The Brad Pitts of the world couldn’t have unglued me from Bloomberg television and my computer since yesterday, watching every little blip of news regarding the debacle happening in Wall Street and thinking about the ramifications locally.
Unlike Lehman Brothers, it seems that American International Group (AIG) has friends in high places. So far, it has been allowed by regulators to raise another $20 billion by borrowing from its subsidiaries and no less than Federal Reserve officials have asked Goldman Sachs and JPMorgan Chase to set up a $75-billion facility to stave off a crisis at AIG.
Gov. David A. Paterson of New York said the magic words: “It’s a systemic risk.” Meaning he thinks if the government let’s AIG fail, this could shake the entire financial system. Having said that, the government has shown reluctance in bailing out any financial firm using public money, of course, so expect more creative means to help out financial companies in trouble.
All this brings to fore what will happen to those who bought Philamlife insurance policies and investments in Philam Asset Management Inc. (PAMI). I just got off the phone with PAMI president and chief executive officer Karen Liza Roa. Here’s the exact transcript:
MoneySmarts: How is PAMI affected by AIG’s troubles?
Karen Liza Roa: First of all, we must be very clear. It’s not the funds that are in trouble. It’s the fund manager’s parent company. We should all be very clear on that.
MoneySmarts: But what does that mean? That information will be going over everyone’s heads and eventually what they want to know is: Is our money safe?
Roa: Yes. Your money is safe. AIG is a different corporation. The assets of PAMI are with a third-party custodian which is Citibank. You are shareholders of the fund. The Board of Directors are separate and independent. The fund is a legal entity of its own. It will follow investment restrictions of the Securities and Exchange Commission and the Philippine’s Investment Company Act. Your money is not co-mingled with AIG. They do not capitalize our funds.
One example would be the GSIS mutual fund. That used to be managed by GSIS and then eventually by us. That’s an example that will show you the relationship between the fund and its fund manager.
MoneySmarts: Under Philippine laws, the mutual fund company is required to buy back shares at any time the investor wants to redeem the shares, right? So, it’s not like the money will disappear into thin air?
Roa: Yes, that’s what the law requires. The company will follow whatever restrictions are in the law. Besides, take a look at your investments. They are still in Philippine blue chips, they are in prime grade fixed income securities.
MoneySmarts: Thank you, Karen, for your time.
Translating all that: worst-case scenario, if AIG closes its doors, is that you get a new fund manager. Read the news article here. I also found Floyd Norris’ blog over at the New York Times particularly interesting.
I have been getting emails and inquiries on whether to pull out investments in PAMI. Here are the facts and the official statement. Investors, you’ll have to decide for yourselves.
I am reminded of how one successful banker handled a bank run years ago. He went to one particular branch in Makati City, displayed cash and served cookies and juice. Visibility and being calm saved the day. Let’s see how Philamlife handles this thing. Watch this space for more updates today.
October 4th, 2008 at 3:37 am
What happens in the case of a tied election result ?
September 25th, 2008 at 1:49 am
[...] AIG is “too big to fail“. This made me wonder: What is “too big to [...]
September 19th, 2008 at 5:31 pm
“I am reminded of how one successful banker handled a bank run years ago. He went to one particular branch in Makati City, displayed cash and served cookies and juice. Visibility and being calm saved the day.”
personal mo nakita si GT?
September 18th, 2008 at 5:22 pm
Hi Ms. Salve,
I am an OFW & considering to immerse into an alternative Retail Investment Instrument, for which I am eyeing for a Mutual Fund to be one.
Now that the global market is in turmoil, I may think otherwise.
My ‘plan B’ is considering UITF which I believe is being handled by commercial banks or perhaps I’ll put my money into LTNCD?
Please advise or comment on this?
Thanks,
Jerome
September 18th, 2008 at 9:27 am
thanks for the interview. i have two MFs under PAMI-PFI and GSIS. i’m happy to read this interview as I feel more secure now.
September 17th, 2008 at 9:43 am
Salve, minor correction here… Insurance Commission can only comment on Philam Life Insurance Co. Pre-need is under SEC and, unfortunately, their track record isnt as rock-solid as IC. We can reserve the word “safe” to Philamlife and PAMI. As for the rest more due diligence is needed.
September 17th, 2008 at 8:14 am
mocs, your two questions has had a lot of people stumped too! It’s anybody’s guess, IMO.
September 17th, 2008 at 8:12 am
Serious Nuts, still working on that. All that we have so far is the statement from president and ceo Joey Cuisia and Insurance Commission that Philam is well capitalized enough to service any claims from its clients — and that includes insurance and pre-need. Thanks
September 17th, 2008 at 8:10 am
@boknoi, Roa speaks only for PAMI, as discussed in the article. That refers to mutual fund investments in Philam-managed funds. I am still getting insiders, regulators and other industry insiders to talk about what this all means for insurance, pre-need and other policies currently in force. Keep watching this space
September 17th, 2008 at 7:26 am
i posted this on a different forum thread, but this is also applicable here. just sharing some thoughts…
the real troubling fact is not that Lehman had collapsed or that AIG is on the brink. the real trouble will start to emerge when the creditors start to assess the carnage and what these will cost them.
remember that Lehman is an investment bank, and that at the time of collapse, its debt stood at more than $600 BILLION. now, this means quite a few of global banks are looking at their combined $600 billion as possibly going down the drain.
the fallout from AIG should it collapse will be even worse, since it is the world’s largest insurance company.
insurance companies are such that they guarantee assets far larger than what they have themselves, and so when they collapse, or even have their credibility questioned, the assets that they back are also affected.
we are all in a serious situation, and there is no place for sugar-coating here. let us not get crippled by fear, but let’s also not hide under a rock and hope everything will be the same when we emerge.
September 17th, 2008 at 6:50 am
I am somewhat confused with the statement of Ms. K.L. Roa: when said that “It’s not the funds that are in trouble”, does the word “funds” also include insurance policies investments (under PhilamLife) or explicitly mutual funds invested through PAMI? Is she speaking for investments under PAMI only, that is. excluding all other investments under the umbrella organization of Philamlife (e.g., pre-need policies, life insurance, educational insurance)? Kindly clarify this with us (thousands of policyholders). Thanks.
September 17th, 2008 at 6:01 am
There’s information about the investment business of Philam. How about the pre-need side?
September 17th, 2008 at 5:29 am
I think this is something to do with a crisis management thing. Of course, they would say that ” everything is all right.. there’s nothing to worry about your money” to control their investors of pulling out their money from PAMI.
September 17th, 2008 at 4:55 am
in fairness, i dont see any malicious intent on the part of Salve, hehehe, looks like many of us now, are just caught up in a bad ’situation’ and all sorts of interpretation pops up in our minds. Biglaan kasi eh.
September 16th, 2008 at 11:33 pm
Salve’s headline question is a valid one because it is really on everybody’s mind. In fact, it was good that she even bothered to get Philam’s formal response.
Personally, I have not had a good experience with the Philam group so it is not a company I would get into. Should an investor friend ask me for advice, it would be prudent to suggest that he makes his own calculated decisions based on his own research, and open forum discussions such as these.
Just because AIG is the parent company and Philam may be a different company doesn’t necessarily insulate investors from possible losses. For example, if you’ve been watching the news — Lehman New York’s bankruptcy has affected Lehman London even if they are separate entities.
I am not saying people should remove their money at Philam. In the end, people need to take personal responsibility for their financial well-being, instead of relying too much on hearsay and blaming others for their losses.
September 16th, 2008 at 9:48 pm
A few questions in the back of my head, right now.
1. AIG got 20B$ from its subsidiaries, would it be enought? If not enough, what would happen? Not to AIG (we know), but to its subsidiaries?
2. If you are BOA, why would you pay such a whopping premium ( purchased at $29 per share even though Merrill-Lynch closed Friday at $17.05 per share). When the atmosphere is not as good …I mean many are falling.
September 16th, 2008 at 8:12 pm
Hi all,
I just want to clarify certain things.
1. Insurance products are backed by assets such as bonds and stocks. If the asset backing-up the insurance products defaults (i.e. Bonds issued by Lehrman will not be paid to the insurance company anymore due to bankruptcy) then the insurance company will suffer ranging from having less income for the company to bankruptcy of the insurance company as well . HOWEVER, most insurance companies in the country distribute their assets to several bonds and stocks usually blue chip (Globe, PLDT, etc) as required by the Insurance Commission. Hence, the eggs in different basket concept. This means that if a company is holding a small percentage of assets in Lehrman then the insurance company will have no problem other than a small blip in their income. However, if most of the assets are in Lehrman then that company is screwed. I believe that almost all insurance companies practice this “eggs in diff basket concept.” Hence if bonds issued by Globe defaults then insurance companies will not suffer tremendously since it has other assets (a lot actually) supporting it (more likely it has SMART bonds as well which could sky rocket if GLOBE defaults). I dont think that insurance companies in the Philippines have Lehrman bonds backing-up their assets since almost all Peso denominated insurance products are backed-up by local assets as well.
What I am saying is that your insurance policies with Philam, Sunlife, Axa etc are safe due to this “basket” concept. No need to panic. What we can learn from this is to practice this “basket” concept in our own lives to make sure that we are protected from these unusual market scenarios.
2. Pre-need plan I believe are even safer since most of the assets backing-up the products are placed in a trust fund (Citibank, Deutsche Bank, HSBC, etc) which is even safer that these “managed assets.” Stricter rules govern the Pre-need industry today, hence I believe that it is even safer to buy them today that five years ago.
3. Mutual funds in the Philippines are MOSTLY invested in Philippines assets (Govt bonds, Local Bonds and stocks) hence it will not be severely affected by the US problems. emphasizing the word SEVERLY. Decrease in NAV is expected, though most of these are caused by bad investment perception that affect us locally. However, I believe that the NAVs will still diminish til 2009 (at least). Hence, invest for the long term and invest only amounts you are confortable risking with. Moreover, DIVERSIFY, mutual funds, stocks, time deposits, real estate are only a few of these options.
Another thing, dont blame Salve. Although, there is a better way to phrase your headline. Hehehe
September 16th, 2008 at 6:27 pm
hvrds,
your posts are the ones that derails what would have been a healthy discussion regarding the effects of IAG’s imminent collapse on our financial institutions. in addition your statement “One year after the 1929 crash the markets had recovered almost 75% OF ITS VALUE.” is clearly MISLEADING.
The US stock market reached bottom on November 13, 1929 with the Dow closing at 198.6 that day. The market recovered for several months from that point, with the Dow reaching a secondary peak at 294.0 in April 1930. This didn’t last long as the market was again on a steady slide in April 1931 that did not end until 1932 when the Dow closed at 41.22 on July 8, concluding an 89% decline from the peak. In fact, Richard M. Salsman said “Anyone who bought stocks in mid-1929 and held onto them saw most of his or her adult life pass by before getting back to even.”
How does that sound next to your advice of holding out until the storm passes?
September 16th, 2008 at 6:11 pm
@hvrds, there’s a HUGE difference between “what will happen to investments in PAMI” and “Is your investments in PAMI safe?”
But even then, that’s exactly what people have been asking me via email, text messages, etc and all i did was ask their questions and got the answers for them. Again, I am NOT giving out ADVICE. I am giving out information so people can choose for themselves. Also, it is not my job to calm markets but to report what is happening in a fair way–letting all who should have their say, have their say. Calming the markets is the government’s job, strictly speaking. This is my last entry on this matter as I think we are just going back and forth. Regards.
September 16th, 2008 at 6:05 pm
agreenspan, thank you for that clarification. you are, of course, right. no guarantee for anything else except liquidity. regards
September 16th, 2008 at 5:52 pm
Ms. Salve. You are the one publishing the headline. Your rhetorical question is, Is your investment safe in PAMI? Timing is everything in the middle of all this storm.
Are you suggesting that investors head for the exits at the same time?
Are you suggesting that people start withdrawing their placements?
That is precisely what will aggravate the crisis. Try screaming fire in a crowded theater…
You are a business editor giving advice on financial investing which is almost entirely based on expectations in times of stress.
Your headline for the prevailing times is loaded with speculation. This is similar to initiating an old fashioned bank run at the level of investment banking. Should everyone withdraw their investments in mutual funds in PAMI?
One year after the 1929 crash the markets had recovered almost 75%
OF ITS VALUE.
However the damage was done. Confidence was gone. What does one do when one goes into a depression?
To forestall speculation, BDO and Metro Bank announced their exposure in Lehman. That is a measure of their confidence.
Now compare that with your headline….Is Your Investment Safe with PAMI?
Did your person from PAMI inform you that mutual funds have no deposit insurance… Did they tell you that the net asset valuation of the fund will be severely affected by the present downturn in asset prices. Did she tell you that AIG is seriously involved in selling insurance in the form credit default swaps for bond buyers or sellers?
But you off course know that. Don’t you?
So by raising speculative questions the probability is there that people would rethink their postions in a time of severe stress and tend to rush for the exits when their valuations have suffered…..
The markets are in essence derivatives of peoples consciousness.
September 16th, 2008 at 5:52 pm
just some clarification since this might be misinterpreted by other readers:
“Under Philippine laws, the mutual fund company is required to buy back shares at any time the investor wants to redeem the shares, right? So, it’s not like the money will disappear into thin air?”
statement, while true, needs to be considered alongside the fact that while the company is required to buy back the shares at any time, it does NOT require the company to buy it at favorable (to the investor) PRICES.
in other words, yes, liquidity might be guaranteed by law, but financial loss is still possible.
The price that investors pay for mutual fund shares is the fund’s per share net asset value (NAV) plus any shareholder fees that the fund imposes at the time of purchase (such as sales loads). The price per share, or NAV (net asset value), is calculated by dividing the fund’s assets minus liabilities by the number of shares outstanding. This is usually calculated at the end of every trading day.
Naturally, if the underlying assets fall in value, the NAV also falls in value. The question now is whether PAMI’s funds are backed by strong assets. Of course, Lehman had insisted until the very very end that their assets were solid.
September 16th, 2008 at 4:35 pm
Thanks Salve for posting this interview with PAMI official. My personal take on this is that while PHILAM is isolated from AIG mess, it will eventually spread in our shores whether affiliated with PAMI or not. As you can see, banks’ stock prices are already down, maybe due to knee jerk reaction of investors here.
The ones who will prevail are those who can tolerate their paper losses. This is maybe the best time to buy blue chips.
September 16th, 2008 at 4:33 pm
Hi Salve,
I dont care if AIG has friends with high places or not. Even if AIG manage to ride this out.. who in their right mind will try to invest or get an insurance again with AIG or any of its “wholly owned subsidiary” ?…
Why on earth will an INSURANCE company have exposure or investments on very risky MORTGAGE DERIVATIVES? I thought these organization was supposed to be run by smart people….but this says that they are no different than the greedy bastards in our government….
Anyways…AIG is as good as dead….
September 16th, 2008 at 4:32 pm
http://mmmpressions.multiply.com/journal/item/274/Local_Reaction_to_AIG_News_
September 16th, 2008 at 4:28 pm
@Salve
Great news gathering Salve and I’d like to thank you personally for the speedy updates.
I don’t know about hvrds but I think he’s the one panicking and adding fuel to the fire.
September 16th, 2008 at 4:20 pm
hvrds,
your advice to “hold positions and wait for the hurricane to pass over” was what the employees of Lehman exactly did, and now they’re laid off, no job, and all those compensation they received in the form of stock options are worth less than toilet paper.
In a financial storm, the best way to safeguard your assets is to convert it to something with tangible value (such as gold) or some thing with solid backing, such as treasury bonds (since governments are less likely to go bankrupt than corporations).
September 16th, 2008 at 3:48 pm
@hvrds, did you actually read through the entire post? what headline are you talking about? What tone of mine will make investors panic? My question on whether AIG is too big to fail and what will happen to PAMI investments? They are valid questions. And questions that every investor is asking now. But if you actually read through the blog post, it showed a very fair treatment of the company, even giving space to the fund managers. Do you think it would be fair for me NOT to write about them because investors shouldn’t believe them? That is not my decision to make. My job is to make that information available so that investors can make their own decisions whether or not to believe the company, so that investors may be informed on what they should do. No journalist will tell investors WHAT to do. They will ask the people involved the right questions, make that information available to readers and give readers a chance to know what the officials said. THEN the readers make their decisions. I am not in a position to say whether you should hold on to your investments or get out. As I said, I gather information so that you can decide what to do.
In your first comment, you said nobody should trust anybody but themselves, least of all the business editor which hosts this blog. Now, you are telling me to advise readers to stay put?? What gives?
September 16th, 2008 at 3:19 pm
Ms. Salve —– Looking at the meltdown of Enron, Global Crossing, Bear Sterns, Lehman.
All the heads of the above companies just before they fell all reassured investors that there was nothing to worry about.
Lehman just recently issued more preferred shares to raise capital.
John Thain formerly of Goldman saw the writing on the wall and immediately and went for the mantle of protection by merging with Bank of America.
Beneath all this is the fact that the government of the U.S. (FR)is now made sure that terms of credit support are made more liberal for Wall Street and commercial banks
Without that even the mighty Citi, BoA, JP Morgan would fall and this market correction would turn out to be the mother of all financial crashes in world history.
Billions of dollars have already been lost to 401k holder, pension funds and yes insurance companies.
For people in the Philippines who have investments in any financial instrument the proper advice in a period of extreme fear is simply to hold positions and wait for the hurricane to pass over.
That damn headline of the Inquirer plus your tone actually adds more fuel to the fire. Would you advice your readers to run out in the middle of signal no. 4 typhoon and say the sky is falling?
Your advice would be more circumspect and it would be stay put and wait for this to pass.
Do you think that would be prudent rather than a screaming headline to sell more papers?
Right now perception rules……
“In the meantime, prayer is in order: Now Lehman has been laid to sleep, I pray the Lord my stocks to keep.” Nicholas Von Hoffman…
September 16th, 2008 at 2:23 pm
regarding the question: will PAMI be affected if AIG fail. the short answer is NO. however, that answer rests on the assumption that only AIG will fail. if AIG’s collapse trigger a global financial crises, then PAMI will also be severly affected, and the assests that are still in Philippine blue chips and prime grade fixed income securities now won’t be so attractive and “prime grade” when global securities markets turn sour.
September 16th, 2008 at 2:10 pm
hello.
adding to Tita’s question re the educational plan:
i also have an educational plan and i was planning to get another one. I only have 2 more payments left on the first one and i am planning to get the second one later this yr!
How would this news affect our existing funds?
September 16th, 2008 at 11:58 am
@hvrds, far be it from me to think that i know more than individual investors what they should do with their investments. that is why i said each one of us has to make our own decisions. but, just to refresh your memory about what the media is here for. as business editor, one of my jobs is to make sure that investors–that includes my mother, my friends, my colleagues, my readers–make INFORMED decisions. to do that, i have to dig deep, research, interview people who are in the know about things that have an impact on people. i think that certainly includes, in this case, official statements from the companies themselves. readers are intelligent–they will know if these companies are lying. i cannot make that judgment for them. my job stops at making sure that information is available to you at the soonest possible time so you can make your own judgments. i am certainly, at this very moment, also trying to find experts who are not connected with the company, regulators and investors themselves, to talk about the issue. sorry if i can’t give them all to you at the drop of the hat. i do only have only two hands and one mouth.
September 16th, 2008 at 11:46 am
Thanks Salve, for this! Very helpful.
September 16th, 2008 at 11:43 am
This blow out should serve as a warning for everyone including the host that the only real expert in all of this and the one who really knows best about ones individual investment is the investor himself.
When it comes to dealing with ones own money –Trust no one except yourself.
If you will note that the title of the host of this blog is business editor.
In case like this the one that is the last you should trust is the government followed by anything the company’s involved in the markets tell you.
Remember that their business is to sell deposits and buy loans.
September 16th, 2008 at 11:31 am
life is getting depressing by the second. It seems like a lot of companies are filing for bankruptcy and employees losing their job. At times like this, all we can do is pray that we still have a job in the future. The emergency fund which several articles have been preaching would come in handy right now.
September 16th, 2008 at 11:30 am
All my 3 kids have educational plan with Philam. Is the educational plan will be affected by this AIG problem?
September 16th, 2008 at 11:16 am
From what I know with Philamlife: they’re safe from the AIG mess and you could thank the Insurance Commission’s tight investment rules for that. Still, you can write IC to be doubly sure: http://www.insurance.gov.ph