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Published on March 29, 2008

Dr Voraphol Sokatiyanulak, vice chairman of the National Economic and Social Advisory Council (Nesac), has been closely observing the US sub-prime mortgage crisis since last July, when some of its first signs emerged.

Today, Voraphol, also a senior lecturer at the National Institute of Development Administration (Nida), says the situation is worrisome and he is not sure if the crisis will be followed by a V-shaped or a U-shaped scenario.

A former New York-based investment advisor affiliated with the Wharton School of Finance, the University of Pennsylvania from 1987-1990, Voraphol believes that the crisis could take up to three years to be resolved if the U-shaped scenario turns out to be the case.

"The depth of this crisis will be enormous in that case. On the other hand, a V-shaped scenario means it will be resolved within a shorter time span and recovery will happen sooner," says Voraphol, who holds a PhD in finance from the Wharton School.

Voraphol is an expert in securitisation, which is the root cause of this sub-prime crisis, in which low-quality home loans were repackaged and then converted into asset-backed securities for resale to American and international investors, most of whom were lured by high interest rates.

"The principles of securitisation are sound but the underlying assets in this case are not. Actually, we've been doing securitisation in the global financial market for quite a long time, but in Thailand it started not too long ago.

"There is no problem if the underlying assets are prime. However, the US crisis stems from the fact that all prime loans were already securitised, so the market resorted to inferior quality assets like those that are causing the problem now.

"These mortgage loans were problematic because they were granted to low- and middle-income borrowers vulnerable to defaults.

"Once the rate of defaults started to jump, which was among the first signs of trouble, the market for CDOs (collateralised debt obligations) then had only sellers, thus worsening the situation in a vicious circle.

"Later on, investment banks started to have problems, so they needed massive recapitalisation. Some of these needs were met by sovereign-wealth funds such as those in the Middle East and Asia.

"And then one of the major US investment banks, Bear Stearns, collapsed and had to be rescued by JP Morgan," says Voraphol, who earlier helped draft Thailand's first securitisation law. According to Voraphol, the US housing market has a tremendous effect on the American economy, which in turn has effects on the rest of the world.

"Over the past decade, the US property market has also seen significant asset price inflation, and bubbles, due to continuous economic expansion.

"As a result, the sub-prime issue has become so serious, with spillover effects into other segments of the home market.

"Usually, Americans relocate when they get new jobs. For example, you'd plan to sell your New York home once you got a new job and a new home in Chicago.

"Previously, it would take just weeks or a month or two to sell, but it's now not possible, so you end up having to pay mortgages for both homes.

"After a while, this can't be sustained, so you default on one, and three months later it becomes a non-performing loan set for foreclosure. After this, prices of those assets fall sharply.

"In other words, I guess the root causes are years of over-spending, easy credit and over-consumption. As for the financial market, the prime causes are  greed and then fear.

"Investors were greedy, wanting high returns, so the risks were also high. Then, these people were fearful of losing money after the initial signs of trouble, so they rushed to get out, thus worsening the situation and generating a chain effect," he says.

Nophakhun Limsamarnphun

nop1122@yahoo.com

The Nation