Warren Buffett ma-naged to stay out of trading of derivatives. He did not understand them but viewed them with suspicion. He called them ?weapons of financial mass destruction.?
In good times, one cannot know who?s been taking excessive risks, he once said, ?It?s only when the tide goes out that you will know who?s been swimming naked.? That?s his folksy equivalent of ?In a bull market, everyone is a genius.?
In the local scene, the propensity of public officials, including a few presidential aspirants to comment on every passing issue only expose not a few vacuous minds. As a nonbanker trying to understand how a ?super bubble? is inflated almost unnoticed until it pops, I found both helpful and hilarious a cartoon illustration ?A Subprime Primer? that went around the e-mail circuit even before the financial crisis.
Primer
In the primer, a banker is shown looking at a pile of stinking mortgage loans. He calls a smart guy from New York and asks how he could get rid of them. The smart guy (who must be from JP Morgan?) had a brilliant idea.
Smart guy: We will create a new Security and use these smelly mortgages as collateral. We will call it a CDO. We sell that to investors and promise to pay them back as the mortgages are paid off.
Banker: But crap is crap. Who will buy them?
Smart guy: Individually, they are. But if pooled together, only some will go bad. And since housing prices always go up, we have little to worry about. We will slice the CDO into three pieces and call them ?the good, the not so good and the ugly. We will promise to pay first those holding the good ones, the not so good, second and the ugly, last. And since the investor that holds the good piece has the least risk, we will pay him a lower interest rate than the other guys. Plus, we will buy bond insurance for the good ones, so the rating agencies will give them AAA to A, the not so good, BBB to B rating.
Banker: You?re a genius. So, we will now have AAA to B rating out of these stinky, risky mortgages. But who do we sell to?
Smart guy: Not to worry. We will not sell to widows and orphans but to sophisticated institutional clients, like insurance companies (like AIG?), banks, small towns in Norway (or Iceland?), school boards in Kansas, to anyone looking for high-quality, safe investments. And you don?t have to worry about carrying them in your balance sheet?we will set up a shell company in the Cayman Islands to take ownership of the mortgages so the crap goes into their balance sheet. We call that a SPV (special purpose vehicle).
In his new book, George Soros said that CDOs were even repackaged into CDOs of CDOs and called them CDO square. The securitization mania spread from mortgages to other forms of credit called credit default swap (CDS).
This synthetic market grew exponentially to an estimated nominal value of $43 trillion. To put matters in perspective, he points out that it is equivalent to the entire household wealth of the United States. The capitalization of the US stock market is $18.5 trillion, and the US treasuries market is only $4.5 trillion.
And so, that?s how we got, not just the boom-bust housing bubble but a longer term, and more complicated super bubble, which now affects not only Wall Street but main Street, not just the US economy but the world economy, because, as Thomas Friedman says, ?the world is flat.?
He did not really apologize for stating a case for globalization, but for not realizing that the world is flatter than he thought. ?Who would have thought that hedge funds would come from the glaciers of Iceland,? he asked. He advised that we must prepare for the long haul. Quoting a historian of financial crises, he said that men think in herds. ?They go mad in herds, while they only recover their senses slowly, and one by one.?
Slowdown
So, shall we sleep soundly when our public officials say that we are insulated from the crisis because our economy stands on sound fundamentals and that we have already done a restructuring of our financial system after the Asian Contagion?
Shall we not worry about our exports when the economy of our major trading partner, the United States, is slowing down? No? Because we have a diversified market for our minerals and raw materials, like China? But doesn?t China also sell to the United States and Europe, which may slip into a recession if the credit freeze does not thaw? Shall we not worry about our workers, who will be displaced in the export manufacturing sector?
Will our unemployment problem at home not be compounded by the possible contraction of the overseas job market? Looking at the concentration of our 8.2 million overseas Filipino workers, we find that 2.9 million have permanent residence mainly in the United States, 3.4 million have temporary work contracts in various countries and 1.5 million are illegally staying, mainly, in the United States and Malaysia.
Where are these temporary workers deployed? Household helpers and related workers account for 28 percent; these are maids in Hong Kong, Singapore, Italy and other countries. Singapore is technically in recession, and the dailies carry accounts of maids worrying they might be sent home because ?the master has been coming home irritable since he lost his job.?
Loss of jobs
Construction workers account for 14 percent; they are mostly in the Middle East working in oil-gas-related projects and high-rise buildings. With the worldwide recession, the price of crude has gone down to $75 a barrel. The downward price trend could put new construction projects on hold.
Another 14 percent consists of factory workers, such as those in manufacturing plants in Taiwan and Korea. Their products similarly go to West. Then, we have nurses, physical therapists and caregivers for the aging population of Europe, United Kingdom and the United States.
Their services will continue to be needed, but competition from other countries and nationals of the host countries have slowed down the deployment of our nurses.
Building services requirements absorbed 5.8 percent of our workers, while Hotel and Restaurant workers account for 5.1 percent. Will travelers, specially the business executives, continue to fly and dine in style or will they now skimp on their reduced expense accounts? Finally, the performing artists make up for 2.4 percent. This includes not only our band players in hotels and night club lounges but also GROs, a euphemism for our female night club workers in Japan. A weakening world economy does not bode well for this group either. But will our seamen encounter rough seas ahead? With reduced commerce, there can only be fewer cargo ships and tankers sailing the oceans.
Even luxury cruise ships will not be able to escape a darkening horizon. That portends gloom not only for our seamen but also for Filipino musical bands, waiters and cooks that are ubiquitous in these ships.
Only after knowing the gravity and extent of the problem, can we offer our prescriptions for the future. As companies take a market slump as opportunity to retool, countries must prepare their economies for the rebound. How? By putting our infrastructure?both hard and soft?at par with those of other countries.
1. It is obvious that our airports, seaports and roads suffer in comparison with those of other countries. Now that the SCETX has been connected to the NLEx, what we need is a direct highway connection of the NLEx to the SLEx so that motorists will be spared the traffic congestion in Edsa and C-5. But first, we have to put SLEx out of the disgraceful state it is in.
With this connection, it will also be easier to transfer passengers from Naia to Dmia in Clark, which is due for upgrading. The plan to move our International Airport to Clark is overdue. With only one runway, Naia cannot serve as a model international airport.
2. The food crisis seems to have been forgotten. But it is sure to come back as the world population increases and global warming is not abated. Our ability to increase our rice production is severely limited because we have only irrigated 45 percent of our irritable areas.
The remaining 55 percent either have irrigation facilities, which are silted and in state of disrepair, or are completely non-irrigated. Have we budgeted enough funds for irrigation and water impounding projects as we vowed to do when the crisis was upon us?
3. To be competitive, we need to upgrade not only our infrastructures but our human resources. Bill Gates, when asked what the United States should focus on in the aftermath of the financial crisis, answered ?education.?
Education
He owes the success of Microsoft to the deep pool of talent in the United States, which he was able to draw on. But his aim is modest, he wants every American to finish high school. In our case, should we not aim for the same for every Filipino youth. Sen. Mar Roxas is right. With more than 30 percent of our children, who enter elementary grades not able to reach high school, we have a long way to go. While there are 13 million students enrolled in elementary, there are only 6.3 million enrolled in secondary schools.
But to achieve this, have we budgeted enough for classrooms, teachers, books and training of our mentors in Math, Science and English, and feeding program for poor school children? If not, why can we not use the P26 billion earlier planned for the mercifully scuttled Cyber-Ed project? With a good high school education, our youth can be trained for skills in industry and agriculture, which we sorely need to be competitive.
4. While we promote industries in our ecozones, there?s a lot that can be done in the countryside in agriculture. There is the dairy industry, to cite one neglected opportunity. We import $600 million of milk and dairy products for 97 percent of our consumption annually, and yet we see our hills and meadows green with cogon grass. What we have to do only is propagate the right kind of grass for improved pasture. To say that we are in the tropics is no excuse; Thailand is on the equator and yet it has succeeded to produce 50 percent of its dairy consumption.
5. And finally, equally important as hard infrastructure is the soft infrastructure for doing business. I refer specifically to our regulatory and judicial system. Former Secretary Romy Neri was being truthful when he talked of ?regulatory capture.? If one Commissioner of a regulatory body can sign a Cease and Desist Order for a collegial body, and a Justice can write the transcript of a proceeding from memory, it is no brainer to conclude that all is not fair and square in doing business in our benighted country.
The root of the problem is in the selection and appointment process of our Justices and officials. It is obvious that the system and the appointing authority does not select the best, the brightest and the upright. This must change.
And perhaps, it is time to think out of the box. There is no field that is more regulated by elaborate rules and procedures than the field of sports. Golf has a thick book of rules, you watch a tennis match, a basketball game and a boxing bout and you see that rules get applied and that technology even keeps up with slow motion replay of fouls committed or balls landing out or in.
Wisdom
Why do rules get applied fairly in sports? The answer is simple: There is wisdom in the crowd. The crowd, or audience or spectators see what is happening and collectively give their instant feedback to the referees, umpires or judges. The referee makes a questionable call and the jeer comes loud and fast. He makes a good call and the cheer also reverberates.
With all sympathy and commiseration with my La Sallite friends, the crowd knew whether Ateneo won the UAAP championship fair and square. There is wisdom in the crowd! Shall we take a cue from sports and apply it to the field of governance?
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(This article reflects the personal opinion of the author and not the official position of the Management Association of the Philippines. The author was three-term Representative of the 1st District of Bataan and former chair and administrator of the Subic Bay Metropolitan Authority. Feedback at map@globelines.com.ph. For previous articles, please visit map.org.ph.)
