By Digoy Fernandez THIS blog is inspired by a lament from one of my relatives who sent us an email wherein she stated her frustration at the huge decline in the values of country-issued bonds, like those of the ROP for example. In a normal market situation, conservative investors find solace in long term bonds, or issues like second tier capital requirements of well known banks. This is no longer a normal world, nor are the financial and capital markets behaving normally in the sense that we have known them to be. Consider therefore, a corporation that dutifully set aside its contributions to a pension and health plan for its employees. It is a safe bet to make that, unless the monies in the fund were invested in super secure and bullet-proof assets, that one would find a serious decline in said pension fund (and in most others besides). Is there really such a thing as a bulletproof investment these days? Probably not. But it pays to know ones fundamentals and limit oneself to going for the safest investment alternatives that your financial planner can suggest. Most derivatives would certainly be thrown out of the window. Country bonds? Only if you are in for the long haul and will not choke at seeing the lower redemption rates that are prevailing in the markets today. Long term deposits? Only if your bank(s) is/are doing their job conservatively and not taking long positions on risky assets. It would be a good idea to visit your local banker to examine the values of your investments. If you set aside trust accounts for your kids, it may also be wise to see if the investment strategy once presented to you as bulletproof is still holding up in the rather heated and irrational markets of today. Then, one could work on a more reasonable strategy. In today’s modern world, banks and financial institutions trade over the Internet in the trillions of dollars daily. Each assumes that the other will fulfill its obligation. After all, one of the sacred stones upon which the trade and commerce regimen is built is the substitution of a bank’s good name and creditworthiness for that of a client. This is seen in the use of LCs and other instruments that offer a safe alternative to barter trade between two parties who would like to ensure that the transaction proceeds without a hitch. Imagine, therefore, the situation when banks begin to fail and other banks refuse to accept their guarantees or papers!!! It is interesting to note that the banks least affected by today’s financial problems are those that did their banking the old-fashioned way. They stuck to the boring formulas of lending (knowing their clients very well) and borrowing (accepting mostly old-fashioned deposits) and keeping a wary distance from what value investor Warren Buffet has called “financial instruments of mass destruction”. Even his value-based fund has had to take a beating, what with the good stocks going down with the bad. But value investors will have a better chance of surviving the violent swings and surges of today’s market, certainly much more than those who invested on the basis of rumors and so-called inside info. It is necessary to go back to conditions that ensure fair trade and a conservative return on one’s investments and deposits. To do this, you will have to let the institutions you deal with that you want to know what they are doing with your money. They must treat your money as if it were theirs to lose.
October 2008 Archives
By Digoy Fernandez ONE of the unintended casualties of the present financial crisis is the temporary sidelining of the Global Warming debate from front and center in the attention of the world and its leaders. While understandable, we hope that the world will not lose focus on this very important aspect of our survival as a species on this planet. The falling price of crude oil is welcome, of course. But it may also deflect efforts aimed at conceptualizing and bringing to actual production various alternative fuels and their respective machinery. Low crude prices should not tempt car manufacturers, for example, to keep on producing gas guzzling SUVs, but make them realize that the reprieve may be temporary. In this era of difficult funding and credit, we hope that enough wise financial institutions and foundations find the motivation to support the development of alternative fuels and machines that use them. On the other hand, one unintended beneficiary of the decline in global economic activity and production may be the ability of the planet to regenerate itself. Hopefully, less harmful economic and personal activity would mean less greenhouse gases produced, and a chance to make up for lost time in the battle to clean our air. It will also mean less rapacious use of non-renewable resources as production winds down, and economic necessity forces firms to become more efficient and smart in the use of their resources. Even now, we see signs of a slight decline in the throw-away mentality that has long been the bane of those advocating the wise use of non-renewable resources. Recycle and Reuse may just catch fire with ordinary citizens! Maybe even the sardines and tuna stocks of the world will be given a chance to replenish themselves. Except that hunger and food will probably be the last need of man left, even as we shed off other non essential needs and desires. There is still hope, after all, for the move to alleviate pressure on the world and its resources, even in the face of a financial crisis.
By Digoy Fernandez THIS particular blog will not bore you with statistics nor will we provide a chronology or a timeline for the present economic crisis. I have received enough forwards, looked into a myriad number of web-pages and articles about how the crisis began and how it is playing out. Instead, I would like to dwell a bit on the motivation that drove otherwise sensible bankers and finance whizzes into making catastrophic (in retrospect) decisions on a truly grand scale. In a word, we find that, in almost all cases, the common denominator was GREED! Someone commented that bankers and finance men (and women) who are currently in their 50s or 60s and above, would be boggled at the type of financial products developed and marketed during the past two decades. These so-called financial products tend to confuse the traditional finance people, schooled as we were in the basics of borrowing and lending. But the new mavens have gotten to the point of fashioning intricate debt or credit instruments that have become less based on fundamentals and more on an ability to flip the products through the mill, earning one a hefty commission in the process. In the good old days, our bosses told us to know our clients very well, and to know their companies and products to the point of being well-versed in the nuances of these businesses. We did cash flows of the firms’ products and their cycles, and we knew when and how much to lend to these corporations. Lending and investment were based on good old fundamentals. Unfortunately, the traditional way of doing business was deemed too arcane and too sluggish for the financial wizards of today. Born and schooled in an age of instant gratification, they tended to live in a world divorced from the Main Streets of the world. In another publication where I write with a group of the country’s top finance people, I have long tended to look askance at financial derivatives and financial analysts who track a company based on quarterly results. Because of this tendency to focus on quarters, top executives have also been inclined to take short cuts or measures that would ensure good quarterly results, often sacrificing a firm’s long term prospects in the process. I am not sure if there is a direct correlation, but the pressure to produce regular rosy reports has probably tempted not a few CEOs to sweep problems under the rug…like hiding them in innocuous sections of the contingency accounts of the balance sheet. Naturally, to participate in such a shameful process, a CEO must probably be motivated by his or her own personal bottom line by way of high salaries and benefits, significant profit sharing schemes, and the ultimate in bailout plans – the golden parachute. This last item, the golden parachute, was originally designed as a “poison pill” that would discourage predatory funds or investors from gobbling up a particular fund, because they would have to pay a very large up-front fee just to get rid of a sitting CEO, for example. Over time, the golden parachute evolved into a necessary part of a CEO’s remuneration, allowing him or her to avail of very large payouts whether or not the company under his or her care made money or was leaking red ink during the period of stewardship. A classmate forwarded a thread that showed how many of the CEOs involved in the institutions being bailed out by various governments were eased out of their respective positions, but not before availing of generous separation benefits. Even the US Congress was incensed enough to point out this fact in their deliberations regarding the $700 billion bailout fund. The CEOs of today will have to remember that, at the very least, they are stewards of their companies, whether they have a significant financial stake in these institutions or not. They are, after all, responsible to a number of employees and their families who depend on the firm for their daily and long term sustenance. Furthermore, the good health of a company, and of all companies for that matter, help ensure the health of the economy in the long term. It will take quite a while, if at all, for the world economy to get back on its feet. This was a Mortal Wound. And it was powered by insensitive Greed, because, to this day, what they did still doesn’t make sense to the man on the street.
By Digoy Fernandez ONE of the unintended casualties of the current global financial meltdown may be corporate social responsibility programs. CSR projects are not exactly favorites of the sharp scissors of most budget cutters, who also cast an evil eye on what they consider as expensive programs like Training and Manpower Development, the upgrade of Information Systems, and the like. In fact, for CSR and the others mentioned to survive the budget cutters’ wide strokes, these would need strong sponsors from the upper reaches of top management or the ownership. Otherwise, kaput! When CSR programs get short shrift, it also sends a signal to various publics of the corporation that the company has ceased to care about some of these sectors and is buckling down into self-defense (or self-preservation) mode. There are many ways of cutting down on expenses without sending the wrong signals to the public. In fact, I am particularly enamored of a continuously running short feature on CNN and Discovery Channel showing a denuded piece of land in Malaysia that was replanted in 2004, and that has began to show signs of becoming a true wildlife habitat just 4 short years later. This is the kind of project that can be replicated by companies, groups, and individuals: regenerating parcels of land -- small to large -- and reclaiming them in the interest of the environment. In fact, the project that finally won the Grand Anvil for the bank I worked with was conceived by this author way back in the early 80s when the country was reeling from the economic and financial crisis that accompanied the assassination of Ninoy. In short, I suggested that companies or groups each adopt a depressed community, and work with them in developing skills that could eventually be made use of by the trainor / adopting units. Our own parish council has some programs aimed at helping the depressed sectors assigned to us, under the concept of Stewardship. For example, used paper could be given to these people to be recycled into stationery or other paraphernalia that both the company and the public could make use of. It is unfortunate that the rapacious greed of a few high flying financial mavens finally caused them to crash, bringing along with them practically the whole world economy. It will be a long time before companies begin to think of CSR again…which would be very very bad indeed. Let us hope that enlightened individuals and companies manage to rise above the projected morass and think of how they can help those who may be in worse shape then even they are.