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 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