THE MOUNTAINEER

Edison L. Baddal
Bailout: Trend to a policy shift

BONTOC, Mountain Province -- With the US congress having stamped its approval of President Bush’s $700 billion bailout plan on Oct. 3, it is expected that the financial turmoil created by the bankruptcy of many wall street bankers will level off to a certain extent. However, even with this pump-priming initiative of the US Government, it failed to erase the jitters in the financial markets in Europe and Asia with the unbelievable fall of many Wall Street investment banks.

These banks, generally regarded as masters of the universe, are the chief clients of wall street, a global financial king which dictates the dynamics of investment trading worldwide. In the same vein, wall street executives are looked upon not only as financial whiz kids, being mostly “ivy-league” graduates, but also financial deities as they are immensely knowledgeable of the trends in the financial market and its impact not only on the US economy but on the rest of the world.

At any rate, the fall from grace of these leviathans in investment banking, like dominoes or stack of cards, inexorably affected the financial market of all countries. Shock waves of tremendous magnitude coupled with trepidation and fear accompanied the collapse of the US financial market. This is due to the fact that almost all the financial markets and systems of the capitalist world are tied up with the day-to-day operations and developments of wall street.

The disastrous fall transpired in the first two weeks of September but this was portentously preceded by the acquisition of the US Government of investment banks Fannie Mae, Freddie Mac and Bear Stearns within the last 15 months after the financial crisis that struck the USA in 2007.

First to fall was the Lehman Brothers in September, once an invincible multi-billion investment bank, whose bankruptcy threw wall street into panic and turned the finance and business world around the globe upside down. Most intriguing about this is that this financial empire once bought a tottering investment bank named Archston to the tune of $3.9 billion last Oct. 2007.
This was the fourth month of the financial crisis which transpired last year starting July, 2007.

The financial crisis last year came to the fore when two hedge funds managed by Bear Stearns, another huge investment bank, imploded and led to its purchase by JP Morgan. Back then, Lehman Brothers seemed to have been unaffected by the financial crisis as it has enough liquidity to buy the assets of Archston.

Nobody had the hunch that 11 months later, Lehman will suffer implosion of its funds itself that triggered its bankruptcy. Closely following suit is the downfall of another investment banker, Merill Lynch, whose assets were quickly bought by the Bank of America. Another investment banker, Washington Mutual, also fell and included to the list of distressed firms that need to be bailed out by the Fed.

Consequently, the unexpected insolvency of these financial giants one after the other thus left Morgan Stanley and Goldman Sachs as hold-outs in the investment banking business. Nonetheless, perhaps anticipating a precipitate fall or entertaining angst on what befell their bigger competitors in the business, they self-demoted their category from standalone investment banks to holding companies so as to access federal bailout funds to hedge against future insolvency.

Prior to the fall of these huge investment banks, AIG, the largest US insurance company with insurance interests spread out in many countries around the world including the Philippines, suffered heavy book losses in its transactions. Its innovative financial products called credit-default swaps and collateralized debt obligations failed to sustain its profitability as the management failed to calculate adequately the risks involved in peddling these products. Thus, it failed to predict accurately the magnitude of its losses which at first it presumed to be about a few billion dollars but which turned to be a whopping hundreds of billions of dollars after sometime.

Honesto C. General, in his column Sept. 24, fancied that the AIG may have gotten in dept trouble with the New York Insurance Commissioner. He averred that “under the insurance code, the AIG is required, as any insurance company in the Philippines, to keep its admitted assets (assets admitted by the Insurance Commissioner, not by AIG’s accountants, at 110 percent of liabilities. This is the mark of insolvency.”

The admitted assets below this threshold causes a dilemna on the part of the insurance company and for the AIG, in order for it not to lose its license and to keep its business afloat, the Fed rescued it with an $85 Billion loan. Right now, it is selling some of its assets in some parts of the world in order to pay some of its debts to the Fed. Philamlife, its subsidiary in the Philippines, and probably its subsidiary in the Bahamas are among its assets that it is putting up for sale to the tune of 402 billion pesos. Grapevine sources intimate that SM is among the takers.

By financially pumping billions into the finance industry, the US Gov’t will buy bad assets from banks and other financial firms through the Treasury and the Fed. These bad assets, considered as nonperforming assets in layman’s terms, are the toxic subprime mortgages invested in the banks that failed to bring money to said banks when real estate prices fell.

This plunge, after a time of bubble, destabilized and choked the smooth dynamics of the finance industry. Nevertheless, the meltdown of the industry that triggered the US economic crisis, with its crippling effects being felt worldwide, came to a head when the Lehman Brothers, a giant investment bank filed for bankruptcy.