Tuesday March 31, 2009
PETALING JAYA: Key changes are imminent at several local banks which will see the exit (and entry) of prominent bankers even as the global economic woes add to the challenges faced by the country’s finance sector.
According to sources, Bank Pembangunan Malaysia Bhd president and group managing director Datuk Tajuddin Atan is tipped to take over the helm at RHB Banking Group from Michael J. Barrett. It is believed that the appointment has the approval of Bank Negara.
Barrett joined the group in January 2005 as CEO of RHB Bank Bhd and was appointed group managing director of RHB Capital Bhd on Oct 8, 2007. He is currently also group managing director of the RHB Banking Group. His term would expire in June this year, a source said.
The Employees’ Provident Fund owns 57.55% and Abu Dhabi Commercial Bank a 25% interest in the banking group. RHB Capital recently released its financial year 2008 results which showed a 47% year-on-year improvement in net profit to RM1.049bil, in line with estimates. Still, there are concerns that the global economic slowdown may crank up the pressure on the group’s asset quality.
Tajuddin, who has 25 years’ experience in the sector, was CEO of Bank Simpanan Nasional before being appointed to helm Bank Pembangunan on Dec 1, 2007.
It is also widely speculated that EPF head of strategic planning unit Johari Abdul Muid may be appointed chief operating officer of the banking group. “There’s no news or confirmation of that appointment,” a source said.
EPF is under pressure to perform well and provide good returns against a tough operating climate that has seen a drastic fall in equity values. It declared a 4.5% dividend for 2008 versus 5.8% the previous year. It is also believed that Affin Bank Bhd managing director and CEO Datuk Seri Abdul Hamidy Abdul Hafiz’s term will come to an end in June; there is no word yet on whether he will continue heading the bank. Hamidy is also chairman of the Association of Banks in Malaysia.
Affin Bank’s parent company, Affin Holdings Bhd, is the flagship financial services subsidiary of Lembaga Tabung Angkatan Tentera (LTAT), which is its major shareholder.
Hamidy was appointed to the top seat at Affin Bank in June 2003, when the bank was going through a trying time, with rising bad loans that reached a staggering 25%. He has since managed to bring the non-performing loans to a more manageable level of under 5%.
Elsewhere, EON Bank Bhd is also set to have a new boss. In response to a news article, parent company EON Capital Bhd announced that the bank’s CEO Albert Lau Yiong “has indicated his desire to retire from the group” when his term of appointment expires on April 26. Lau is also group CEO and executive director of EON Capital. He has been with the group for more than 24 years.
It is understood that Michael Lor, who heads the bank’s consumer banking business, will be the acting CEO.
According to sources, Lau may have opted to retire for personal reasons. It is generally perceived that he is closely tied to EON Capital’s major shareholder, Rin Kei Mei. The company’s largest shareholder is Hong Kong-based private equity firm Primus Pacific Partners LLP.
http://biz.thestar.com.my/news/story.asp?file=/2009/3/31/business/3590721&sec=business
Tuesday, March 31, 2009
Saturday, March 28, 2009
Safest capital for banks
Saturday March 28, 2009
REGULATORS and investors globally are beginning to look at banks’ shareholders funds as the safest form of capital that the financial institutions may use.
As losses have begun to wipe out shareholders funds, some Western banks now see they make up less than 1% of Tier-1 capital.
Tier-1 capital is widely considered the core measure of a bank’s financial strength, but not when shareholders fund is only 1% of the total, Jupiter Securities Sdn Bhd research head Pong Teng Siew tells StarBizWeek.
According to Pong, the reason for this is partly the use of structured products as Tier-1 capital, also known as innovative Tier-1 capital by some large multinational banks.
“You cannot be operating on structured products as capital. Losses can be absorbed by shareholders funds but not by these structured (products).”
Looking at Malaysian banks, the same problem does not exist with shareholders funds, as defined in the balance sheet, exceeding the total value of Tier-1 capital.
Pong agrees that Malaysian banks, being more conservative, are not facing the same problem and still stand up well in the light of this new benchmark measure.
He points out that Bank Negara in its annual report on Wednesday has expressed similar sentiments.
In fact the central bank mentions that Malaysia has begun using innovative Tier-1 capital instruments as well, although likely to a smaller extent.
“Despite the more active capital management activities by banking institutions in recent years and introduction of more innovative Tier-1 capital instruments, approximately 90% of Tier-1 capital comprised ordinary shares, share premium, statutory reserves, general reserves and retained earnings (net of unaudited losses) less goodwill,” Bank Negara says in its annual report.
As a result of the high use of share capital, the equity to assets ratio of the banking system is at 10% of total risk-weighted assets or 6.8% of total assets. Even for investment banks, the equity to assets ratio remains manageable at 6.9% to 47.7%.
“This still compares favourably with the benchmark used by the US regulators that deem any Tier-1 capital to total assets ratio of more than 3% to 4% as strong.
“Arising from the current crisis, there has been greater emphasis on traditional capital (ordinary shares and reserves) to gauge the capital strength of banking institutions,” Bank Negara says, adding that it will monitor closely international developments in this area.
http://thestar.com.my/news/story.asp?file=/2009/3/28/business/3567560&sec=business
REGULATORS and investors globally are beginning to look at banks’ shareholders funds as the safest form of capital that the financial institutions may use.
As losses have begun to wipe out shareholders funds, some Western banks now see they make up less than 1% of Tier-1 capital.
Tier-1 capital is widely considered the core measure of a bank’s financial strength, but not when shareholders fund is only 1% of the total, Jupiter Securities Sdn Bhd research head Pong Teng Siew tells StarBizWeek.
According to Pong, the reason for this is partly the use of structured products as Tier-1 capital, also known as innovative Tier-1 capital by some large multinational banks.
“You cannot be operating on structured products as capital. Losses can be absorbed by shareholders funds but not by these structured (products).”
Looking at Malaysian banks, the same problem does not exist with shareholders funds, as defined in the balance sheet, exceeding the total value of Tier-1 capital.
Pong agrees that Malaysian banks, being more conservative, are not facing the same problem and still stand up well in the light of this new benchmark measure.
He points out that Bank Negara in its annual report on Wednesday has expressed similar sentiments.
In fact the central bank mentions that Malaysia has begun using innovative Tier-1 capital instruments as well, although likely to a smaller extent.
“Despite the more active capital management activities by banking institutions in recent years and introduction of more innovative Tier-1 capital instruments, approximately 90% of Tier-1 capital comprised ordinary shares, share premium, statutory reserves, general reserves and retained earnings (net of unaudited losses) less goodwill,” Bank Negara says in its annual report.
As a result of the high use of share capital, the equity to assets ratio of the banking system is at 10% of total risk-weighted assets or 6.8% of total assets. Even for investment banks, the equity to assets ratio remains manageable at 6.9% to 47.7%.
“This still compares favourably with the benchmark used by the US regulators that deem any Tier-1 capital to total assets ratio of more than 3% to 4% as strong.
“Arising from the current crisis, there has been greater emphasis on traditional capital (ordinary shares and reserves) to gauge the capital strength of banking institutions,” Bank Negara says, adding that it will monitor closely international developments in this area.
http://thestar.com.my/news/story.asp?file=/2009/3/28/business/3567560&sec=business
World stuck with dollar
Saturday March 28, 2009
THE dollar is, and will remain, the US’ currency and its own and everyone else’s problem.
The idea of creating a global currency, as espoused by China earlier this week, is interesting, has a certain amount of merit and is simply not going to happen any time soon.
The US’ desire for free access to the cookie jar that being the world’s reserve currency represents will be too strong, especially given its need to finance huge amounts of debt reasonably cheaply. As well practicalities are fearsome, even if consensus was more or less there.
Chinese central bank head Zhou Xiaochuan on Monday called for the creation of a new “super-sovereign” global reserve currency, advocating building on an International Monetary Fund instrument called Special Drawing Rights.
Zhou echoed a call by Russia last week, when it indicated it would raise the issue at the upcoming Group of 20 meeting in London on April 2, saying the idea had support from emerging market economies including Brazil, India, South Korea and South Africa.
There is no doubt that the current system breeds instability, but it enjoys the great advantage of entrenchment and sticking with it allows the US, and others, to avoid making hard choices and paying true market prices for their economic decisions.
No surprise then that President Barack Obama knocked the idea down in blunt terms. “I don’t believe that there’s a need for a global currency,” Obama said, terming the dollar “extraordinarily strong right now.”
Exactly. Too strong by some margin, especially when one considers the coming effects of both quantitative easing and a massive long-term need to fund the costs of the debt binge that exploded and the ever increasing bailout to clean up the aftermath.
In fact, you could say the dollar’s “extraordinary” strength can only be fully explained when you take into account the fact that foreign central banks keep piling up huge reserves of the thing and that it is the international medium of exchange for commodities and energy, well really for global trade and financial intermediation.
Treasury Secretary Timothy Geithner said on Wednesday the US dollar is still the world’s reserve currency and will remain so for a long time, but expressed openness to greater use of IMF SDRs.
The dollar’s central role has two main implications, both rather ugly but also very seductive for those involved.
For the US, it’s a bit of a free ride as far as debt financing goes. People buy and hold treasuries more and the US gets cheaper financing that would otherwise be the case. Of course, that’s a bit like an alcoholic bartender getting a discount at work; a real benefit, but not a true one. It also means that even if the US has the will to take away the proverbial punchbowl or drive the dollar down, it doesn’t always have control, as what it does at the short end of the interest rate curve can be confounded by foreign purchases that keep the long end and financing costs down and the dollar up.
The US reserve status also opens up the opportunity for mercantilist countries, like, say China, to keep its own currency cheap, building up huge dollar stocks and force-feeding the American milch cow with cheap credit with which to buy imported goods.
That may not work any more anyway, as all of the cow’s stomachs are full and the milk’s gone thin.
There is a temptation also to build up reserves as protection against bad times and bitter IMF medicine. Many Asian leaders seem to have vowed after 1997 that they would do what was needed, which often included building up dollar reserves, to avoid having to meet an IMF director’s plane at the airport and accept the accompanying prescription.
That rather indicates that the old system, with the US as global reserve currency, is dying, but I doubt it will do so without a fight and with cooperation among nations willing to cede part of their sovereignty, even for a greater good.
It is amazing and encouraging that China speaks of ceding control of a portion of its foreign reserve assets to IMF management, but I have a hard time seeing it happening widely soon.
So, we will have to get through the next year or two without a super-sovereign currency and with global imbalances being worked out, or around, under the current system.
My best guess is that things actually go in the right direction, more or less. The dollar should weaken as a result of US policy even without a deliberate push downhill from the Chinese. Asian exporting nations will see slowing reserve growth generally, which should translate into diminished flows into the dollar and Treasuries.
That’s going to be painful all around. The Chinese and others will see their investments dwindle, even as they have to resist the impulse to sell into the fall. For the US the process of implementing monetary policy and paying for fiscal policy will be made that much more difficult.
So, goodbye and perhaps good riddance to dollar hegemony, but don’t expect a stable system of global cooperation to rise easily and quickly in its place. – Reuters
http://thestar.com.my/news/story.asp?file=/2009/3/28/business/3575268&sec=business
THE dollar is, and will remain, the US’ currency and its own and everyone else’s problem.
The idea of creating a global currency, as espoused by China earlier this week, is interesting, has a certain amount of merit and is simply not going to happen any time soon.
The US’ desire for free access to the cookie jar that being the world’s reserve currency represents will be too strong, especially given its need to finance huge amounts of debt reasonably cheaply. As well practicalities are fearsome, even if consensus was more or less there.
Chinese central bank head Zhou Xiaochuan on Monday called for the creation of a new “super-sovereign” global reserve currency, advocating building on an International Monetary Fund instrument called Special Drawing Rights.
Zhou echoed a call by Russia last week, when it indicated it would raise the issue at the upcoming Group of 20 meeting in London on April 2, saying the idea had support from emerging market economies including Brazil, India, South Korea and South Africa.
There is no doubt that the current system breeds instability, but it enjoys the great advantage of entrenchment and sticking with it allows the US, and others, to avoid making hard choices and paying true market prices for their economic decisions.
No surprise then that President Barack Obama knocked the idea down in blunt terms. “I don’t believe that there’s a need for a global currency,” Obama said, terming the dollar “extraordinarily strong right now.”
Exactly. Too strong by some margin, especially when one considers the coming effects of both quantitative easing and a massive long-term need to fund the costs of the debt binge that exploded and the ever increasing bailout to clean up the aftermath.
In fact, you could say the dollar’s “extraordinary” strength can only be fully explained when you take into account the fact that foreign central banks keep piling up huge reserves of the thing and that it is the international medium of exchange for commodities and energy, well really for global trade and financial intermediation.
Treasury Secretary Timothy Geithner said on Wednesday the US dollar is still the world’s reserve currency and will remain so for a long time, but expressed openness to greater use of IMF SDRs.
The dollar’s central role has two main implications, both rather ugly but also very seductive for those involved.
For the US, it’s a bit of a free ride as far as debt financing goes. People buy and hold treasuries more and the US gets cheaper financing that would otherwise be the case. Of course, that’s a bit like an alcoholic bartender getting a discount at work; a real benefit, but not a true one. It also means that even if the US has the will to take away the proverbial punchbowl or drive the dollar down, it doesn’t always have control, as what it does at the short end of the interest rate curve can be confounded by foreign purchases that keep the long end and financing costs down and the dollar up.
The US reserve status also opens up the opportunity for mercantilist countries, like, say China, to keep its own currency cheap, building up huge dollar stocks and force-feeding the American milch cow with cheap credit with which to buy imported goods.
That may not work any more anyway, as all of the cow’s stomachs are full and the milk’s gone thin.
There is a temptation also to build up reserves as protection against bad times and bitter IMF medicine. Many Asian leaders seem to have vowed after 1997 that they would do what was needed, which often included building up dollar reserves, to avoid having to meet an IMF director’s plane at the airport and accept the accompanying prescription.
That rather indicates that the old system, with the US as global reserve currency, is dying, but I doubt it will do so without a fight and with cooperation among nations willing to cede part of their sovereignty, even for a greater good.
It is amazing and encouraging that China speaks of ceding control of a portion of its foreign reserve assets to IMF management, but I have a hard time seeing it happening widely soon.
So, we will have to get through the next year or two without a super-sovereign currency and with global imbalances being worked out, or around, under the current system.
My best guess is that things actually go in the right direction, more or less. The dollar should weaken as a result of US policy even without a deliberate push downhill from the Chinese. Asian exporting nations will see slowing reserve growth generally, which should translate into diminished flows into the dollar and Treasuries.
That’s going to be painful all around. The Chinese and others will see their investments dwindle, even as they have to resist the impulse to sell into the fall. For the US the process of implementing monetary policy and paying for fiscal policy will be made that much more difficult.
So, goodbye and perhaps good riddance to dollar hegemony, but don’t expect a stable system of global cooperation to rise easily and quickly in its place. – Reuters
http://thestar.com.my/news/story.asp?file=/2009/3/28/business/3575268&sec=business
Monday, March 23, 2009
Banks give advice on appropriate risk management
Monday March 23, 2009
BANKS have turned cautious on trade financing for which demand has dropped by as much as 70% in certain cases.
While these facilities remain largely available, banks are requiring customers to be more aware of the factors that could affect the viability of their business plans.
According to HSBC Bank Malaysia Bhd director (trade and supply chain) Vivek Gupta, the bank has been extending trade finance as usual but with additional advice on appropriate risk management.
“Clients need to understand and anticipate much better than ever before in this challenging economic climate. They need to be aware of the changes in foreign exchange, bank and country risks and impact of falling demand on their cashflows.
“Enlightened clients engage effectively with banks and gain easier access to trade financing,” he told StarBiz.
In line with the slowdown in business, banks are also expected to experience a decreased demand for trade financing.
Gupta said the sluggish business environment was due to lower demand in terms of the number of units sold and the plunge in global commodity prices.
“Consequently, customers do not require as much working capital now as they used to before the financial crisis,” he said.
“Generally, for customers dealing in commodities, the average trade financing required from banks has now fallen by 60% to 70% from peak requirements,” he said.
Citi Malaysia head of treasury and trade solutions, global transaction services, Noel Saminathan, said trade financing for established exporters would remain available under the current sluggish economic conditions.
“Banks continue to assess applications based on viability of business plans, which among others, take into account the health of the export markets. Trade financing will continue to be offered competitively, yet prudently, by banks,” he said.
He added that export credit insurance could also help exporters improve the risk profile of their cashflow to gain better financing terms from banks.
“Global banks have the ability to assess and assume cross-border risks through our international networks. Risk premiums have risen generally across the world and we expect costs for credit protection to be elevated for the rest of the year,” he said.
Saminathan said credit costs were reflective of risk premiums, besides underlying cost of funds.
“The difficult interbank credit markets globally have increased costs for financing in international currencies but local currency financing remains less affected.
“Trade financing costs for medium to large Malaysian companies are among the most competitive in the Asia-Pacific region,” he said.
OCBC Bank (M) Bhd head of global trade finance, group transaction banking, Chuang Boon Kheng said that although trade financing in terms of letters of credit and pre-shipment financing were among the core products of banks, customers’ needs now might be skewed towards credit enhancement and credit protection solutions.
“Customers’ need for trade financing may have slipped since the financial turmoil due to reduction in orders while manufacturing companies may be resorting to ‘just in time’ inventory control practices.
“But we believe that in any economic environment, there will be industries that flourish and new enterprises will emerge with viable business plans. At the same time, there will be industries that might face a tougher operating environment and businesses that fail to plan for their survival.
“Individual banks will have their own target segments and expertise to continue to support viable enterprises,” she said.
Recently customers seemed to have regained confidence following the various positive initiatives put in place by the Government, Chuang said.
“We have seen customers start to order consumables, necessities and spare parts in small quantities from the start of this month. However, the volume of trade financing may not be there due to an ease in (product and commodity) prices,” she said.
· About 90% of world trade valued at US$14 trillion is funded via trade finance.
· Trade finance is also needed to bridge the gap between the time exporters deliver the products and receive payment from buyers.
· The most common trade finance facility is the letter of credit (LC) that includes pre-shipment finance, post-shipment finance and import finance.
http://thestar.com.my/news/story.asp?file=/2009/3/23/business/3465379&sec=business
Thursday, February 12, 2009
Syarikat Takaful outsources IT infrastructure ops to HP
12 February 2009 Business Times
SYARIKAT Takaful Malaysia Bhd (STMB) has outsourced its information-technology (IT) infrastructure operations management services to Hewlett-Packard (HP) in a RM12 million deal. The move is part of STMB's strategy to be the country's leading takaful operator, said group managing director Datuk Hassan Kamil.
Under the three-year contract, STMB aims to enhance service deliveries and ensure faster product launches.
It will also help the company focus on its core competency of delivering insurance services.
Both companies sealed the agreement in Kuala Lumpur yesterday. Also present was STMB's chairman Tan Sri Hadenan Jalil and HP's managing director TF Chong.
HP was among three companies that participated in a tender for the project.
Using HP's expertise, Hassan said, will enable STMB to align its IT cost with actual usage, enhance service levels to its business and improve utilisation of computing resources.
Meanwhile, Hassan said STMB is on track to meet its gross premium target for the year ending June 2009 despite the sluggish economy.
http://global.factiva.com/ga/default.aspx
SYARIKAT Takaful Malaysia Bhd (STMB) has outsourced its information-technology (IT) infrastructure operations management services to Hewlett-Packard (HP) in a RM12 million deal. The move is part of STMB's strategy to be the country's leading takaful operator, said group managing director Datuk Hassan Kamil.
Under the three-year contract, STMB aims to enhance service deliveries and ensure faster product launches.
It will also help the company focus on its core competency of delivering insurance services.
Both companies sealed the agreement in Kuala Lumpur yesterday. Also present was STMB's chairman Tan Sri Hadenan Jalil and HP's managing director TF Chong.
HP was among three companies that participated in a tender for the project.
Using HP's expertise, Hassan said, will enable STMB to align its IT cost with actual usage, enhance service levels to its business and improve utilisation of computing resources.
Meanwhile, Hassan said STMB is on track to meet its gross premium target for the year ending June 2009 despite the sluggish economy.
http://global.factiva.com/ga/default.aspx
Saturday, December 27, 2008
Overdrawn! Global credit crisis continues to unfold
Overdrawn!
As the global credit crisis continues to unfold at a rapid pace, the leading commentators ask how much more is to come
By Madeleine Heffernan
Warren Buffett says buy shares now. The 78-year-old American billionaire investor says he is buying US stocks for his personal account. 'A simple rule dictates my buying: Be fearful when others are greedy and be greedy when others are fearful.' But even Buffet's recent opinion piece in The New York Times hasn't been enough to persuade investors to re-enter the market.
Perhaps investors were getting their clues from another billionaire mogul, media owner Rupert Murdoch. The News Corporation chief says the global financial crisis has left no sector untouched. Shares in News Corporation have lost 60 per cent in the past year. That situation could just as easily change in a heartbeat, given the incredibly rapid pace with which the current global credit crisis has played out.
Observing the trigger points that have caused it and the subsequent effect on markets, the banking system and governments has put even the best observers through their paces. Even the usual prediction gurus have been left reeling by the gathering momentum.
For many investors, it is a case of continuing to keep an eagle and wary eye on the daily rollercoaster ride of the share market as the complex and intertwined global credit squeeze continues to play out. But, the question on a much broader range of lips is where will it take us next? All we can work with in that regard is what has been publicly disclosed so far.
The International Monetary Fund (IMF) recently estimated the crisis would cost US$1.4 trillion, about the same figure quoted by National Australia Bank CEO John Stewart back in July. Since then, banks across the world have reported losses of more than US$500 billion, and more than $US500 billion of public money has been granted to the banks and the US government-sponsored lending entities Fannie Mae and Freddie Mac.
The banks have also raised in excess of US$300 million from private investors, but Stewart believes there's plenty more of the same to come. Stewart, the outgoing CEO at NAB, forecasts banks will need to raise capital 'by the shovelful' over the next two years. He also says the investment banking model we once knew is gone, and he predicts that banks will be nowhere near as geared as they once were.
The US$1.4 trillion damage estimate is all the more remarkable because it was less than a year ago that Australian investors were drunk on the commodities boom, pushing the ASX200 to above 6800 points.
Nowadays, the index is following the wild gyrations on the US market and has more than once dived below the psychological barrier of 4000 points. Long gone are concerns over the 'inflation genie', monitoring CPI has instead taken the back seat to mitigating a slowdown at best, or recession at worst.
According to Alan Kohler, leading financial commentator of The Eureka Report, now that 'central banks and governments are the only buyers of risk assets, banks are being nationalised and / or governments are forced to guarantee their deposits. A long and deep global recession seems assured and free-market capitalism itself seems to be collapsing'.
He foresees the likelihood of a re-regulated banking system, as people revolt against the use of taxpayers' funds to bail out the mistakes of publicly listed companies. Big banks are likely to emerge stronger, as we saw with the Commonwealth Bank of Australia snapping up the Halifax Bank of Scotland's (HBOS) Australian unit BankWest for a bargain basement price, and the vultures are circling Suncorp's banking and wealth management arms.
Some are even talking about the removal of the Four Pillars system, which maintains the separation of the four largest banks in Australia by not allowing their merger or acquisition by any of the other four, saying competition is less important than survival.
In order to make some sense of it all, it's worth revisiting how 'a US housing problem' transformed firstly into a credit crunch, and later into a global financial crisis, with the possibility of a recession still looming large.
The global financial crisis can be traced back to the late 1990s, when the Clinton administration wanted to boost the level of home ownership among minorities and people on low incomes. The administration amended an act introduced in the 1970s by former president Jimmy Carter which loosened lending requirements in a bid to boost house ownership among minorities.
The 1999 amendment allowed Fannie Mae, which purchases loans made by banks on the secondary market, to soften the credit requirements on loans it purchased from banks and others lenders. This decision by the largest underwriter of home mortgages paved the way for people who did not qualify for conventional mortgages, those with a limited credit history, low or no incomes, or a history of bankruptcy, the opportunity to get a home loan.
The emergence of the so-called sub-prime loan also gave a shot in the arm to Fannie Mae's stock price and allowed banks, mortgages institutions and thrift institutions to widen their home-loan net.
According to The New York Times, the Fannie Mae sub-prime pilot program gave borrowers an interest rate one percentage point higher on a mortgage of less than US$240,000 than a regular, 30-year, fixed-rate mortgage.
The rate would drop after two years if the person made the appropriate monthly payments. Spurred by an ease of access and historically low interest rates, the US Federal Reserve cut rates to 1 per cent after the 11 September 2001 terror attacks on New York's twin towers in a bid to stimulate economic activity.
The US housing market soared 86 per cent from 2000, peaking in 2006 and 2007. Sub-prime lending ballooned, making US$625 billion in 2006, or one-quarter of all new mortgages.
From sub-prime we moved to Alt-A or self-verification loans, where applicants stated their assets and income, and then to NINJA loans, which were given to people with no income, jobs or assets. The rise in house values encouraged people to draw from their mortgages to use the equity they believed they had gained in their homes. But as with all bubbles, it eventually burst.
Rising interest rates, from 1 per cent to 5.35 per cent between 2004 and 2006, pressured home owners. Defaults and foreclosures started to rise to record levels as borrowers (particularly the NINJA borrowers) realised they could no longer afford their repayments once the introductory interest rates were phased out. Default and foreclosure levels soared, pushing down house prices by as much as 40 per cent and creating ghost towns across a number of US states.
Officials in California were, ironically, faced with a mosquito infestation problem because of stagnant swimming pools in abandoned homes. A recent article in The Wall Street Journal stated that one in six US home owners is paying more on their mortgage than their house was actually worth.
And as people defaulted on their loans on a wide scale, mortgage and loans groups throughout the US went bust. One key difference between sub-prime lenders and traditional banks was that most sub-prime lenders were financed by investors on Wall Street rather than through deposits.
With sub-prime, the mortgage assets alongside other loans, bonds and assets were bundled into portfolios (residential mortgage-backed securities or RMBS) and sold to investment banks, superannuation funds and hedge funds throughout the world. And many of these mortgages were placed into the asset pools that backed securities, called collateralised debt obligations (CDOs).
Fear spread as people wondered whether the RMBS were prime or sub-prime, toxic or otherwise. This fear encouraged banks to begin hoarding cash and stop lending to companies, to individuals and to each other. The 'credit crunch' had emerged and it was no longer just a US problem.
Debt was harder to find and more expensive. In a credit-constrained environment, highly leveraged companies such as Australia's Centro Property Group, Allco Finance Group and Babcock & Brown were burned.
Perhaps the first sign of big trouble was New Century Financial, which specialised in sub-prime mortgage, filing for Chapter 11 bankruptcy protection in April 2007. But a real shock to the system was in July 2008, when investment giant Bear Stearns told investors to expect to see little, if any, of the money invested in two of its hedge funds.
This prompted Federal Reserve chairman Ben Bernanke to warn that the sub-prime crisis could cost up to US$100 billion. That the credit crunch had travelled abroad was confirmed in August 2007, when French bank BNP Paribas noted the 'complete evaporation of liquidity' in the market and told investors they could not take money out of two of its funds.
One by one, sub-prime losses emerged from the US and Europe: UBS, Bear Stearns, Wachovia, Citigroup, Merrill Lynch, Credit Suisse and Barclays were among those reporting billion-dollar write downs.
Some investment banks put their hands out to sovereign wealth funds, such as Singapore's Temasek, the Qatar Investment Authority and the China Investment Corporation, but unfortunately for the cashed-up, government-owned companies, these investments did not pay off. Sovereign wealth funds are estimated to have lost US$30 billion on their investments in western banks.
Because of the massive writedowns, the banks could not lend as they used to. Inter-bank lending rates surged. Economic growth was sliced. The commercial paper market slumped. There was a clear indication that it was hard for even strong companies to fund their daily needs. Sharemarkets around the world dived.
Those who most aggressively repackaged sub-prime loans, such as Bear Stearns and Lehman Brothers in the US, were the worst hit.
Investment banks faltered under the weight of toxic real estate and securities, and one by one they have fallen. Bear has been forced into a shotgun marriage with JP Morgan Chase, Lehmans was allowed to fall, and Bank of America took over Merrill Lynch for US$50 billion.
This leaves Goldman Sachs and Morgan Stanley as the last two standing, but they too will desert the shadow banking system for the traditional banking system.
Some companies were deemed too big to fail: Fannie Mae, Freddie Mac and AIG, America's largest insurance group. Others, such as Lehman Brothers, HBOS, and Washington Mutual, were not.
While central banks and banking authorities had been tinkering around the edges, cutting rates here and pumping billions into the banking system, the US Government tried to stop the rot with a US$700 billion bail-out package.
It sought to buy up Wall Street's 'toxic' assets and boost confidence in the financial system by separating the good assets from the bad. Major western economies also moved to guarantee bank deposits.
The central banks and governments in the US and Europe are now taking equity in banks and guaranteeing inter-bank loans. The UK Government said it would make £400 billion of capital available to eight of the UK's biggest banks and building societies in return for preference shares.
Back to Australia, and the Reserve Bank has cut interest rates by two percentage points (at the time of writing). The Australian government has unveiled a $10.4 billion stimulus package and said it would guarantee bank deposits for three years and has lent its AAA rating to Australian banks to facilitate term wholesale funding.
We're yet to deal with the massive credit default market, which some believe will cause problems greater than those caused by sub-prime. Kohler sees difficult years ahead for the banking, resource and retail sectors, but advises investors to not lose hope. 'These are the times when great fortunes are made, but they are always made at the expense of those who have given up,' he says.
According to Robert Gottliebsen, The Eureka Report columnist, an American downturn will last for at least two years, perhaps three or four. He thinks global banks are still harbouring 'enormous losses' that have not been disclosed to shareholders.
A loss of confidence prompted by further writedowns, plus the need to raise more capital, will see bank shares under pressure for some time, he says. And the removal of the government guarantee on deposits and lending in a few years will also hurt smaller lenders.
Morgan Stanley economist Gerard Minack, who had previously warned the ASX 200 would drop to 3500 and the housing market would fall, is now advocating investors dust themselves off and pick up some bargains.
The 'risk reward now favours buying risk assets,' he says. But Minack too warns of a few troubling years ahead. 'We have a potentially deep recession ahead of us, against the backdrop of unprecedented pressure for the financial sector to deliver.
But, whether fortune favours the brave in times of economic downturn, we are likely to be closely observing the daily unfolding of the current credit crunch for some time to come and picking over the likely ongoing impacts on an unprecedented global scale.
INTHEBLACK
Reference: December 2008, volume 78:11, p. 28-31
As the global credit crisis continues to unfold at a rapid pace, the leading commentators ask how much more is to come
By Madeleine Heffernan
Warren Buffett says buy shares now. The 78-year-old American billionaire investor says he is buying US stocks for his personal account. 'A simple rule dictates my buying: Be fearful when others are greedy and be greedy when others are fearful.' But even Buffet's recent opinion piece in The New York Times hasn't been enough to persuade investors to re-enter the market.
Perhaps investors were getting their clues from another billionaire mogul, media owner Rupert Murdoch. The News Corporation chief says the global financial crisis has left no sector untouched. Shares in News Corporation have lost 60 per cent in the past year. That situation could just as easily change in a heartbeat, given the incredibly rapid pace with which the current global credit crisis has played out.
Observing the trigger points that have caused it and the subsequent effect on markets, the banking system and governments has put even the best observers through their paces. Even the usual prediction gurus have been left reeling by the gathering momentum.
For many investors, it is a case of continuing to keep an eagle and wary eye on the daily rollercoaster ride of the share market as the complex and intertwined global credit squeeze continues to play out. But, the question on a much broader range of lips is where will it take us next? All we can work with in that regard is what has been publicly disclosed so far.
The International Monetary Fund (IMF) recently estimated the crisis would cost US$1.4 trillion, about the same figure quoted by National Australia Bank CEO John Stewart back in July. Since then, banks across the world have reported losses of more than US$500 billion, and more than $US500 billion of public money has been granted to the banks and the US government-sponsored lending entities Fannie Mae and Freddie Mac.
The banks have also raised in excess of US$300 million from private investors, but Stewart believes there's plenty more of the same to come. Stewart, the outgoing CEO at NAB, forecasts banks will need to raise capital 'by the shovelful' over the next two years. He also says the investment banking model we once knew is gone, and he predicts that banks will be nowhere near as geared as they once were.
The US$1.4 trillion damage estimate is all the more remarkable because it was less than a year ago that Australian investors were drunk on the commodities boom, pushing the ASX200 to above 6800 points.
Nowadays, the index is following the wild gyrations on the US market and has more than once dived below the psychological barrier of 4000 points. Long gone are concerns over the 'inflation genie', monitoring CPI has instead taken the back seat to mitigating a slowdown at best, or recession at worst.
According to Alan Kohler, leading financial commentator of The Eureka Report, now that 'central banks and governments are the only buyers of risk assets, banks are being nationalised and / or governments are forced to guarantee their deposits. A long and deep global recession seems assured and free-market capitalism itself seems to be collapsing'.
He foresees the likelihood of a re-regulated banking system, as people revolt against the use of taxpayers' funds to bail out the mistakes of publicly listed companies. Big banks are likely to emerge stronger, as we saw with the Commonwealth Bank of Australia snapping up the Halifax Bank of Scotland's (HBOS) Australian unit BankWest for a bargain basement price, and the vultures are circling Suncorp's banking and wealth management arms.
Some are even talking about the removal of the Four Pillars system, which maintains the separation of the four largest banks in Australia by not allowing their merger or acquisition by any of the other four, saying competition is less important than survival.
In order to make some sense of it all, it's worth revisiting how 'a US housing problem' transformed firstly into a credit crunch, and later into a global financial crisis, with the possibility of a recession still looming large.
The global financial crisis can be traced back to the late 1990s, when the Clinton administration wanted to boost the level of home ownership among minorities and people on low incomes. The administration amended an act introduced in the 1970s by former president Jimmy Carter which loosened lending requirements in a bid to boost house ownership among minorities.
The 1999 amendment allowed Fannie Mae, which purchases loans made by banks on the secondary market, to soften the credit requirements on loans it purchased from banks and others lenders. This decision by the largest underwriter of home mortgages paved the way for people who did not qualify for conventional mortgages, those with a limited credit history, low or no incomes, or a history of bankruptcy, the opportunity to get a home loan.
The emergence of the so-called sub-prime loan also gave a shot in the arm to Fannie Mae's stock price and allowed banks, mortgages institutions and thrift institutions to widen their home-loan net.
According to The New York Times, the Fannie Mae sub-prime pilot program gave borrowers an interest rate one percentage point higher on a mortgage of less than US$240,000 than a regular, 30-year, fixed-rate mortgage.
The rate would drop after two years if the person made the appropriate monthly payments. Spurred by an ease of access and historically low interest rates, the US Federal Reserve cut rates to 1 per cent after the 11 September 2001 terror attacks on New York's twin towers in a bid to stimulate economic activity.
The US housing market soared 86 per cent from 2000, peaking in 2006 and 2007. Sub-prime lending ballooned, making US$625 billion in 2006, or one-quarter of all new mortgages.
From sub-prime we moved to Alt-A or self-verification loans, where applicants stated their assets and income, and then to NINJA loans, which were given to people with no income, jobs or assets. The rise in house values encouraged people to draw from their mortgages to use the equity they believed they had gained in their homes. But as with all bubbles, it eventually burst.
Rising interest rates, from 1 per cent to 5.35 per cent between 2004 and 2006, pressured home owners. Defaults and foreclosures started to rise to record levels as borrowers (particularly the NINJA borrowers) realised they could no longer afford their repayments once the introductory interest rates were phased out. Default and foreclosure levels soared, pushing down house prices by as much as 40 per cent and creating ghost towns across a number of US states.
Officials in California were, ironically, faced with a mosquito infestation problem because of stagnant swimming pools in abandoned homes. A recent article in The Wall Street Journal stated that one in six US home owners is paying more on their mortgage than their house was actually worth.
And as people defaulted on their loans on a wide scale, mortgage and loans groups throughout the US went bust. One key difference between sub-prime lenders and traditional banks was that most sub-prime lenders were financed by investors on Wall Street rather than through deposits.
With sub-prime, the mortgage assets alongside other loans, bonds and assets were bundled into portfolios (residential mortgage-backed securities or RMBS) and sold to investment banks, superannuation funds and hedge funds throughout the world. And many of these mortgages were placed into the asset pools that backed securities, called collateralised debt obligations (CDOs).
Fear spread as people wondered whether the RMBS were prime or sub-prime, toxic or otherwise. This fear encouraged banks to begin hoarding cash and stop lending to companies, to individuals and to each other. The 'credit crunch' had emerged and it was no longer just a US problem.
Debt was harder to find and more expensive. In a credit-constrained environment, highly leveraged companies such as Australia's Centro Property Group, Allco Finance Group and Babcock & Brown were burned.
Perhaps the first sign of big trouble was New Century Financial, which specialised in sub-prime mortgage, filing for Chapter 11 bankruptcy protection in April 2007. But a real shock to the system was in July 2008, when investment giant Bear Stearns told investors to expect to see little, if any, of the money invested in two of its hedge funds.
This prompted Federal Reserve chairman Ben Bernanke to warn that the sub-prime crisis could cost up to US$100 billion. That the credit crunch had travelled abroad was confirmed in August 2007, when French bank BNP Paribas noted the 'complete evaporation of liquidity' in the market and told investors they could not take money out of two of its funds.
One by one, sub-prime losses emerged from the US and Europe: UBS, Bear Stearns, Wachovia, Citigroup, Merrill Lynch, Credit Suisse and Barclays were among those reporting billion-dollar write downs.
Some investment banks put their hands out to sovereign wealth funds, such as Singapore's Temasek, the Qatar Investment Authority and the China Investment Corporation, but unfortunately for the cashed-up, government-owned companies, these investments did not pay off. Sovereign wealth funds are estimated to have lost US$30 billion on their investments in western banks.
Because of the massive writedowns, the banks could not lend as they used to. Inter-bank lending rates surged. Economic growth was sliced. The commercial paper market slumped. There was a clear indication that it was hard for even strong companies to fund their daily needs. Sharemarkets around the world dived.
Those who most aggressively repackaged sub-prime loans, such as Bear Stearns and Lehman Brothers in the US, were the worst hit.
Investment banks faltered under the weight of toxic real estate and securities, and one by one they have fallen. Bear has been forced into a shotgun marriage with JP Morgan Chase, Lehmans was allowed to fall, and Bank of America took over Merrill Lynch for US$50 billion.
This leaves Goldman Sachs and Morgan Stanley as the last two standing, but they too will desert the shadow banking system for the traditional banking system.
Some companies were deemed too big to fail: Fannie Mae, Freddie Mac and AIG, America's largest insurance group. Others, such as Lehman Brothers, HBOS, and Washington Mutual, were not.
While central banks and banking authorities had been tinkering around the edges, cutting rates here and pumping billions into the banking system, the US Government tried to stop the rot with a US$700 billion bail-out package.
It sought to buy up Wall Street's 'toxic' assets and boost confidence in the financial system by separating the good assets from the bad. Major western economies also moved to guarantee bank deposits.
The central banks and governments in the US and Europe are now taking equity in banks and guaranteeing inter-bank loans. The UK Government said it would make £400 billion of capital available to eight of the UK's biggest banks and building societies in return for preference shares.
Back to Australia, and the Reserve Bank has cut interest rates by two percentage points (at the time of writing). The Australian government has unveiled a $10.4 billion stimulus package and said it would guarantee bank deposits for three years and has lent its AAA rating to Australian banks to facilitate term wholesale funding.
We're yet to deal with the massive credit default market, which some believe will cause problems greater than those caused by sub-prime. Kohler sees difficult years ahead for the banking, resource and retail sectors, but advises investors to not lose hope. 'These are the times when great fortunes are made, but they are always made at the expense of those who have given up,' he says.
According to Robert Gottliebsen, The Eureka Report columnist, an American downturn will last for at least two years, perhaps three or four. He thinks global banks are still harbouring 'enormous losses' that have not been disclosed to shareholders.
A loss of confidence prompted by further writedowns, plus the need to raise more capital, will see bank shares under pressure for some time, he says. And the removal of the government guarantee on deposits and lending in a few years will also hurt smaller lenders.
Morgan Stanley economist Gerard Minack, who had previously warned the ASX 200 would drop to 3500 and the housing market would fall, is now advocating investors dust themselves off and pick up some bargains.
The 'risk reward now favours buying risk assets,' he says. But Minack too warns of a few troubling years ahead. 'We have a potentially deep recession ahead of us, against the backdrop of unprecedented pressure for the financial sector to deliver.
But, whether fortune favours the brave in times of economic downturn, we are likely to be closely observing the daily unfolding of the current credit crunch for some time to come and picking over the likely ongoing impacts on an unprecedented global scale.
INTHEBLACK
Reference: December 2008, volume 78:11, p. 28-31
Thursday, October 9, 2008
Gold prices climb as investors seek safe-haven
Wednesday October 8, 2008 MYT 12:16:31 PM
NEW YORK: Gold prices kept rising Tuesday, approaching US$900 an ounce after another day of turmoil in financial markets encouraged buying of safe-haven assets. Silver also rose.
Investors remained skittish even after the Federal Reserve announced it would ramp up emergency efforts to clear obstructed credit markets and revive the economy.
The central bank said it would buy massive amounts of short-term commercial debt and in a speech Tuesday, Fed Chairman Ben Bernanke hinted that it might cut interests rates as well.
The measures, which follow last Friday's approval of a $700 billion financial bailout, failed to console Wall Street.
The Dow Jones industrials fell more than 500 points.
With few safe places to put money, investors flocked to gold.
The December contract jumped $15.80 to settle at $882 an ounce on the New York Mercantile Exchange, after earlier rising as high as $893.70.
On Monday, gold shot up $33 to $866.2 an ounce.
Gold, long considered an attractive investment during rough economic times, has seen a resurgence of late as the spreading credit crisis weighs down equity markets across the globe.
"This bailout plan has not been the magic bullet that many people hoped it would, so gold is catching some of the safe-haven bid from that,'' said Matt Zeman, head trader at LaSalle Futures in Chicago.
December silver rose 9.5 cents to settle at $11.38 an ounce on the Nymex, while December copper fell 15.55 cents to settle at $2.5345 a pound.
A slightly weaker dollar Tuesday also supported gold.
A falling greenback encourages investors to buy precious metals as a hedge against inflation or weakness in the U.S. currency.
In energy markets, oil prices rebounded from the previous day's big drop as investors halted selling to see whether the economic bailout can gain traction and stem a widening global downturn.
Light, sweet crude for November delivery rose $2.25 to settle at $90.06 a barrel on the Nymex, after earlier trading as high as $93.02.
In other Nymex trading, heating oil rose 3.17 cents to settle at $2.5057 a gallon, while gasoline futures rose less than half a penny to settle at $2.0628.
In agriculture trading, major grain prices traded mixed on the Chicago Board of Trade.
Wheat for December delivery rose 8 cents to settle at $6.0325 a bushel, while December corn fell 7 cents to settle at $4.17 a bushel.
November soybeans added 4 cents to settle at $9.26 a bushel.
http://thestar.com.my/news/story.asp?file=/2008/10/8/business/20081008083918&sec=business
NEW YORK: Gold prices kept rising Tuesday, approaching US$900 an ounce after another day of turmoil in financial markets encouraged buying of safe-haven assets. Silver also rose.
Investors remained skittish even after the Federal Reserve announced it would ramp up emergency efforts to clear obstructed credit markets and revive the economy.
The central bank said it would buy massive amounts of short-term commercial debt and in a speech Tuesday, Fed Chairman Ben Bernanke hinted that it might cut interests rates as well.
The measures, which follow last Friday's approval of a $700 billion financial bailout, failed to console Wall Street.
The Dow Jones industrials fell more than 500 points.
With few safe places to put money, investors flocked to gold.
The December contract jumped $15.80 to settle at $882 an ounce on the New York Mercantile Exchange, after earlier rising as high as $893.70.
On Monday, gold shot up $33 to $866.2 an ounce.
Gold, long considered an attractive investment during rough economic times, has seen a resurgence of late as the spreading credit crisis weighs down equity markets across the globe.
"This bailout plan has not been the magic bullet that many people hoped it would, so gold is catching some of the safe-haven bid from that,'' said Matt Zeman, head trader at LaSalle Futures in Chicago.
December silver rose 9.5 cents to settle at $11.38 an ounce on the Nymex, while December copper fell 15.55 cents to settle at $2.5345 a pound.
A slightly weaker dollar Tuesday also supported gold.
A falling greenback encourages investors to buy precious metals as a hedge against inflation or weakness in the U.S. currency.
In energy markets, oil prices rebounded from the previous day's big drop as investors halted selling to see whether the economic bailout can gain traction and stem a widening global downturn.
Light, sweet crude for November delivery rose $2.25 to settle at $90.06 a barrel on the Nymex, after earlier trading as high as $93.02.
In other Nymex trading, heating oil rose 3.17 cents to settle at $2.5057 a gallon, while gasoline futures rose less than half a penny to settle at $2.0628.
In agriculture trading, major grain prices traded mixed on the Chicago Board of Trade.
Wheat for December delivery rose 8 cents to settle at $6.0325 a bushel, while December corn fell 7 cents to settle at $4.17 a bushel.
November soybeans added 4 cents to settle at $9.26 a bushel.
http://thestar.com.my/news/story.asp?file=/2008/10/8/business/20081008083918&sec=business
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