GLOBAL FINANCIAL MELTDOWN AND IMPACT ON THE FAMILY

In recent times, there have been increasing doubts over the financial health of most Nigerian banks. *The Nigerian stock market has witnessed tremendous plunge in market capitalization and price depreciation over the last year. *The global crude oil prices have dropped from an all time high of $147.20 mid 2008 to close at about $40 by the end of 2008.*Banks and blue-chip companies are either reducing staff strength or reviewing employees’ salaries downwards. *Banks lose about US$1.3 trillion across the world. *Brazil Central bank continues to sell foreign reserves, eases limits on bank reserves, releasing up about $10billion Australia put $7.4bn into the economy. *Central Bank had cut interest rate. *Japan’s gross domestic product fell 12.7 percent in the fourth quarter in 2008. *A slump in exports has led to tens of thousands of layoffs across Japan, and the government of Japan rules on companies buying up their own shares and approved $18bn stimulus plan. *China is facing falling export due to dwindling demand from the U.S. and other countries
In the United States of America: *The 3 major car assemblies in US – GM, Ford and Chrysler, visited Congress requesting for a bail out, stressing fears of 3million job loss if the proposal fails. *Lehman Brothers goes bankrupt. *Merrill Lynch is bought up by Bank of America for $50billion. *Mortgage giants Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation) are taken over by the government. *Bear Stearns collapses. *America's largest insurance company AIG's share collapses from $22.19 on September 9, 2008 to less than $4.00, a decline of more than 80 percent of its value. *AIG reports $62 billion loss in one quarter – the biggest in corporate history. *The US government bails out AIG to the tune of $180billion. *The U.S. Government spends over $8 trillion in loans, guarantees, and outright bailout of financial and non-financial firms.
The above scenario aptly describes ‘Global Financial Melt Down’. A lot of terms have been used to describe this situation – Slump, Recession, Decline, Downturn, Fall, Slide, Collapse, Crash, Plunge, Crunch, Turmoil, etc.
Causes
The crisis is a manifestation of the saying that ‘When America sneezes, the whole world catches cold’. It has its root in a banking practice called sub-prime lending or sub-prime mortgage lending in the United States. A mortgage is a long-term loan that is designed to make home ownership more affordable. Sub-prime mortgage is granted to borrowers whose credit history is not sufficient to get a conventional mortgage or who do not qualify for market interest rates owing to various risk factors, such as income level, size of the down payment made, credit history, and employment status.

Between 1994 and 2004 the U.S Housing market experienced persistent boom fueled by a host of factors, chiefly sub-prime borrowing. During this period sub-prime borrowing was a major contributor to an increase in home ownership rates and the demand for housing. The overall U.S. home-ownership rate increased from 64 per cent in 1994 (about where it was since 1980) to a peak in 2004 with an all time high of 69.2 per cent.

However, by 2006, a number of factors like, the rising gasoline prices, the Hurricane Katrina, the War in Iraq and Afghanistan, outsourcing and the rising food price due to the global food crisis, led to rising unemployment and decline in business activities. This macro-economic turbulence translated to increasing default by home owners hence increasing foreclosure rates. Rising foreclosure rates coupled with over building during the boom years led to an excess supply of housing, and these in turn led to decline in housing prices. Once housing prices started depreciating moderately in many parts of the U.S., refinancing became more difficult. Some homeowners were unable to re-finance and began to default on loans as their loans reset to higher interest rates and payment amounts. Other homeowners, facing declines in home market value or with limited accumulated equity, chose to stop paying their mortgage. They were essentially "walking away" from the property and allowing foreclosure.

Most importantly, most of the default or foreclosures were sub-prime mortgages. While as at March 2006 the value of U.S. sub-prime mortgages was estimated at $1.3 trillion ,as at March 2007, 16 per cent of these loans were 90-days delinquent or in foreclosure proceedings as of October 2007. By January 2008, the delinquency rate had risen to 21 per cent and by May 2008 it was 25 per cent. Though sub-prime only represent 6.8 percent of the loans outstanding in the U.S, yet they represent 43.0 per cent of the foreclosures during the third quarter of 2007.
The sub-prime mortgage crisis reached a critical stage during the first week of September 2008, characterized by severely contracted liquidity in the global credit markets and insolvency threats to investment banks and other institutions.
Parallel to the concept of sub-prime mortgage problem in the United States is the rife phenomenon of marginal borrowing/lending in Nigeria, whereby investors borrow money from banks to invest in other financial instruments (particularly IPOs of other banks) with the hope of making profit all around. This may have been Nigeria's own "sub-prime" problem version, resulting in an exploding domestic stock market and astounding bank profits without commensurate physical development in the country.

Impact on the Family
The current global financial meltdown seems to have been derived from two human needs that largely drive economic activity in structured societies - homes and energy (with an understandable relationship with human’s basic needs of shelter, food and air). In the United States, foreclosures mean that a lot of families lost their homes. The US Labor Department said that the US lost 533,000 jobs in November 2008, the biggest monthly loss since 1974.

In Nigeria, families who borrowed to invest in stock witnessed their investment collapse in their faces. First they were told it was just a temporary thing that would soon bounce back but the share prices have continued in downward prices. There is continued dearth of infrastructure as government is faced with lack of revenue in view of the dwindling prices of crude oil, Nigerian being a mono-economic nation. As the economy gets worse, food crisis looms. For the working class families, the impact could be in form of job losses, salary cuts, freeze in promotion, unavailability of credit, undue job pressure, etc.

Remedies
The government of the United States of America (USA) has risen to the challenge, rolling out a $700 billion stimulus package to cushion the impact. Following the collapse of the Lehman Brothers, the US government had moved in to safeguard AIG, its pre-eminent insurer. In Europe, the Far East and South East Asia, efforts are on to mitigate the impact of the economic downturn. It would be recalled that in Nigeria however, the apex bank and the Ministry of Finance have been quick to allay worries, noting that the economy is insulated from unfolding events. Recently the Central Bank of Nigeria got banks to review their lending rates and their interest rates.

The Nigerian Government and the Organized Private Sector needs to periodically reappraise the country's level of exposure to the global financial melt down and take steps to safeguard the domestic economy, while seizing the opportunity provided by the development to invest in equities that may yield bumper dividend when the situation turns around.
For the general populace, the following tips may help:
• *Improve your performance (Remain Motivated and seek opportunities aggressively )
• *Sustain your future (Set 2 major Financial Goals)
• *Determine & Monitor your Net worth
• *Form a Cash Backed Reserve
• *Avoid Debt: With astronomical interest rates
• *Live within your means (But enjoy life)
• *Take a Health insurance and a life Insurance
• *Invest in Fixed Income earning asset.
• *Do a Will or a Trust
• *Do a Budget and stick to it meticulously
• *Willfully preserve your cash.
• *Most importantly, be OPTIMISTIC (Do not necessarily worry about the future which you cannot control, but about your ability to make the best out of whatever the future presents at you).

Conclusion
Families face an uncertain economic situation both in the near and far future as a result of the ongoing global and domestic financial crisis. The Nigerian capital market is in tatters at the moment; the banks are struggling, our monoculture of oil continues to bedevil us, resulting in a reported need to repeatedly adjust government expenditure; for example the 2009 budget benchmark price for oil is now set at $45 per barrel, down from 2008's $59. Our foreign reserves situation remains an enigma wrapped in a mystery for now.

One hopes that the government in Abuja - both Executive and the National Legislature – as well as the Nigerian Stock Exchange (NSE), the Securities and Exchange Commission (SEC), the Nigeria Deposit Insurance Corporation (NDIC) and the Central Bank (CBN) will all coordinate their activities and rise to the occasion as has been attempted by various governments around the world, lest our nation gets consigned to another long period of economic wilderness. The admonition in the West is even more apt in the developing countries, that in this new order of globalization, high technology and 24/7 operations, the only option is the infusion of innovative ideas (including new technology), new regulations, and in particular highly-competent (and less mutually chummy) professionals at the NSE, SEC, NDIC and CBN conversant with the management of 21st century financial markets.

Burying our heads in the sand, holding on to the old order of doing business, and mouthing platitudes of complacency, are no options.
-Nnadozie Okolo is a Chartered Accountant working with Deloitte Chartered Accounts Firm, Lagos
By Nnadozie Okolo