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Asian stock markets declined after President George
Bush signed the so-called $700-billion bailout law. As of this
writing yesterday, the Philippine Stock Exchange Index was down 2.55
percent to 1,574 index points. The Philippine peso is also weakening
against the US dollar which itself is very weak.
The bailout law will enable the
US Treasury department to buy so-called toxic assets of banks,
mortgage companies, investment banks and other US-based investors.
The good that it will do is that such buying will set prices for the
assets or real estate holdings. On that basis then, the banks and
the financial houses can plan. They can compute just how much is the
value of their toxic assets, how much are their losses and how much
they can generate from their remaining assets. Those holding too
much of toxic assets will suffer a run and thus go bankrupt. So
expect more bank bankruptcies in America and in Europe, which is
just beginning to cope with the financial meltdown.
The prices at which the US
government buys toxic assets will also help ailing insurance giant
AIG determine its actual losses. AIG has booked about $1 trillion in
assets but a lot of it is trash right now. The Wall Street Journal
reported last month that AIG’s liabilities exceeded its assets as
of the last quarter by $78 billion. But that was before Lehman
Brothers went under and Merrill Lynch was acquired by Bank of
America.
AIG has had to borrow $85 billion
from the US government, but at high price. The two-year loan has an
interest of 850 basis points above three-month Libor which now is
4.30. Plus 850 basis points, that’s 5.15 percent which if applied
on $85 billion means an annual interest of $4.38 billion or $13
million a day. This is from a company that no longer has valuable
assets, for all practical purposes, because its liabilities exceed
assets by $78 billion.
What does AIG do? Sell assets, in
America and abroad. “We will sell our assets to brand name
companies,” declared AIG CEO Edward Liddy on TV yesterday. Such
assets include the Philippines. Philamlife Philippines is one of the
most profitable AIG subsidiaries in the world,”a crown jewel,”
“a very attractive company,” as Philamlife CEO Joey Cuisia puts
it.
In effect, AIG is doing a fire
sale. In a fire sale, you don’t have much choice and much time. So
you cannot get a good price. Your creditors will probably snatch
your assets before you can start to negotiate with potential buyers.
Two major groups have expressed
interest in buying Philamlife lock, stock and barrel—the Alfonso
Yuchengco group of RCBC and Pan Malayan Insurance and the SM group
of Henry Sy Sr. who has no large insurance business.
“We are going to sell to brand
name companies,” says AIG CEO Edward Liddy. If you ask me, he is
going to sell to the highest bidder and that guy is not necessarily
the best name in the business. He must decide within a week.
The news from the US is really
bad.
About 9.5 million Americans are
out of work, according to The New York Times. Two million of them
have been jobless for six months. Another 6.1 million are just
working part-time because of the business slowdown. They work fewer
hours and thus earn much less pay. In September 2008, 156,000
Americans lost their job, bringing total job losses to 760,000 since
January 2008.
Conditions are getting worse,
says The New York Times, in an editorial, noting that “Personal
spending stagnated in August, the latest month with government data.
Auto sales plunged in September. Factory orders are off. New home
sales fell to a 17-year low in August, according to the Census
Bureau. And home prices continued to fall sharply in July, for a
decline of 16.3 percent over 12 months, according to the Standard
& Poor’s/Case-Shiller index of prices in 20 major cities.
There is no sign that prices have hit their bottom.”
US home prices are likely to
decline further after losing 30 percent from their 2000 base. Since
2000, home prices have doubled, so about 70 percent should be the
expected additional cumulative price declines before home prices
stabilize and bring sanity to the real estate market. If that
happens, however, more Americans will lose their homes, lose their
jobs, lose their credit lines. That in turn will reflect on
consumption, which would result in a slowdown globally. America is
the world’s largest consumer, with GDP in purchasing power parity
of $13.8 trillion. China comes next, but with just $7 trillion,
Japan third with $4.28 billion, India $3 trillion and Germany $2.75
billion.
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