Impact of Global Financial Crisis Towards Malaysia

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Banks will start to limit their loan for borrowing when the economy is doing badly. However, although the banks had reduced the amount of new loans they made, the public still have to keep up repayments on the debts they already had. Therefore, when people repaid loans faster than the banks making new loans, the economy was starting to slow down. As a result of this, the salaries or wages were starting to decrease but the loan repayments did not change in value, leading to debts relatively higher in the “real” terms. The economic was turning into recession and the financial crisis was happened.

Furthermore, the government policy and regulatory failure was one of the main causes that lead to global financial crisis to happen. Government policies in some countries focused in increasing the home ownership. In United Stated, the desire to increase the level of home ownership led to large increase of subprime mortgage lending which later caused the financial crisis to happen. The U.S government also provided low interest rate and some down payment assistance to help low-income minority family to obtain mortgage loans more easily. Due to the government policy that encourages everyone to buy a house, it leads to the housing price increased sharply.

By year 2006, lender had lent $1 trillion in non-prime loans which was subprime mortgage and Alt-A loans. These non-prime loans were given to the low credit rating borrower. Since they had a higher default risk, lenders basically will charge them a fixed interest rate in the first few years and floating rate based on the LIBOR for the following years. When the government saw the housing price increased sharply, government will increase the interest rate to control the inflation. When the interest rate went up, the non-prime loans lenders will increase the interest rate charged to the borrower too. At this point, the housing price had been pushed up faster than the wages and salaries, many low credit borrowers were unable to pay back their loans repayment. When this happened, the economic was said to be fall in recession.

Next reason caused the Global Financial Crisis 2008 was the collapsed of the Lehman Brothers in September 2008, it sent the wave of fear around world of financial market. With $639 billion in assets and $619 billion in debt, Lehman Brother investment bank bankruptcy filing was the largest in history.The Lehman Brothers was the fourth largest U.S investment bank at the time when it collapse. The Lehman Brother collapse was a seminal event that greatly intensified the 2008 crisis and contributed to the erosion of close to $10 trillion in market capitalization global equity markets in October 2008, the biggest monthly decline on record at the time.

One of the reasons that caused the Lehman Brother’s company to windup was due to the subprime mortgage. The subprime mortgage is a type of loan granted to individuals with poor credit histories who would not be able to qualify for conventional mortgages. The subprime borrowers present a higher default risk for lenders, so the subprime mortgages will charge an interest that above the prime lending rate. The lenders can charge a fixed interest rate in few years and convert to a floating rate based on an index such as LIBOR, plus a margin. Before the financial crisis happened, many borrowers were unable to pay back the Lehman Brother’s loan repayment because of the higher interest charged by Lehman Brother investment bank. When Lehman found that many borrowers were not able to pay back the loan repayment, they were in the danger of going bankruptcy.

The main reason that caused Lehman Brother went into bankruptcy was due to the credit crisis erupted in August 2007 with the failure of two Bear Stearns hedge funds, Lehman stock fell sharply. On Monday September 15, Lehman declared bankruptcy, resulting in the stock plunging 93% from its previous close on September 12. The collapse of this largest bank caused the economic turn into recession and become one of the causes that lead to global financial crisis happened.

Lehman Brother investment bank had about 25,000 employees in worldwide. However, due to the ending of the bank, many people had lost their job and thus, pushed up the unemployment rate. When the unemployment rate increased, the purchasing powers of them were become lesser. At the time when the purchasing power had reduced, the demand for all goods will decrease same as in the financial market. Since they were unemployed, they would rather sell off the financial instruments instead of buying it. The action of everyone keeps selling their financial instruments caused the prices of financial instrument dropped rapidly and thus, leads to the declining of economic.

The failure of credit agencies to evaluate the risk caused the financial crisis to happen. The failure of the credit rating agencies and investors to fully evaluate or understand the financial risks of new complex products caused the financial crisis to happen. Credit agencies play a very important role in evaluating the risk of financial instruments. The ratings made by credit agencies are very important to the investors as they based on it to make investment decisions. The credit-rating agencies such as Standard & Poor's, Moody's Investors Service and Fitch Ratings failed to estimate and foresee the risk of the mortgage before the global financial crisis happened. This can be shown when most of the securities started to incur loss.

In addition, the agencies were said to be in the conflict of interest. This is because during the year 2006 to 2007, mortgages were very profitable financial instruments. According to the John Griffin, professor of finance in the University of Texas-Austin said that, these agencies knew that they were pushing the rice of the mortgages, but they did not care as they were more focused in the profit they can earn.

The agencies ratings played a critical role in the marketing of risky mortgage-backed securities, such as collateralize debt obligations, which helped bring the U.S. financial system to its knees. Before an investment bank sold their products, it required the rating agencies to rate its products such as AAA, a rate that is considered as very safe for financial market instruments and below BB are mostly considered as junk bonds, which meant have a higher risk.

Before the financial crisis happened, these agencies gave a higher rating to the products that bundled by the investment bank and thus, caused the investors to believe that these financial products were considered safe. As a result of this, many investors bought the financial products and lead the product prices increased sharply in a short time. So at the time the financial market collapsed, most of the financial