US federal authorities' seizure of mortgage lender IndyMac Bancorp Inc on Friday after withdrawals by panicked depositors is seen by analysts as a sign that the worst is not over yet in the global financial crisis.
The news was exacerbated by the market wiping almost half the share value of the two biggest mortgage finance giants Fannie Mae and Freddie Mac, before they recovered a bit with the news of government support if needed. The two government-chartered, shareholder-owned giants underpin some $5 trillion (Dh18.35trn) in home loans and both have lost around 75 per cent since the start of the year.
Four small banks have already been closed this year and the Federal Deposit Insurance Corp (FDIC) – which took over IndyMac – is hiring staff in preparation for more failures. The agency has boosted its list of troubled banks to 90 and said an increasing number of banks face high exposure to deteriorating conditions in commercial real estate and construction lending.
With the meltdown of British mortgage-lender Northern Rock last year, along with three bank failures in US, some thought the sub-prime mortgage crisis in was coming to an end. They might have been over optimistic in their estimates, as global financial markets are getting more and more volatile into the third quarter of this year.
"The current crisis is not coming to an end yet because its reasons still remain: weakness of the American economy coupled with overspending besides rising energy and food prices and instability in financial markets. Also global tension is adding more pressure on oil prices to go up," said London-based business editor Rafle Khoriati.
Banker and investment consultant Hameed Husain said: "2008 is a critical year, and the economic depression could start to ease by the end of the year."
But he is cautious in his estimate and added: "We've seen that the US realty market problem is not yet over. We have only witnessed the sub-prime meltdown, there are still personal loan and credit card troubles to come. So the worst is not over. We're in recession zone and shares could fall further."
One of the shining spots in the global financial crisis is the injection of investments from wealthy countries into foreign markets. In a report this week, McKinsey Global Institute (MGI) concludes that four new power brokers – Asian sovereign investors, petrodollars, hedge funds, and private equity firms – are having a growing impact on global capital markets.
The report titled "The new power brokers: gaining clout in turbulent markets", reveals that all four power brokers grew in 2007, with their combined financial assets rising by 22 per cent to $11.5trn.
Despite the global financial crisis, MGI projects that the power brokers will continue to grow in wealth and clout. Under a conservative, base-case scenario, their combined assets will grow to $21trn by 2013. If they grow more briskly at their 2000 to 2007 pace, their wealth would rise to $31trn in 2013.
But how much could the foreign investments of these power brokers alleviate the impact of the current crisis?
Not much, according to Khoriati. He said: "Surplus money invested in global markets can not do much, as these investors are just trying to curb losses. To keep their foreign investments going, they might as well be obliged to inject such investments."
The core of the problem is in United States, said Husain.
"As for oil and trade surpluses it might not really solve the problems of global financial markets. The core problem is in the United States as the American economy is the largest in the world and once America can overcome its problems, it will be OK elsewhere."
When US housing market started to crumble last year leading to global credit crunch, some economists suggested the looming crisis is going to be more than a cyclical correction. A big change in the dynamics of the global economy could be the result of a long period of slowdown and recession.
"It is a transition period, everything is changing: cars, cloth and likes. Manufactures will have to clear stocks and invest in new lines with large layoffs expected to dampen the outlook more," said Husain.
The talk about a paradigm shift is surfacing again as the global crisis deepens. Khoriati said: "The current crisis could lead to structural changes in the global economy, especially with the continuing decline of the US dollar and the rise of the euro. There is a need to improve economic power relations with new rising heavyweights who have the wealth and capital."