US Bankruptcies, A Portent of Worse Things to Come

The bankruptcies of five global financial services firms based in the US are not yet the worst that could happen. There is yet no end in sight to the current convulsion of the crisis in the US. If things do not bode well for the US, more so for the Philippines. There is not truth to the claim of the Arroyo government that the country would hardly be affected by the crisis in the US as the exposure of local banks to Lehman Brothers is limited. The impact of the recession and bankruptcies in the US on the Philippine economy are far greater than that.

BY BENJIE OLIVEROS
ANALYSIS
Bulatlat

Bear and Stearns, Fannie Mae and Freddie Mac, Lehman Brothers, Merrill Lynch, and AIG are global giants that, a few years back, seem to be unassailable. Bear and Stearns, which was established in 1923, survived the Great Depression to become one of the largest global investment bank, and securities trading and brokerage firm. But on March 2008 – on the brink of collapse – it was bought at a bargain price of $10, or was it $2?, per share by J.P. Morgan Chase.

Fannie Mae, which was established in 1938 as part of Roosevelt’s New Deal, and Freddie Mac, which was organized in 1970 – both government-sponsored enterprises- controlled 90 percent of the US’ second mortgage market. The value of their combined assets in 2003 was 45 percent greater than that of the largest bank in the US. By September, 2008 the US government had to take over the two mortgage companies to prevent it from folding up.

Lehman Brothers, a global financial services firm that started out as a dry goods store in 1844, was named as the number one dealer in the London Stock Exchange for three years, from 2004-2007, the “Most Admired Securities Firm” by Fortune magazine, and the top performer among the largest companies in US and Canada by the Barron’s 500 annual survey in 2006. It was managing $175 billion worth of assets in 2006. Just last week, it has declared bankruptcy.

Merrill Lynch, another giant in global financial services, was established in 1914. It handled as much as $1.8 trillion in assets, and operated in more than 40 countries around the world. By September, it was bought for $50 billion by the Bank of America.

The AIG or American International Group, which was established in 1919, is among the biggest insurance and financial services firms in the US and the 18th largest company in the world. It operates in more than 130 countries. By September, the US Federal government had to extend an $85 billion loan facility to AIG to prevent it from going under.

These are not simple cases of mismanagement by overpaid executives. These reveal the enormity of the global crisis. While the fall of these companies are attributed to the sub-prime mortgage crisis, the US, mortgage crisis itself is but a symptom of the economic crisis enveloping the US and the world.

The world economic recession and crisis since the 1980s pushed investors into a speculation frenzy: investing in real estate, which resulted in the 1997 Southeast Asian financial crisis, in high tech stocks leading to the bursting of the hi-tech bubble in 2000, and in mortgage-backed securities or collateralized debt obligations resulting in the sub-prime mortgage crisis. Financial investments also went into commodity futures markets pushing the prices of food and oil up until it “overheated”: prices going so high resulting in the dampening of demand. With every convulsion of the crisis, billions of dollars are lost.

There is yet no end in sight to the current convulsion of the crisis in the US. Analysts fear a further contraction of credit, which, in turn, would lead to a further slowing down of manufacturing and production. Already, exports, which is the main factor enabling the US to keep its head above the water, is in danger of sliding with the contraction of the economies of Europe and Japan during the second quarter of the year. Worse, a tightening of credit would also serve to dampen US domestic consumption. These problems would make matters worse for the world’s largest economy, the US, as its growth during the last decade or so has been fueled by debt and is consumer-driven.

If things to do not bode well for the US, more so for the Philippines. There is not truth to the claim of the Arroyo government that the country would hardly be affected by the crisis in the US as the exposure of local banks to Lehman Brothers is limited. The impact of the recession and bankruptcies in the US on the Philippine economy are far greater than that.

The US is the country’s top export destination and main trading partner. Around 18 percent of the country’s exports go to the US. It consistently ranks among the top three sources of foreign investments. According to IBON Foundation, 90 percent of the country’s revenues from Business Process Outsourcing (BPO) – the only sector keeping the unemployment situation from getting worse – is from contracts from US companies. US companies also hold two-thirds of foreign equity in the BPO sector. The US is also the biggest source of overseas remittances amounting to $4,728,920,000 or 49 percent of the total from January to July 2008.

We are now feeling the effects of the US crisis on the country. For the first eight months of the year, the country experienced a net outflow of portfolio investments amounting to $209.5 million; the Philippine stock market is experiencing losses; the value of the peso is being dragged down by the US dollar. Exports to the US and the entry of foreign direct investments would expectedly slow down as the recession in the US deepens, and the worsening unemployment there would definitely have an impact on remittances from overseas Filipinos. Likewise, sources of foreign loans, which are keeping the country afloat, would also tighten.

Neither could the country seek relief in its trade with other countries. Japan, the country’s second largest trading partner, and which is among the top three sources of foreign investments is frantically injecting funds into its money market to cushion the impact of the bankruptcies in the US. Its economy contracted during the second quarter of the year and is not expected to grow much in the next two years with projections constant at 2.1 percent. European economies, to include Germany, are also in recession. The Halifax Bank of Scotland almost went under and was bought by Lloyds TSB. World central banks are infusing $300 billion in currency swap facilities to cushion the impact of the financial crisis.

The situation the Philippine economy is in, is the consequence of its orientation towards exports instead of production for local consumption; its dependence on imports for capital and consumer goods; its reliance on debt to cover its trade and budgetary deficits; its dependence on foreign direct investments for capital, and portfolio investments and remittances of overseas Filipinos for the foreign currencies it needs.

We thought and we have hoped that we have seen the worst of the crisis in the country during the last nine months of the year with the run-away inflation and worsening unemployment. Unfortunately, the worst is yet to come. (Bulatlat)