Random commentary

(Ford Expedition 2008, gorgeous but a gas guzzler)

THE Big Three automakers in the United States are asking for their own bailout package. Why? What good will that do for the U.S. economy? These automakers — Ford, General Motors, and Chrysler — have long been inefficient. They make huge expensive SUVs that guzzle up a lot of gas! It's no wonder most Americans buy Japanese-made sedans. Compact, fuel-efficient, and reasonably-priced. Why should American taxpayers for the Big 3's incompetence?

At the U.S. House of Representatives' recent hearing, the chief executives of the Big 3 said they cut their expenses every which way. But guess what? They flew their company jets to get to Washington. This is a repeat of AIG whose executives were found to have gone on a chi-chi Caribbean vacation even as the company was going under, and just as Treasury Chief Hank Paulson announced a credit line for it. The gall of these CEOs. Such excesses!

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I had lunch recently w/ a friend whom I call "El Presidente", a former banker and one-time head of a large private entity conducting vital business in the local market, and he was mightily incensed at the bailouts in the U.S. What gets his goat are what he feels are unnecessary and violative business practices by those companies to be bailed out, such as hedging.

Hedging is basically described as taking a position on a commodity today, and betting on its price in the future. Like some airlines hedge on oil prices, betting that the commodity will be priced higher in say 3-6 months against its current price. So if the current market price of oil is $56/barrel, and an airline feels oil prices will again shoot up to $100/barrel in say a year, it can lock in its oil purchases at the current price. Companies hedge on raw materials or vital products they need for their operations to minimize the risks of working in a highly volatile environment when even a small event somewhere in the world can send price shockwaves in the global market.

But El Presidente thinks hedging distorts the markets and really doesn't resort to anything beneficial for the one who practices it bec. you don't always win. Meaning, in the case of the airline which hedges on its oil needs, if it bets that the commodity will go to $100/barrel a year, but in actuality, it falls to even lower than $56, then it loses out and it ends up w/ very expensive oil. Basically it is gambling, he says.

But then I think going into business is a gamble in itself. Your business can either prosper or fail. All you can do is minimize the risks in your business, and one of those tools available is hedging. So no, I didn't agree w/ El Presidente.

Arbitrage? Derivatives? Well now that's another story. I'll save that discussion for another day.

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So someone must be doing cartwheels in Malacañang because she made a new "friend."

Not since that illicit phone call made by the presidentita to former Comelec Commissioner Virgilio Garcillano ("Hello Garci") at the height of the 2004 elections has a phone call been much talked about, blogged, derided and a constant source of news bits in the tri-media.

It's really so sad to realize the depths our country, Philippines my Philippines, has sunk that the President-elect of the United States, didn't return the congratulatory phone call of our illegally-elected presidentita until two days ago. She made two phone calls earlier which were just noted down by White House operator and Barack Obama's staff but the presidentita was not among the first heads of state that he had called back.

Undeterred, the presidentita flew out to Chicago, purportedly to meet w/ the local Fil-Am community (and probably trying to find a direct connect among them to Obama), but still, she didn't get a meeting w/ Obama even if he was also in the same state. Grabeh naman the lengths to which this woman would go to just so the new U.S. President will notice her. Gumastos pa ng malaki, our taxpayers' money 'yan ha! all for nothing.

Finally, Obama calls her on Tuesday, at the ungodly hour of 3:17 a.m.! Obama's staff isn't stupid. They knew very well what time it was in Manila before placing that call. They were probably hoping the presidentita was asleep already. But noooo! Sympre excited, the presidentita answered the VIP call. Nanginig-nginig pa siguro sa kilig!

But then there were no details about the phone call. Did it actually take place? It doesn't matter really because all signs point to the fact that in the eyes of the newly-elected U.S. President, the Philippines means nothing. It is not a military power like the UK and Australia; it is not a huge trading partner; it is a country w/c the U.S. taxpayers still support through grants, out of delicadeza for some shared WWII history, and w/c are only inefficiently used by our corrupt gov't agencies; it is only a country to sell excess harvests by American farmers; it poses no strategic importance to the U.S. militarily bec. we kicked out its bases; and what's more, we have an illegally-sitting president.

If you were Obama, papansinin mo ba si GMA?

35 insurance firms face closure

By VG Cabuag / Reporter
BusinessMirror, Oct. 21, 2008

By the end of this year all insurance companies must have a capitalization of at least P100 million, but about 35 firms of the roughly 70 insurance companies, mostly small players, have not complied with the Insurance Commission (IC) and face being shut down.

Who these companies are have not been disclosed by IC Deputy Commissioner Vida Chiong, who said on Monday, “We will issue a cease-and-desist order to them if they have not complied.” (Click here for the rest.)

Actually, you can tell which insurance firms these are. You can download the lists of insurance companies (life and non-life) and their paid-in capitalization via the Insurance Commission's web site. But in the interest of the public, I'm posting the lists here.

Life insurance firms

Non-life firms

As per the Corporation Code of the Philippines, corporations have to have at least 25% of their authorized capital paid up. So get your calculators cracking to find out w/c of these insurers you should avoid.

(Eduardo T. Malinis runs the show at the Insurance Commission. Photo from the IC web site.)

It is interesting to note that the Insurance Commission has been sitting on this problem for two years. Only when the mighty AIG fell that the agency's heads thought of actually doing anything about the poor capitalization of the country's insurance firms. Well, as they say, better late than later.

So if you're afraid of the sub-prime credit mess in the U.S. will have a great impact on Philippine banks, well, guess again. What we should be worried about are our insurance companies and their very low capitalization. A high capital is vital to protect the insured from a collapsing insurance company. It is the government's reponsibility to make sure that if anything untoward happens to an insurance firm, the latter will have enough capital/money to pay the benefits to its clients or refund them their premiums.

As usual, this government is only great on soundbytes but very poor in actual implementation.

The Joey Cuisia extravaganza

(Joey Cuisia, left, and Michel Khalaf at the Philamlife presscon, Oct. 6, 2008)

I HAULED my carcass out of the house today and into a cab to attend the press conference of Philamlife CEO Jose "Joey" L. Cuisia. The venue of the presscon was on the fifth floor of the company's still stunning headquarters along UN Ave. in Manila, a landmark in Philippine architectural history. I was a tad late and the room was fully packed by media from print, radio and TV.

The news of AIG selling Philamlife, one of its crown jewels, was already announced last Friday evening, right after the conference call of AIG CEO Edward Liddy w/c we listened to via the company's web site. The American insurer had to raise funds quick to be able to replenish its $85-billion credit line w/ the Federal Reserve Bank of New York. So it wasn't surprising that almost everyone who was everyone in media was there. Imagine seeing even publishers and the editors attending, I suspect because they were Philamlife insurance policy holders or mutual fund investors. I know of a couple of reporters whose mutual fund investments were dragged down because of the high bond prices and the global uncertainties owing to the sub-prime credit mess in the U.S.

For the most part, Cuisia tried his best to explain how the sale would push through but was honest enough to say that he wasn't exactly sure how the company would be sold. (The Philam Group has about 10 separate units under its wings among them Philamlife, Philam Plans, PhilamCare, AIG PhilAm Savings Bank, etc.). He didn't know if it was to be sold as a group or in separate units as some possible buyers have already been mentioned in some newspapers as being keen only on the insurance concerns, or in the banking units. AIG had appointed The Blackstone Group and JP Morgan to handle its divestiture program.

(Cuisia mobbed by the reporters after his presscon.)

“I think there is some value to selling [Philamlife] as a group, but you know, it will again depend on the kind of interest that we have. If there is a strong interest in say, Philamlife, but not as strong in the affiliates and [the buyers] will pay a very good premium for Philamlife, these investment bankers may recommend to AIG to sell the units separately. It’s not up to us, it will be up to AIG to make that decision. We will, of course, give our own input, but I think at this point, we cannot disclose that,” Cuisia said.

A former central bank governor under President Cory Aquino's term, Cuisia tried to reassure policyholders again that Philamlife had enough financial muscle (about P80 billion in reserves) to answer any demands for a payout, in case policyholders wanted to surrender their insurance contracts. Michele Khalaf, Philamlife's deputy president and chief operating officer, said some did surrender their insurance policies but these were "immaterial" and didn't make a dent in the insurance firm's bottomline considering that it had about P143 billion worth of insurance contracts owned by individuals or corporates.

For the most part, the presscon was somber even as Cuisia tried to be upbeat about the prospects of Philamlife's future. But there was a few light-hearted moments such as when Mam Yeng Galang, business editor of Malaya, asked him what he thought about "another former [central bank] governor heading the new Philamlife." To w/c Cuisia shot back: "What former governor? You be more specific. Are you referring to a former governor that sits in a competing firm?" w/c cracked us up. After snickering, Cuisia decided to give us a "no comment."

(Gabby Singson, left, who until recently was financial adviser of taipan John Gokongwei, right. Photo from Ateneo web site.)

Mam Yeng of course was referring to no other than former Bangko Sentral governor Gabriel C. Singson who now chairs Grepalife, a unit of the Yuchengco Group of Companies. The ribbing by the media was so because Lolo Gabby had already announced last week that the Yuchengcos (yes the very same ones who owned the now shuttered Pacific Plans Inc.) were interested in buying Philamlife. And everyone knew that while Cuisia and Lolo Gabby are not enemies, they keep a cool distance from each other. Uhuh, yeah, the term "frenemies" is apt in the description of these two's relationship. Methinks this is just another play of an De La Salle (Cuisia)-Ateneo (Singson) rivalry.

It was interesting that even while Cuisia didn't want to say anything pointed about his successor at the central bank, his Philamlife colleague apparently wanted to make it known that they weren't exactly hot about the idea of the Yuchengcos buying the insurance firm. Khalaf said AIG had outlined "clear criteria" for prospective bidders for its units. “One, it has to be a strong reputable brand name; two, it has to be an institution that is strong financially; and three, that it has to be a strategic fit as far as providing the employees and the stakeholders of the compant with growth potential and to continue the legacy of Philamlife.

(Despite the prospect of being jobless soon, Michele Khalaf still manages a smile for our camera.)

“I think if you apply the criteria to some of those rumored to be interested, I think automatically you can draw your own conclusions as to wheter that interest will be seriously considered or not.”

Oof! was that a subtle jab at the Yuchengcos' flameout in Pacific Plans? I can just hear the PEP Coalition members gnashing their teeth.
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ON a personal note, it will be sad to see Philamlife go to another owner. It is one of the few efficient insurance firms around these parts. When my Pop passed away last year, we had no problems at all claiming the benefits (my Pop's policy dated back to the 1960's can you imagine?!).

In contrast, Insular Life was sooooo super slow in acting on our claim even if our requirements were complete. It was a model of inefficiency as papers kept on being shuffled bet. us and the Insular office as their claims people kept on asking yet another proof of my Pop's death from us. I would not recommend Insular Life to anyone.

Martial Law in the U.S.?

WITH all that's been happening in the U.S....the sub-prime credit mess, collapse of Fannie Mae and Freddie Mac, the instability of its insurance industry and near collapse of its major investment houses, plus the continuing debate in the U.S. Congress over the bailout package, I am getting more convinced that the presidential election in November may not happen at all.

Far-fetched ya think?

President George W. Bush is sounding the alarm, issuing veiled threats, and predicting a depression that the U.S. economy may not be able to get out of in a while; he is saying you guys better get with the program and approve the bailout package or you're dead. Unfortunately, congressmen are hemming and hawing over the plan because they know their constituents are against it. Why give money to those stinking greedy CEOs with houses in the Hamptons, when the rest of America can hardly make the next mortgage payment?

I mean, stranger things have happened...the U.S. did go to war and invade Iraq on the wrong information that it had weapons of mass destruction. So there is a precedent for irrational behavior. Bush could very well declare martial law on the pretext of "saving" the economy. He can argue that he is only after the welfare of the public and national security, and that bailout package is the only way to get the economy back on its feet again. After all, the chief executives in the other countries were the ones egging him to put such a plan together. So Bush can say he is not only saving the U.S. but the global economy. He needs this bailout plan in place like yesterday.

Bush and a messianic complex? I wouldn't put it past him.

(Ballot box photo from newmediabytes.com.)

Ah Ludwig, you were right

“There is no means of avoiding the final collapse of a boom brought about by credit expansion.”

- Ludwig von Mises
(1881 – 1973)
Austrian Economist, philosopher and a major influence on the modern libertarian movement

I guess that says it all about the U.S. economy, ey? Dontcha worry my fellow Pinoys, the remittances of our parientes abroad will save our economy yet.

Good morning pow.

Stay calm

IN case you guys are still shaking your heads, trying to figure out what all the fuss is about, yes we are now caught up in a global financial flummox because of the interconnectedness of the world today. No doubt, we here in da Pinas will be affected, but we can only cross our fingers that our banks are strong enough to withstand the shocks.

As a depositor, I am staying put. I am keeping my money in our banks and praying that they have not been "irrationally exuberant" in their credit transactions and investments. No sense in withdrawing our monies and stashing 'em in Switzerland (or worse, in your piggy banks at home) because it will just add pressure on the banks, and exacerbate the delicate situation they are in.

I have friends who are already feeling the hit because the value of their investments in mutual funds and UITFs (unit investment trust funds) have dropped dramatically. I have advised them to stay with those funds because right now, all their losses are on paper. Unless they decide to liquidate their investments, of course. Just breathe and hang on to the belief that those investments are gonna stabilize and move up as soon as the financial world settles down. (As I have been saying since last year, stick w/ the safer deposit instruments like time deposits and 5-years tax-free accounts.)

I am pinning my hopes on the pronouncements of Bangko Sentral Gov. Amado Tetangco Jr. that the Philippine financial system is healthy.

And so read on:

Why AIG matters
or why the Fed decided not to let the insurance company fail like Lehman Brothers

WASHINGTON—After World War II, a far-flung insurance company in China run by an American businessman took a risky bet insuring that about 20 boats filled with Americans would make it back to the United States.

From those distant beginnings grew American International Group (AIG), which became one of the biggest insurance companies in the world, under the leadership of Maurice “Hank” Greenberg.

With more than $1 trillion in assets, AIG is bigger than Fannie Mae, Freddie Mac, Merrill Lynch, Lehman Brothers or the former Bear Stearns.

AIG’s subsidiaries sell life, auto, property, workers’ compensation, kidnapping and ransom and many other types of insurance. The company offers retirement plans such as annuities. Its financial markets subsidiary services include investment banks, pension funds, governments and other institutional investors, and AIG manages portfolios of stocks, bonds and real estate. The company is the nation’s largest leaser of aircraft.

Among the activities it ventured into: buying mortgage-related securities and offering other firms an exotic type of insurance to cover losses from investments tied to mortgages.

That proved to be a problem. (Click here for the rest.)

BTW, do you know AIG's corporate slogan? Tic, toc, tic, toc...sirit na? "The strength to be there." (araykow!)
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Also check out the editorial of BusinessMirror today: (As Michael Douglas' character Gordon Gekko in the 1987 film Wall Street said: "It's all about the bucks, kid. The rest is conversation." Indeed.)

Tale as old as time

BY this time, the breathtakingly simple way—“hubris and greed at work”—by which this week’s disaster on Wall Street has been dismissed is now a tune long worn.

And yet, as simple as it may seem, it forms the thread within each of the key lessons that may be derived, as some form of morbid consolation, from this crisis.

What is one to make of a spectacle where no less than the titans of New York’s financial empire are falling by the wayside, their pedigree notwithstanding: investment bank Lehman Brothers Holdings Inc., Merrill Lynch, and now, the insurance giant AIG or American International Group? The full stories behind their debacles won’t be told yet as details keep unfolding while the markets swoon. But from the broad sketches of what went on, it is clear that the crisis combines the timeless tale of human folly, the failures of regulators and a system that brought so much wealth to millions around the world but is now its own worst enemy. (Click here for the rest.)

And now I leave you with these thoughts from the master of greed himself, Gordon Gekko:



(Note: Photo of AIG building is from the cover of its 2007 annual report available on its web site .)