Government announces $85 billion loan to save AIG

Government announces $85 billion loan to save AIG

Tuesday September 16, 9:28 pm ET 

Government announces $85 billion loan to rescue AIG to stave off further financial turmoil

WASHINGTON (AP) — In a bid to save financial markets and economy from further turmoil, the U.S. government agreed Tuesday to provide an $85 billion emergency loan to rescue the huge insurer AIG. The Federal Reserve said in a statement it determined that a disorderly failure of AIG could hurt the already delicate financial markets and the economy.

 
It also could “lead to substantially higher borrowing costs, reduced household wealth and materially weaker economic performance,” the Fed said.

“The President supports the agreement announced this evening by the Federal Reserve,” said White House spokesman Tony Fratto. “These steps are taken in the interest of promoting stability in financial markets and limiting damage to the broader economy.”

Treasury Secretary Henry Paulson said the administration was working closely with the Fed, the Securities and Exchange Commission and other government regulators to “enhance the stability and orderliness of our financial markets and minimize the disruption to our economy.”

“I support the steps taken by the Federal Reserve tonight to assist AIG in continuing to meet its obligations, mitigate broader disruptions and at the same time protect taxpayers,” Paulson said in a statement.

The Fed said in return for the loan, the government will receive a 79.9 percent equity stake in AIG.

Earlier, Fed chairman Bernanke and Paulson met with Sen. Christopher Dodd, D-Conn., Majority Leader Harry Reid, D-Nev., and House Republican leader John Boehner of Ohio, to brief them on the government’s option.

“At the administration’s request, I met this evening with Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke. They expressed the administration’s views on the deepening economic turmoil and shared with us their latest proposals regarding AIG,” Reid told reporters. “The Treasury and the Fed have promised to provide more details in the near future, which I believe must address the broader, underlying structural issues in the financial markets.”

On Tuesday, shares of the insurance company swung violently as rumors of potential deals involving the government or private parties emerged and were dashed. By late Tuesday, its shares had closed down 20 percent — and another 45 percent after hours. Still, no deal emerged.

The problems at AIG stemmed from its insurance of mortgage-backed securities and other risky debt against default. If AIG couldn’t make good on its promise to pay back soured debt, investors feared the consequences would pose a greater threat to the U.S. financial system than this week’s collapse of the investment bank Lehman Brothers.

The worries were triggered after Moody’s Investor Service and Standard and Poor’s lowered AIG’s credit ratings, forcing AIG to seek more money for collateral against its insurance contracts. Without that money, AIG would have defaulted on its obligations and the buyers of its insurance — such as banks and other financial companies — would have found themselves without protection against losses on the debt they hold.

“It might not just bring down other financial institutions in the U.S. It could bring down overseas financial institutions,” said Timothy Canova, a professor of international economic law at Chapman University School of Law. “If Lehman Brother’s failure could help trigger AIG’s going down, who knows who AIG’s failure could trigger next.”

New York-based AIG operates an insurance and financial services businesses ranging from property, casualty, auto and life insurance to annuity and investment services. Those traditional insurance operations are considered healthy and the National Association of Insurance Commissioners said “they are solvent and have the capability to pay claims.”
 

Source : AP - 17 Sept 2008

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Singapore MAS tells Lehman entities to seek approval before making payments

Singapore MAS tells Lehman entities to seek approval before making payments 

LEHMAN Brothers’ operations in Singapore have been curtailed by the authorities as a result of its bankruptcy.
The Monetary Authority of Singapore (MAS) yesterday issued a directive to Lehman entities here to seek its approval before paying out any of their own funds to third parties.

This is to ensure that Lehman Brothers and Lehman Brothers Singapore continue to meet their financial requirements, a MAS spokesman said.

Separately, the Singapore Exchange (SGX) said it has suspended Lehman Brothers from taking on new securities and derivatives positions with effect from yesterday.

It is facilitating the orderly transfer of customers’ derivatives positions to other brokers.

The exchange also confirmed that, at present, Lehman Brothers was meeting its financial obligations to SGX’s securities and derivatives clearing houses.

However, the fate of Singapore-based employees at Lehman Brothers and Merrill Lynch continues to hang in the balance but many employees fear the worst.

Said one Merrill employee who did not want to be named: ‘Even an e-mail to reassure our jobs would be nice.’

Staff at both banks here are still in the dark about their future amid one of the worst banking crises in history.

‘No, we haven’t heard anything,’ said one Lehman employee who requested to remain anonymous.

‘Nothing has been formally announced - that’s all I can say to you,’ said another.

Both the Lehman workers at the Suntec City offices yesterday were wearing jeans - unusual attire for the bank’s 270 staff here.

Another sign that business was not quite as usual might be the ‘Casual Friday’ attire that seemed to be the dress code for many others with Lehman lanyards at Suntec City’s foodcourt and Tower 5.

Lehman, the fourth-largest investment bank in the United States, filed for bankruptcy on Monday, while Merrill Lynch managed to avoid that fate through its sale to Bank of America.

Merrill’s Singapore operation comprises about 800 front-end banking staff supported by 900 in back-end operations.

Its Singapore spokesman said it was still ‘too early’ for any announcements about staff but the bank’s workers remain anxious and hungry for more information.

The Straits Times understands from industry sources that some Lehman staff in Hong Kong were getting ready to leave the firm yesterday.

This came after Hong Kong’s stock exchange announced that it had suspended the bank’s right to trade with ‘immediate effect’.

A spokesman for Lehman’s Hong Kong operations declined further comment but confirmed that ‘no formal announcement’ has been made about staff matters.

It also issued a statement saying that its asset management arm will continue to operate on a ‘business as usual basis’.

Source : Straits Time - 17 Sept 2008

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Will my money be safe? Experts tell who is at risk

Will my money be safe? Experts tell who is at risk 

By Gabriel Chen 

AMID all the mayhem on Wall Street, many ordinary bank customers here are wondering: How does all this affect me?

Should I be worried if I have bank deposits, structured products investments, or unit trusts linked in any way to embattled American financial institutions?

We talk to financial experts to find out exactly what the risks are.
Q: If I have deposits with a bank here, will my money be safe?

Mr Leong Sze Hian, president of the Society of Financial Service Professionals, said: ‘In the worst-case scenario, even if the bank is liquidated, you’re protected up to $20,000 under the deposit insurance scheme for banks in Singapore.’

It is very unlikely for banks here to fail as they are subject to tight regulations, and are required to keep a big sum in capital as buffer against its loans.

For example, Citi is incorporated in Singapore, which means that the bank has to put up capital that is ring-fenced from its parent’s.

In other words, the US bank is seen as a separate entity here. This means that if the parent firm goes belly up, that should not affect deposits here, said Mr Joseph Chong, chief executive of financial advisory firm New Independent.
Q: If I have bought a structured product - a complex investment product - such as Lehman Brothers’ Minibond series, how will I be affected?

Minibond was a product offering 4.8 per cent in regular payments and attracted a lot of retail interest when it was launched due to its high payout.

It was also risky.

Experts estimate that investors will get about 30 cents on the dollar if they were to redeem their investment.

‘It will be difficult to get a market price for the Minibond series because the markets for some of the underlying credits have frozen as a result of the credit crisis,’ said Mr Nicholas Tan, head of group wealth management at OCBC Bank.

‘Holders of these instruments will have to wait and see what the liquidation price for these assets will be.’

‘It’s a confidence issue. If you bought anything that is structured by Lehman, you’ll be finished,’ Mr Leong said.

The value of such products - typically based on derivatives, such as a single security, basket of securities, options, indices, commodities, debt issuances, and to a lesser extent, swaps - has fallen so much that there is hardly any interest in them, he said.
Q: Along the same lines, what about investment products with some Lehman exposure such as DBS High Notes 2 and High Notes 5?

The value of DBS High Notes 5, for example, is partly determined by a basket of eight reference entities, including US investment banks Merrill Lynch, Lehman and Morgan Stanley.

It is also structured on a first-to-default basis, which means that if any of the eight reference entities goes bankrupt, then it will trigger what is known as a credit event.

Once triggered, the customer could lose his investment, said Mr Rajan Raju, head of DBS’ consumer banking group.
Q: I have funds managed by the asset management units of banks facing problems in the financial crisis. If banks go belly up, are my funds in trouble?

It depends on what you mean by trouble. Your assets may fall in value, but they don’t just disappear overnight.

This is because the unit trust assets are held by custodians such as BNY Mellon Asset Servicing on behalf of their unitholders, so the assets in those unit trusts really belong to unitholders.

‘The fund managers don’t own the assets, but they just manage them for investors. Even if the custodian banks go bust, the assets still belong to unitholders,’ said APS Asset Management chief investment officer Wong Kok Hoi.
Q: Given the crisis, will the value of my unit trusts fall?

Yes. Fund managers point out that any fixed income fund that is global or US-focused are likely to be holding debts belonging to troubled Wall Street firms such as Lehman and Washington Mutual.

So it really is a question of how much exposure as a whole these funds have to that particular financial firm.

If the exposure is huge, then yes, there will be a negative impact.

In Singapore, for instance, Schroder ISF US Large Cap, an equities fund, has exposure to cash-starved insurer AIG, though this is less than 1 per cent.

Of course, if a fund is heavily exposed to Lehman stock, the value of the fund is likely to have tumbled badly by now.
Q: Should I leap into the plummeting market to grab a cheaper blue chip stock or two?

It depends on who you ask. For instance, if you’re a trader, you could buy at these levels and sell them at 10 per cent higher.

Dr Marc Faber, who told investors to bail out of US stocks before the 1987 so- called Black Monday crash, said that if investors are holding 100 per cent in cash, then they should be putting 10 per cent of that cash in equities now.

‘But if someone’s fully invested in equities, I would tell him to sell on the rally because he’s overly exposed and the economic downturn could be worse than expected,’ he said.
Source : Straits Time - 17 Sept 2008

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Fallout in Singapore: A tighter job market and lower asset prices

Fallout in Singapore: A tighter job market and lower asset prices 

By Alvin Foo 

SINGAPORE and the region will not escape the financial tsunami sweeping through Wall Street, according to local economists.

They told The Straits Times yesterday that the man on the street will feel the fallout from the credit crisis in the form of a tighter jobs market, sinking asset prices and shrinking corporate bottom lines.

MORE PAINFUL SLOWDOWN

‘Asia’s not at the epicentre of this crisis, so I don’t think it’ll be that severe. The region has restructured and is more resilient. We’re not looking at a meltdown. But what it’ll mean is that the slowdown in Singapore will be a lot more painful than what people were expecting at the start of the year.’ - Citigroup’s Kit Wei Zheng
 
Singapore’s growth will probably also be affected. Exports are likely to take a further hit and the domestic economy will experience a slowdown.

However, the economists added that the situation unfolding now is not as severe as during the Asian financial crisis of the late 1990s.

Citigroup’s Kit Wei Zheng said the storm in the US will ‘increase the risk on the export front’, leading to ‘a broadening of the slowdown into the domestic economy’.

‘First to be hit will be the export-oriented sectors such as manufacturing, and the externally-oriented sectors, like tourism. The slowdown will also filter through to affect domestic demand.’

OCBC Bank economist Selena Ling said: ‘It’s a confidence crisis more than anything else. The biggest question now is, who’s next in line?’

The economists pointed to the way this week’s dramatic events could reach down to affect the man on the street.

Consumers are likely to tighten their belts and cut spending and investment in light of plunging equity markets.

That will mean corporate bottom lines will be dampened, and firms will in turn be more cautious about expansion, resulting in fewer jobs created.

These are likely to be accompanied by falling property prices, leaner bonuses and smaller salary increases.

Banks will also turn more defensive, limiting loans for cars, homes or business expansion.

The economists noted that the impact of a giant insurer such as AIG going under would be greater than that of an investment bank like Lehman Brothers.

Ms Ling said: ‘That’s because insurance cuts across both companies and consumers. If an insurer goes under, consumers will be affected via auto, personal policies. It’ll have a greater economic impact.’

Nanyang Technological University economist Choy Keen Meng said the maelstrom will result in fewer jobs for the financial sector.

But he added: ‘I don’t think the deterioration will be substantial…I don’t think we’re anywhere close to the 2001 recession scenario…unless the whole world goes into a recession.’

Other economists also aired the view that the crisis is nowhere near as bad as during the Asian financial meltdown.

Mr Kit said: ‘Asia’s not at the epicentre of this crisis, so I don’t think it’ll be that severe. The region has restructured and is more resilient. We’re not looking at a meltdown.

‘But what it’ll mean is that the slowdown in Singapore will be a lot more painful than what people were expecting at the start of the year.’

Ms Ling added: ‘Asia’s still growing now - that’s the key distinction as compared to the previous period. The crisis is more concentrated in the US, and is spreading to Europe and Japan.’

And economists are not all scampering to trim their 2008 growth forecasts in the wake of Wall Street’s mayhem.

Standard Chartered Bank’s Alvin Liew said: ‘We are still fairly comfortable with keeping our full-year 3.5 per cent forecast unless the third-quarter prelim GDP growth turns out much worse than the 0.4 per cent year-on-year projection we made.’

But not everyone is as optimistic.

Mr Kit said: ‘The current situation reaffirms our bearish view over the next 12-18 months. The 4-5 per cent Government growth forecast range may not be realistic any more, and growth could fall under 3 per cent this year and the next.’
Source : Straits Time - 17 Sept 2008

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If the worst should happen…

If the worst should happen… 

FINANCIAL experts offer an insight into what may happen in the worst-case scenario of an AIG collapse.
Q: What happens to the insurance coverage for my life, health costs, house or car policies?

Former president of the Singapore Insurance Institute Stanley Jeremiah says that if an insurance company goes bankrupt, it may not be able to fully pay future claims. If you make a claim, that claim will be dealt with together with claims from other policyholders.

Q: Can I get back the cash value of my policies?

There is no guarantee of getting the full cash value back. Cash value is different from coverage. It is the amount you receive when you surrender the policy and is part of an insurer’s obligation to you.

Insurers in Singapore are required to maintain separate insurance funds for all policies issued here. These funds are segregated from the insurer’s parent company and are held specifically for the purpose of meeting its obligations to policyholders.

When an insurance firm is wound up, MAS will therefore have recourse to these funds and assets in Singapore. A fairly complex process of distributing the funds to all those entitled to recover them will follow after determining the total assets against total liabilities.

There is some risk that the assets may not be enough to meet all demands to redeem policies for their cash value. But both MAS and AIA Singapore have said that AIA currently has enough capital and assets to meet all obligations to policyholders.

Q: If I have invested in an AIA investment-linked insurance product (ILP) or unit trust, can I get my investments back?

Yes. Alpha Financial Advisers’ chief executive Arthur Lim says that fund managers don’t own the assets but rather manage them for the customers, so the assets still belong to the unit holders. However, the value of the unit trusts may have fallen along with financial markets.

But he also warned that one possible scenario (in a bankruptcy) is that all assets invested in AIA ILPs and unit trusts may be temporarily frozen and any redemption allowed only later.

Source : Straits Time - 17 Sept 2008

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Is Asia safe from Wall St?

Is Asia safe from Wall St? 

Systemic risks are far less than in 1997, yet much can go wrong 

By Ravi Velloor, South Asia Bureau Chief 
  

IN SOME boardrooms in Seoul, people remember how a storied Wall Street name came to the brink of buying the credit card division of Korea Exchange Bank (KEB) in 2001, then walked away at the last minute. KEB had been a victim of the Asian financial crisis and had to sell off part of its assets. Now, scrubbed back into health, some of those assets were on the table but the Wall Street bank wasn’t satisfied.
This month, the boot was on the other foot.

Lehman Brothers, a 158-year-old icon of American capitalism, was on the block. But the chill winds blowing from Wall Street gave the managers of Korea Development Bank, led by a man who once ran the Lehman business in South Korea, reason to pause. In the end, they walked away from the deal.

Similarly, Korea Asset Management Co decided not to buy some loans on the books of Merrill Lynch & Co.

On Sunday, Lehman went bust and Merrill was rescued by Bank of America.

‘There was a time when the Americans used to hammer us,’ says an Asian investment banker who was part of the KEB negotiations in 2001. ‘They talked down to us on transparency, on the need to enhance shareholder value, on strengthening boards and other best practices. Now, all that has blown up in their face.’

Asia itself has come a long way since the crash of South Korea’s Hanbo Steel signalled the start of its economic and financial meltdown in 1997. Outside of Japan, economies are still expanding briskly, though the pace has slowed. Its banks are in better shape. The loan books are cleaner and few here have any significant exposure to the sub-prime crisis.

Unlike in 1997, most notably in Thailand, short-term foreign currency debt is also moderate. Except in the odd case like Pakistan, foreign currency reserves are strong. South Korea had just US$9 billion (S$13 billion) in reserves at the end of 1997. Last month, it had more than US$240 billion.

Systemic risks, therefore, have greatly eased.

Yet much can still go wrong, if only because of the enormity of the financial tragedy unfolding in the United States and the impact of that US$10 trillion economy on the rest of the world.

‘What we are witnessing on Wall Street is a once-in-a-lifetime event,’ says a senior Singapore banker.

‘It is too early to tell how much we in Asia will be affected. Most of us have cleaned up our balance sheets and improved risk management but then, a lot of banking is also interrelated.’

Others worry that Asian financial institutions are too prone to ape some of the intricate financial industry practices of the West, such as credit default swops.

While such tricky manoeuvres hold forth the promise of massive reward for the banks and for the experts who put them through, there is fear that this may sometimes be happening at the cost of massive risk to the institutions themselves.

Some analysts think that Asia, after beavering away at improving its banking and regulatory standards post-crisis, may have got a trifle complacent about protecting the larger economy.

For one thing, many governments failed to build up domestic spending enough to cushion themselves against a drop in demand in their top market - the so-called G3 economies comprising the US, European Union and Japan.

The Asian Development Bank (ADB) took note of this in its latest Outlook, released this month.

‘Asia remains heavily dependent on the G3 for its major export markets and has not uncoupled from industrial countries’ business cycles,’ the ADB said. ‘That uncoupling is a myth.’

With demand dropping off in the G3, export-led Asian economies are having to fight harder to grow.

China’s recent cut in interest rates is an effort to sustain the double-digit expansion that has helped lift living standards for millions of its citizens. Indeed, some analysts think The People’s Bank of China’s move signifies a ‘recoupling’ with the US Federal Reserve.

‘It is too late for this cycle for Asia to consider decoupling Asia from the G3,’ says Dr V. Ananth-Nageswaran, head of strategy for Bank Julius Baer in Singapore. ‘But never too late for the next cycle.’

Optimists will hope that the Lehman-Merrill episode may be the trough that spells a reversal of the current turmoil in the global financial edifice.

But even as their own financial institutions are vastly stronger now than a decade ago - much of the cosy relationship between conglomerates and their banking arms has been unwound, for instance - Asian investors are bound to worry.

Lehman’s biggest unsecured creditors include a host of Asian companies with names like Sumitomo Mitsui, Mizuho and Bank of China.

Yesterday, there were lines in front of the Singapore offices of AIA, the subsidiary of giant insurance company AIG that is seen as the institution most at risk now, particularly after a ratings downgrade.

Many Singaporeans wanted to dump their AIA insurance plans, even though the Monetary Authority of Singapore (MAS) has said AIA’s Singapore funds are segregated from the parent company’s. The regulator had also advised Singapore customers to avoid acting ‘hastily’.

Like MAS, other Asian regulators and the industry under their supervision should probably be ready with damage control measures, even if the crisis is not of their making.

Looking out on the carnage on Wall Street, it is hard to imagine that Merrill’s famous bull logo will disappear from the world’s financial markets.

Goes to show perhaps that when a herd stampedes, even the sturdiest animal has to yield. And that is why much more could still go wrong.

 
Source : Straits Time - 17 Sept 2008

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Singapore MAS advises against rush to give up policies

Singapore MAS advises against rush to give up policies 

By Lorna Tan, Finance Correspondent 
  

THE Monetary Authority of Singapore (MAS) yesterday urged jumpy AIA policyholders not to rush to surrender their policies, saying that the insurer is still able to meet all its liabilities.
Surrendering policies early might mean financial losses for customers and the loss of potentially important insurance protection, the regulator warned.

The MAS statement came as about 1,000 anxious policyholders thronged insurer AIA Singapore’s Customer Service Centre in Finlayson Green yesterday.

Many wanted to surrender life policies amid fear and uncertainty over AIA’s future financial stability. AIA is a subsidiary of the world’s largest insurer American Insurance Group (AIG), which some fear may be on the brink of collapse.

MAS’ advice is shared by financial experts, who urged customers to wait for further developments and greater clarity.

Financial adviser Providend’s head of risk management and special projects, Mr Eddy Cheong, said one risk of surrendering early is that customers might not get much cash back.

This is because policies such as whole life and endowments are structured as long-term contracts, he said.

Another risk is that customers may not be able to secure the same coverage and premiums from other insurers if, for instance, their health has deteriorated since the time they took out the AIA policy.

Last evening, AIA assured customers that it has more than sufficient capital and reserves to meet all its obligations.

The firm said that like other life insurers here, it maintains separate insurance funds for all policies issued in Singapore, including investment-linked policies - life policies where some of the premiums are invested in stocks and so forth.

‘The funds maintained in Singapore are segregated from AIG and are held specifically for the purpose of meeting our obligations to policyholders,’ said AIA’s executive vice-president and general manager, Mr Mark O’Dell.

This point was also stated in MAS’ statement, which added that the value of these assets is not linked to AIA or AIG’s financial condition. Still, like all investments, their value may be affected by general market conditions, MAS said.

Mr O’Dell added that although AIG faces short-term liquidity pressures, it has a strong, well-positioned business in Singapore.

‘We would like to assure our customers of AIA’s commitment to meeting their needs,’ he said.

With 4,000 agents and over two million policies in force, AIA is the one of the largest insurers operating here. It offers a range of products such as whole life, term, endowment, investment-linked insurance policies, personal accident, home insurance, health insurance and education saving plans.

Yesterday, about 40 AIA customers were already waiting outside the centre when it opened its doors at 8.45am.

By late morning, this had swelled to hundreds of customers eager to make inquiries and, in some cases, surrender their policies.

They were not daunted by the long waiting time of two to three hours to see an AIA staff member after obtaining a queue number.

In the queue was AIA customer John Tan, 53, who wanted to surrender five AIA policies that he has owned for about 12 years.

‘There is a lot of uncertainty in the US market and financial institutions are collapsing one by one. If AIG files for bankruptcy and AIA goes bust, our funds may be frozen or suspended and I may lose everything,’ he said. His annual premiums amounted to $50,000.

Source : Straits Time - 17 Sept 2008

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Temasek’s stake in Merrill

Temasek’s stake in Merrill
IF this were a boxing match, it could be said that Temasek Holdings was saved by the bell. Once sitting on huge paper losses, the Singapore investment fund can instead now look forward to a potential gain on its investment in Merrill Lynch. But, while it has been spared further pummelling, for now at least, much uncertainty still surrounds the stake.
Bank of America (BOA) is buying Merrill for US$50 billion or US$29 per share by exchanging 0.8595 BOA common stock for each Merrill share. Temasek is the single largest investor in Merrill with a stake of about 14 per cent after injecting some US$5.9 billion, or paying an average US$23.11 a share since last December.

It stands to reap a gain of about US$1.5 billion if it takes up the BOA offer. Temasek would also gain a stake in a global financial giant with a more diversified business than investment bank Merrill. That is not a bad result, although it is more the result of fortuitous circumstance than of a deliberate investment strategy. And while the potential upside can be large, right now the situation remains on edge.

For one thing, Temasek’s gains will only be intact if BOA shares hold their ground. But on Monday, following news of the purchase of Merrill, BOA shares fell 21 per cent or US$7.19 to US$26.55. It’s impossible to make a call on BOA’s share price in the near term, given the volatility in the markets. Falls of such extent can quickly turn gains into losses, if only on paper. Merrill is also facing a shareholder suit claiming that efforts to sell the company to BOA were unfair to shareholders.
Long-term, the question is how Merrill will change BOA. The acquisition has already led Standard & Poor’s to downgrade its ratings for BOA. While Merrill will give BOA a large brokerage franchise, it will also introduce more residential housing risk to BOA, notably in the form of its sizeable holdings of collateralised debt obligations (CDOs) backed by sub-prime residential mortgage-backed securities, at a time when the US mortgage market continues to slump. So the possibility of future writedowns cannot be ruled out.

The acquisition also takes place shortly after BOA’s July acquisition of troubled mortgage lender Countrywide Financial Corp, which will place further pressure on BOA’s capital. And while BOA has a history of successfully integrating bold acquisitions, the purchase of Merrill carries integration risk, particularly since it comes during a period of severe market turmoil. BOA has never integrated an investment bank the size of Merrill.

So the jury is still out on Temasek’s investment in Merrill. If anything, the events of the past week have demonstrated again the risks of buying too early in a prolonged market downturn. The fall of Lehman Brothers and Merrill Lynch is also a reminder that in such an environment, even buying prestigious brand names provides no guarantees.

 
Source : Business Time - 17 Sept 2008

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Opposition can form new govt: Malaysia Anwar

Opposition can form new govt: Malaysia Anwar

More than required Front MPs have given commitments, he tells media
By S JAYASANKARAN
IN KUALA LUMPUR

IN a move that was slightly anti-climactic, Malaysian opposition leader Anwar Ibrahim announced yesterday that the opposition coalition could form the next government but stopped short of revealing the names or precise numbers of defectors.

 
Public support: Anwar addressing supporters waving national flags during a gathering in a stadium in Petaling Jaya, outside Kuala Lumpur, on Monday 
‘We have received firm commitments from members of Parliament in excess of the numbers required to form a new government,’ he told a packed press conference.

Anwar said he had written to Prime Minister Abdullah Ahmad Badawi requesting a meeting with him to discuss the terms of the takeover, calling such an approach ‘conciliatory’.

‘We will reveal the names (of the defecting lawmakers) to the Prime Minister if he wants,’ Anwar said. Pressed on the exact numbers, Anwar hedged: ‘More than 31.’

The Opposition needs 30 seats to retain a simple majority.

Separately, the treasurer of Parti Islam SeMalaysia (PAS), Hatta Ramli, told newsmen that Anwar’s coalition had received commitments from 35 National Front lawmakers.

Asked to name names, Anwar said that was ‘impossible as the government would immediately begin harassing them’, adding ‘we do not want another Teresa Kok’, referring to the opposition lawmaker who was detained on Friday under the Internal Security Act for allegedly trampling on religious sensitivities.

Even so, his statements are unlikely to impress Mr Abdullah who told senior civil servants yesterday that the Opposition leader was ‘just bluffing’.

One political analyst said that even if presented with a list of would-be defectors, ‘no Prime Minister in the world would resign on such grounds’.

Indeed, Anwar is expected to be lambasted by the mainstream media today for his apparent lack of credibility.

As if anticipating the response, Anwar told reporters that no one had believed him when he talked about taking over five states and denying the Front its two-thirds parliamentary majority in March 8 general elections.

Nor had they believed him when he said he would increase his majority in the Permatang Pauh by-election.

‘But all of that actually happened,’ he said to loud cheers from his supporters.

It is not clear if Malaysia’s King can intervene even if he was convinced of Anwar’s support.

The only way for Anwar to get to the top would be to win a parliamentary vote of no-confidence against the Prime Minister, the analyst said. Then all it would take for Anwar to be appointed prime minister was an audience with the King who had to be satisfied that Anwar really had the support from a majority of parliamentarians.

 
Source : Business Time - 17 Sept 2008

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AIA policies a different animal from Lehman’s Minibonds

AIA policies a different animal from Lehman’s Minibonds

By GENEVIEVE CUA

FROM reading the news pages which are replete with financial disasters, it may seem that individuals here who have put their savings into AIA and Lehman instruments face dire outcomes.
Losses are a foregone conclusion for those who have invested in a derivative product called Minibond where Lehman was the issuer. But that certainly is not so for AIA, one of Singapore’s largest and most conservative insurers.

Hitting the panic button on insurance policies is almost always a mistake.

But first on Minibonds and their ilk. Over the last few years, structured products worth billions of dollars have flown off the shelves of banks and brokerages to investors that barely understand the instruments that they are investing in.

Structured credit, usually packaged as relatively safe, bond-like instruments, are particularly insidious. This is because as far as the investor is concerned, he should get the coupon and principal at the end. So far so good - it looks and smells like a bond.

But the truth is far different. In reality, the investor has last priority in the case of a ‘credit event’ - an euphemism for a default or credit downgrade. The investor actually does not invest in bonds.

Instead, issuers use derivatives to artificially create an instrument with regular coupon payments and one single maturity date.

 
 
In many such instruments, including the Minibond, the arranger fashions a credit default swap. The swap counterparty which is likely to hold the bonds or securities in his books pays a premium to protect his assets from default.

The premium is then paid to the investor in the form of coupons.

Effectively, the investor has sold protection; his funds are used to protect the swap counterparty from any default in the latter’s holdings of bonds. This is a far cry from the investor’s belief that he has bought protection, or a bond where the principal at maturity should be paid back.

In the Minibond case, disaster has struck not in the form of a credit event in any of the credit names to which the numerous issues were linked to. Instead, the bombshell is the failure of the arranger and swap counterparty - Lehman itself.

That is ironic because prospectuses usually devote pages to explain the risks of the credits to which a structure is linked, giving details of various credit ratings. But explanations of the counterparty and issuer risk are sometimes dispensed with in just a paragraph or a page at best.

Segregated funds Minibond investors will have to resign themselves to a steep loss. Typically, there is a recovery value when a credit structure is unwound. But liquidating assets at this time fetches only distressed prices.

The situation that AIA policyholders face, however, is far different. The crisis snowballed when AIG sought US$40 billion in funds to stave off a liquidity crisis; it has posted US$18 billion in losses from guarantees that it wrote on mortgage derivatives.

First off, AIA last night issued a statement that its insurance funds here are segregated from its parent AIG Inc. That should allay any doubts over whether its assets can be seized by AIG Inc as collateral to help shore up its liquidity crisis.

On the issue of its stability and financial strength, AIA has more than enough capital to meet policy obligations. In an interview last October, AIA general manager Mark O’Dell told BT that its aim was to maintain a capital adequacy ratio above 200 per cent - ‘which is well within the strongest band’. ‘We’re easily within the 230-240 per cent range,’ he said then. The MAS’s required minimum is well below that.

Of course, insurance funds are not shielded from market risk or loss. But AIA could well be the most conservative of local insurers. As at end-December last year, its participating fund was valued at $14.8 billion. Almost three-quarters of that is invested in fixed income securities. Only 10 per cent is in Singapore equities and 4 per cent in mutual funds and foreign equities.

As for policyholders who have put money into investment-linked AIA products (ILPs), there is even less of an issue in terms of the vulnerability of their assets to AIG Inc’s problems. ILPs are effectively unit trusts where investors own the units and bear the market risk.

Of course, the asset values of those funds will reflect the mauling that global markets are currently enduring. But panicking and redeeming units at this time will only exacerbate the falls in the funds’ asset values.

Insurance - particularly policies with substantial sums in protection value - is a long-term commitment where the decision to terminate should not be made lightly. This is because an individual in poor health may not be able to secure protection elsewhere.

What’s more, the contracts are structured with long breakeven periods. So, early termination is usually done at a heavy loss.

AIA’s policyholders should sit tight. This crisis is painful, but it will pass.
Source : Business Time - 17 Sept 2008

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Mindy Yong

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