Did the market rally as a result of it? No, it didn't. In fact, I think it's slightly worse, if not a whole lot worse. But at least with the announcement out, there is less uncertainty in the market, and everyone will be less jittery, so that should be some consolations.
There are reports of bond insurers facing bankruptcy prospects. Basically, bond insurers are those that make the value of CDO, so if they are out of business, the worth of CDO will be much lesser, or worst case - nil. This means that those banks which reported substantial losses owing to subprime (hence, they own CDO) will have even more losses than expected, unless they had written 100% off the value of the CDO in which they owned. Since no banks will be so conservative to that extent of writing the whole value off, they will have to announce even more losses on top of what they have announced. This will lead to even more problems creating a credit crunch. That is, of course, the worst case scenario. The powers that be may step in before this whole episode spirals out of control.
History should shed some light. Just read how everyone is saved when long term capital management (LTCM) went bust. A bailout plan is announced in 1998. Goldman Sachs, AIG and Berkshire Hathaway offered then to buy out the fund's partners for $250 million, to inject $4 billion and to operate LTCM within Goldman Sachs's own trading. The offer was rejected and the same day the Federal Reserve Bank of New York organized a bail out of $3.625 billion by the major creditors to avoid a wider collapse in the financial markets. The contributions from the various institutions were as follows:
* $300 million: Bankers Trust, Barclays, Chase, Credit Suisse First Boston, Deutsche Bank, Goldman Sachs, Merrill Lynch, J.P.Morgan, Morgan Stanley, Salomon Smith Barney, UBS
* $125 million: Société Générale
* $100 million: Lehman Brothers, Paribas
* Bear Stearns declined to participate.
In return, the participating banks got a 90% share in the fund and a promise that a supervisory board would be established. The fear was that there would be a chain reaction as the company liquidated its securities to cover its debt, leading to a drop in prices, which would force other companies to liquidate their own debt creating a vicious cycle. The total losses were found to be $4.6 billion.
Ironically, after the bail-out by the other investors, the panic abated, and the positions formerly held by LTCM were eventually liquidated at a small profit to the bailers. Some industry officials said that Federal Reserve Bank of New York involvement in the rescue, however benign, would encourage large financial institutions to assume more risk, in the belief that the Federal Reserve would intervene on their behalf in the event of trouble. Federal Reserve Bank of New York actions raised concerns among some market observers that it could create Moral hazard.
Sounds similar to the present situation? Another irony is that the ones who bailed out LTCM in the past are the very ones that need bailing now.
A few things to share:
1. CSC bagged the foundation works contract for phase 2 of the marina bay financial centre commercial tower. This is in addition to 3 other foundation works in the past three weeks - Alexandra Industrial park, Lonza Biologics plants at Tuas and public housing at choa chu kang/yishun area. Total contracts winning is S$118 million. Total order book stands at $448 million, most will be completed within the next 12 months. As of now, the group's revenue of S$185 million and PAT of S$20 million had already exceeded last year's revenue of S$127 million and PAT of S$9.3 million.
Price didn't change much though.
2. CFO of YZJ resigned. No reasons are given for it, not even the customary "sudden urge to spend more time with the family" is given. Is that bad? I think so. Wait for the bad news to come?
Dow is now -33 pts.