Webdiary - Independent, Ethical, Accountable and Transparent
header_02 home about login header_06
sidebar-top content-top

The money train

This contribution has been submitted to Webdiary by a student in the Online Journalism unit for the Masters in Media Practice and Masters in Publishing courses at The University of Sydney as part of the unit's assessment. The topics covered in the pieces awaiting publication are interesting – and diverse. We hope that Webdiarists will enjoy reading them, as well as giving these aspiring journalists plenty of constructive commentary.

The money train
by Prea Peter

Will the current crisis in the global financial markets adversely affect Australia? Will a sick passenger on a Chatswood train disrupt the Bankstown service?

The answer to both these seemingly unrelated questions is something along the lines of “we don’t know for sure. Even if we did, there is probably not much we can do”. Complex networks of tracks or markets definitely have a downside.

There were two distinctly opposite reactions in Australia to the global financial crisis. On the one hand, the Rudd government declared that Australian financial institutions are in “sound shape”. On the other, the financial markets swam in fear about the fallout of the crisis. Share prices for major banks fell to record lows, inter-bank lending rates increased, and investors scrambled to buy insurance for their investments.

The two different reactions clearly show that no one really knows what the implication of the financial crisis is likely to be for Australia. Even if anyone did, complex interdependencies in the financial system may leave little room for anything to be done.

In the US, banks were lending money to home buyers, relying on their ability to pay back the mortgage, or if that fell through, on the option of repossessing and selling off the houses against which the loans were secured. According to Dr. Alex Eapen, lecturer at the Faculty of Economics and Business at the University of Sydney, “This arrangement collapsed for two reasons. First, lending was not responsibly done and many mortgagees ended up defaulting. Second, lenders were unable to recoup the loans in a housing market in a trough”. In the meantime, lenders had sold off their mortgage-repayment cash flows to other financial institutions such as Fannie Mae and Freddie Mac for cash to finance yet new mortgages. Mae and Mac then repackaged the debts into complex financial products and resold them to other institutions like Lehman brothers and Merrill Lynch. A lot of cash rich Chinese, Japanese and other investment banks also bought into these mortgage-based securities and passed the risks on to yet other investors around the world. And all along, investors were trying to pass on their risk to insurance companies like AIG by buying insurance. All it took for this complexly intertwined chain of investments to collapse was the crunch in the housing market. Without mortgages being repaid and low returns from repossessions, financial institutions with substantial exposure to the mortgage-based securities found themselves short of liquid cash and in line for bankruptcy. With huge claims to meet, insurance companies also felt the pressure.

Many are already calling for better regulation of the financial markets. But I think the crisis also points to need for investors and institutions to better monitor their risk exposure and posture in complexly intertwined financial networks. To stem the contagion of the crisis, institutions need to be able to quickly decouple from the network. Just like city rail is doing with its $1.8 billion ‘rail clearways’ plan to ensure that a problem on the Chatswood line does not disrupt traffic on the Bankstown route.


Australian Financial Review, Friday 19 Sept 2008, p.34 (online access at http://www.afr.com/)



Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.

Led through the maze by a good captain rat

You would be a good rat in a maze methinks Prea. That is the clearest path through the international financial maze that I have read to date. For someone like me with no sense of direction mazes are rather daunting so it is good to meet a good captain rat as one fumbles one's way along passages that lead nowhere. Prior to your piece I had given up trying to get my mind around it all.

Day by day I just have the sense that the whole global financial system is built out of froth and bubble.

Young men and women in their ties and black best, bent over computers, playing with our pockets as they would a computer game.  Have we all just been pawns in the hands of those computer game playing whizz kids? Is that where they all learned their financial skills before they started playing with our money?  

Risk Exposure

"...need for investors ...to better monitor their risk exposure..."

Aye, there's the rub    

How can they do that effectively when the signals, ie ratings agencies, glow  green where they should flash amber or red?

Mal says it will

Turnbull claims this crisis is going to affect us and K.Rudd should be back here consulting with him on how to fix it.

If it's so bad he should let us all in on the inside story , or is going to let us all hang out to dry because he can't get his own way ?.

Is the US closing its financial borders?

Penny-dop moment:  NABs billion, all the international debt funding, is for the purpose of the US recovering its currency from financial markets?

And "America's richest man"  (whatever his name is, can't remember) is investing a billion into Goldman Sachs?

Any correlations?


You have a natural fluency of reporting,Prea,of which I'm jealous.  Did you spend much time researching this information, or have you soaked it in and processed it?

I love it when somebody can take what could otherwise be a difficult clump of information to absorb and reshape it into something more layman-palatable.  As you might tell by my "Freddie's Revenge" piece (definitely the favourite headline I've come up with) I don't have as firm a grasp on the situation as I'd like.   Many hours of Lateline Business have gone into my level of financial comprehension.   Plus a lot of share-price reading to a wily grandfather who reckoned he couldn't see the figures any more.    He died not long after the eighties crash.  Lost his favourite interest.

Sorry, where were we?  Oh yeah... it's a pleasure to meet such a fine writer!

So, what do you think will happen next?

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
© 2005-2011, Webdiary Pty Ltd
Disclaimer: This site is home to many debates, and the views expressed on this site are not necessarily those of the site editors.
Contributors submit comments on their own responsibility: if you believe that a comment is incorrect or offensive in any way,
please submit a comment to that effect and we will make corrections or deletions as necessary.
Margo Kingston Photo © Elaine Campaner

Recent Comments

David Roffey: {whimper} in Not with a bang ... 12 weeks 6 days ago
Jenny Hume: So long mate in Not with a bang ... 12 weeks 6 days ago
Fiona Reynolds: Reds (under beds?) in Not with a bang ... 13 weeks 1 day ago
Justin Obodie: Why not, with a bang? in Not with a bang ... 13 weeks 1 day ago
Fiona Reynolds: Dear Albatross in Not with a bang ... 13 weeks 1 day ago
Michael Talbot-Wilson: Good luck in Not with a bang ... 13 weeks 1 day ago
Fiona Reynolds: Goodnight and good luck in Not with a bang ... 13 weeks 3 days ago
Margo Kingston: bye, babe in Not with a bang ... 13 weeks 6 days ago