Asian Financial Crisis , CMO, CDO, MBS, ABS

Prepared For:

Mr. Nafeez Al Tareq

Course Teacher

Modern Financial Engineering

Prepared By:

Md. Khairul Islam

Student ID: 182

MBA Program, first Batch

Department of Finance & Banking

Jahangirnagar University, Savar, Dhaka -1342

November 07, 2014

Asset-backed security:

An asset-backed security (ABS) is a type of security whose value is derived from a pool of

underlying assets and whose income payments are backed (collateralized) by the same pool,

which can be composed out of different receivables. Pooling of assets and their sale to third

parties is a process known as securitization.

Example:

Assume United Company is in the business of making auto loans. When it makes a loan, it

gives cash to the borrower and the borrower agrees to repay that amount with interest. But if

Company United wants to make more loans, it may find itself needing cash to do so. This is

where asset-backed securities come in. Company United can sell its auto loans to ACI

Investments. As a result, Company United receives cash to make more loans, and it transfers

those auto loans from its balance sheet to ACI's balance sheet.

ACI Investments may group these auto loans into tranches groups of loans that may have

common characteristics such as maturity or delinquency risk. ACI then issues a security

similar to a bond that essentially keeps an administrative fee for itself and then "forwards" the

remaining proceeds from the auto loans to the investors.

Mortgage backed securities:

A mortgage-backed security is a type of asset-backed security that is secured by a mortgage,

or more commonly a collection of sometimes hundreds of mortgages. The mortgages are sold

to a group of individuals that securitizes or packages, the loans together into a security that

can be sold to investors. The mortgages of an MBS may be residential or commercial,

depending on whether it is an Agency MBS or a Non-Agency MBS in the United States they

may be issued by structures set up by government-sponsored enterprises like Fannie Mae or

Freddie Mac or they can be private-label issued by structures set up by investment banks. The

structure of the MBS may be known as pass-through, where the interest and principal

payments from the borrower or homebuyer pass through it to the MBS holder or it may be

more complex, made up of a pool of other MBSs. Other types of MBS include collateralized

mortgage obligations .

Example:

Assume you want to buy a house, so you get a mortgage from Dhaka Bank. Dhaka Bank

transfers money into your account, and you agree to repay the money according to a set

schedule. Dhaka Bank may then choose to hold the mortgage in its portfolio (i.e., simply

collect the interest and principal payments over the next several years) or sell it. If you're

ready to buy a home, use our Mortgage Calculator to see what your monthly principal and

interest payment will be. If Dhaka Bank sells the mortgage, it gets cash to make other loans.

So let's assume that Dhaka Bank sells your mortgage to ICB Company, which could be a

governmental, quasi governmental or private entity. ICB Company groups your mortgage

with similar mortgages it has already purchased. The mortgages in the pool have common

characteristics maturities.

ABC Company then sells securities that represent an interest in the pool of mortgages, of

which your mortgage is a small part. It sells these MBS to investors in the open market. With

the funds from the sale of the MBS, ICB Company can purchase more mortgages and create

more MBS. When you make your monthly mortgage payment to Dhaka Bank, they keep a

fee or spread and send the rest of the payment to ICB Company. ICB Company in turn takes

a fee and passes what's left of your principal and interest payment along to the investor who

holds the MBS.

CMO:

This is a type of mortgage-backed security in which principal repayments are organized

according to their maturities and into different classes based on risk. This collateralized

mortgage obligation is a special purpose entity that receives the mortgage repayments and

owns the mortgages it receives cash flows from. The mortgages serve as collateral, and are

organized into classes based on their risk profile. Receiving income from the mortgages is

passed to investors based on a predetermined set of rules, and investors receive money based

on the specific slice of mortgages invested in.

Example:

The most basic way a mortgage loan can be transformed into a bond suitable for purchase by

an investor would simply be to "split it". For example, a $300,000 30 year mortgage with an

interest rate of 6.5% could be split into 300 1000 dollar bonds. These bonds would have a

30 year amortization, and an interest rate of 6.00% for example (with the remaining .50%

going to the servicing company to send out the monthly bills and perform servicing work).

CDO:

This is a structured financial product that pools together cash flow-generating assets and

repackages this asset pool into discrete tranches that can be sold to investors. This

collateralized debt obligation is so called because the pooled assets such as mortgages, bonds

and loans are essentially debt obligations that serve as collateral for the CDO. The tranches in

a CDO vary substantially in their risk profile. The senior tranches are relatively safer because

they have first priority on the collateral in the event of default. As a result, the senior tranches

of a CDO generally have a higher credit rating and offer lower coupon rates than the junior

tranches, which offer higher coupon rates to compensate for their higher default risk.

A collateralized debt obligation may be called a collateralized loan obligation (CLO) or

collateralized bond obligation (CBO) if it holds only loans or bonds. Investors bear the credit

risk of the collateral. Multiple tranches of securities are issued by the collateralized debt

obligation, offering investors various maturity and credit risk characteristics. Tranches are

categorized as senior, mezzanine or subordinated/equity, according to their degree of

perceived credit risk. If there are defaults or the collateralized debt obligation’s collateral

otherwise underperforms, scheduled payments to senior tranches take precedence over those

of mezzanine tranches, and scheduled payments to mezzanine tranches take precedence over

those to subordinated/equity tranches. Each tranche receives its own credit rating, reflecting

both the credit quality of underlying collateral as well as how much protection a given

tranche is afforded by tranches that are subordinate to it. Senior tranches of a collateralized

debt obligation backed by low-quality debt can receive an AAA rating due to the protection

of subordinate tranches.

The Onset of Financial Crisis:

In the 1980s and 1990s, many Asian developing countries fell into an external debt-led

financial crisis. In the first generation of these crises, the failure to service debt was due to a

combination of factors, including depression in commodity export prices, increase in the

price of oil imports, a rapid increase in foreign loans and the inability to utilize these loans

productively or appropriately. In the 1990s, several more countries (including the more

economically advanced of the developing countries) experienced financial crises. A major

cause of many of these second-generation crises was the inappropriate design and

implementation of capital account liberalization. Some countries that had till now succeeded

in attaining high economic growth rates and in using export expansion for this growth, faced

difficulties in managing rapid liberalization in financial flows.

In 1997 several East Asian countries began to experience serious financial problems. Due to

financial deregulation, they had received large inflows of capital, including bank loan and

portfolio capital. A significant part of the foreign loans was not channeled to activities that

yielded revenue in foreign exchange, and thus a mismatch occurred, at least in the short term,

so that pressures built up on foreign reserves. In some of these countries, in this situation of

increased financial fragility, currency speculators took advantage of the deregulated

environment borrowed in local currency and sold the currency short against the US dollar.

In Thailand, the Thai central bank sold dollars against the baht in an attempt to maintain the

bath’s exchange rate level. When its foreign reserves dried up, and it could no longer defend

the baht, the local currency depreciated sharply. This made it even more difficult for the

country to service its high foreign debt. The Thai crisis spread via “contagion effect” to other

East Asian countries.

In Indonesia, there had also been a rapid build-up of foreign loans, especially to the private

sector. There was a very sharp depreciation of the rupiah (at one stage its value against the

US dollar had fallen by more than 80 per cent), rendering the country unable to meet its

foreign loan obligations.

In South Korea, following financial deregulation and liberalization when the country

prepared to join the Organization for Economic Cooperation and Development (OECD),

private banks and companies had also accumulated huge quantities of foreign loans. Due to a

sharp depreciation of the won, the country also experienced debt-servicing difficulties.

In Malaysia, the ringgit came under speculative attack and also declined significantly.

However, the country had not liberalized its capital account to the same extent as the other

three countries, at least in one important respect, i.e. local companies were allowed to obtain

foreign loans only with Central Bank permission, which would be given only if and to the

extent that the borrower could show that the loan would be used for activities that would

yield revenue in foreign exchange that could be used for loan servicing. Partly as a result of

this restriction, Malaysia’s debt situation remained manageable, although the situation was

also fragile, as there was also a possibility of debt-servicing difficulty if the ringgit

depreciated even more sharply, or if there was a rapid enough outflow of capital.

The causes of Asian Financial Crisis:

Credit bubbles and fixed currency exchange rates

The causes of the debacle are many and disputed. Thailand's economy developed into an

economic bubble fueled by hot money. More and more was required as the size of the bubble

grew. The same type of situation happened in Malaysia, and Indonesia, which had the added

complication of what was called "crony capitalism". The short-term capital flow was

expensive and often highly conditioned for quick profit. Development money went in a

largely uncontrolled manner to certain people only, not particularly the best suited or most

efficient, but those closest to the centers of power. At the time of the mid-1990s, Thailand,

Indonesia and South Korea had large private current account deficits and the maintenance of

fixed exchange rates encouraged external borrowing and led to excessive exposure to foreign

exchange risk in both the financial and corporate sectors. In the mid-1990s, a series of

external shocks began to change the economic environment the devaluation of the Chinese

renminbi, and the Japanese yen due to the Plaza Accord of 1985, raising of US interest rates

which led to a strong U.S. dollar, the sharp decline in semiconductor prices; adversely

affected their growth. As the U.S. economy recovered from a recession in the early 1990s, the

U.S. Federal Reserve Bank under Alan Greenspan began to raise U.S. interest rates to head

off inflation.

Some economists have advanced the growing exports of China as a contributing factor to

Asia nations’ export growth slowdown, though these economists maintain the main cause of

the crises was excessive real estate speculation. China had begun to compete effectively with

other Asian exporters particularly in the 1990s after the implementation of a number of

export-oriented reforms. Other economists dispute China's impact, noting that both ASEAN

and China experienced simultaneous rapid export growth in the early 1990s. Many

economists believe that the Asian crisis was created not by market psychology or technology,

but by policies that distorted incentives within the lender–borrower relationship. The

resulting large quantities of credit that became available generated a highly leveraged

economic climate, and pushed up asset prices to an unsustainable level. These asset prices

eventually began to collapse, causing individuals and companies to default on debt

obligations.

Panic amongst lenders and withdrawal of credit

The resulting panic among lenders led to a large withdrawal of credit from the crisis

countries, causing a credit crunch and further bankruptcies. In addition, as foreign investors

attempted to withdraw their money, the exchange market was flooded with the currencies of

the crisis countries, putting depreciative pressure on their exchange rates. To prevent

currency values collapsing, these countries' governments raised domestic interest rates to

exceedingly high levels (to help diminish flight of capital by making lending more attractive

to investors) and to intervene in the exchange market, buying up any excess domestic

currency at the fixed exchange rate with foreign reserves. Neither of these policy responses

could be sustained for long.

Very high interest rates, which can be extremely damaging to an economy that is healthy,

wreaked further havoc on economies in an already fragile state, while the central banks were

hemorrhaging foreign reserves, of which they had finite amounts. When it became clear that

the tide of capital fleeing these countries was not to be stopped, the authorities ceased

defending their fixed exchange rates and allowed their currencies to float. The resulting

depreciated value of those currencies meant that foreign currency-denominated liabilities

grew substantially in domestic currency terms, causing more bankruptcies and further

deepening the crisis.

Other possible cause of the sudden risk shock may also be attributable to the handover of

Hong Kong sovereignty on 1 July 1997. During the 1990s, hot money flew into the Southeast

Asia region through financial hubs, especially Hong Kong. The investors were often ignorant

of the actual fundamentals or risk profiles of the respective economies, and once the crisis

gripped the region, coupled with the political uncertainty regarding the future of Hong Kong

as an Asian financial centre led some investors to withdraw from Asia altogether. This shrink

in investments only worsened the financial conditions in Asia.

Several case studies on the topic – Application of network analysis of a financial system;

explains the interconnectivity of financial markets, and the significance of the robustness of

hubs or the main nodes. Any negative externalities in the hubs creates a ripple effect through

the financial system and the economy (and, the connected economies) as a whole.

IMF and high interest rates

The conventional high-interest-rate economic wisdom is normally employed by monetary

authorities to attain the chain objectives of tightened money supply, discouraged currency

speculation, stabilized exchange rate, curbed currency depreciation, and ultimately contained

inflation. In the Asian meltdown, highest IMF officials rationalized their prescribed high

interest rates as follows: From the IMF First Deputy managing director, Stanley Fischer

(Stanley Fischer, "The IMF and the Asian Crisis," Forum Funds Lecture at UCLA, Los

Angeles on 20 March 1998):

”When their governments "approached the IMF, the reserves of Thailand and South Korea

were perilously low, and the Indonesian Rupiah was excessively depreciated. Thus, the first

order of business was... to restore confidence in the currency. To achieve this, countries have

to make it more attractive to hold domestic currency, which in turn, requires increasing

interest rates temporarily, even if higher interest costs complicate the situation of weak banks

and corporations.

Maturity transformation

One of the main reasons of Asian financial crisis is maturity transformation. Despite the

entire furor that’s surrounded the sector recently; retail banks perform a vital role in an

economy. They take short-term sources of finance, such as deposits from savers and money

market loans, and turn them into long-term borrowings, such as mortgages. This is called

maturity transformation – a rather grand way of saying that they exist to meet the needs of

lenders and borrowers. In return for providing this service they make money by charging

more for a loan than they offer to pay on, say, a deposit. Maturity transformation is the

practice of fractional reserve banks borrowing money on shorter timeframes than they lend

money out. Financial markets also have the effect of maturity transformation whereby

investors such as shareholders and bondholders can sell their shares and bonds in the

secondary market at any time without affecting the company that issued the shares or bonds.

Thus the company can be a long-term borrower from a market of short-term lenders. The

short-term lenders are simply buying and selling the ownership of the shares or bonds on the

stock market. The company keeps a register of owners and changes the name whenever there

is a sale.

Lack of Risk Management

This is one of the vital reason of Asian financial crisis .Risk management can be a thankless

profession. In bull markets, risk managers are often viewed as wet blankets who, as some

might say, “take away the punch bowl just when the party starts getting interesting.” Upon a

turn for the worse, people wonder why they weren’t warned earlier. Even when successful

risk managers limit losses, their recognition is somehow lacking. Maybe it’s the loss aversion

baked into our psychology, but it can be difficult to find comfort in situations that are merely

bad, rather than terrible.

The ongoing financial meltdown has cast a shadow over the entire economy, and caused

some to question whether the much-hyped movement of enterprise risk management (ERM)

has failed

Indonesia

In June 1997, Indonesia seemed far from crisis. Unlike Thailand, Indonesia had low inflation,

a trade surplus of more than $900 million, huge foreign exchange reserves of more than $20

billion, and a good banking sector. But a large number of Indonesian corporations had been

borrowing in U.S. dollars. During the preceding years, as the rupiah had strengthened

respective to the dollar, this practice had worked well for these corporations; their effective

levels of debt and financing costs had decreased as the local currency's value rose.

In July 1997, when Thailand floated the baht, Indonesia's monetary authorities widened the

rupiah currency trading band from 8% to 12%. The rupiah suddenly came under severe attack

in August. On 14 August 1997, the managed floating exchange regime was replaced by a

free-floating exchange rate arrangement. The rupiah dropped further. The IMF came forward

with a rescue package of $23 billion, but the rupiah was sinking further amid fears over

corporate debts, massive selling of rupiah, and strong demand for dollars. The rupiah and the

Jakarta Stock Exchange touched a historic low in September. Moody's eventually

downgraded Indonesia's long-term debt to 'junk bond'.

Thailand

From 1985 to 1996, Thailand's economy grew at an average of over 9% per year, the highest

economic growth rate of any country at the time. Inflation was kept reasonably low within a

range of 3.4–5.7%. The baht was pegged at 25 to the US dollar. On 14 May and 15 May

1997, the Thai baht was hit by massive speculative attacks. On 30 June 1997, Prime Minister

Chavalit Yongchaiyudh said that he would not devalue the baht. This was the spark that

ignited the Asian financial crisis as the Thai government failed to defend the baht, which was

pegged to the basket of currencies in which the U.S. dollar was the main component, against

international speculators. Thailand’s booming economy came to a halt amid massive layoffs

in finance, real estate, and construction that resulted in huge numbers of workers returning to

their villages in the countryside and 600,000 foreign workers being sent back to their home

countries. The baht devalued swiftly and lost more than half of its value. The baht reached its

lowest point of 56 units to the US dollar in January 1998. The Thai stock market dropped

75%. Finance One, the largest Thai finance company until then, collapsed.

South Korea

The banking sector was burdened with non-performing loans as its large corporations were

funding aggressive expansions. During that time, there was a haste to build great

conglomerates to compete on the world stage. Many businesses ultimately failed to ensure

returns and profitability. The chapbook, South Korean conglomerates, simply absorbed more

and more capital investment. Eventually, excess debt led to major failures and takeovers.

For example, in July 1997, South Korea's third-largest car maker, Kia Motors, asked for

emergency loans. In the wake of the Asian market downturn, Moody's lowered the credit

rating of South Korea from A1 to A3, on 28 November 1997, and downgraded again to B2 on

11 December. That contributed to a further decline in South Korean shares since stock

markets were already bearish in November. The Seoul stock exchange fell by 4% on 7

November 1997. On 8 November, it plunged by 7%, its biggest one-day drop to that date.

And on 24 November, stocks fell a further 7.2% on fears that the IMF would demand tough

reforms. In 1998, Hyundai Motors took over Kia Motors. Samsung Motors' $5 billion venture

was dissolved due to the crisis, and eventually Daewoo Motors was sold to the American

company General Motors (GM).

Philippines

The Philippine central bank raised interest rates by 1.75 percentage points in May 1997 and

again by 2 points on 19 June. Thailand triggered the crisis on 2 July and on 3 July, the

Philippine Central Bank intervened to defend the peso, raising the overnight rate from 15% to

32% at the onset of the Asian crisis in mid-July 1997. The peso dropped from 26 pesos per

dollar at the start of the crisis to 38 pesos in mid-1999 to 54 pesos as in early August

2001.The Philippine GDP contracted by 0.6% during the worst part of the crisis, but grew by

3% by 2001, despite scandals of the administration of Joseph Estrada in 2001, most notably

the "jutting" scandal, causing the PSE Composite Index, the main index of the Philippine

Stock Exchange, to fall to 1000 points from a high of 3000 points in 1997. The peso's value

declined to about 55 pesos to the US dollar. Later that year, Estrada was on the verge of

impeachment but his allies in the senate voted against continuing the proceedings.

Hong Kong

In October 1997, the Hong Kong dollar, which had been pegged at 7.8 to the U.S. dollar since

1983, came under speculative pressure because Hong Kong's inflation rate had been

significantly higher than the U.S.'s for years. Monetary authorities spent more than US$1

billion to defend the local currency. Since Hong Kong had more than US$80 billion in

foreign reserves, which is equivalent to 700% of its M1 money supply and 45% of its M3

money supply, the Hong Kong Monetary Authority (effectively the city's central bank)

managed to maintain the peg. Stock markets became more and more volatile; between 20 and

23 October the Hang Seng Index dropped 23%. The Hong Kong Monetary Authority then

promised to protect the currency. On 15 August 1998, it raised overnight interest rates from

8% to 23%, and at one point to 500%. The HKMA had recognized that speculators were

taking advantage of the city's unique currency-board system, in which overnight rates

automatically increase in proportion to large net sales of the local currency. The rate hike,

however, increased downward pressure on the stock market, allowing speculators to profit by

short selling shares. The HKMA started buying component shares of the Hang Seng Index in

mid-August.

Malaysia

Before the crisis, Malaysia had a large current account deficit of 5% of its GDP. At the time,

Malaysia was a popular investment destination, and this was reflected in KLSE activity

which was regularly the most active stock exchange in the world (with turnover exceeding

even markets with far higher capitalization like the New York Stock Exchange). Expectations

at the time were that the growth rate would continue, propelling Malaysia to developed status

by 2020, a government policy articulated in Wawa a 2020. At the start of 1997, the KLSE

Composite index was above 1,200, the ringgit was trading above 2.50 to the dollar, and the

overnight rate was below 7%.In July 1997, within days of the Thai baht devaluation, the

Malaysian ringgit was "attacked" by speculators. The overnight rate jumped from under 8%

to over 40%. This led to rating downgrades and a general sell off on the stock and currency

markets. By end of 1997, ratings had fallen many notches from investment grade to junk, the

KLSE had lost more than 50% from above 1,200 to under 600, and the ringgit had lost 50%

of its value, falling from above 2.50 to under 4.57 on (23 January 1998) to the dollar.

Malaysian moves involved fixing the local currency to the US dollar, stopping the overseas

trade in ringgit currency and other ringgit assets therefore making offshore use of the ringgit

invalid, restricting the amount of currency and investments that residents can take abroad,

and imposed for foreign portfolio funds, a minimum one-year "stay period" which since has

been converted to an exit tax. The decision to make ringgit held abroad invalid has also dried

up sources of ringgit held abroad that speculators borrow from to manipulate the ringgit, for

example by "selling short." Those who do, have to purchase back the limited ringgit at higher

prices, making it unattractive to them. In addition, it also fully suspended the trading of

CLOB (Central Limit Order Book) counters, indefinitely freezing approximately US$4.47

billion worth of shares and affecting 172,000 investors, most of them Singaporeans

Singapore

As the financial crisis spread the economy of Singapore dipped into a short recession. The

short duration and milder effect on its economy was credited to the active management by the

government. For example, the Monetary Authority of Singapore allowed for a gradual 20%

depreciation of the Singapore dollar to cushion and guide the economy to a soft landing. The

timing of government programs such as the Interim Upgrading Program and other

construction related projects were brought forward. Instead of allowing the labor markets to

work, the National Wage Council pre-emotively agreed to Central Provident Fund cuts to

lower labor costs, with limited impact on disposable income and local demand. Unlike in

Hong Kong, no attempt was made to directly intervene in the capital markets and the Straits

Times Index was allowed to drop 60%. In less than a year, the Singaporean economy fully

recovered and continued on its growth trajectory.

China

The Chinese currency, the renminbi (RMB), had been pegged to the US dollar at a ratio of

8.3 RMB to the dollar, in 1994. Having largely kept itself above the fray throughout 1997–

1998 there was heavy speculation in the Western press that China would soon be forced to

devalue its currency to protect the competitiveness of its exports vis-a-vis those of the

ASEAN nations, whose exports became cheaper relative to China's. However, the RMB's

non-convertibility protected its value from currency speculators, and the decision was made

to maintain the peg of the currency, thereby improving the country's standing within Asia.

The currency peg was partly scrapped in July 2005 rising 2.3% against the dollar, reflecting

pressure from the United States.

United States and Japan

The "Asian flu" had also put pressure on the United States and Japan. Their markets did not

collapse, but they were severely hit. On 27 October 1997, the Dow Jones industrial plunged

554 points or 7.2%, amid ongoing worries about the Asian economies. The New York Stock

Exchange briefly suspended trading. The crisis led to a drop in consumer and spending

confidence (see 27 October 1997 mini-crash). Indirect effects included the dot-com bubble,

and years later the housing bubble and the Subprime mortgage crisis. Japan was affected

because its economy is prominent in the region. Asian countries usually run a trade deficit

with Japan because the latter's economy was more than twice the size of the rest of Asia

together; about 40% of Japan's exports go to Asia. The Japanese yen fell to 147 as mass

selling began, but Japan was the world's largest holder of currency reserves at the time, so it

was easily defended, and quickly bounced back. GDP real growth rate slowed dramatically in

1997, from 5% to 1.6% and even sank into recession in 1998, due to intense competition

from cheapened rivals. The Asian financial crisis also led to more bankruptcies in Japan. In

addition, with South Korea's devalued currency, and China's steady gains, many companies

complained outright that they could not compete

Effect of Financial crisis

Asian currencies dropped by 35-83% against dollar n stock declines 40% started in Thailand

1997 then Korea. The crisis had significant macroeconomic-level effects, including sharp

reductions in values of currencies, stock markets, and other asset prices of several Asian

countries. The nominal U.S. dollar GDP of ASEAN fell by US$9.2 billion in 1997 and

$218.2 billion (31.7%) in 1998. In South Korea, the $170.9 billion fall in 1998 was equal to

33.1% of the 1997 GDP. Many businesses collapsed, and as a consequence, millions of

people fell below the poverty line in 1997–1998. Indonesia, South Korea and Thailand were

the country’s most affected by the crisis.

The crisis has been intensively analyzed by economists for its breadth, speed, and dynamism;

it affected dozens of countries, had a direct impact on the livelihood of millions, happened

within the course of a mere few months, and at each stage of the crisis leading economists, in

particular the international institutions, seemed a step behind. Perhaps more interesting to

economists was the speed with which it ended, leaving most of the developed economies

unharmed. These curiosities have prompted an explosion of literature about financial

economics and a litany of explanations why the crisis occurred. A number of critiques have

been leveled against the conduct of the IMF in the crisis, including one by former World

Bank economist Joseph Stieglitz. Politically there were some benefits. In several countries,

particularly South Korea and Indonesia, there was renewed push for improved corporate

governance. Rampaging inflation weakened the authority of the Suharto regime and led to its

toppling in 1998, as well as accelerating East Timor's independence.

Effect outside of Asia

After the Asian crisis, international investors were reluctant to lend to developing countries,

leading to economic slowdowns in developing countries in many parts of the world. The

powerful negative shock also sharply reduced the price of oil, which reached a low of about

$11 per barrel towards the end of 1998, causing a financial pinch in OPEC nations and other

oil exporters. In response to a severe fall in oil prices, the super majors that emerged in the

late-1990s, undertook some major mergers and acquisitions between 1998 and 2002 – often

in an effort to improve economies of scale, hedge against oil price volatility, and reduce large

cash reserves through reinvestment.

The reduction in oil revenue also contributed to the 1998 Russian financial crisis, which in

turn caused Long-Term Capital Management in the United States to collapse after losing $4.6

billion in 4 months. A wider collapse in the financial markets was avoided when Alan

Greenspan and the Federal Reserve Bank of New York organized a $3.625 billion bailout.

Major emerging economies Brazil and Argentina also fell into crisis in the late 1990s (see

Argentine debt crisis).

The crisis in general was part of a global backlash against the Washington Consensus and

institutions such as the IMF and World Bank, which simultaneously became unpopular in

developed countries following the rise of the anti-globalization movement in 1999. Four

major rounds of world trade talks since the crisis, in Seattle, Doha, Cancún, and Hong Kong,

have failed to produce a significant agreement as developing countries have become more

assertive, and nations are increasingly turning toward regional or bilateral free trade

agreements (FTAs) as an alternative to global institutions.