The Panic of 2008

It’s been called a tectonic shift in the global economic environment, with aftershocks to be felt for some time to come.

First, investment bank Lehman Brothers , a firm founded in 1850 and which survived the Great Depression, two world wars and every market upheaval before and since, went belly-up over the weekend. Then rival Merrill Lynch was sold to Bank of America for a fraction of its value of just a few months ago.

American International Group (AIG), one of the world’s largest insurers, was effectively bought by the U.S. Federal Reserve for a bailout amounting to US$ 85 billion to forestall its impending bankruptcy. AIG is the mother company of the local Philippine American Life Insurance Company (Philamlife). It’s often been said that when the U.S. sneezes, the Philippines catches a cold. Well, when the U.S. gets a cold, we get pneumonia.

Investment funds immediately began pulling out of emerging markets, in anticipation of more volatility and turbulence in the global financial system. Including, naturally, the Philippines, not the most attractive investment milieu to begin with as compared to our neighbors.

According to BusinessWorld, market expectations prior to the Lehman news were already pessimistic. Foreign investors have been dropping local stocks. Analysts expected share prices, already down 32% in the first half, to continue falling for the rest of the year.

With the domino effect caused by the convulsions on Wall Street, the local stock market index has fallen some 8.7% in just two days since Monday, and the Peso has hit a 16-month low, closing at P47.20 to the U.S.$. The top two domestic banks with the largest Lehman-related exposure, Banco De Oro and Metrobank, have been scrambling to set aside funds to cover possible losses. The Banko Sentral ng Pilipinas was quick to assure the public that the banking industry remained adequately capitalized and that it has prepared a facility to aid distressed banks. The global credit crunch has come home to roost.

In the view of many analysts, we should brace for more capital flight and rough times as the crisis is just beginning. Less investments mean less business activity, leading to an inevitable contraction of the economy. Growth targets for the year will not be met. Credit will be tight, as lending institutions will adopt stricter loan requirements. Jobs opportunities will continue to shrink. In short, there won’t be enough money to go around.

Our saving grace, as always, is the expected surge in OFW remittances as the year ends. But even this ever-reliable lifeline will likewise decline, as hard-hit countries which require our services will be facing difficult times too. Guess where they’ll cost-cut first.

No one really knows where this will all lead to. But one thing’s sure. It will get worse before it gets better.

Former U.S. Federal Reserve boss Alan Greenspan gives his take on recent events:

Let’s recognize that this is a once-in-a-half-century, probably once-in-a-century type of event.

There’s no question that this is in the process of outstripping anything I’ve seen and it still is not resolved and it still has a way to go…

We will see other major financial firms fail but this does not need to be a problem. It depends on how it is handled and how the liquidations take place.

And indeed we shouldn’t try to protect every single institution. The ordinary course of financial change has winners and losers.

Citi CEO for Southeast Asia Piyush Gupta, as quoted by BusinessWorld, gives a gloomy outlook and warns investors to be cautious:

The markets are going to stay turbulent until next year. Be thoughtful and cautious. It’s not the time to take undue risk because a lot of things can go wrong. With wild market swings a constant threat, investors should put their money where there is a guarantee the initial investment will be recovered.

It’s the time for principal protection. Look for stuff where the principal is safe It’s a very difficult market, both on the fixed-income side and the equities side. That goes without saying that stock markets are particularly not a good place to park money for now. Take this as an opportunity to wait. It’s better to err on the side of caution.

Asian markets tumble as financial fears deepen.

Gold prices jumped as investors looked for safe havens from stocks.

Nicholas Kristof tackles issues of corporate governance and CEO compensation (which is seldom tied up to long-term performance). Lehman Brothers CEO Richard Fuld took home nearly half-a-billion U.S. dollars in total compensation between 1993 and 2007, then promptly drove the bank into the ground.

13 thoughts on “The Panic of 2008”

  1. It really would be interesting (and painful) to see how things play out. It’s a consensus among economists that this market correction in the US must be allowed to play out for things to get better, lets see when the US govt decides to finally listen to them.

  2. @ BrianB, I think they remain interconnected. Just a computer glitch probably. But best to remain cautious about your deposits. If you can, spread it over as many banks as possible to lower the risk in case some go under. Maximum amount covered by PDIC per account is 200k.

    @ CD, yes it will be painful, but since markets are supposed to be self-correcting, it must play out with as little intervention as possible. The market has to find its natural bottom and hard lessons will have to be learned. I just hope our banks and the entire Philippine financial system won’t be that hard-hit.

  3. i am an ordinary employee and though it is good news to hear that gas prices are going down, news of economic turmoil is always a scary thought. the president is going on the news reassuring everyone that it will be alright. is that something worth believing?

  4. @ Arpee, GMA is probably right in saying that we can weather the storm for the time being. Public confidence in our banking sector is high. If a person is gainfully employed at the moment, there seems to be no immediate danger that his/her job will be affected, unless the job is connected with AIG and other U.S. financial institutions. But the long-term effects of a contracting economy is more worrisome, as it can lead to a slowdown or even stagflation.

    See you at the blog awards.

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