Dec 29, 2008

Miscellaneous Musings on the Financial & Economic Crisis

I'm feeling tired.

I work in an investment bank. I also specialise in derivatives. In addition, I am a lawyer.

Put that all together, throw in the financial crisis, and what it really means is that life at work has been hectic for me, for many months. The crazy market conditions have thrown up all sorts of unprecedented fires that need to be put out.

That includes, among other things, legal disputes with defaulting clients who will do anything they can to extricate themselves from a deal gone bad.

I can't give details here, of course. Confidentiality, and all that. But if you read the financial news from around the world, you'll get a sense of what I'm talking about. It's a global phenomenon.

Here's one example that I can discuss, since it's from the other side of the world, and very public, and has nothing to do with me:

President says Ecuador will default on debt
By GONZALO SOLANO – Dec 12, 2008

QUITO, Ecuador (AP) — President Rafael Correa announced Ecuador will not meet a debt payment next week, making good on threats to default on debts his government considers illegitimate.

Correa told a news conference Friday in the city of Guayaquil that Ecuador will not make a $30.6 million interest payment due Monday on $510 million in bonds due in 2012.

"This foreign debt will not continue to be paid," Correa said. Ecuador will offer a restructuring plan to creditors in hopes of avoiding a drawn-out legal battle, he said.

Correa threatened to default on Ecuador's foreign debt before his landslide victory in 2006, and his government has spent heavily on social programs like monthly payments for single mothers, seeds for farmers and building materials for new homeowners.

The still-popular president recently warned that falling oil prices may force his hand on a default. Oil is Ecuador's top source of foreign income, accounting for 40 percent of the national budget.

.... A presidential commission last month recommended that Ecuador default on almost 40 percent of its $10 billion foreign debt, accusing former officials and bankers of profiting irresponsibly from bond deals.

Correa, a leftist U.S.-trained economist, said then that he would seek to halt payment on the loans and hold foreign investment banks and ex-government officials responsible.
What does this mean? Well, in a nutshell, Ecuador doesn't have much money. We know why. Ecuador sells oil, and oil prices have collapsed, so Ecuador is broke. So Ecuador decided not to pay its creditors.

Next, you need to find a reason not to pay. So you set up an official presidential commission and have it recommend that Ecuador should refuse to pay interest on USD $4 billion of its debt. Need some moral justification? Well, just accuse the banks of making irresponsible profits out of these deals. But didn't Ecuador's own government approve of these deals in the first place? Oh. Well then, let's just choose a few government officials and make accusations against them too. Simple as that.

So in the past few months, this is the repeating story of my working life. As mentioned earlier, I'm not involved in the Ecuador matter at all, but I am looking at many cases where the client is broadly just doing the same thing - in other words, anything and everything it can to try to wriggle out of a deal gone bad. That includes employing tactics which are dishonest and unethical, and sometimes frivolous to the point of being baffling.

I spend hours on conference calls and meetings just unravelling and deciphering all this nonsense. Well, on the positive side, I guess this means I still have a job. I think. Haha.

Lots of people must be worried about their jobs right now. Tan Kin Lian had a suggestion on how to save jobs. The suggestion is so simple that I suspected that there must be something wrong with it. This is the problem when I do too much work of the kind of work I do - my mind grows too complicated for its own good.

Okay, let me put it simply. Tan Kin Lian's suggestion is simple. And good. Read it here.

Dec 23, 2008

Interpreting Statistics for our Education System

There is plenty of publicly available information about our education system. Interpreting that information, however, is not always easy. Furthermore our media frequently gets it wrong. Here's an example from TODAY:
Stumped by math, science at PSLE But Malays did better at‘A’ levels, statistics show
Tuesday • December 23, 2008

MALAY pupils continued to see a slight dip in performance at the Primary School Leaving Examination (PSLE) — especially in science and math — but showed a marked improvement at the GCE “A” levels as the revised curriculum took effect.

According to the Ministry of Education’s (MOE) annual report card, PSLE science has been a problem subject for Malay pupils, with pass rates going down from a high of 82 per cent in 2000 to 73.6 per cent last year.

It was the same for math, with just 56.8 per cent of Malay pupils passing the PSLE paper last year, compared with 64.6 per cent in 2000.

Chinese pupils had 89.8 per cent passes last year, down from 91.6 per cent in 1999, while Indians saw 74 per cent passes, a marginal fall from 74.7 per cent two years ago.

But Malay pupils made up for the slack at the lower level by registering their best performance in the “A” levels last year — 76.4 per cent getting at least 3A (advanced level) or H2 passes, as well as a pass in General Paper or the new subject, Knowledge and Inquiry — an 11.7 per cent improvement over 2000.
Here, the media is providing a snapshot of how the Malays are performing in the education system. The report says that Malay students continue to do worse and worse in maths and science at the PSLE level, but have shown very good improvement at the A-levels. So the reader's overall impression may be that the Malays aren't doing that well, but they aren't doing that badly either (because they managed to do a lot of "catch-up", by the A-level stage).

This conclusion is flawed. The simple reason is that the report says nothing about the percentage of Malay students who managed to qualify to take the A-levels at all.

If at the PSLE stage, the Malay students are already so far behind the other races, we know that the Malays must form a disproportionately large number of Singaporeans who drop out of school after the PSLE.

At the O-level stage, the gap widens even further. The latest 2007 statistics (available from the MOE) show that while 85.4% of the Chinese students achieved 5 or more O-level passes, only 59.4% of the Malays students managed to do the same.

In other words, once again a disproportionately large number of Malays will not even qualify for the A-levels (or for the polytechnics - see the cut-off points here as a rough guide). Instead many of these Malay students will have to drop out of school, or go to the Institutes of Technical Education.

As for the Malays who do enter junior college and take the A-levels, it is true that they do close the gap somewhat, relative to the other races. However, the majority of Malay students in each primary school cohort don't even get that far.

Dec 22, 2008

Letters From Our World-Class Government

Two posts ago, I featured a letter in the TODAY newspaper. The writer, Ee Teck Siew, suggested that when a customer seeks a housing loan, some kind of risk profiling should be done to help the customer determine whether he is able to afford this long-term obligation.

You may or may not agree with this suggestion, but Teck Siew certainly did express his idea clearly enough. His last sentence sums it up: "It is high time a more rigorous regulatory regime, one with a focus on educating consumers, be added to help Singaporeans in their financial decisions."

The Ministry of National Development has now replied. Rather predictably, its response was mostly irrelevant and rather inane:
Monday • December 22, 2008
Letter from Lim Yuin Chien
Deputy Director (Corporate Communications),
Ministry of National Development

In “Risk profiling for homebuyers?”(Dec 17), Mr Ee Teck Siew suggested that the Government and industry associations consider implementing a “fact finding process” to ensure that potential home buyers buy properties they can afford, based on their abilities to service mortgage loans.

Most homebuyers would need to obtain a bank loan upfront. The homebuyers would therefore be subject to credit screening by the banks, which will ensure that the home-buyers can afford the properties they intend to buy. In the credit checks, the banks would typically take into consideration the homebuyer’s income, age and other debt commitments.

Housing and Development Board (HDB) flat buyers taking HDB concessionary loans are required to obtain a HDB Loan Eligibility (HLE) letter before committing to the flat purchase. The HLE letter similarly takes into account the flat buyers’ age, income and other financial commitments to calculate the maximum loan quantum and the expected monthly installments to ensure that the flat buyer is not financially overstretched.

We thank Mr Ee for his feedback.
As I had already explained in my earlier post, it is quite true that the bank will definitely check its customer's credit, before granting him a housing loan. However, as I had also already explained, the bank performs these credit checks for its own benefit, not for the benefit of the customer. Furthermore the bank has no duty to advise the client.

Now if you were going to take a 30-year mortgage to buy a new home, here are some of the issues that you would want to think about first. How many children do you have, or plan to have? Do you expect them to go for higher education, and if so, how much do you plan to save for that? How much are you saving for your own retirement? If you were to become unemployed for six months, would you still be able to meet your mortgage payments?

Do you have aged parents to support? How much money might you need to do that? What are your own career prospects, at least for the foreseeable future? Will you be needing extra capital, to run your own business? How much does your current lifestyle cost to maintain? Does your spouse work, or is yours a single-income family? If the latter is the case, what's the game plan if that sole breadwinner were to lose his job, become ill or die?

You have to think about these kinds of questions, before you decide how much you can afford to borrow. The future can't be predicted with 100% certainty, but that's precisely why you need to do your planning.

These are also the kinds of questions which neither the banks nor the HDB will help you with. Therefore Teck Siew's suggestion was that perhaps some kind of regulatory process could be put in place to help Singaporeans work through such questions.

In its reply, the Ministry failed to address any of the above. It was really a nothing sort of reply. Almost completely meaningless.

Dec 20, 2008

Singapore's Very Own Subprime Crisis in the Making?

Some people will accuse me of being alarmist. But that's how I see it right now. It all follows from the data that the URA released last Friday:

ST Dec 20, 2008
10,450 on DPS
Cash-strapped buyers may sell low if they can't get sufficient loans
By Joyce Teo

PRICES in the the already fragile property market could be battered even more from next year if some of the 10,450 homes bought on deferred payment are dumped by cash-strapped buyers.

The danger is that when final payments are due at completion stage, buyers faced with falling values may just sell at fire-sale levels, putting even more pressure on prices.

And a key reason for buyers to dump units is that in today's tight credit markets, risk-averse banks will demand that buyers put in more of their own cash before they will agree to lending the balance.

Take a flat that was bought for $1 million with a deposit of $100,000. The buyer must provide $900,000 on completion but if prices have fallen too far, the bank will not come to the party with a loan for the full amount. So the buyer either dips into his own pocket or cuts his losses and sells - likely into a falling market.

The numbers, revealed for the first time by the Urban Redevelopment Authority (URA) yesterday, are sobering.

Two-thirds of the 10,450 uncompleted homes will come on stream in the next two years - 4,560 in 2009 and 2,540 in 2010.

They were sold from 2005 to this year. That includes a period when many properties were being snapped up by eager buyers with little regard for price.

Deferred payment was introduced during the Asian financial crisis to boost the market, but scrapped late last year. It was blamed for encouraging speculation, as buyers could secure a property for little cash down and then flip it for a profit before a brick had been laid.

Down payments are 10 to 20 per cent with the rest deferred until completion a few years down the track.

To make things worse, the URA said that the 10,450 new homes include sub-sale units. They were likely bought at even higher prices from speculators, who had already flipped the units for a profit.

The figures also show that the homes are spread far and wide - about 4,000 each in the core central and city-fringe areas and the rest in the suburbs.

..... Responding to the news, the Real Estate Developers' Association of Singapore said the figures released by the URA underscored the popularity of the scheme.

It maintained that the scheme was beneficial to the market and reminded buyers that although they can sell their units to other buyers on the market, they cannot easily repudiate sales contracts and return the homes they bought to developers.

Conditions are afoot, for a perfect storm. The general economy is worsening, making would-be property buyers very cautious. The financial crisis has also reportedly caused local banks to scale back on lending (and that includes housing loans). Also, a large number of homes (including non-DPS homes) are scheduled for completion next year and will flood the market simultaneously.

Don't forget the Foreign Factor too. In recent years, rental rates in Singapore have been propped up by the large number of foreigners working and living here. In fact approximately one out of five residents in Singapore is not a citizen. If the unemployment rates go up, many of these foreigners will give up their rented homes and return to their home countries.

And if you look at the stock market's performance in the past 1.5 years, you know that many Singaporeans must have lost a lot of their wealth there.

There we have it - bad economy; unwilling banks; oversupply of new homes; a shrinking tenant population; big-time losses in the stock market ... and the DPS issue.

I can't see how this can work out well. (Unless you're planning to buy a property, of course).

Dec 17, 2008

The Risk of Having a Roof Over Your Head

An interesting idea, from the TODAY newspaper:

Risk profiling for home buyers?
Such checks would minimise impact of sudden economic downturn on investors
Wednesday •

December 17, 2008

Letter from Ee Teck Siew

MANY Singaporeans who bought properties during the boom years have since been caught up by the sudden financial turmoil and found themselves in a bind as the property market has taken an about-turn and some banks have frozen lending.

Such investors stand to lose a lot of money should they sell in this declining market. The problem is compounded for “flippers” who are stuck with properties bought under deferred payment schemes, which they had every intention of selling as soon as prices went up. At its worst, economic turmoil can bring about the collapse of the property market, causing severe consequences to the economy at large.

Many people do not consider whether they can truly afford a long-term asset such as property when prices skyrocket, and blindly jump into the market hoping to get a good bargain — either to buy a dream home while it’s available, or to make a windfall by flipping the unit.

As with the financial advisory and insurance industries, maybe it is time that the Government and the relevant industry body implement a fact-finding process for potential home buyers. Under the Financial Advisers Act/Financial Advisers Regulations, the fact-finding process is mandatory before any investment product can be sold. The objective is to ensure consumers buy what they can afford, taking into account their needs and risk profiles.

Buying a property involves substantial financial resources and, for the Average Joe, probably a lifetime of commitment to service the loans. Many could end up enslaved to their properties. They could face significant financial losses when a negative equity situation occurs, in that their outstanding mortgage loans could exceed the market values of their properties.

It is high time a more rigorous regulatory regime, one with a focus on educating consumers, be added to help Singaporeans in their financial decisions.

The law says that before a bank sells you a financial product, the salesperson should ask you many questions to ascertain your risk profile. Based on your risk profile, the salesperson should then recommend a suitable product, and explain to you what that product is all about.

These legal requirements don't apply to all types of financial products. For example, they don't apply to credit cards, fixed deposits or mortgage loans. In the TODAY letter above, the writer suggests that perhaps the law should require banks to profile and advise customers who are seeking a housing loan.

Actually, if you ask a bank for a housing loan, it will definitely study you quite carefully. In fact, the bank will study you much more carefully than if you were asking to buy a Lehman Minibond. That's because where housing loans are concerned, the bank will be giving you its money to buy the house; whereas in the Lehman Minibond scenario, you will be giving the bank your money to buy the Minibond.

How does the bank study you, before granting you a housing loan? Well, it will ask for your salary statements; your income tax assessments; and/or your CPF statements. It will want to know your occupation, and where you work (and it may even make discreet phone calls to find out whether you really work where you claim to work). It may run checks to see if you've ever been made a bankrupt or defaulted on your credit cards. And of course, it will check the market value of the property which you want to buy.

Note that the bank isn't doing all these things for your benefit. It's doing all these things for its own benefit. It certainly isn't under any obligation to provide you with financial advice on whether the housing loan is suitable for you or not.

So when a bank agrees to give you a housing loan, this does not mean that the bank thinks it's good for you to take the loan and buy that house. It only means that the bank thinks that it's good for the bank to lend you the money and earn your interest. There's a difference ... and if you can't see it, you'd better look again.

As my regular readers know, I've recently been doing some house-hunting myself. As part of that process, I've met and discussed with a bank salesperson. Through these discussions, I've learned a few things about how banks assess the credit risk of their mortgage customers.

Here's one thing I learned - if all other checks are satisfactory, this particular local bank will grant its customers a housing loan such that the monthly instalment works out to be not more than 60% of the customer's current monthly salary. For example, if you earn $10,000 a month, then the bank will give you a housing loan such that your monthly repayment instalment works out to be $6,000 or below.

However, for the customer, the more relevant questions remain unanswered. Should you commit yourself to spending 60% of your monthly salary on your mortgage repayments? Is that financially advisable for yourself? That's what the bank won't tell you. You'll have to figure it out for yourself.

Dec 16, 2008

The Possibility of the Impossible Wage Increase in Singapore

Last month Mercer Singapore, a consultancy firm, did a survey. It polled 233 firms in Singapore. The survey indicated that wages in Singapore would rise by an average of about 4 per cent next year.

The government's response was quite loud and sarcastic. Here's an ST report (4 Dec 08):

Be realistic about wage increase
By Li Xueying

UNIONISTS and employer group Singapore National Employers Federation (SNEF) have scoffed at a recent survey that shows wages next year will increase by 4.2 per cent.

'It is highly unrealistic,' was how NTUC secretary-general Lim Swee Say put it bluntly on Thursday.

Also questioning the salary projection was SNEF president Stephen Lee who said a study by his federation showed a 'very different picture'.

'Given the sentiments, this 4 over per cent seems to be too high,' he said.

... Mr Bob Tan, chairman of Jurong Engineering, who is also vice-president of SNEF, started the dialogue yesterday with the first question, asking panel members Manpower Minister Minister Gan Kim Yong, Mr Lim and Mr Lee, for their opinion of the projection.

It met with this quip from NTUC president John De Payva: 'The unions sent bouquets of roses to Mercer and thanked them for their optimism.'
(Small note: Minister Lim Swee Say and his friends were speaking in their capacity as unionists ... but in Singapore, you can more or less take that as a government response).

Anyway, I was a little amused by Lim Swee Say's choice of adjective "unrealistic", and the Straits Times' description of Mercer's data as a "projection". Why?

Because the Mercer survey data wasn't a "projection". It was simply survey data. Data isn't "realistic" or "unrealistic". Data is just ... data.

Mercer Singapore wasn't trying to offer its own guess as to how much wages would increase next year. All it did was (1) ask 200+ companies for their expected salary increases in 2009, and (2) calculate the average. That worked out to slightly more than 4%.

Whether companies will indeed actually increase wages by that much remains to be seen. But to say that Mercer Singapore was making a "projection", and that the projection was "highly unrealistic" (when Mercer Singapore was simply doing a survey) doesn't seem, ummm, terribly intelligent on the part of Lim and friends.

On the other hand, Lim can't be all that dumb (I hope). So the essential question is - in these bad times, how would companies be able to afford a relatively generous 4% wage increase?

A rather brutal answer came to my mind. The 4% wage increase would be possible, if firms retrenched more employees now.

Of course, the poor performers would go first. The savings from these job cuts could then be used to partially fund higher wages for the remaining employees in 2009. In fact this way, the top performers might even get quite substantial wage increases:

Carrot for performers
One in 10 bosses invest more in talent, while two-thirds not cutting bonuses, incentives
Tuesday • December 16, 2008
Neo Chai Chin

THE recession is not stopping some bosses from throwing cash at top talent.

While most employers are shrinking or freezing their budgets for salary increases, more than one in 10 — or 13 per cent — are investing more in their high performers, a survey by management consulting firm Hay Group has found.

This targeted allocation of resources is shown in the pay increases Singapore companies are dishing out to their workers. Star performers will see base salaries increase by 60 per cent more than the company’s average this year. This is nearly twice the global average of 33 per cent, but lower than the Asian average of 67 per cent.

So, if the average Singapore employee gets a five per cent increment, the star performer would receive an eight per cent raise.

This is a reflection of the talent crunch in Singapore, said Mr Christian Vo Phuoc, country manager of Singapore for Hay Group’s reward information services.

Companies know they “cannot afford to be complacent and assume their high performers will not have motive or opportunity to leave”, he said.

Dec 8, 2008

The Importance of Speaking Up

I don't really want to rehash a topic which I've already blogged about, and which had already attracted more than 100 comments from my readers (I'm referring to the suicide of the ACS student, Tan Wen Yi). However I just saw this ST Forum letter:

ST Dec 5, 2008
Death over CCA: Every child's voice should be heard

I AM writing in response to the article, 'Boy leapt to his death over CCA' (Nov 27).
I was appalled and deeply saddened by his actions. Behind his cheerful disposition, no one had any inkling of the turmoil in his mind.

It was a senseless act that led to a loss of life over such a trivial issue as co-curricular activities (CCA). All he wanted was to pursue his interest and for his wish to be respected. He had said 'he had lost inspiration to run and insisted on the switch'. Although this was what was said, there could have been other underlying reasons.

But all that should have mattered was respecting his wish and giving him the necessary support. Every child has a voice that should be heard and his wishes should be respected. I cannot imagine any troubled child wanting to speak to a stranger over the phone about his problems, when those close to him fail to understand his problems.

I hope no other child will resort to such drastic measures. Instead of waiting for troubled children to seek help, help should be sent to them via regular talks at schools by organisations such as the Ministry of Community Development, Youth and Sports.

Samuel Wittberger
Who is this letter-writer, Mr Wittberger? I had no idea. I googled his name to find out (Google often turns up interesting information that way). I was half-expecting that he might turn out to be a teacher or a youth counsellor.

It turns out that Mr Witterberger is a 12-year-old kid who has just graduated from ACS Junior. Recently he was in the news - something about either being or not being Singapore's top Eurasian PSLE student. However, that's not the point.

My point is that I feel that it's great to see a young chap like Samuel writing to the press to express his view on a matter of public interest. Especially when it's a matter that's so relevant to youths in Singapore.

Too often, too many Singaporeans fail to speak up on important issues, even issues that should concern them directly. They are too stupid; too apathetic; too afraid - we know the usual reasons. But the failure to speak up for what you think is right is ultimately a failure to take a stake in your society and nation ... it's a sign of irresponsibility and immaturity.

Samuel may be only 12, but he demonstrates a different kind of possibility. He sets a good example - if there were many more young Singaporeans like him, then as a society we might yet be saved.

(Interestingly, despite being from ACS Junior, he chose not to go to ACS Independent. Perhaps he wants to do CCAs that actually interest him).

Dec 2, 2008

Mr Wang Has A Question

I came quite close to buying a new apartment recently. Construction has already commenced at the site and is expected to complete sometime in 2010.

In the end, I didn't go ahead. I am adopting a wait-&-see approach. I had a few concerns, one of which is discussed in the Straits Times article below. Basically I am a bit worried that the construction company might go bust before the project is completed.

If any of you readers are familiar with the property / construction sector in Singapore, please comment ....

ST Nov 28, 2008
Construction industry woes
Many of the 2,000 firms in DP Info's study have high debt, little cash and weak profitability
By Joyce Teo

THE local construction industry could already be in serious trouble heading into the economic downturn, new data from DP Information Group (DP Info) shows.

Ironically, the seeds of the problem were sown during the recent construction boom as firms snapped up projects using short-term credit to get things moving. As a result, many are heavily reliant on this short-term credit.

And they now face the risk of defaulting on repayments, should banks further tighten credit as times get tougher, the credit and business information firm said.

This finding was based on an analysis of the audited financial results of more than 2,000 construction firms lodged this year.

About three in four have an annual turnover of $10 million or less. The other 24 per cent are over $10 million. Overall, about 6,000 firms make up the construction industry here.

The analysis of the data found that many companies face not just one but multiple financial problems. These include: high levels of debt, low levels of liquidity and weak profitability. All these are all tell-tale signs of pending financial trouble, said DP Info.

Managing director Chen Yew Nah said: 'The research is a warning sign for the construction industry and while it does not mean a large number of firms will fall, it does mean they are vulnerable to collapse if their position deteriorates.'

DP Info's research showed that 45 per cent of the construction firms surveyed rely on short-term loans.

Of these firms, slightly more than half have debt levels that exceed the cash levels they have in the bank. This means that 27 per cent of all construction firms surveyed are likely to face financial difficulties if their short-term credit is denied or if the repayment terms are shortened.

Construction firms also face weak levels of liquidity. Of those surveyed, 45 per cent had less than $100,000 in cash. Of the firms relying on short-term loans, about 59 per cent of them with more than $100,000 in debt have less than $100,000 of cash at the bank.

A third weakness is profitability. About 35 per cent of construction firms reported net losses while 51 per cent have accumulated losses. Many construction firms do not have strong balance sheets in any event, but during the boom in the past two years, they took on more projects using short-term loans, said Ms Chen.

'The high level of dependence on short-term debt and the staggered pattern of receipts mean the construction industry will face difficulties if short-term credit dries up,' she said.

Many financial institutions may be reluctant to renew or extend credit if project sales are slow. If credit lines of constructions firms dry up, they may not be able to pay their sub-contractors or other firms promptly.

'What is needed is a coordinated effort by the Government, the industry and financial institutions to respond to the unique problems faced by the construction industry,' said Ms Chen.

For instance, an industry-specific response is required to ensure that the funds made available by the Government are best used.

The Government recently said it will help make available $2.3 billion worth of loans to help firms ride out the economic slowdown.

'Bankers need to articulate clearly what are the products available to help the sector, for example,' said Ms Chen.

Small construction firms are not likely to default as their debt exposure should not be extensive if their debt is related only to committed construction project works, said Singapore Contractors Association executive director Simon Lee.

Ms Chen said cash flow is emerging as a problem at some construction firms since they are not getting paid on time. 'Once you're in default, you have negative cash flow and are no longer a viable company,' warned Ms Chen.

Some firms have folded because of negative cash flow, even if they still have business to do, she said.