Buffett Blames Banks for Credit Crisis

I Read this article on Reuters and wonders if it was really just the banks at fault for the current U.S. credit crisis or should the relevent monetary authority be responsible?

U.S. billionaire investor Warren Buffett told newspaper El Pais that the banks should be for the sub-prime crisis as the banks took too many risks in mortgage lending

Mr Buffett further shared, "The banks exposed themselves too much, they took on too much risk .... It's their fault. There's no need to blame anyone else,". He believed the situation in financial markets would not deteriorate further.

"I don't think the situation will get worse in financial markets. General conditions in the business world will get worse, but it will only last a while," he said, adding he had no idea when an upturn would come.

I would like to pour some views on why I presume the relevent Monetary Authority should also be responsible. As a Monetary Authority, or the Central bank, the authority should observe the credit crisis brewing and taken earlier actions to avoid a meltdown turning a blind eye to the situation, expecting that the financial institutions in a mature financial market should be able to judge themselves what risk level to take.

Coming back to Singapore financial market. The Monetary Authority of Singapore relaxed car financing rules in year 2003. Previously, car buyers needs to have a deposit of up to 30% and are only able to take a maximum of 7 years loan. The relaxation of rule now permits banks to allow up to 100% financing, for up to 10 years duration.

Car ownership here in Singapore is based on a 10 year Certificate of Entitlement (COE). Thus, a new car will only have a road life of 10 years before they need to undergo a renewal of COE.

If a car buyer were to take a maximum of 100% loan over 10 years and decides to change car (or get rid of car) just before 5 years is up, he will loose more than 50% of the car's value, but still have more than 50% of the car loan outstanding.

If the car owner decides to change car, he may need to top up an amount above $10,000. If he were to buy a new car, banks are giving loans with Cash Rebates. Car buyer then takes the Cash Rebate to roll over the outstanding loan on the previous car. He ends up ballooning his debt while the banks are providing a loan larger than the value of the property. Isn't this sub-prime or credit-crisis in the brewing?

Let's look at the car population in Singapore. There are about 500,000 cars in Singapore. If each car has an average outstanding debt of $20,000 each, the total car debt market is S$10 billion.

Since the Monetary Authority controls the credit market, who would be blame should the mini sub-prime brews over here in Singapore? The Authority or the Banks?