| Written by Free Enterprise / Jean d’Orival |
| Thursday, 16 April 2009 19:51 |
 THE good thing in a revolution is that it destroys myths and removes polluting players.If there is something we have learned (or relearned) from the current global crisis, it is that liquidity and funding capabilities are major risks to be analyzed before making any investment decision. When I started in the capital markets back in 1984 , that is the first thing you were taught. However basic, these investment criteria have been largely forgotten or ignored by the investment banks and hedge funds. The investment-bank model is dead THE world was shocked when Bear Stearns collapsed in March 2008. Then came the Lehman Brothers bankruptcy (the largest in US history) that sent shockwaves and threatened the world financial system in September 2008. This was followed by the collapse of Merrill Lynch and the quasi-collapse of Morgan Stanley. The world suddenly (and sadly, too late) realized that these banks were built on fragile and shaky grounds. What did all these banks have in common? • A low capitalization (compared with the massive risks they were taking); • Highly leveraged balance sheets; • A small and undiversified deposit base; • A large exposure on illiquid products; • Large funding needs; and • An overreliance on money markets for funding. They were structuring huge and complex deals, forcing them—sometimes willingly—to hold large positions of papers like lower-rated mortgage-backed securities while waiting to find buyers. These positions needed, of course, to be financed. I advised my clients as early as July 2007 to stop buying papers issued by US investment banks. Then, in late summer 2008, the “fear factor” set in and the funding markets suddenly froze. The explosion of the (real or perceived) credit risk led all funding markets to stop functioning. The heart of the whole financial system— the money markets—came to a halt. The banks stopped lending to each other, preferring to park their funds in government securities—even sometimes at negative yields!—or just leaving them on their current accounts. This sparked a violent reaction and affected the whole financing chain, from the banks to the financial intermediaries, down to the consumer finance companies that led to a full-blown economic downturn. The universal banks with sizable investment-banking activities were also severely hit, but managed to survive due to their bigger capitalization and, most of all, to their large and diversified retail-deposit base (UBS, Deutsche Bank or HSBC, for example). The purely investment banks with huge funding needs and overly relying on money markets, collapsed like a castle of game cards (as we say in French). The investment-banking model is dead and, given the tsunami we experienced, will never recover in its existing form. The remaining “independent” investment banks understood that quickly and morphed into banks. Goldman Sachs and Morgan Stanley are now fully licensed banks allowing them, among other things, to access the retail-deposit market. Long live the universal banks! A ‘purified’ hedge-fund model can survive THE hedge-fund model as we know it, is dead unless it transforms itself. The lack of regulation and supervision has been identified as the major factor behind their failure by all the screaming heads of government. It is partly right and needs to be addressed. But it is only one of the faces of the hedge funds evil. What happened during the crisis? First, like the investment banks, a large number of hedge funds relied on borrowings to finance their strategies. In addition, many were highly leveraged. And, cherry on the pie, they were often financed by the investment banks themselves! Imagine the minefield…. More important, and that is the main reason the hedge- fund model as we know it has to die, they showed a complete disregard for their investors. Their behavior came down to a simple sentence: “Give me your money and I will steal from you right and left, top and bottom, and front, back and center!” What many investors didn’t know, ill-advised by their greedy private bankers, is that the investment agreements for hedge funds were full of tiny written clauses allowing the funds to change the rules of the game right in the middle of the investment! The hedge funds were very imaginative in finding new concepts like market- value reduction in case of “poor market conditions.” As a result, when things turned sour, they decided overnight to freeze the redemptions, to stagger the redemptions over many months or years, or to purely and simply postpone the redemptions ad vitam eternam until conditions get better! It basically means that even if you wanted to, you couldn’t get out of your investment. What happened to the beautiful promises of weekly or monthly liquidations? Disappeared…. To add insult to injury, in many instances, the subsequent exit strategies proposed to their clients was that the client had to decide today if they wanted to sell in three months’ time at a price fixed in three months on a value, of course, entirely at the discretion of the hedge fund itself, and therefore unverifiable! It was take it or leave it. So after having stolen from their clients a first time, they did it again a second time…. The hedge-fund industry can survive but will have to be strictly regulated, much more transparent and, above everything, respect their clients. Rules to force the funds to ensure their own liquidity must be established. More important, the hedge funds must be obliged to provide liquidity to their clients according to its initial and preannounced liquidation policy and without any force majeure clause. The fund of hedge funds (FoHF) model is dead and buried FUNDS of hedge funds were very popular strategies used, among others, to diversify the risks by using many different fund managers and many different fund strategies. The FoHF would, therefore, invest in many different hedge funds, which would smoothen and level the risks and performance of the FoHF itself. But instead of reducing the risks, it multiplied the risks. The liquidity issues seen above became exponential. FoHF managers suddenly had zero control over their own liquidity and therefore couldn’t ensure the liquidity of their clients. They were completely dependant (hostages) on the goodwill of each of the underlying funds. Imagine: instead of one fund restricting redemptions, you have to deal with 20 funds, each of them having different ways of “stealing” their investors! It is obviously unmanageable but nobody thought about it before the disaster occurred. Even with very strict rules, and given what happened, this model will never recover, simply because in situations of intense stress, it becomes impossible to manage. S imple piece of advice: Do not invest in investment banks (if there are any left), do not invest in funds of hedge funds and do not invest in hedge funds until clear and mandatory liquidity rules are established. I much prefer private-equity funds: at least you know in advance that you are in for the long term, that it is a risky investment and that it has no liquidity. Analyzing the liquidity of your portfolio is something that I’ll be glad to do for you! **** Jean d’Orival is the chairman of Dorias Advisors Inc. Free Enterprise is a rotating column of members of the Financial Executives Institute of the Philippines (Finex), appearing every Wednesday and Friday. |
Wednesday, April 22, 2009
Investment banks and hedge funds: The death sentence
Peso seen hitting 46:$1 by midyear, 52:$1 by end-2009
| Erik dela Cruz / Reporter |
| Wednesday, 15 April 2009 21:09 |
THE next nine months may see wild swings in the foreign-exchange rate as the peso may gain further strength up to 46 per dollar by the middle of this year, but may eventually lose ground in the second half and end the year at 52, according to a new research report from Metropolitan Bank & Trust Co. (Metrobank).
The peso has fallen by 0.9 percent so far this year, slowly recovering after an 1.7-percent loss in the first quarter.
“Currently, the peso has been appreciating alongside other currencies as risk aversion has tapered off for now amid the big upward strides in major equity markets around the globe,” said Ildemark Bautista, Metrobank head of research.
“The question, therefore, on everyone’s mind is if this is only temporary or will depreciation still be in the cards,” he said.
The peso is bound to appreciate in the near term, he said, with support coming from remittances of Filipinos abroad which traditionally surge during this time of the year, and with dollar requirements weak at the same time.
Remittances are usually on an upswing a few weeks before the start of a new school year in June.
“In the very near term...trends point to a direction towards the 46-per-dollar level going towards midyear as OFW [overseas Filipino worker] inflows dominate amid current market optimism,” he said.
But Metrobank’s research team, he said, was maintaining its view of peso depreciation toward the end of 2009, “perhaps running as high as 52…50 per dollar, or at least going up to the 51 level.”
The continued weakness of the Philippine economy and the need to prop up growth through bigger deficit spending will contribute to weak sentiment toward the peso, Bautista said.
Demand for dollars, however, may rise even before the import season in the third quarter, capping the peso’s gains in the second quarter, he said.
With dollar requirements normally increasing and remittances slowing down in the third quarter, he said the peso may be bound to again depreciate at that time.
“Expectations such as this might temper the current peso strength, as importers might buy earlier and produce marginal dollar demand right now instead of in the third quarter,” Bautista said.
The recent rally on Wall Street reflected investors’ upbeat mood as companies start reporting better earnings, which could be the result of the relaxation of mark-to-market (MTM) rules, he said.
“MTM rules require that assets not being held to maturity should be priced at market levels, and in a poor market environment such as the one right now, this means markdowns and lower earnings [as writedowns are treaded as expenses] or lower asset prices,” he said.
“With these rules now being relaxed, it appears that markets are riding along, willing to suspend disbelief right now about how bad things might be, giving the equity markets a big boost.”
Still, he said some investors viewed the recent bull run in the US with caution as it appeared “too much, too far, too soon,” and that a correction might be in the offing.
The peso rose on Tuesday to as high as 47.65 per dollar, its strongest level in two months following the greenback’s broad weakening in the previous day, which indicated waning risk aversion.
In a report released last week, Moody’s Investors Service said the peso must be kept stable if the government wants to support economic growth.
RP deficit, US concerns drag peso lower
| Erik de la Cruz / Reporter |
| Tuesday, 21 April 2009 21:29 |
The local currency slumped to an intraday low of 48.49—its weakest intraday value since March 31 when it fell to 48.58—before settling at 48.46, down almost 0.8 percent from Monday’s close of 48.09.
“The Philippine peso has started weakening again, but this is likely to be due to domestic concerns regarding its widening budget deficit,” said Philip Wee, currency strategist at DBS Bank.
The government has further raised the deficit ceiling this year to P199.2 billion, or 2.5 percent of the gross domestic product, from P177.2 billion as it intends to pump-prime the economy despite expectations of weak revenue. The official 2009 economic growth forecast has been cut to 3.1 percent to 4.1 percent, from the previous estimate of 3.7 percent to 4.4 percent, to account for weak exports.
Concerns about the stability of US banks, which sparked selloffs in the equities markets, also weighed down the peso, dealers said. The major US equity indexes dropped by 3 percent to 4 percent on Monday.
“Risk aversion is back after weak results from Bank of America reignited worries about the US financial system and the economy, setting off a broad-based fall on Wall Street,” said dealers at Metropolitan Bank & Trust Co. (Metrobank) in a note.
The dollar rallied as the fall in equities increased the greenback’s safe-haven appeal, dealers said. On the domestic front, they said growth and fiscal concerns added to pressure the peso downward. The budget deficit hit P67 billion in the first two months of the year, more than double in the same period last year, as the economic downturn resulted in weak revenue that prompted the government to spend more to boost economic activity.
The peso is expected to trade between 48.30 and 48.60 today, said Banco de Oro chief market strategist Jonathan Ravelas. Dealers at Union Bank of the Philippines said 48.50 is the dollar’s immediate resistance level.
Metrobank expects the peso to reach 52.50 per dollar by the end of 2009, given shrinking inflows as exports contract and remittances of Filipinos abroad post flat or negative growth.
‘Sari-sari’ stores as agent banks?
| by Jun Vallecera / Reporter |
| Wednesday, 22 April 2009 21:56 |
THE Bangko Sentral ng Pilipinas (BSP) is seeking legal opinion on whether they have basis for allowing third-party entities, such as sari-sari (retail) stores, to act as agent banks.
The plan, which includes such other agents as retail chain stores and government-owned post offices, forms part of the larger program of financial inclusion.
Financial inclusion, as the term suggests, ideally includes every Filipino to have access to financial services that often leaves out the rural-based population as farmers and fisherfolk.
Deputy BSP Governor Nestor Espenilla Jr. acknowledged it took them one year to convince authorities, the policymaking Monetary Board included, to sell the idea of the e-money, or electronic money popularized by Globe Telecommunication’s G-Cash product and by Smart Communication’s Smart Money.
The hardest thing about this product, according to Espenilla, was convincing everyone they were not deposits, which then complicates regulation.
“It took us a year to put it together, including the appropriate circular,” he said.
The same thing is happening about the plan allowing sari-sari stores, retail chains such as 7-Eleven and Mercury Drug Stores and various post offices to act as agent banks.
Under the plan, the neighborhood sari-sari store is empowered to help the financial inclusion program become reality by allowing it to act as cash centers where one can buy or encash so-called e-money.
Globe’s G-Cash centers and its equivalent Smart Money services are mostly urban-based products.
According to Espenilla, the Philippines is one of the leading proponents of e-money, along with Kenya and certain other Latin American countries like Brazil.
But the Philippines has a potential to become a pioneering entity in e-money transactions because most Filipinos own a cellular phone.
In Brazil, for instance, e-money usage is via points-of-sale, or POS, which is limited in nature, Espenilla said.
When approved, Filipinos may convert hard cash into e-money in any sari-sari store and send it via cell phones to pay for utilities charges, settle a personal debt or even make a deposit, he said.
“The question now is whether we can use third-parties like sari-sari stores to act as agent banks. We are in the process of seeking a legal opinion,” Espenilla said. He ruled out authorizing sari-sari stores as deposit-taking entities, however.
“I have problems enough monitoring the activities of regular banks, I don’t want added pressures at this point,” Espenilla said.
29 rural banks closed since ’08
Written by Jun Vallecera / Reporter Wednesday, 22 April 2009 21:58
Less than 30 rural-based lending institutions have fallen by the wayside since last year but the Bangko Sentral ng Pilipinas (BSP) remains confident the banking system as a whole remains fundamentally sound.
Deputy BSP Governor Nestor Espenilla stressed this point in a text message on Wednesday soon after confirming that two more rural lenders folded and ordered closed by the policy-setting Monetary Board of the central bank.
“This is normal house cleaning,” Espenilla said.
He meant the 29 rural lenders that folded and toppled from 2008 up to present, including seven that closed since January this year.
Only one Legacy Group-linked lender folded thus far this year but the BSP refused to identify the lender because many of their owners refuse up to now to disclose their close relations with Legacy-owner Celso de los Angeles.
Twenty-two rural banks were ordered closed last year. Of this number, 12 were Legacy-linked.
“Only 10 rural banks, if you exclude those linked to the Legacy Group, actually closed last year, which is below the annual average,” Espenilla said.
He stressed both Accord Savings Bank based in Baguio City and Bangko Rural ng Bulacan of the same province were never linked to the Legacy Group of banks whose principals were headed by part-time politician and financial engineer de los Angeles.
“I’d rather characterize this as occasional closure and part of the continuing maintenance of the overall health of the banking system,” Espenilla said.
Ten rural banks closed shop in 2006 followed by 15 more in 2007 but their closure should not be missed by small borrowers in the countryside, according to Espenilla.
“Their loss has promptly been replaced by the establishment of new ones, resulting to even more new branches overall,” he added.
House committee approves REIT bill
by fernan marasigan/b.mirror/4.22.09
SUBJECT to amendments, the House ways and means committee approved on Tuesday a bill that would provide for a regulatory framework for real- estate investment trust (REIT).
The committee, headed by Lakas Rep. Exequiel Javier of Antique, approved the substitute bill to House Bills 148, 3566 and 4182, or “An Act Providing the Legal Framework for Real Estate Investment Trust,” following assurance from Philippine Stock Exchange president and chief executive officer Francis Lim that safety nets or safeguards are in place to avoid concentration of properties in the hands of a few, particularly the rich.
He was referring to the similar measure recently approved by the House economic affairs committee and was submitted to the Javier committee.
Laban Rep. Juan Edgardo Angara of Aurora said the approved bills would undergo thorough scrutiny by the committee. “They are still subject to amendments,” Angara said in an interview at the sidelines of the hearing.
“Ang worry kasi ng ways and means committee, especially ni chairman [Javier], is iyong leakage sa revenue at saka iyong law might be taken advantage of by the rich kasi iyong structure ng real estate sa Philippines is that they are owned by a small percentage of the population tapos karamihan family-owned. If you look at our top companies. . . family-owned corporations iyan na lumaki na so ’yung concern is to have a law which is sufficiently attractive to attract investors but also will not be a tax shelter for rich corporations and rich families so iyon ang balance doon,” Angara said. He also cited the proposal of Javier on the limit of ownership.
“For example, five individuals cannot own more than 50 percent of the companies, hindi niya ido-dominate iyong ownership. Kung owned by the son or family members, considered as one lang iyon in terms of the five persons para hindi limitado lang sa kanila ang ownership,” he said.
Javier, for his part, said the committee will craft its own proposed amendments on the approved bills.
During a hearing last week, Javier also questioned the proposal for the 30-percent minimum public ownership. By adopting this, the REIT will not be democratizing ownership, supposedly one of the salient features of the measure.
The bill should provide that after five years, at least an additional 5 percent should go to public until it reaches more than 50 percent.
“Otherwise, it will just be used as a tax shelter for wealthy families,” Javier said.
The REIT bill seeks to attract foreign investment, develop the capital market and provide an alternative investment instrument that has a steady income stream and has proven to have a higher interest yield than other forms of securities so that even local investors will be attracted.
Angara said the measure will also help the government put up infrastructure and democratize land ownership by corporatizing land, convert it to income-generating real estate, list in stock exchange as REIT and invite local investors to buy the stocks allowing them to be coowners of the real-estate.
Its main purpose, Angara said is to provide small and large investors alike with the opportunity to participate directly in the ownership and financing of large-scale real-estate projects at affordable rates of investment, without the disadvantages of illiquidity, high transaction and management costs, as compared to traditional private real estate ownership.
.Yields rise on deficit report
PHILIPPINE bond yields rose yesterday as the government posted a bigger budget deficit, but sentiment improved after the state said it would raise more funds abroad to plug the shortfall, traders said.
The yield on the five-year bond, the most actively traded securities, rose 2 basis points (bps) from morning levels to 6.15% after the government said that it posted a P119.7-billion budget gap in the first quarter, more than its P110-billion target.
But yields eased back to morning levels after the government said it would increase foreign borrowings and cut the amount of debt it would raise at home, traders said.
Total deals reached P29.8 billion ($614 million) by late afternoon, versus P15.5 billion at the same point on Tuesday, traders said.
"The priority right now is for the stimulus measures to move into the economy and that is being done," said Joey Cuyegkeng, an economist at ING Bank. "The market has been primed for a bigger deficit this year."
Expectations of more central bank rate cuts and a lower inflation outlook would outweigh concerns about the budget shortfall, pushing yields lower, Mr. Cuyegkeng said.
The central bank will likely cut its overnight rates by 25 to 50 bps more, while inflation will likely dip to below 5% in the next three to six months, he said.
Meanwhile, Thai bond yields fell on hopes that the central bank will ease rates to revive the economy, traders said.
The Bank of Thailand forecast the economy would shrink between 1.5 and 3.5% this year due to the political unrest at home and the global economic downturn.
Yields were 5 to 10 bps lower on average, with the five-year bond down to 2.34% from Tuesday’s close of 2.45% , traders said.
The government’s plan to cut spending and reduce the deficit for the next fiscal year also pushed yields lower, traders said. — Reuters
Subscribe to:
Posts (Atom)