Derivatives - financial weapons of mass destruction

The local market was blissfully sheltered from the squalls that hit international markets when the fallout from the United States subprime loans market crossed the Atlantic and rocked France's largest bank, BNP Paribas. This caused BNP to stop withdrawals from three of its US mortgage-laden hedge funds, which had around €2 billion invested in subprime loans.

The move follows a statement from BNP only the previous week stating that its exposure to this sector was not significant. With the near bankruptcy of Germany's IKB just a week old, this sent shivers through the banking sector, causing banks to get cold feet about lending each other money since they have no idea what kind of toxic waste (bad investments) their colleagues and rivals are holding.

The Financial Times did not beat around the bush, saying: "Thursday's spike in the cost of borrowing euros, dollars or sterling overnight takes the current round of credit turmoil into a new phase. There is now the risk of a real financial crisis, with banks forced to sell assets because they cannot borrow cash."

The European Central Bank (ECB) pumped an unprecedented ?95 billion into the system on Thursday to calm nerves, with the US Federal Reserve injecting an additional ?24 billion. On Friday the ECB lent a further ?61 billion, at rates just above its 4% base - but it did not reduce its base rate.

Such events give us that unsettling feeling that fundamental changes are taking place that could have hugely deleterious effects on the markets - and therefore your financial health. These rumblings, which could be the precursor of the next Big One, are caused by the massive swelling of the financial derivatives market into the hundreds of trillions of dollars.

It was Warren Buffett who, four years ago, launched a new tirade against derivatives, calling them "financial weapons of mass destruction". Before that, nine years ago next month, an American hedge fund called Long-Term Capital Management (LTCM) went belly up when its capital had fallen to less than $800 million while its total market positions in derivatives were estimated at $1.25 trillion.

The very relevant lesson here is that LTCM's founder, John Meriwether, was a former head of trading at Salomon Brothers, and two other famous partners were Robert Merton and Myron Scholes - two economists whose work in the field of derivatives had earned them a Nobel Prize in 1997. Now, when two Nobel winners can get it wrong...

Maybe we should therefore thank our lucky stars that, as yet, you cannot even sell an equity short on the Malta Stock Exchange!

As the country grinds to a halt for Santa Marija this week, the market itself slowed down but still managed a more than creditable Lm607,309 equity turnover. With HSBC Bank Malta plc (HSB) going ex-dividend (XD), its price dropped by 3.8% and took the MSE Index down with it to 4,846.75 - a 1.2% drop for the week, and still 0.55% down for the year to date.

HSBC, as expected, started the week on a slide as it traded XD. The Lm1.94 opening trades gave way to successively lower prices, cent by cent, to settle at Lm1.88 with the day's final deal effected at Lm1.87. The price progressed to Lm1.90 for Tuesday on mute volume of just under 10,000 shares.

Activity picked up on Wednesday, though the price moved in a very tight range of Lm1.899 to Lm1.90, closing at the latter. Thursday and Friday saw HSB firmly stuck at Lm1.91 to end the week 3.8% lower.

Turnover for the five days totalled 89,841 shares, which accounted for a value of Lm170,728. At the end of trading, the best bid was for 623 shares at 1c higher (Lm1.92), and the best offer for 2,700 shares stood at Lm1.94.

Bank of Valletta plc (BOV) opened the week 1c lower at Lm3.59, but settled at Lm3.58, where the rest of the day's trading took place. Tuesday and Wednesday again saw BOV steady at Lm3.58, and on Thursday it just moved up a fraction, closing at Lm3.585.

Likewise, on Friday it picked up another 5 mils to close the day and week at Lm3.59, a mere 0.3% down on the previous Friday. Turnover totalled 33,170 shares for a value of Lm118,820.

At the end of trading, best bids totalled 3,000 shares at Lm3.581, with a supply of 1,000 shares at Lm3.598.

International Hotel Investments plc was very active on Monday, the only day it traded, when turnover totalled 44,500 shares. It opened 2c higher at €1.05 but shed 1c in the final deal to show a 1% gain for the week.

Maltacom plc (MLC) was the most actively traded stock, with a turnover of 140,994 shares for a value of Lm202,496 - a full one third of the week's equity turnover. It started at Lm1.42, rising to Lm1.425 by the end of the morning.

The positive vibe saw MLC move higher on Tuesday, opening at Lm1.43 and closing 1c higher on substantial volume of 81,190 shares. The upward trend continued into Wednesday as the bulk of the day's turnover took place at Lm1.44.

MLC settled at this level for Thursday and Friday to end the week ahead by 1.4%. At the end of Friday's session, the best bid was for 2,000 shares at Lm1.426 and the best offer was for 6,467 shares at Lm1.44.

Malta International Airport plc (MIA) only traded once on Monday, down 1c to Lm1.34 on a 700-share trade. It was back at Lm1.35 on Tuesday and advanced to Lm1.36 by Thursday's close, although on slim turnover. All of Friday's deals were executed at Lm1.37 for this equity to increase 1.5% on the week. Total turnover amounted to 10,700 shares for a value of Lm14,527. At the end of the session, best bids were for 1,300 shares at Lm1.34 and offers for 6,060 shares started at Lm1.37.

FIMBank plc traded steadily at $1.95 on Monday on strong turnover of 67,150 shares. It only traded again on Thursday, down 1c for all of the five deals negotiated.

On Tuesday Lombard Bank plc issued the financial statements for the six months ended June 30. Compared to the same period last year, LOM registered:

• pre-tax profits of Lm2.09 million, an increase of 26%;

• profits after tax attributable to shareholders of Lm1.38 million, a 28.7% gain;

• a net interest income increase of 8.8%, which contributed Lm2.64 million to total operating income;

• an operating income increase of 8.3%, reaching Lm3.08 million;

• a cost-to-income ratio of 40.96%, with administrative expenses up by 16% to Lm1.20 million;

• a 27% rise in earnings per share from 12c7 in 2006 to 16c1.

Loans and advances to customers at Lm102.24 million were up 13.3% over December 31. Lombard did not trade at all last week. The best bid was for 214 shares at Lm4.75 with an offer for 4,120 shares at the last closing price of Lm4.975.

Plaza Centres plc (PZC) was comparatively busy on Monday with 12,500 shares changing hands, stable at 68c. It traded at this level again on Tuesday. Another busy session took place on Friday, with almost all deals struck at 69c for PZC to end the week 1.47% higher.

Grand Harbour Marina plc (GHM) was the week's top performer, with a 3.17% share price increase. It traded on Tuesday when one deal for 7,100 shares was executed at 78c.

On Thursday GHM announced that Camper & Nicholsons Marina Investments Ltd (CNMI) received acceptances of its offer for 917,209 GHM shares, representing approximately 9.2% of GHM's issued share capital. As a result CNMI now holds 79.2% of GHM.

As the minimum free float normally required to maintain GHM's listing is below the 25% required, CNMI will be discussing the situation with the MFSA to consider whether there are grounds for GHM to seek a dispensation allowing GHM to remain listed on the MSE.

Simonds Farsons Cisk plc only made a token presence, when 500 shares were traded at the unchanged price of Lm1 on Thursday.

On Thursday Datatrak plc announced that it had been notified that C.I. OmniBridge Ltd, incorporated in the UK, had, by way of a special trade, acquired 1,288,920 ordinary shares held by Siemens VDO in the company, at 26c per share.

In the Government bond market, turnover by value reached Lm2.2 million with 56 deals traded. In the corporate bond market there were 31 deals for a total turnover value of Lm132,336.

Turnover value in the Treasury Bill market totalled Lm169,623.

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