BANKING NEWS - AIBEA - 12.11.2008

HSBC to cut 600 employees

By siliconindia news bureau November 10, 2008Bangalore:

HSBC Holdings, a UK based bank has decided to give pink slips to 600 employees of its Asian branch, based in Hong Kong, as a result of the economic crunch.
Earlier, the bank had announced that it was cutting 1,100 jobs in its investment banking operation in September. It comprises four percent of the total workforce which includes 100 in Hong Kong.
HSBC has also planned to
release its interim management statement and third-quarter results for its U.S. business.It did not report figures for net profit or revenue but said it had been forced to write down the value of its assets by $4.8 billion in the third quarter, hurt by the global financial crisis.Michael Geogheagan, Chief Executive Officer, HSBC said, "Recovery depends on the success of further economic stimulation, which is likely to take some time to take effect."
In August, HSBC reported that net profit for the first half of the year — the six months through June 30-plunged 29 percent to $7.7 billion from $10.9 billion during the same period last year.
The biggest losses came from the North American market, which HSBC depends on for a quarter of its revenue. Operations there posted a first-half loss of $2.9 billion, compared with profit of $2.4 billion a year earlier.

AIG offered fresh financial package
WASHINGTON:
The U.S. government on Monday provided new financial assistance to troubled insurance giant American International Group, including pouring $40 billion into the company in return for partial ownership.
The action was announced jointly by the Federal Reserve and the Treasury Department. All told, the moves boost aid to the company to around $150 billion.
The $40 billion infusion comes from the recently enacted $700 billion financial bailout package.
As part of the new arrangement, the Federal Reserve is reducing a $85 billion loan it had made available to AIG to $60 billion.
The Fed also is replacing a separate $37.8 billion loan to the insurance company with a $52 billion aid package. — AP
Growing uncertainty
Time to invest in real economy
by Prof. Arun Kumar The Tribune, November 5, 2008.
These are extraordinary times, so strange and unexpected things occurring should not surprise us. The only thing predictable is that one cannot predict correctly (that also applies to the Indian cricket team!). The US government, after promising under different heads a few trillion dollars, seems to be fighting a losing battle with the economy steadily declining.
The Indian government, after so much song and dance in the last few years about the need for strict adherence to FRBM, has thrown it out of the window by announcing huge expenditures. Much was also made of the RBI’s autonomy but that is also a thing of the past with the government requiring it to act quickly and, of all things, it has released almost Rs 2,70,000 crore of liquidity in a month — an unthinkable amount till recently.
The latest data from the US economy points to a worsening economic situation. For the first time in several decades, consumer expenditures have dropped and that too sharply. Worse, this data is for the quarter immediately preceding the big pain induced by the collapse in the financial sector in mid September. So, analysts have argued that the last quarter of 2008 is likely to be much worse.
There are straws in the wind, suggesting that the recent rise in the stock markets is a blip. Reports suggest that the largest insurance firm AIG, which has been given a total bailout package of $123 billion, has more or less exhausted this amount in a month. The bailout of $ 85 billion announced in September looked huge but another $38 billion had to be given and even that has disappeared into a bottomless pit. How much more would be needed by the AIG?
That depends on the liabilities on its books and how much have its assets degraded in the present situation of rapid economic decline. All this indicates the difficulties that every business, and not just financial institutions, may be currently facing. All of them may be headed for difficulties because the assets on their books have lost value with the decline of the markets while their huge liabilities may be intact. The balance sheet may have huge holes.
The largest Japanese bank, Mitsubishi Financial Group that took equity in Morgan Stanley to bail it out, is now in trouble. It is trying to raise an equity of $10.7 billion. The shares held by Mitsubishi have fallen in value by 40 per cent. This has shaken confidence not only in Japan but also in the rest of the world. So entities that may look healthy at one point of time and may be asked to bail- out the not-so-healthy ones may themselves be in trouble very quickly not only because they took on another collapsing entity but because their own portfolio has degraded — not in years but in days and months.
The clear lesson is that given the disastrous financial situation worldwide, one does not know which entity is headed for trouble in the coming days and months. Under the circumstances, every entity is protecting itself. One way to do so is to become conservative and not trust others, not invest, etc. This becomes an added source of trouble.
The situation has gone out of the control of governments as far as the financial markets are concerned. The losses in the books have become so large that even the governments do not have the resources to save these entities. The monetary authorities have lost their power to regulate since their instruments are now blunted by the loss of trust and abnormal events in the economy. They may lower interest rates, but investments in the current situation of growing uncertainty will not rise. They may release money but it will simply sit with economic agents since they do not want to take on fresh commitments and want to stay liquid rather than commit funds. In brief, demand has collapsed.
The real economy is being severely dented since most businesses have also indulged in buying the financial instruments that are now in trouble. After all, they like to make as high a profit as possible and the financial markets were promising that and luring all and sundry — everyone was trapped by greed.
An Indian conglomerate bought a Europe firm at what was then thought to be a high price. Today the price of that asset would have collapsed in the market but the debts taken to buy the company would stand. The financial situation of the firm must be poor. The same company also bought two more firms later for the sake of prestige and again they would have taken a hit. How this firm would fare in the coming months is a moot question.
Assocham put out a report that soon some major industries will retrench in a big way. Not so surprisingly, within a week, they have withdrawn the report under pressure for the government which is still claiming that the economy would grow at 7 per cent. Is this feasible, given that the industrial growth has fallen to 1.5 per cent for the latest month and major parts of the tertiary sector, like the financial sector, hotels, tourism, trade, travel and housing, are seeing sharp declines? The Finance Minister has claimed that more jobs would be generated this year than during the entire NDA regime — a poor game of political one upmanship.
The problem is likely to aggravate as time passes because the world economy is headed into a prolonged recession or even a depression. Major Indian industries are likely to slow down or show negative growth. Can industry carry surplus labour in times when its bottomline is being hit due to lack of orders and build-up of inventories? Its losses can only mount even faster and it would sink sooner than later unless a national strategy is worked out as to how India will cope with the coming difficult time. There is no point in living in denial and not preparing.
Malaysia delinked itself from international capital flows in 1997 to save itself from the ongoing economic collapse in South-East Asia. The US and the IMF lectured it then for wrong policies but later held it up as a model for others. We also need to protect our interest and not open ourselves indiscriminately. The FIIs brought in funds but now they are withdrawing and leading to the collapse of the stock market. The government is opening up the insurance sector to greater FDI. In these times when the insurance sector is also in deep trouble (AIG being the biggest one) where will these funds come from? If they do come, would they also not try to quickly exploit the situation to shore up their parent companies, etc?
We need to invest in our real economy, keep employment up, encourage investment and keep our savings moving within the economy and not let them leak out through opening up the sector. Are we learning anything from anyone? If not, that is not unusual but a part of the predictability.
On the brink of bankruptcy, Pakistan looks to IMF
Nirupama Subramanian The Hindu 29 10 08

Going to IMF will bring in money, but it may turn into a political hot potato.
Real is the possibility of defaulting on payments
The Saudis have not said anything yet
The IMF would resurrect the begging bowl nightmare
It could have been a scene out of a French film. At an international bank in Islamabad, a sharp-suited Arab diplomat with close cropped hair, sun glasses perched on his head, is in a tense exchange with the branch manager, a worried-looking 30-something Pakistani.
“So, inshallah I come tomorrow, and you will have 35,000 dollars ready for me, okay?”
“No, sir, I cannot make a commitment. There is a crisis in the country, dollars are not available, we are trying to get the Central Bank’s help, but I cannot promise you anything.”
“That is not my problem. I come tomorrow, inshallah, and you have the money, okay?” This time the diplomat’s voice had a steely edge to it.
“No sir, I cannot promise,” the manager said.
“Ok, how much can you give? 30,000? No? 25,000?”
“No, sir, please try to understand, this is not my problem with you or your problem with the bank, this is a problem in the entire country. We are trying our best. All the embassies are our customers. Their salary days are coming up. There are so many payments to be made, so we are trying our best to make some arrangements. Please be patient.”
The Arab diplomat finally left with a promise from the bank manager to let him know later in the day how much money he could withdraw from his account.
With the country’s foreign exchange reserves scraping the bottom of the barrel, the bank manager is not the only one sweating in the Pakistani October.
According to figures released by the central bank last Thursday, the reserves have fallen to $ 7.32 billion, of which the State Bank of Pakistan’s share is $4.036 billion, while the rest is held by private banks. That, according to the government, is enough only to pay for a month of imports, despite the recent fall in oil prices. So severe is the crisis and so real is the possibility of defaulting on payments that the it is certain to see the PPP government, cap in hand, to the International Monetary Fund, as the possibility of financial aid from other quarters has receded.
Last resort
But officials are still saying that the IMF option — it will bring in the money with strings attached and may turn into a political hot potato — would be its last resort.
Pakistan’s economic crisis became apparent about six months ago, coinciding with the new government taking office. In part it was triggered by the global oil and food prices, in part by a flight of capital due to the volatile political and security climate. The government has squarely blamed the Musharraf regime’s economic policies for creating the conditions of this crisis by misspending the billions of dollars received in financial assistance and remittances. President Asif Ali Zardari recently accused the previous government of frittering away precious foreign exchange importing luxury consumer goods, while doing nothing to develop infrastructure.
The shortage, and consequent efforts by the State Bank of Pakistan, the country’s central bank, to mop up dollars in the market, has seen the Pakistani currency plummet from Rs. 61 to a dollar to its present levels of about Rs. 84. Currency speculators have added to the crisis by hoarding greenbacks. There is a run on the banks with creditors rushing to transfer their money abroad.
The Karachi Stock Exchange, whose soaring index was the pride and joy of the Musharraf regime, was the first to be affected by the crisis. As the government dealt with its terrorist threat and with a power crisis that set off violent protests in Lahore and Karachi, it also had to announce a Pak Rs. 50-billion rescue package for the KSE whose index has fallen by 30 per cent since March.
Initially, the PPP-led government put its faith in Pakistan’s traditional friends to bail it out of its economic problems. Since April, there has been an expectation that Saudi Arabia would grant a deferred oil payment facility worth $ 5 billion. But the Saudis have not said anything yet. Instead, there have been reports that the Saudi royals are sulking after the Pakistan government, which lays out game hunting privileges for Arab rulers, withdrew a hunting ground from the Saudi Interior Minister Prince Naif and allotted it to a Dubai dignitary.
There were expectations too from Mr. Zardari’s Chinese visit earlier this month, but again, Pakistan’s “all-weather friend” agreed to build two more nuclear reactors, invest in two big dams, and help to launch Pakistan’s first satellite, but there were no offers of hard cash.
Need for hard cash
Hard cash is what the government desperately needs. Shaukat Tareen, a former head of Habib Bank and recently appointed Adviser to the Prime Minister on Finance, sent out an SOS to the world last week that Pakistan is looking for 4.5 billion dollars within the next 15 to 30 days to help it tide over the immediate payments crisis. It may need as much as $15 billion over the next three years to inject stability and restore confidence in the system.
The country’s economic situation is now so bad that it has for the moment even overtaken the threat from terrorism as the main source of instability in Pakistan. Observers of course realise that the two challenges are linked, and that an economically unstable Pakistan will weaken the government’s capacity to take on the terrorist challenge.
This is also the government’s sales pitch as it seeks funds. “Pakistan has paid an economic price for its role in the war on terror. That economic cost has to be understood. Should Pakistan be asked to bear this cost all by itself. It cannot, and the world must play its role if it wants Pakistan to play its role,” Foreign Minister Shah Mahmood Qureshi said at a press conference recently.
Mr. Tareen, the government’s main troubleshooter, has said approaching the IMF would be the last resort. The government says it will first tap “Friends of Pakistan,” a group of countries banded together in a U.S. initiative. The group is meeting in the UAE in the first week of November. But Richard Boucher, the U.S. Assistant Secretary of State, poured cold water that these countries would step in to fill the resource gap. During a visit to Islamabad last week he said the idea is “not to throw cash on the table.”
The world is waiting to see if President Zardari’s visit to Saudi Arabia, also in the first week of November, will yield any results. But hopes are not high and the government has already begun informal negotiations with the IMF. Pakistan may soon make a formal request to the Fund, whose board of governors is expected to discuss a bail-out package of about $ 9.6 bn when it meets on November 7.
According to media reports, the IMF rescue could be accompanied by the condition of a 30 per cent slash in the defence budget (the government has denied this), a cut in its pension bill by more than half, and imposition of new taxes. The IMF would also want to oversee the preparation of next year’s budget. All of this could prove politically unpopular for the government. It would also resurrect the begging bowl nightmare for Pakistan that the Musharraf regime claimed it had vanquished.