and that led to capital flight plaguing the ASEAN economies on the 2nd July 1997 after the central banks float their currencies which depreciated heavily.

The SPC was triggered by the falling house prices, rapid defaulting loans and deleveraging mortgage back portfolio. An investment banker with good credit history saw the interest rate of his loan application jumped by 5% within 3 days.(Dash 2007)

Market panic and realization of faulty assumptions commonly trigger both crises. The wrong assumption that housing prices will always rise to give a return despite potential default losses, induced SPC. The faulty assumption that ASEAN economies will continuously be progressing to support short term investment, induced AFC.

Externalities & Effect:

SPC and AFC spillovers are not evenly spread across the epicentre of its respective affected region (Janssen 2008). However, SPC has a relatively greater impact on economies than AFC in terms of spread, magnitude and penetration power. This is because SPC infected the financial system at a time in which the global market is heavily integrated via affecting the derivative market and the credit market.

(Bird 2007) empirical results prove that the source of epidemic in the FX market is not solely Thailand even though it was first to report significant devaluation. However (Dibooglu 2006) indicated through the study of volatility of stock market during the SPC that the spread pattern of the crisis started from Thailand to Malaysia and Korea at one state and from Philippines to Taiwan and Indonesia at another state. This implies that AFC transmit via a single channel and in a geographical manner from 2 epicentres.

AFC did not significantly affect the North American economy because of strong domestic demand and low inflation rate. The America even benefits from capital flight from the AFC (Loser 1998). However, SPC affected everyone including Asia.

In addition, SPC strike in an escalating manner that spread via multiple channels and throughout the global financial systems. SP led to the derivative crunch that led to Bear Stern merged with JP Morgan at fire sale price. The derivative crunch led to the subsequent downfall of Lehman Brothers. Given the huge significant role that Bear Stern and Lehman Brothers in the derivative and custody financial market, this led to systemic credit crunch that escalate funding cost and counterparty risk that eventually led to financial market failure that marked the beginning of the New World Great Economic Recession.

Country

Absolute Difference on economic losses

% Difference of GDP

(US$1 billion)

(US$1 billion)

Time of event (discounted back to 1997) at assumed rate of 5% per annum Thailand Indonesia Philippines Malaysia South Korea ASEAN Countries US -68 -171 -28 -35 -147 -449 -5095 -40% -83% -37% -39% -34% -46% -43%

Sources: (Roger C.Altman 2009), (Cheetham 1998), (CIA 2009)

AFC generated lower absolute economic losses than the SPC but AFC generated higher % losses than SPC. Referring to the above diagram, ASEAN countries suffered US$449 billion losses during the AFC while the US suffered US$5095 billion losses during the SPC in terms of absolute difference. On the other hand, ASEAN countries lost about 46% of their GDP during the AFC while the US lost about 43% of its GDP during the SPC.

Conclusion:

The US originated both crises and Bank was a common medium to breed SPC and AFC. However, Bank securitization deteriorated in SPC while Bank Intermediation supported excessive short term foreign investment in AFC. Government intention to improve welfare implemented with disaster for both crises. Moreover, authorities did not impose effective regulations to anticipate their policy implementations. Authorities were lax in regulating the value chain of securitization prior to SPC. Regulations on capital flow were relaxed but could have been guided properly prior to AFC. Even then, perfect regulation and heavy supervision were impossible to guard dynamic and evolving financial markets because moral hazard will always be present. Moral Hazard exhibited in SPC when credit agencies were paid by their clients to rate products that will affect the credit firms profitability. Moral Hazard also occurs in AFC when bank lending was based not on investment objectives. Nonetheless, Moral Hazard can be minimised on bank lending practices but will remain in the credit rating industry. Market panic and realization of faulty assumptions commonly trigger both crises. Victims of SPC who invest in CDO realized their stupidity when falling house prices exceed the defaulting rate while victims of AFC should have learn that short term investment works when the economy stay competitive. SPC and AFC spillovers spread unevenly across its respective affected region. AFC transmit via a single channel and in a geographical manner from 2 epicentres. AFC did not significantly

affect the North American economy but SPC affected everyone including Asia. SPC furiously strike across multiple channels and throughout the global financial systems.