RCRSM Suggested Top 5 International Stories for 2008
1. U.S. Wall Street Meltdown
2. Beijing 2008 Olympics
3. China Milk Produce Scandals
4. U.S. Presidential Election - First Black President
5. Worldwide Recession
September 27, 2008
At Wall Street
‘The party is over’
TAKIN’ CARE OF BUSINESS
By Babe Romualdez
http://www.philstar.com/index.php?Business&p=49&type=2&sec=27&aid=2008092975
Tuesday, September 30, 2008
US Speaker Nancy Pelosi’s message to Wall Street was a fitting warning to executives whose “greed” and “excesses” may have led to the US financial turmoil: “The party is over.” Even as the White House and US Congress agreed to a $700 billion bailout plan for the beleaguered financial sector, the FBI had started widening its probe of some 26 major companies believed to have “misstated” their assets. Sources say these companies resorted to “creative accounting” methods to hide the extent of their financial problems, understating debts and risky investments.
It’s understandable why Pelosi was particularly emphatic that the era of “golden parachutes for high-flying Wall street operators is over,” adding that “no longer will the US taxpayer bailout the recklessness of Wall Street.” Even while problems with subprime mortgage loans were already mounting, with borrowers unable to pay for their housing loans, five of the biggest US firms reportedly paid more than $3 billion to their executives over the last five years in perks like signing bonuses and hefty retirement packages. Employees also shared in the bounty, with salaries pegged at an average of $350,000 per employee and bonuses totaling $39 billion from 2003 to 2007 – which critics say were at the expense of American taxpayers.
This is probably why Democrats, most especially, placed tighter conditions on the amount of federal money for the rescue plan, with the caveat that it will only be open to companies that will limit pay packages and will not give “golden parachutes” to top executives. At least one consolation is that these erstwhile high rollers can still keep their jobs. On the other hand, among the potential winners are homeowners facing foreclosures since the rescue plan can help them sleep a little better at night, knowing they will not lose the roof over their heads after all.
Maurice “Hank” Greenberg must be enjoying his sweet revenge over those who booted him out as AIG CEO. Hank sold off five million AIG shares worth $18.8 million while Starr International Company, an outfit he heads, sold off 35 million shares worth $107 million. AIG was on the verge of collapse, and was only able to keep its head above water after getting an $85 billion loan from the Federal Reserve. But Hank Greenberg’s move to sell is being seen by other shareholders as a signal that perhaps they should do the same – which might in the long run pose additional problems for the beleaguered company.
Obviously, the current financial crisis carries echoes of the Great Depression where unemployment reached its peak and production levels fell by as much as 62 percent in the US. Even other countries were not spared from the effects of the downturn, with production in Canada, Germany, Czechoslovakia, France and Italy going on rapid declines. While the cause of the Depression is still the subject of considerable debate, among the notable parallels with the current crisis include the rapid growth of debt, with the value of outstanding real estate urban mortgages increasing from $11 billion in 1920 to $27 billion in 1929. Consequently, the crash in October 1929 created a lot of uncertainty among investors and consumers, and the consequent banking crises triggered widespread panic as deflation took hold.
At the time, the Federal Reserve was “unwilling to increase money supply to meet the demand for liquid assets,” which experts say was also responsible for the deflation. This is probably why the US government has seen fit to step in and engage in a massive rescue plan – said to be the biggest in US history – to avert an all-out economic disaster.
But while the Philippines had not been overly affected by the US financial crisis, we’re not still fully insulated. As some labor groups have pointed out, the $386 million exposure of local banks still has the potential of dragging down the economy and triggering more unemployment. Data from the National Statistics Office disclosed that the unemployment rate as of July 2008 stood at 7.4 percent, or some 2.75 million Filipinos going totally jobless. Obviously, the $386 million could stretch these banks’ capital reserves and could mean a reduction of funds for credit.
Whether we like it or not, the US also remains one of our top trade partners, and whatever happens to their economy could have an impact on our local economy considering that a large part of our exports are intended for the US market. Add to that the foreign investments coming from US firms. Naturally, America will be focused on fixing its domestic situation first before giving its attention to other countries. Even the rest of Asia has been haunted by the unfolding US financial crisis, particularly in light of an energy and food crisis. And it wasn’t too long ago when the 1997 financial crisis almost put Asia down on its knees. As Indian Prime Minister Manmohan Singh had pointed out, developing countries could hardly afford periods of slow growth as a result of upheavals in international financial markets.
The collapse of Lehman Brothers and the subsequent US financial crisis has certainly given a lot of people bitter lessons. In their desire to keep the profits coming, these banks and other lending institutions became reckless, giving credit to people who could not really afford to buy houses and pay the interest rates on their loans. At the end of the day, excessive greed can lead to recklessness. Some people think there is no limit to making money, but in the end, the never-ending search for profit will not only destroy you – it will ultimately choke you.