The turmoil within
In view of the turmoil that plummeted financial markets into chaos these last few days, The Times Business caught up with Peter Perotti, general manager of Valletta Fund Management, to get a better insight into the situation.
What were the main reasons that spurred off this international turmoil?
There are broadly two factors behind the current credit crisis. The first is a set of tangible economic losses from US mortgage defaults. Many US mortgage holders on low incomes have been unable to meet their loan repayments and banks are having to write off the so-called sub-prime loans.
In recent years, banks have moved to a new model where they sell on the mortgages to the bond markets. This has made it much easier to fund additional borrowing. When re-packaged as mortgage-backed bonds, these financial instruments were given ratings by the credit rating agencies based on delinquency experience during the past few years. Hundreds of billions of dollars of these mortgage-backed bonds have been re-engineered as collateralised debt obligations (CDO) and mortgage-backed securities (MBS).
These CDOs are customised bonds of varying quality and varying yields. There is nothing intrinsically noxious about them. These are marketed as high quality investments and there is accumulating evidence that even the simpler CDOs have been bought by investors without knowing the risk associated with such investment. After default of these investments, banks stopped lending each other with central banks pumping cash into the banking system to avert a possible crisis.
What were the first indicators that led market observers to realise what was about to happen?
In August 2007, short-term credit markets froze up after French Bank BNP Paribas suspended three investment funds citing problems in the US sub-prime mortgage sector. During the following months, US and European banks reported losses totalling hundreds of billions of dollars.
Who in the international sphere, was mostly affected by these recent developments?
In the last days we have seen the 158-year-old US investment bank Lehman Brothers file for bankruptcy. Lehman Brothers was the fourth largest investment bank in the US. Earlier we had seen Bear Stearns being forced to seek emergency funding from the US Federal Reserve and was eventually sold to JP Morgan Chase while Merrill Lynch was recently bought by Bank of America. Other large investment banks such as Morgan Stanley and Goldman Sachs are in better financial shape but still their business model is broken and many doubt their future as standalone investment banks. In fact, both Morgan Stanley and Goldman Sachs are changing their status to become bank holding companies, allowing them to take deposits from investors.
Who has been affected most, corporate clients or the small investors?
Both corporate clients and the small investors have been hit by the degree of their exposure. The financial impact of the bankruptcy of Lehman Brothers is still emerging as firms worldwide state their degree of exposure to the bankrupt firm.
To what extent have VFM's investors been hit?
The La Valette euro, sterling and US dollar money funds invest in the Insight Liquidity Fund which is AAAm rated by S&P and the portfolio is managed in accordance with the requirements laid down by S&P. These funds are designed to ensure appropriate diversification and maintenance of liquidity. I can confirm that none of these money funds hold any securities or deposits with Lehman Brothers. Moreover, none of the other funds managed by Valletta Fund Management hold any direct investment in Lehman Brothers.
One must also note that, indirectly, the funds managed by Valletta Fund Management have not remained immune to the ongoing global credit crisis and resultant economic uncertainty. In fact, the funds which invest in the local and international markets are currently affected by the high volatility being experienced across all markets.
In Malta who were the investors who were hit most and to what extent?
The investors who have been hit most are those with a poorly diversified portfolio and excessive direct exposure to the market. By their nature funds offer diversification benefits as opposed to direct investments and, moreover, the fund's assets are "ring-fenced" and kept separate from their parent bank's holdings.
How do these market developments compare to previous similar developments?
Alan Greenspan, former Governer of the US Federal reserve has labelled the current events as a "once in a generation happening". History has shown that there have been several financial crises in the past, however, these were brought about by different circumstances. The major financial crises in recent history have been the dot.com crash in 2000, the collapse of hedge fund Long-Term Capital Market in 1998 and the crash of 1987 triggered by the widespread belief of insider trading. Each time the markets recovered from the crisis with a number of key lessons being learned.
How does the outlook for the immediate future look?
In the immediate future we expect the markets to remain volatile as the current uncertainty is expected to carry on for the coming months. In the current market scenario it is important for existing investors not to panic and seek advice from their licensed intermediary.
There are broadly two factors behind the current credit crisis. The first is a set of tangible economic losses from US mortgage defaults. Many US mortgage holders on low incomes have been unable to meet their loan repayments and banks are having to write off the so-called sub-prime loans.
In recent years, banks have moved to a new model where they sell on the mortgages to the bond markets. This has made it much easier to fund additional borrowing. When re-packaged as mortgage-backed bonds, these financial instruments were given ratings by the credit rating agencies based on delinquency experience during the past few years. Hundreds of billions of dollars of these mortgage-backed bonds have been re-engineered as collateralised debt obligations (CDO) and mortgage-backed securities (MBS).
These CDOs are customised bonds of varying quality and varying yields. There is nothing intrinsically noxious about them. These are marketed as high quality investments and there is accumulating evidence that even the simpler CDOs have been bought by investors without knowing the risk associated with such investment. After default of these investments, banks stopped lending each other with central banks pumping cash into the banking system to avert a possible crisis.
What were the first indicators that led market observers to realise what was about to happen?
In August 2007, short-term credit markets froze up after French Bank BNP Paribas suspended three investment funds citing problems in the US sub-prime mortgage sector. During the following months, US and European banks reported losses totalling hundreds of billions of dollars.
Who in the international sphere, was mostly affected by these recent developments?
In the last days we have seen the 158-year-old US investment bank Lehman Brothers file for bankruptcy. Lehman Brothers was the fourth largest investment bank in the US. Earlier we had seen Bear Stearns being forced to seek emergency funding from the US Federal Reserve and was eventually sold to JP Morgan Chase while Merrill Lynch was recently bought by Bank of America. Other large investment banks such as Morgan Stanley and Goldman Sachs are in better financial shape but still their business model is broken and many doubt their future as standalone investment banks. In fact, both Morgan Stanley and Goldman Sachs are changing their status to become bank holding companies, allowing them to take deposits from investors.
Who has been affected most, corporate clients or the small investors?
Both corporate clients and the small investors have been hit by the degree of their exposure. The financial impact of the bankruptcy of Lehman Brothers is still emerging as firms worldwide state their degree of exposure to the bankrupt firm.
To what extent have VFM's investors been hit?
The La Valette euro, sterling and US dollar money funds invest in the Insight Liquidity Fund which is AAAm rated by S&P and the portfolio is managed in accordance with the requirements laid down by S&P. These funds are designed to ensure appropriate diversification and maintenance of liquidity. I can confirm that none of these money funds hold any securities or deposits with Lehman Brothers. Moreover, none of the other funds managed by Valletta Fund Management hold any direct investment in Lehman Brothers.
One must also note that, indirectly, the funds managed by Valletta Fund Management have not remained immune to the ongoing global credit crisis and resultant economic uncertainty. In fact, the funds which invest in the local and international markets are currently affected by the high volatility being experienced across all markets.
In Malta who were the investors who were hit most and to what extent?
The investors who have been hit most are those with a poorly diversified portfolio and excessive direct exposure to the market. By their nature funds offer diversification benefits as opposed to direct investments and, moreover, the fund's assets are "ring-fenced" and kept separate from their parent bank's holdings.
How do these market developments compare to previous similar developments?
Alan Greenspan, former Governer of the US Federal reserve has labelled the current events as a "once in a generation happening". History has shown that there have been several financial crises in the past, however, these were brought about by different circumstances. The major financial crises in recent history have been the dot.com crash in 2000, the collapse of hedge fund Long-Term Capital Market in 1998 and the crash of 1987 triggered by the widespread belief of insider trading. Each time the markets recovered from the crisis with a number of key lessons being learned.
How does the outlook for the immediate future look?
In the immediate future we expect the markets to remain volatile as the current uncertainty is expected to carry on for the coming months. In the current market scenario it is important for existing investors not to panic and seek advice from their licensed intermediary.