AndrewChia.com

Source:  The Star, Malaysia
Straits Times, Singapore

Highlights

1.  Krystal Koglin went on a spending spree when her bank boosted her credit card limit by 11 times.  She hit departmental stores, starting treating her friends at restaurants, splurging on designer jeans and buying “needless things” on eBay.

2.  Her bank and other Canadian banks are now suffering from a rise in credit card losses from customers such as Koglin.  Four of the country’s biggest banks set aside 51% more cash on average in the first quarter for card losses, and the costs may rise further this year.

3.  “If there is another shoe to drop, credit cards are going to be it.  It is going to be the Achilles heel this year for the banks.”

4.  Credit card delinquencies and losses have risen with higher unemployment and personal bankruptcies.  Canadian card losses rose to 3.1% of average balances, the seventh straight period of year-over-year increases.  By comparison, US card losses rose to 6.6% of balances.

5.  Canada’s largest card issuer was slowing growth of credit cards.

6.  Royal Bank of Canada was more concerned about rising defaults from credit cards than mortgages in the recession.  They had C$8.93 billion in credit card loans as of January 31.

“Credit card deterioration always happens much sooner and much more dramatically than you’d have in a mortgage portfolio because they are unsecured loans.”

7.  Earlier, conservative lending practices and regulation have allowed Canadian banks to escape the worst of the writedowns faced by US banks from the collapse of the subprime mortgage market.  The lenders don’t have such protection for credit cards.

8.  “It’s definitely the canary in the coal mine.  If customers aren’t paying their credit cards, that means they are not buying anything else and you’ll see a ripple effect.”

9.  Across in the US, consumers are having increasing problems making credit card payments in another sign of economic stress, according to new banking industry data.

Fitch Ratings said 4 per cent of consumers at least 60 days late.

‘Record credit card delinquencies are just the latest sign that US consumers are under considerable levels of stress,’ said Fitch’s Michael Dean.

10.  ‘The latest numbers point to even higher default rates and worsening consumer credit quality measures in the coming months.’ Credit card issuers typically charge off bad debt after 180 days of delinquency or within 60 days of a bankruptcy filing.

The rise in delinquencies indicates that chargeoffs, at 7.40 per cent as of January month end, are likely to rise significantly in the near term, according to Fitch.

‘As the unemployment rate accelerates and consumers’ ability to service their debt weakens, Fitch anticipates that gross chargeoffs will surpass 8.5 per cent by mid-year.’

11.  Some analysts say the problems in credit cards could deal another blow to a banking industry already reeling from the meltdown in real estate, and that the industry issued too many cards and too much credit to consumers unable to afford them.

Comments

1.  Hello!  Anyone out there?  This type of warning has been issued way earlier but my estimate is that at least 90% of people are blissfully unaware of the second coming of the tsunami.

2.  Count the number of days yourselves from the report above. In March, customers are already 60 days overdue.  When they reach 180 days overdue, the banks would have to charge them off as losses.  What is today’s date?

Now look at the stock markets around the world.  They are still making new highs after recovering from the trough of 6,500 points in March this year.

3.  Stay away from the water (I mean markets, especially stock markets).  Listen to the guys with first hand information on the ground, like the bankers who keep seeing customers default on their credit card payments.  That is how financial tsunamis start – with small trickles of water.

If you still wish to invest, you may buy good companies’ shares yielding high dividends.  Buy at low prices.  If you don’t know what that means, grab Ho Kok Mun’s book, How to make money from your stock investment even in a falling market.  My book Bursa Winners may take another year or so to hit the shelves.  Some readers just can’t wait and they’re even grabbing my make-shift ebook which is only 58 pages.  Nevertheless the points are complete and the formula is ready.

Good luck and may the Force be with you!

Learning message:  Remember Warren Buffett’s first criteria for stock investing – buy stocks only if you are willing to hold for five years.

Source:  The Star, Malaysia
by Paul Krugman

Highlights

1.  Madoff’s investors looked at their statements and thought they were rich.  One day, they discovered to their horror that their supposed wealth was just a figment of someone else’s imagination.

2.  Unfortunately, that was also what happened to America in the first decade of the 21st century!  There has been basically no wealth creation at all since the turn of the millennium.  The net worth of the average US household is lower now than it was in 2001.

3.  America was a nation of borrowers and spenders, not savers.  The personal savings rate was 9% in the 1980, 5% in the 1990s, and only 0.6% from 2005 to 2007.  Why should we have expected our net worth to go up?

4.  Yet until very recently Americans believed they were getting richer because they received statements saying that their houses and stock portfolios were appreciating in value faster than their debts were increasing.

They could not be blamed.  The Wall Street Journal, Forbes and National Review – all promoted that belief, and ridiculed those who worried about low savings and high levels of debt.

Then reality struck, and it turned out that the worriers had been right all along.  The surge in asset values had been an illusion – but the surge in debt had been all too real.

5.  The problem is then amplified when everyone realises that they need to sell assets and pay off debts.  This deepens the plunge in asset prices.

And attempts to start saving more translate into a collapse in consumer demand, thus deepening the economic slump.

This is a vicious circle.

6.  It took the World War II to boot the economy out of the debt trap and ended the Great Depression.

7.  Since the next world war does not look like it is going to happen any time soon, it means that it will be a long and painful slump for families and firms to work off the debt they ran up so blithely.

Comments

1.  The figures on our statements may be misleading.

2.  Although not all debt is bad, we should be wary at all times.  An old banker friend of mine had RM11 million worth of properties before the property market crashed in the 1980s.  His loans was only RM4 million against those properties.  Trained as a banker, he thought that ratio was rather conservative.  Yet he ended up bankrupt!  That was because his properties were not only overvalued, they were not strategically located.  During the credit crunch when he needed cash badly, he found that his properties could not be easily sold.

Learning message:  Financial intelligence can help us identify true assets.

Source:  The Star, Malaysia

Highlights

1.  When Tata, India’s oldest and largest conglomerate, bought the fabled Jaguar auto brand last year.  The country celebrated the gleaming trophy as affirmation of its new role as a global superpower.  They also purchased the Land Rover.

2.  Within a year the Tata group is now drowning in condolence calls, not international applause. Many see Tata’s woes as especially alarming because, as has been the case for over a century, where Tata goes, India goes.

3.  “If it happens to the Tatas, it means something much more than if it was happening to other companies.”

4.  The past year, which has seen the stock price of Tata’s listed companies fall nearly 60 percent, has been perhaps the most difficult in the group’s history. Tata faces a global meltdown that is eating into some of its most high-profile brands, terrorism that scarred its landmark hotel, and political demonstrations that have crippled business plans.

5.  Tata Motors revenues’ fell more than 34 percent in the most recent quarter, its first loss in seven years. And Tata Steel reported its first drop in quarterly profits in nearly three years.

6.  In India, Tata’s group of 100 companies, is everywhere – tea, salt, steel, cars, chemicals, hotels, housing, telecommunications. They include the country’s largest automaker, the largest private steel company, and a leading outsourcing firm. The companies employ more than 350,000 people around the world.

7.  From the current chairman, Ratan Tata, to his great-grandfather, Jamsetji N. Tata, the Tata men are famously philanthropic and civic-minded. They are seen as something like national uncles: kindly, wise and dependable.

Jamsetji N Tata

8.  The 141-year-old company’s story is intertwined with that of modern India. The company’s founder, Jamsetji N. Tata, a young trader from India’s Parsi minority, helped usher in the industrial era when he established India’s first textile mill, its first shipping line, and its first cement factory.

9.  Tata founded Mumbai’s grand Taj Mahal hotel after a doorman refused to let him into one of the city’s elegant hotels because he was Indian, according to the company’s own history.

10.  Tata “got swept up in the general mood,” said Guha. “There was this arrogance that we can go buy the world.”

11.  Today, in the sobering light of the global recession, a harsh reality has set in. With car sales everywhere plummeting, the Jaguar and Land Rover brands have been a drag on Tata Motors, forcing the company to approach British authorities for a bailout and take the extraordinary step of appealing directly to the public for funds.

12.  The value of the 28 publicly listed Tata companies has tumbled from $59.7 billion last March to $24.29 billion as of Feb.

13.  The Sensex, the country’s leading stock market index, has fallen from a peak of more than 21,000 in January 2008 to around 9,100 a year later. And inflation hit a 13-year high of 12.9 percent in August.

Comments

1.  Big corporates in India are also badly affected by the subprime crisis in US.

2.  Even Warren Buffett’s companies are not spared the punishment by Wall Street as stock prices fell across the board.

Learning message:  Do not use the stock price as a final indicator of the real strength (or weakness) of a company.

Source:  The Star, Malaysia
by Seah Chiang Nee (cnseah05@hotmail.com)

Highlights

1.  Singapore’s hard-earned reserves which are tied to global investments, have plunged over the past year.

2.  In just eight months, Temasek, the state investment corporation, fell by a staggering S$58 billion (RM138.9 billion), or 31%.  (Singapore’s GDP for 2008 is estimated at S$250 billion.)

3.  Because of this many people are fearful that they may eventually be asked to pay higher indirect taxes.

Ho Ching

4.  Temasek’s powerful CEO, Ho Ching, who is the wife of the Prime Minister and the world’s eighth most powerful woman, announced that she is leaving the company on October 1.  She is responsible for making major investment decisions for the company for the past six years.  (Ho Ching ranks third on Forbes list of 100 Most Powerful Women 2007.)

5.  Singapore is one of the countries worst affected by America’s subprime problems.

Comments

1.  The percentage of population affected by the subprime crisis is much higher in Singapore compared to Malaysia.  Singapore is a financial centre.  Its people are more savvy when it comes to investing their funds abroad.

Learning message:  Countries that have more faith in the US’ intellectual and financial capital are more badly affected by the subprime crisis.

Source:  The Star, Malaysia
by Dr Lin See-Yan

Highlights

1.  Dr Mahathir asked Dr Lin, former deputy governor of the central bank of Malaysia this question during a private brainstorming session with selected experts, “Why did the US financial meltdown happen so swiftly?”

2.  Throughout history, financial crashes share one trait – excessive expansion of credit which feeds on itself.

3.  The US Fed kept interest rates too low and for too long.

4.  By pushing so much excess credit into the economy, the Fed created a consumption and housing mania that Wall Street took full advantage of, with many banks abandoning normal risk standards.

The housing boom inevitable led to a housing bust.  It was one party no one wanted to end, but it did nevertheless ended in 2008.

5.  The system then failed.  It was a system that is based on trust.  And trust failed on four fronts:-

> Trust in regulators (central banks, securities and commissions, inspectorates) failed.
>Belief in the viability of modern capital markets failed.
>Confidence in credit rating agencies failed.
>Trust in the intellectual capital and capital muscle of Wall Street failed.

6.  Derivatives also helped to create a bubble, diverting capital to feed the pangs of greed.  The most common and dangerous is the credit default swap, or CDS.  It is a sort of insurance policy.  A third party assumes the risk of the debt (say, mortgage) going into default.  In exchange, the insurer receives payment (like a premium) from the issuer bank.

Created by whiz-kids from MIT and Cambridge for JP Morgan in 1994, they have since ballooned into a US$62 trillion market, before racheting down to US$55 trillion last September after AIG had defaulted on US$14 billion of CDS.  It held US$440 billion.)

Warren Buffett called them “financial weapons of mass destruction”.

The entire derivatives market is very large.  Latest estimates point to US$668 trillion (gross) or about 15 times the size of the world economy.  Their underlying worth is about US$15 trillion, slightly larger than the US GDP.

7.  40 years ago, 90% of all loans were backed by bank deposits.  Today, it is only 60%.

8.  In 2004 the US Securities and Exchange Commission (SEC) removed the leverage cap of 15 to one for investment banks like Bear Stearns, Lehman Brothers and Merrill Lynch.  This allowed them to expand lending vigorously without raising capital.

9.  Even before that, the regulation that separates investment banks and ordinary banks have been removed, encouraging banks like Bank of America and Citibank to move more and more of their lending to their investment arms.  Leverage took off.  By end-2007, 30:1 was not uncommon.  Lehman’s leverage, when it collapsed, exceeded 40:1.

10.  Stock buybacks were also funded by borrowings.

11.  Sophisticated computer models with advanced risk management controls were adopted, with the aim of further lowering capital requirement per loan.

12.  Regulatory and accounting changes (including mark-to-market rules) resulted in banks’ capital bases eroding much faster than expected.

13.  While US banks went on a lending spree so far this decade, their capital base had lagged behind, leaving the system vulnerable and in jeopardy of collapse.  It had US$13.6 trillion in assets against only US$820 billion in tangible equity, or less than 7%, as at September 2008.)

14.  Despite many early warning signals (including by notables Professor Robert Shiller of Yale and Professor Nouriel Roubini of Columbia), the Fed appears convinced that these “deals” have changed the system in a fundamentally beneficial way.

15.  Basic trust has since crumbled and this has shaken faith in banking and finance.  Western banks found themselves running out of capital in a way none of the regulators had imagined.

The Fed initially estimated that subprime losses were unlikely to go beyond US$50 billion to US$100 billion – a fraction of the total capital of Western banks or assets held by global investment funds.

As it evolved, banks started hoarding cash and stopped lending to each other.  Bankers lost faith in their ability to assess the health of other institutions – sometimes, even their own!

Then a vicious deleveraging spiral got under way as banks scurried to improve their balance sheets – selling assets and cutting loans, especially to hedge funds.

The regulators lost credibility; the US Securities and Exchange Commission’s relaxation of the leverage capital cap was a huge mistake.

It also became clear that the global capital markets, especially New York and London, were not what they seemed.  They could not stay really liquid when required.

Neither did the ratings generate the confidence required of them.  The agencies started downgrading even supposedly ultra-safe debt, causing prices to crumble.  For example, in July, Merrill Lynch sold a portfolio of complex derivatives at 22% of its face value even though they were rated triple A.  Investors lost faith in the ratings and stopped buying, thus created a funding crisis.

Worse still, banks that should have been better protected because of risk dispersion, also cracked.

In the end, everything came back to haunt the banks with a vengeance.

16.  More than a year into the credit crisis, America’s broken banks are eyesores.  The system did crack and banks remained fearful of their own solvency.  Trust remains a rare commodity after eight years of easy money.

This trust was broken when the underpinnings of 21st century finance turned out to be dangerously flawed.

In a crisis born of greed and indiscipline in the face of the myth of a rational market – the markets know best, remember? – pity is in short supply.

17.  To summarise and to answer Mahathir, in an environment of easy money, banks, borrowers and investors lost their cool and self-discipline.  Free markets ran amok, trust in the banking system (and its collaborators) was shattered as regulators let their guard down, and bankers let the pursuit of profits undermine the integrity of the system which they were supposed to protect.  Result:  The entire system failed in the face of denial, indiscipline and greed.

Comments

1.  Great economists like Dr Lin explain complex concepts in everyday language.  They also strip complicated financial instruments like CDS and reduce them to something that laymen can relate to.  With their help, non-economists like Dr Mahathir could quickly get a grasp on the ideas in our money world.

2.  When liabilities are mistaken for assets, the results can be catastrophic.

Learning message:  Leverage should be used wisely, and with discipline.