Published September 16, 2008
US FINANCIAL CRISIS
Deal fails to calm jangling nerves
Dow plunges at opening as traders say confidence is at a low point
By ANDREW MARKS
NEW YORK CORRESPONDENT
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US STOCKS were battered in the early going yesterday as the collapse of Lehman Brothers and the takeover of Merrill Lynch, engineered in seemingly last-minute fashion on Sunday, shook investor confidence down to the bone.
High anxiety: Workers outside Lehman's offices in London yesterday. Lehman's British operations were placed in administration to protect them from creditors
The Dow Jones Industrials plummeted to a triple digit decline within the first minutes of trading yesterday morning, registering a 270-point loss at 940 am in New York, a decline that grew as large as 318 points minutes later before a slight rebound brought the decline to 288 points, or 2.65 per cent at 10 am.
The broader S&P 500 index was faring similarly, sinking by 31 points, or 2.4 per cent, as it see-sawed between bad and worse in the first half hour of trading.
The technology-laden Nasdaq Composite was falling by 40 points, or 1.8 per cent, after an initial decline of 60 points or 2.65 per cent.
Market strategists were trying to make sense of the historic series of events that have unfolded since the market's closing bell last Friday.
'This is not an easy one to process, I think it'll be a couple of days at least before we can say with any certainty how the market will ultimately take these events,' said S G Cowen head equity trader John O'Donoghue.
The tumble came in reaction to a weekend of high drama on Wall Street that at the very least promises to forever change the landscape for the US finance and securities brokerage industry, and is the latest sign that the financial crisis that has gripped the world for nearly a year now is deepening profoundly.
Lehman Brothers bowed to the inevitable and filed for Chapter 11 bankruptcy protection, sealing its fate and moving the 158-year old securities firm into liquidation mode.
Merrill Lynch, facing the same pressures that began Lehman's extraordinary demise just a week ago, agreed on Sunday to sell itself to Bank of America for roughly US$50 billion, or US$29 per share, to avert a deepening financial crisis at the firm.
'Confidence is at a low point, it's really collapsed,' said Hugh Johnson, chief investment officer at Johnson Illington Advisors. 'With the rescue of Fannie and Freddie, we thought the worst had passed. Now we know it hasn't.'
The problem for Wall Street at the moment, he said, is that unlike with the Bear Stearns bailout or even the takeover of Fannie Mae and Freddie Mac, there is no sense of relief after the weekend's events.
'Before anyone has time to even begin to absorb the implications of Lehman's failure or Merrill's forced sale, we're looking at AIG's crisis and how that's going to be resolved,' observed Mr Johnson.
'The natural reaction at this point is to run for cover, sell what you have to and wait and see how much worse this crisis can get,' he added.
Indeed, the giant insurer AIG may not survive the week if the Federal Reserve does not float the insurance company a US$40 billion bridge loan it requested on Sunday night in the face of a potential downgrade from credit ratings agencies that would allow counterparties to withdraw capital from their contracts with the company.
AIG has reportedly rejected a cash infusion by J C Flowers and other private equity companies because the deal would have granted the firms the possibility of taking over AIG. Separately, Kohlberg Kravis Roberts and TPG offered to support AIG with fresh capital pending a bridge loan to AIG from the Fed.
To help Wall Street brace for Lehman's bankruptcy, the Federal Reserve widened the collateral it accepts for emergency loans to securities firms.
A group of 10 banks that includes JPMorgan Chase, Goldman Sachs and Citigroup separately formed a US$70 billion fund to ensure market liquidity.
Major European central banks yesterday said that they were prepared to inject billions into global money markets to ensure that the weekend's turmoil on Wall Street does not spread to the rest of world's financial systems.
Adding to the woes emanating directly from Wall Street yesterday, investors were also faced with a US dollar in retreat and a big tumble on the European stock markets as major banks like UBS came under severe pressure.
Tuesday, 16 September 2008
Published September 16, 2008
The need for buyer of last resort?
By TEH HOOI LING
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IN August 1998, in the throes of the Asian financial crisis, the Hong Kong Monetary Authority (HKMA) spent over US$15 billion scooping up the territory's blue-chip stocks and stocks futures.
The authorities were waging a battle against the speculators who were shorting the Hong Kong stocks, futures and currencies. Then Hong Kong Financial Secretary Donald Tsang defended the stockmarket intervention on the grounds that it was to 'deter market manipulation' and to protect 'national interests'.
Hong Kong's move drew flak. Alan Greenspan, then the US Federal Reserve chairman, said he did not agree with what the Hong Kong government had done. 'One, I don't think it can succeed. And two, I think that the consequences of doing that erode some of the extraordinary credibility that the Hong Kong monetary authorities have achieved over the years,' he said.
As events would unfold, Hong Kong's move proved astute and highly profitable and its taxpayers ended up billions of dollars richer.
Fast-forward to today. The US is desperately fighting its ever-deepening financial crisis. In the process it, too, has resorted to numerous desperate measures.
Instead of being a lender of last resort only to banks, the Fed expanded that role to other financial institutions recently. And in July, the US Securities and Exchange Commission (SEC) banned 'naked' short-selling of 19 large financial stocks traded on the New York Stock Exchange (NYSE), including the beleaguered Fannie Mae and Freddie Mac. The SEC - the bastion of free market - described naked short-selling as 'unlawful manipulation' and claimed that its ban was consistent with its mission of 'protecting investors, maintaining orderly markets and the promotion of capital formation'.
And while the US is trying to stop its financial institutions from collapsing it is the Asian stock markets that have borne the brunt of selling.
Year to date, the US stock market has only shrunk by 15.7 per cent. In Asia, China's market has shrunk by 55.7 per cent, India 45.3 per cent, Hong Kong 33.7 per cent and Singapore 27.9 per cent. And among Singapore stocks, it was the Chinese companies or the S-chips that were pummelled the most. Many decent Chinese companies are now trading at less then four times next year's earnings.
Do prices today reflect the fair value of these companies? How much of the selling was due to the drying up of liquidity as funds were withdrawn from the Asian markets? How much was due to 'market manipulations' of short-sellers?
It would not be wrong to say that markets are somewhat disorderly and illiquid now. In times like this, it is not uncommon for prices of even good assets to fall below their fundamental values.
The same holds for the prices of bad, impaired and sub-prime assets. Impaired assets too will have a fair or fundamental value. That fundamental value may well be far below the face value of the security, but it may also be well above the price the impaired asset would fetch in a fire-sale in an illiquid market.
In times of crisis, banks have lender of last resort to go to. In times of stock market turmoil, perhaps there is valid argument for 'buyer of last resort'.
At the very least, it would serve to build confidence.
And as Willem Buiter, professor of European political economy, London School of Economics and Political Science and former chief economist of European Bank for Reconstruction and Development, said: 'If the central bank, or some other government agency, were to act as Market Maker of Last Resort and buy up assets at a price lower than its fair value, but higher than what it would fetch in the free but unfair illiquid market, such a purchase would be welfare-increasing.'
The central bank or the government agencies will be properly rewarded for taking on this risk - as has been shown by the HKMA example.
And when it comes to S-chips, the 'national interest' argument can also be applied. Singapore has been trying to build itself up as the Asian gateway to the world's capital market for regional companies. It won't succeed if companies come here and are valued at only three to five times earnings.
An investor relations practitioner puts it this way. 'In this market condition, we are in need of leaders - people who dare to make the first step.
Value investments
'Singapore Exchange has done a great job attracting Chinese companies to list here. It is now up to our government-linked funds to be the leaders to ensure fairer pricing for these decent S-shares.
'Government-linked funds should stop just looking outside of Singapore for value investments. It is not necessarily that the grass is always greener on the other side of the fence!'
Ultimately, the point is even the US has resorted to desperate measures in these desperate times. It shouldn't be beyond Singapore to do so as well when it comes to the crunch, especially when national interests are at stake.
The need for buyer of last resort?
By TEH HOOI LING
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IN August 1998, in the throes of the Asian financial crisis, the Hong Kong Monetary Authority (HKMA) spent over US$15 billion scooping up the territory's blue-chip stocks and stocks futures.
The authorities were waging a battle against the speculators who were shorting the Hong Kong stocks, futures and currencies. Then Hong Kong Financial Secretary Donald Tsang defended the stockmarket intervention on the grounds that it was to 'deter market manipulation' and to protect 'national interests'.
Hong Kong's move drew flak. Alan Greenspan, then the US Federal Reserve chairman, said he did not agree with what the Hong Kong government had done. 'One, I don't think it can succeed. And two, I think that the consequences of doing that erode some of the extraordinary credibility that the Hong Kong monetary authorities have achieved over the years,' he said.
As events would unfold, Hong Kong's move proved astute and highly profitable and its taxpayers ended up billions of dollars richer.
Fast-forward to today. The US is desperately fighting its ever-deepening financial crisis. In the process it, too, has resorted to numerous desperate measures.
Instead of being a lender of last resort only to banks, the Fed expanded that role to other financial institutions recently. And in July, the US Securities and Exchange Commission (SEC) banned 'naked' short-selling of 19 large financial stocks traded on the New York Stock Exchange (NYSE), including the beleaguered Fannie Mae and Freddie Mac. The SEC - the bastion of free market - described naked short-selling as 'unlawful manipulation' and claimed that its ban was consistent with its mission of 'protecting investors, maintaining orderly markets and the promotion of capital formation'.
And while the US is trying to stop its financial institutions from collapsing it is the Asian stock markets that have borne the brunt of selling.
Year to date, the US stock market has only shrunk by 15.7 per cent. In Asia, China's market has shrunk by 55.7 per cent, India 45.3 per cent, Hong Kong 33.7 per cent and Singapore 27.9 per cent. And among Singapore stocks, it was the Chinese companies or the S-chips that were pummelled the most. Many decent Chinese companies are now trading at less then four times next year's earnings.
Do prices today reflect the fair value of these companies? How much of the selling was due to the drying up of liquidity as funds were withdrawn from the Asian markets? How much was due to 'market manipulations' of short-sellers?
It would not be wrong to say that markets are somewhat disorderly and illiquid now. In times like this, it is not uncommon for prices of even good assets to fall below their fundamental values.
The same holds for the prices of bad, impaired and sub-prime assets. Impaired assets too will have a fair or fundamental value. That fundamental value may well be far below the face value of the security, but it may also be well above the price the impaired asset would fetch in a fire-sale in an illiquid market.
In times of crisis, banks have lender of last resort to go to. In times of stock market turmoil, perhaps there is valid argument for 'buyer of last resort'.
At the very least, it would serve to build confidence.
And as Willem Buiter, professor of European political economy, London School of Economics and Political Science and former chief economist of European Bank for Reconstruction and Development, said: 'If the central bank, or some other government agency, were to act as Market Maker of Last Resort and buy up assets at a price lower than its fair value, but higher than what it would fetch in the free but unfair illiquid market, such a purchase would be welfare-increasing.'
The central bank or the government agencies will be properly rewarded for taking on this risk - as has been shown by the HKMA example.
And when it comes to S-chips, the 'national interest' argument can also be applied. Singapore has been trying to build itself up as the Asian gateway to the world's capital market for regional companies. It won't succeed if companies come here and are valued at only three to five times earnings.
An investor relations practitioner puts it this way. 'In this market condition, we are in need of leaders - people who dare to make the first step.
Value investments
'Singapore Exchange has done a great job attracting Chinese companies to list here. It is now up to our government-linked funds to be the leaders to ensure fairer pricing for these decent S-shares.
'Government-linked funds should stop just looking outside of Singapore for value investments. It is not necessarily that the grass is always greener on the other side of the fence!'
Ultimately, the point is even the US has resorted to desperate measures in these desperate times. It shouldn't be beyond Singapore to do so as well when it comes to the crunch, especially when national interests are at stake.
Published September 15, 2008
Police allow Anwar to stage rally
Event at Selangor stadium set to draw 30,000 supporters
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(KUALA LUMPUR) Malaysian police have allowed opposition leader Anwar Ibrahim to hold a rally this week protesting against a government crackdown widely seen as a move to derail his plans to take power, his party said yesterday.
Mr Anwar: Tension is high after the govt extended the crackdown on the former deputy prime minister
The rally today, expected to draw 30,000 supporters to a stadium in the opposition-held state of Selangor in central Malaysia, will be on the eve of Mr Anwar's bid to lure 30 MPs from the ruling party to join his opposition bloc and form government.
'The rally should be not an issue for the police because we are not taking to the streets. It is a peaceful expression of the injustices suffered by Malaysians,' said Tian Chua, the information chief of Anwar's People's Justice Party.
On Friday, authorities arrested an opposition member of parliament, a well known blogger, and a journalist under the Southeast Asian nation's draconian Internal Security Act (ISA), which permits the indefinite detention of people without trial.
Police said the three had made comments that inflamed racial and religious hatred. The journalist was released on Saturday after the government said she had been taken into custody for her own protection.
The detentions were seen as an attempt to spoil Mr Anwar's bid to seize power from a coalition that has ruled the country of 27 million for 51 years since independence from the British.
Earlier last week, Prime Minister Abdullah Ahmad Badawi's government sent 50 of its MPs on a study trip to Taiwan.
It has denied there were any political motives behind the arrests and the study trips ahead of Anwar's bid to wrest power from the government.
Mr Anwar, 61, was jailed in the late 1990s on charges of sodomy and corruption. A former deputy prime minister, he is facing new sodomy charges which he describes as trumped up.
Political tensions are bubbling after the government extended its crackdown by issuing warning letters to three newspapers.
A leading Chinese daily, for which the released journalist worked, was warned for reporting comments made by a junior official from the ruling party who referred to the country's ethnic Chinese as 'immigrants' and 'squatters'.
The remarks sparked outrage in the Chinese community, which makes up about a quarter of the population.
The opposition fear a repeat of a 1987 crackdown in which almost 120 people were imprisoned under the ISA after then Prime Minister Mahathir Mohamad blamed the media for playing up racial issues. -- Reuters
Police allow Anwar to stage rally
Event at Selangor stadium set to draw 30,000 supporters
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(KUALA LUMPUR) Malaysian police have allowed opposition leader Anwar Ibrahim to hold a rally this week protesting against a government crackdown widely seen as a move to derail his plans to take power, his party said yesterday.
Mr Anwar: Tension is high after the govt extended the crackdown on the former deputy prime minister
The rally today, expected to draw 30,000 supporters to a stadium in the opposition-held state of Selangor in central Malaysia, will be on the eve of Mr Anwar's bid to lure 30 MPs from the ruling party to join his opposition bloc and form government.
'The rally should be not an issue for the police because we are not taking to the streets. It is a peaceful expression of the injustices suffered by Malaysians,' said Tian Chua, the information chief of Anwar's People's Justice Party.
On Friday, authorities arrested an opposition member of parliament, a well known blogger, and a journalist under the Southeast Asian nation's draconian Internal Security Act (ISA), which permits the indefinite detention of people without trial.
Police said the three had made comments that inflamed racial and religious hatred. The journalist was released on Saturday after the government said she had been taken into custody for her own protection.
The detentions were seen as an attempt to spoil Mr Anwar's bid to seize power from a coalition that has ruled the country of 27 million for 51 years since independence from the British.
Earlier last week, Prime Minister Abdullah Ahmad Badawi's government sent 50 of its MPs on a study trip to Taiwan.
It has denied there were any political motives behind the arrests and the study trips ahead of Anwar's bid to wrest power from the government.
Mr Anwar, 61, was jailed in the late 1990s on charges of sodomy and corruption. A former deputy prime minister, he is facing new sodomy charges which he describes as trumped up.
Political tensions are bubbling after the government extended its crackdown by issuing warning letters to three newspapers.
A leading Chinese daily, for which the released journalist worked, was warned for reporting comments made by a junior official from the ruling party who referred to the country's ethnic Chinese as 'immigrants' and 'squatters'.
The remarks sparked outrage in the Chinese community, which makes up about a quarter of the population.
The opposition fear a repeat of a 1987 crackdown in which almost 120 people were imprisoned under the ISA after then Prime Minister Mahathir Mohamad blamed the media for playing up racial issues. -- Reuters
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