Crisis - Lawyers, Rentals and the Vicious Circle

Someone once asked me recently how does the global crisis impact Malaysia. We dont have a subprime problem. We have oil. Why should Malaysia be impacted?

The one thing i have learnt in the last year - everything is connected. I wont talk about slowing exports, drop in oil prices, portfolio funds exiting, the non existent Foreign Direct Investment. All these will impact Malaysia negatively even if our leaders refuse to acknowledge these problems.

I want to show how the world is linked in the most surprising and simple ways.

This is a true conversation and a true story (or at least some parts). Names have been changed of course.

Nick Cheah is a 28 year old Malaysian lawyer. He recently got married to the beautiful Jane Wong who worked for a local investment bank in KL. At their wedding, bathroom conversations revolved around the question - WHY did she marry him? She was too nice for him. She was beautiful and some referred to her as the Baywatch banker for obvious reasons.

A few months after their marriage, Nick got a call from a head hunter who told him that Allen & Payne (a well respected New York law firm) was setting up offices in Singapore. Nick was thrilled. He was flown down to Singapore where he had lunch with Mr Allen himself and the local head, one Ellen Chen, a 37 year old unmarried and stunningly sexy lady with 3 inch heels.

Nick got the job. His wife Jane applied to Citibank Singapore and immediately got the job with minimal effort. They were ecstatic as they were gonna be paid 1.5x what they were earning and more so, it would be in SGD.

Life looked amazing and they decide to stay in the swanky waterside apartments. They decided to pay 7k for a 2000 sq ft apartment. Nick was amazed at how cheap cars were and immediately bot a 3 series BM for 100k sgd. Jane tried convincing Nick to ease off on the spending but Nick felt he needed to keep up appearances at his posh office where a Toyota was the security guards car.

This was Nov 2007.

Now its Nov 2008.

For the last year Nick has been involved in cross border legal work. His primary function is to act as external legal counsel for financial institutions. He had three big clients - StanChart, CSFB and Lehman Brothers. He uses his expense account liberally.

In June, his bosses were pleased with the revenues that Nick had generated and there was talk of him being promoted as he had consistently hit his numbers. He actually exceeded it. But Nick in September was noticing that deals were starting to dry up. Then Lehman went bankrupt and Nick realised that he had outstanding invoices for legal work for the last 6 months. He reported this to his bosses who were less than pleased.

Then OCTOBER came and Nick suddenly got calls from StanChart and CSFB that they were freezing all loan and trading businesses. Nick tried to get as much as his invoices out but StanChart told him that they cant pay the invoices as they need to bill their loan clients who now refuse to pay.

Nick's revenue numbers drop 90% in less than two months. Ellen gets a call not only from Mr Allen but also Mr Payne. They say to Ellen you better be self sustaining or we are shutting you down.

NOVEMBER comes and Ellen has no choice but warns her people that they will be downsizing. Nick is depressed and comes home Nov 18th and finds Jane his wife crying. She works at Citibank and it has just been announced that globally they are firing 52,000 people. Jane has been warned that she will lose her job.

Nick immediately tries to break his lease on his apartment and tries to sell his car. His landlord tells him you will have to pay penalties and his car has dropped in value and cannot cover his outstanding loan.

They both lose their job and have combined 6 mths reserve from their retrenchment. Thankfully Nick finds a job at a local law firm which pays him half his previous salary. Jane cant find a job as all banks have frozen hiring.

They wait till their lease is up and immediately move to 1200 sq feet apartment where they pay rental 3k. They keep the car because the loss on the loan is too big. BUT, they now SAVE and not spend.

>>>>

The above is a story that fictional (to a certain degree) is unfortunately happening. In some cases the Nicks are not finding new jobs. Everything is linked. The reason things are getting so bad is that CREDIT (the money banks lend is freezing).

BANK loses money, they freeze lending. The lawyer who was dependent on the income from banks loses his job security. HE stops spending and rents at a cheaper place. His previous landlord now has to rent at a discount to his loan payments. He stops spending. Sales in stores drop. The salespeople there get laid off. They stop spending. This is the VICIOUS circle and it is happening globally.

What needs to be done?

Rectify the bank's problem as the banks need to perform its function of allocating capital to business and individuals. If the banks cant do it, then alternative forms of financing is needed. One way is to allow greater access for cooperatives to be set up. This is a group of people coming together and pooling capital to grant loans to their members. Currently this is very restrictive.

There are numerous Nick and Jane stories going around. Here's hoping our leaders can understand their pain (although they did deserve some of it) and they really believe that their role is not to serve themselves but to protect Nick and Jane.