The Hong Kong SAR Government was facing a “double-play” by the predators – manipulation and profiteering in the money market and stock market through massive short-selling. It was a critical situation – not only were we confronted with a sharp fall in the stock market and great losses to shareholders, there were also systemic risks to our monetary system and financial markets. Classical economics does not differentiate between big and small markets and assumes that market prices will not be manipulated by just a few players. Reality, however, is different from theory. At that time, the market capitalisation of the Hong Kong stock market was only $ billion, a mere 3% of the New York stock exchange’s $ trillion. The predators were unable and hence did not choose to make their move on the big US markets, but were able to plunder Hong Kong’s mid-sized and open market with impunity. 5. However, on 14 August 1998, with the authorisation of the Hong Kong SAR Government and backed by the war chest of the Exchange Fund, the HKMA intervened in the stock and futures markets through market operation to counteract the double-play by international predators. When the market operation was completed by the end of August, the HKMA had used about $ billion to acquire a vast amount of Hong Kong stocks, propelling the HSI from the pre-operation level of 6,700 points to 7,800 points. 6.
The subprime mortgage crisis precipitated an avalanche that nearly buried many financial institutions with tremendous losses. Obviously, human greed was at play. But this was not a sufficient explanation. Human greed has always existed. Why then had the US financial market sleepwalked toward the brink of collapse? Whenever an asset or credit bubble forms, many bewildered market participants are often of the view that it will be different to previous bubbles, and that the market boom is well supported by fundamentals. “This time is different,” so they say. In my view, the main cause of the market failure and near meltdown of the market was the collective failure of the various “safety valves” that maintain the orderly operation of the market. They include the internal risk control functions of financial institutions, the external discipline imposed by regulators and the ratings assigned by international credit rating agencies (CRAs), etc. In fact, it’s worth noting that many of the subprime mortgage-backed securities and related credit derivatives rampant in the market at that time were assigned the highest AAA rating by the major CRAs. And, according to the general estimates of these agencies, the probability of default within a year for debt instruments with such a rating was near zero (0.000%); while the probability of default within five years was a mere 0.09%. Now, we all know that these CRAs were dead wrong. Many people, including professional and institutional investors, had a misplaced trust in these agencies and underestimated the risks involved. They learnt a painful lesson in 2008/09.