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When Catastrophes Collude
When Catastrophes Collude
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[When catastrophes collude]
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Catastrophe, Catastrophe and yet another one.
5/12/2010
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Mohammed Salah Khalil
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Introduction:
It has almost been three years )we are in the third one (filled with many disasters and catastrophes, that
anyone would be left in shock of how worldwide crisis can cumulate one after another .
These catastrophes covered three types :financial, health and natural; of course natural disasters may
affect finance, health or both, while financial and health disasters affect each other to some degree .
My purpose in this research is to mention catastrophes in general and many hit the world lately, but I will
be more specific about two of them, the financial crisis and Iceland's volcano ashes.The former have a
continuous effect and is persisting since late 2007, while the later effects duration is yet to be determined
how long it will remain.
Of course this isn't all that happened in the past three years, there were many earthquakes, in example
there were earthquakes in Haiti, Chile and China .But they all had what can be considered relatively a local
effect. Thus these earthquakes along the Swine Flu pandemic will be discussed briefly to complete a set of
unfortunate events that hit the world.
- Dangers to flight.
- Iceland and
These entities became crucial to the credit markets, supporting the financial, but without any
kind of regulations and control at least similar to those of the conventional banking system .And
even more these entities tended to use short-term borrowing in liquid market to purchase
long-term, illiquid and risky assets which is procedure that must be restricted to conventional
banks because of the regulations that govern the availability of capital in them to meet deposits
which is not the case in the shadow banking institutions .This lead for these entities to become
fragile against any disruption in the credit market, they would incur high returns in a prosperous
economy but also incur high losses in times of a crisis .
Securitization is the process of distributing risk by aggregating them in a pool then sell them in
the form of securities .This risk highly comes from mortgages or other loans these securities
would mostly be sold to institutions of the shadow banking system .Like investment and
insurance institutions, ex :Goldman Sachs and AIG. Of course these activities further weakened
the economy and created a bubble that is prone to burst at any point .As was said in an article
by Mike Whitney titled "What Really Triggered the Financial Crisis?": "It's a shyster's dream come
true; capitalism without capital."
- Cause 2 :High debt or overleveraging:
There quite the statistics that describe this point, but statistical numbers are dry, they lack
meaning, and thus instead I have chosen to describe the financial condition, specifically debt, to
form a clear picture of this cause.
The subject would be 3 companies :Freddie Mac, Fannie Mae and Lehman Brothers :
Federal Home Loan Mortgage Corporation )FHLMC (commonly known as Freddie Mac,
its purpose was to provide continuous and affordable home financing. And the Federal
National Mortgage Corporation )FNMC( commonly known as Fannie Mae, its purpose is
to ensure liquidity for the mortgage market regardless of economic conditions .They are
both Government Sponsored Enterprises )GSEs .(It's worth noting that both are not
officially backed by the government, but it is implied to have a guarantee of fitness that
is equal in value to federally backed financial group .Both of these corporations by year
2008 have had guaranteed about half of the United States' $12 trillion mortgage market,
this fact made it clear that both corporation are vulnerable to the subprime mortgage
crisis in the same year, which is a prediction that came true eventually .The Treasury
Department and the Federal Reserve made multiple moves to increase confidence in the
corporations and save them from collapse, but this was not enough and in turn raised
calls to increase regulations on GSEs .On September 7, 2008 both corporations had been
placed under the government's conservatorship, specifically the Federal Housing
Financial Agency )FHFA(, Fannie Mae's and Freddie Mac's CEOs have been replaced by
the former vice chairman of Merrill Lynch Herbert M .Allison and former vice chairman
of US Bancorp David M .Moffett respectively .Estimations say that the both
corporations' liabilities would cost the American government tens of billions of dollars.
Lehman Brothers Holdings Inc .was one of the five biggest banks in the United States .It
was a worldwide financial services firm that had part in many activities such as
investment banking, mortgage banking and equity and debt research. To get an idea on
how big this corporation was, let's use numbers, by the end of the financial year in the
corporation in year 2007, Lehman Brothers had 691,063 million in total assets compared
to 503,545 million in 2006, and had 668,573 million in total liabilities compared to
484,354 million in 2006 .For such a corporation to file for bankruptcy in 2008, was quite
a shock, and an a warning for the American government that if it doesn't interfere, the
possibility of its whole banking collapsing dragging the economy to the point of no
return is not farfetched, thus it interfered and started to pump billions of dollars in the
banking sector. The beginning of the end was when Lehman Brothers used extensive
borrowing to finance its investments, a noteworthy portion of this fund is to be invested
in the booming housing market )like mortgages .(Of course this move made them highly
susceptible to the crisis in late 2007 .In August 2007, Lehman Brothers closed BNC
Mortgage, its subprime lending division, a move explained by the firm as response to the
poor market which "necessitated a substantial reduction in its resources and capacity in
the subprime space". Year 2008 was not any good, substantial losses stroke the
company, no light was to be seen at the end of the tunnel, losses and sale of assets
continued .Six months into the year, Lehman's stocks value decreased by 73 .%News of
selling the corporation to Korea Development Bank, but negotiations later collapsed .
Confidence in the company eroded .September 10, 2008 the company announced a loss
of 3.9 billion, in addition to the loss of 2.6 billion in the second quarter of the year .
September 13, 2008 marked Timothy Geithner stepping in, then the president of the
Federal Reserve Bank of New York, to start negotiations with the management on the
future of the company .Talks started with Bank of America and Barclays, both talks
collapsed, diminishing any last hope of revival .September 15, 2008 Lehman brothers
filed for Chapter11 Bankruptcy protection, marking the largest bankruptcy filing in the
U.S .history.
"The time for Katla to erupt is coming close...We [Iceland] have prepared...it is high
time for European governments and airline authorities all over the world to start
planning for the eventual Katla eruption".
The first eruption was short lived, as stated before, beginning on 20 March and can be considered
ended on 22, since on that day the evacuated 500 farmers and their families, and the postponed air
traffic in the Keflavík International Airport was continued on 21 March. So I will refrain from
describing the details of the first eruption and its effects, and concentrate on the second, for it had
the most disastrous effects economically speaking, discussion will be in two sections :1 -Losses the
airline industry, 2 -Gains substitute transportation means, though it is important to note that losses
were not restricted to the airline industry, African, Asian, Australasian and European economies
were affected in the general since the movement of merchandise and supplies were also hindered
in the process:
As to earthquakes I will start with the Haiti earthquake with the strength of 7.0 on Richter's scale .
The quake occurred on 12 January, 2010 .Interior Minister said speaking about the casualties:
"There are people who put forth the figure of 230,000, but we have counted a bit more
than 217,000. These are verified figures."
As quoted in the BBC site. Prior to this earthquake there were two quakes, the first was on 12 May,
2008 in China's Sichuan Province with strength of 7.9 on Richter's scale, resulted in the death of
69195 people and 18392 missing (it is noteworthy to say that the province was hit by an
earthquake in august 2008 that damaged 258000 homes and killed 32 people) and 374177 injured.
The second is an earthquake in Central Italy with strength of 6.3 on Richter scale, more specifically
the village of L'Aquila; it was on 6 April, 2009. The earthquake killed 287 people, 1000 injured and
over 40000 homeless. The third earthquake in Sumatra, Indonesia, with strength of 7.5, in
minimum it killed 1100 people, 2181, more than 2650 buildings were damaged and communication
and power were disrupted because of landslides. As for the earthquakes after Haiti's earthquake,
there is an earthquake in offshore Maule, Chile, with strength of 8.8)this region had 13 earthquakes
of magnitude of 7.0 and bigger since 1973( killing 507, a lot of injuries and 200000 houses were
damaged) this earthquake prompted a tsunami that contributed to the damage(, in 13 April 2010
an earthquake hit Southern Qinghai, China, with strength of 6.9, in minimum 2183 people were
killed, 84 missing and 12135 injured, and a number of buildings were damaged) this region and
nearby areas, like Sichuan, had several earthquake over the years, Sichuan's 2008 earthquake killed
almost 70000, injured hundreds of thousands and displaced millions .
These are not all the earthquake that happened over the last three years, but many of them may
simply be felt without any significant damage occurring even if they reach strength of 7.0 or higher.
And some areas actually happens in areas that are actually active seismic area, thus an earthquake
there is not something to be considered a shocker .There has been talks revolving about that these
earthquakes are caused by the nuclear tests some countries perform, part of the conspiracy theory,
but I personally don't believe them, sometimes I consider it a way to explain the unexplainable, it's
like when in the dark ages and before, people would say its magic or some angry god .Though it is
true that many conspiracy theories are based on facts and comprehensive research, but in my
opinion I don't think that these earthquakes have any relation to any conspiracies or tests.
Conclusion:
Maybe the disasters themselves were not the problem, it's just their timing was a surprise, or they
came up when we were busy handling something else .The volcano's ashes came when the world
was busy with the financial crisis, and I have to note that the ashes problems didn't end in 22 April,
though airports commenced work, in May it forced airports in Spain, Morocco and other to close
again .The same goes for the earthquakes as I mentioned some of them were to be expected since
the area is seismically active .But their timing that collided with other disasters made them more of
depressing news to be heard, and as a result we became sensitive to the word "disaster "whenever
we hear it, we start to think "what is happening to this world", and again I have to note that I didn't
mention all of them, there were floods and hurricanes and blizzards, too .So I end by saying that
what is disastrous about these disasters is their timing.
Appendix:
1- Subprime Lending :this terminology is in reference to the riskiest category in consumer loans
usually sold in a different market than prime loans.
2- Icesave accounts :online saving accounts offered by Landsbanki, which extended to the U.K .and
Netherlands and was planned to be extended further in 2008 .This service attracted 5 billion € in
the U.K .and 1.7 billion € in the Netherlands .After the crisis these accounts which were in the
parent bank in Iceland were inaccessible for 6 to 8 weeks
3- Pandemic alert phase 6 :as reported in the WHO site" the pandemic phase, is characterized by
community level outbreaks in at least one other country in a different WHO region in addition to the criteria
defined in Phase 5. Designation of this phase will indicate that a global pandemic is under way."
- Phase 5 :as reported in the WHO site "is characterized by human-to-human spread of the virus into at
least two countries in one WHO region. While most countries will not be affected at this stage, the
declaration of Phase 5 is a strong signal that a pandemic is imminent and that the time to finalize the
organization, communication, and implementation of the planned mitigation measures is short."
References:
1- Britannica.com :search "Fannie Mae "and "Freddie Mac"
2- Wikipedia.com :search "Fannie Mae", "Freddie Mac", "Shadow Banking system", "Financial Crisis
(2007-2010)"," Federal takeover of Freddie Mac and Fannie Mae" and "Bankruptcy of Lehman
Brothers", "2010 eruptions of Eyjafjallajökull", "Airline disruptions after the 2010 Eyjafjallajökull
eruptions", " Eyjafjallajökull" , "1918 flu pandemic"
4- Reuters.com
5- http//:www.forbes.com/2008/10/16/brown-iceland-britain-oped-cx_av_valfells.html?referer=spher
e_related_content&referer=sphere_related_content
6- http//:www.aljazeera.net/NR/exeres/968A0A1B-2084-4D03-8596-85107200973E.htm
http//:www.aljazeera.net/NR/exeres/B035BEDC-DA60-4271-B74D-CC86ABF567E2.htm
7- http//:topics.nytimes.com/topics/news/science/topics/earthquakes/sichuan_province_china/index.ht
ml
8- http//:edition.cnn.com/2010/WORLD/americas/03/31/haiti.donors/index.html
9- http//:www.corriere.it/english/09_aprile_07/abruzzo_earthquake_2f6d86d8-2360-11de-aefc-00144
f02aabc.shtml
10- http//:www.corriere.it/english/09_aprile_07/abruzzo_earthquake_2f6d86d8-2360-11de-aefc-00144
f02aabc.shtml
11- USGS.gov
12- http//:www.huffingtonpost.com/2010/04/06/sumatra-earthquake-78-mag_n_527698.html