The subprime contagion

In the last couple of weeks, we’ve been inundated with previously alien concepts like sub-prime loans and carry trades that have become two of the biggest financial buzzwords of the year. These financial schemes over the past years had flooded financial markets everywhere with oodles of cash, and now with loads of problems.

We have seen stocks and currency markets everywhere gyrate as global investment giants from the United States to Europe, even Japan, disclosed the billions of dollars invested in assets — usually in CDOs or collateralized debt obligations — that had become exposed to the US sub-prime home loan mortgages. The sting started mid-year when borrowers with poor credit started defaulting on their home loans, a market that at one point lured so many investors because of the promise of higher yields given the risk it carries.

In today’s world order where investors plumb markets to borrow the cheapest capital to invest in high-yielding assets, the Japanese yen is currently the most popular — with an interest rate of 0.5 percent, and without argument, the lowest among developed countries.

Among investment managers, the game had been to find the investments that would give the biggest margins, thereby taking advantage of the so-called yen-carry trade (borrowing in yen and investing in higher-yielding assets).

There was a time in the not-so-distant past that CDOs — an instrument that pools different assets into one instrument — even or especially with sub-prime debt were attractive because of the higher yields.

Too good to last

Unfortunately, the sub-prime wave wasn’t meant to last.

In the case of high-risk housing debt, people who really couldn’t afford to buy a house (or a second one) but were lured into thinking they could, started defaulting when more pressing bills had to be paid.

As the US sub-prime problem worsened, financial markets roiled from a credit crunch as demand for bonds, loans, commercial papers and stocks plunged. Naturally, no fool in his right mind would buy debt papers especially those that are linked or suspected to have exposure in sub-prime.

Not even the billions of dollars infused by the US Federal Reserve and major central banks of other countries are solving the problem. Apparently, some form of contagion had set in, making financial markets all over the world sick. It did not help that a blanket of opacity surrounded the whole problem. Like an illness caused by a foreign virus, financial doctors are having problems identifying the strain, what caused it, how badly it has spread, and most importantly, how exactly to cure it.

“Virus” carrier

In the case of the Philippines, with so much hot money or foreign funds coming in to the stock market in recent months, the effect was almost immediate. Along with the rest of the world, our stock market took a hit, wiping out gains made during the whole year as investors sold emerging market assets.

The benchmark PSE Index lost 12 percent in the week ending Aug. 17. It had since recovered some of its value as markets sobered up after the US Fed lowered its so-called discount rate or what it charges banks for loans to unleash more liquidity into the market. The peso that week also suffered its biggest loss in more than six years, paring its gains this year to less than five percent from what used to be close to eight percent. Philippine dollar-denominated bonds or the so-called ROPs also plunged while the price of so-called CDS or credit-default swaps — insurance-like protection against defaults — rose, indicating heightened risks of holding Philippine debt.

“Nothing fundamentally wrong”

If you ask market experts, all of them would probably tell you that there’s nothing fundamentally wrong with Philippine assets. Or at least, that nothing has changed in the intrinsic value of stocks before the sub-prime crisis started.

Of course, problems accompanying the budget deficit, revenue collections, peace and order in Mindanao, bureaucratic inefficiencies and corruption have always been there, and would not have caused stocks and the peso to tumble in any significant way.

Even the Bangko Sentral ng Pilipinas assures us that the Philippines doesn’t have any exposure to sub-prime debt, and therefore need not worry about the current global turmoil. This view, by the way, is publicly seconded by many Asian central banks.

Only 0.2 percent of the total assets of Philippine banks are invested in those collateralized debt obligations, and supposedly none of them are tied to the problematic US home loan sector.

Only three banks, big ones at that, have bought into these CDOs. And each of them claims their exposure had been less than $100 million each, definitely not big enough to cause any systemic risk.

Yet, there is still a feeling of uncertainty in the financial sector. And during these volatile times, there are two things that any astute investor can do. Stay on the sides and do nothing; or selectively buy investment instruments, particularly stocks that have dropped in value and are now dirt cheap. Your call.

Poker tournament fever

The frenzy for non-wager poker competitions reached fever pitch last week when the Asia Pacific Poker Tour (APPT) Hold’Em tournament was held at Hyatt Hotel and Casino with over 250 participants from various countries around the region.

The two-day eliminations tested the patience, physical and mental endurance of participants trying to earn a place in the prize-winning circle. While stories of bad breaks, odds-defying turn of the cards, and other unbelievable winning combinations abounded, at the end of the day, those who managed to maintain a balance between aggressiveness and conservative play, keen perception of opponents’ reactions and focus, survived the grueling hours of intense struggle.

For Congressman Ronald Singson, a known sportsman and one of the few Filipino survivors of the elimination rounds, it was surely a test of skill, mental acumen and physical toughness. The good congressman is now a firm believer that poker is indeed a mind game and not merely a “game of chance.”

“Pag-usapan Natin” at IBC-TV13

Watch “Pag-usapan Natin”, a segment in the IBC-TV13 news program, News Tonite, from 10:30 p.m. to 11 p.m. (Mondays to Fridays) as we discuss another issue that has relevance to our everyday living.   

Should you wish to share any insights, write me at Link Edge, 25th Floor, 139 Corporate Center, Valero Street, Salcedo Village, 1227 Makati City. Or e-mail me at [email protected].