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.
37 Responses to “(UPDATE) Is AIG too big to fail? What will happen to investments in PAMI?”
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Pages: « 8 7 6 5 [4] 3 2 1 » Show All
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_