by Jessica Cheam, The Straits Times, April 17 2009
PROPERTY developer City Developments (CDL) said yesterday that it expects increasing numbers of homebuyers to enter the market in the next three to 12 months.
Its optimism stems from the sale of more than 80 per cent – or 150 units – of its newly-launched development, The Arte [...]
Throughout the entire financial meltdown, mainstream newspaper coverage has centred mostly on the lack of regulatory vision that has fuelled the greed of Wall Street.
But the BBC recently sheds some light on who may be the real culprits:
rating agencies.
A search on our news archives shows our paper is also been guilty of not giving coverage to the discussion of this topic.
I include here the transcript of a recent discussion on BBC World Service. Found it particularly illuminating. This is essentially the crux of the issue:
” The simple reality is that the world would have been better off if the credit rating agencies had not existed because then pension funds, bond funds, insurance companies would have had to do much more work about what they were buying. So actually that these agencies existed is the biggest problem of all. “
Ratings agencies sometimes come off as incredibly self-righteous, since they have the power to essentially pass verdict on the credit-worthiness of companies and countries. The question is, who regulates them? Do they deserve this kind of power?
Surely they should pay in some way, for having rated those worthless subprime bonds AAA in the first place, and in part causing the whole crisis…
BBC World Service, 5 March 2009
Mark Gregory: It’s strange to think that this short narrow street is the heart of global capitalism. Wall Street is bustling today but appearances are deceptive. This place is in the midst of an implosion. As the financial system strolled nonchalantly towards the precipice a couple of years ago, one sort of organisation gave investors fool’s confidence to march on. One sort of organisation had the ability to blow the whistle, but didn’t.
‘The world would be better off if the credit rating agencies didn’t exist because they created an illusion of comfort which was totally unjustified.’
‘I knew it was like a house of cards. Eventually it was going to implode.’
‘We stress-tested our securities to be able to withstand a storm but what we’ve actually witnessed is a Force 10 hurricane.’
Credit rating agencies assess risks. They are a central pillar of the financial system. And they gave the seal of approval to bonds, units of debt, which had plummeted in value and which have lead to mega losses for financial institutions, plunging the world economy into crisis. Many of these bonds were secured against mortgages given to poor Americans, so-called subprime mortgages. The three main rating agencies are Fitch, Standard & Poor and the best known, Moody’s, and they’re the subject of this BBC investigation.
CW: The simple reality is that the world would have been better off if the credit rating agencies had not existed because then pension funds, bond funds, insurance companies would have had to do much more work about what they were buying. So actually that these agencies existed is the biggest problem of all.
Mark Gregory: Chris Wood (CW), an economist at the broking firm, CLSA, is something of a guru. He’s one of the few people to predict the financial meltdown before it happened.
CW: My single point is a lot of these institutions wouldn’t have bought all this stuff unless it was rated because at least I would say 70 to 80 per cent of the buyers of this paper just bought on the credit rating because they created an illusion of comfort which was totally unjustified.
MH: See, now, this is just one street.
Mark Gregory: It looks like about one out of every four or five houses here is all boarded up. They’re all foreclosures, are they?
MH: Foreclosures, ya. That is indicative of a lot of streets in this area.
Mark Gregory: It’s quite a depressing sight.
Here in a rundown part of New Haven in Connecticut is the human face of the financial meltdown; streets pockmarked with boarded-up homes, repossessed because the occupants couldn’t pay their mortgages. What’s happening in this tiny street and in towns across America is being felt in every corner of the globe. Michael Haines (MH)(??) who helps people in housing difficulties is showing me around.
MH: This right here is a perfect example of kind of what we’re dealing with. You could just walk right in, there’s no lock, no one lives here, there’s really no one that’s responsible for this.
Mark Gregory: This place has just been abandoned.
MH: It’s abandoned. This house is abandoned but that house isn’t and that house isn’t but the next house is abandoned. So then you have people who are actually home owners who end up having to deal with the issue of a declining neighbourhood.
Mark Gregory: The mortgages on these homes and millions like them were packaged up by investment banks and sold to financial institutions around the world but not before ratings agencies had declared these bonds to be financially sound. As we now know, many of the bonds consisting of subprime mortgages turned out to be close to worthless.
Moody’s has its headquarters here in a shiny brash new tower close to the site of the 911 attacks. Its business is rating the credit worthiness of companies, governments and what’s known as securitised debt, complex debt linked to assets like mortgages. Bonds and other securities are graded according to how likely they are to default. There are 19 grades in total. Triple A is the gold standard, the ultimate assurance of safety. Anything below Triple B is rated as junk, meaning it’s risky and may not be repaid. The problem with subprime debt is many securities rated as Triple A subsequently collapsed in value.
JF: They affected the fortunes of countries. It’s been argued that there were two super powers in the world; one is the United States, the other is Moody’s. So they were widely respected and feared.
Mark Gregory: Jerry Fonz (JF) is a former managing director at Moody’s.
Ratings agencies were born out of the railroad boom of the early 1900s. Vast numbers of competing companies issued bonds. An errand boy turned entrepreneur, John Moody, came up with the brilliant idea of rating them so confused investors could tell which firms might go bust. A century later, ratings agencies are embedded into the financial system, to the point where in many cases, investors are by law only allowed to buy bonds backed by a specific rating. Along the way, ratings agencies became hugely powerful. A rating downgrading was something both countries and companies need to worry about. Jerry Fonz again.
JF: Well, the immediate effect would be to raise borrowing costs for the company or country. It could lead to a loss of confidence, it could lead to a run by external creditors. It’s not a pleasant thing and many large companies had as a business objective to maintaining a given rating.
Mark Gregory: At the personal level, that’s a huge responsibility, isn’t it, knowing that you can affect the fortunes of a company or even a country?
JF: It makes it an interesting proposition, especially when you’re a young analyst straight out of school and here you are sitting across the table from a CEO up to a finance minister and you’re there on equal terms and in a position to cause that company problems or you’re going to make their day.
Mark Gregory: Powerful maybe but the agencies were also stuffy and a little dull, aloof from the dynamic aggressive deal making culture of the financial markets whose products they graded. Sylvain Raynes (SR) describes the atmosphere when he worked at Moody’s as an analyst in the 1990s.
SR: It was academic. People did not see themselves as part of Wall Street. They were separate, they did not mingle with Wall Street. There was no invitations to closing dinners. We did not get tickets to the Super Bowl, no fashion models walking around, it was a very sedate and humble environment.
Mark Gregory: That culture changed, in particular after Moody’s became a stock market listed company in 2000 which led to a new emphasis on profits. Sylvain Raynes says rating agencies became cosier with the firms they were rating.
SR: There were actually classes in congeniality. Consulting firms were hired to educate analysts to be nice to Wall Street. Now this did not happen in my days. I’m not particularly hostile to Wall Street but I’m not particularly nice either.
Mark Gregory: At the same time, ratings agencies became hugely profitable, mainly due to a boom in new financial products. Incredibly, Moody’s had the highest profit margins of any of the top 500 US companies for five years in a row.
How were they able to make so much money?
SR: Oh, you charge, I think it was seven or eight basis points for every deal that you rate so if you rate $100 million you made $80,000. That’s pretty good. The billion dollar deal in real estate is not unthinkable. Many deals were like this. So that’s $800,000. That’s a lot of money I think for what, three or four hours of work, sitting around with a pizza and a bottle of beer? I did that. I mean, I am amazed that this actually could happen.
Mark Gregory: Critics say the rating agencies came under pressure to drop their standards as they became more dependent on the lucrative income they received from grading this new generation of complex bonds. These new financial instruments were drawn up by a relatively small number of Wall Street investment banks who, it’s alleged, would shop around for a rating that declared their product safe to invest in. David Grace (DG) is a partner in a New York law firm involved in litigation with rating agencies.
DG: In traditional corporate bonds, they have tens of thousands of customers and if one of them was grumpy about its rating and threatened to take its business elsewhere, the rating agencies wouldn’t care. On the structured side, which is the faster growing side, there were about a dozen investment banks that accounted for the vast majority of that business. So if an investment bank was grumpy about the way a rating agency was rating its structured deals and threatened to pull that business, that was a really big stick. The investment bank said that if you don’t play ball with us, we’ll take our rating business down the street. And I think they were the serpent that led the rating agencies out of the Garden of Eden.
Mark Gregory: So they were under huge pressure to drop their standards?
DG: No question, and I think there is no question that they did drop their standards very far and I think no one seriously disputes that their standards went to hell in 2005, 2006 and 2007.
Mark Gregory: One major complaint against the ratings agencies is they gave their stamp of approval to investment products backed by very unsound mortgages, loans made to people who hadn’t proved or had given false information about their ability to repay.
New Haven in Connecticut is a microcosm of the US housing market. In the boom years, those who brokered deals between buyers and banks were racking in big commissions. Mortgages arranged by brokers were sold on to Wall Street investment institutions who parcelled them up as having various levels of risk, the safest being Triple A.
Bridgette Russell (BR) works with the New Haven branch of the Neighbourhood Housing Services.
BR: A lot of applications were falsified where they put that a potential borrower was earning more than they were earning. Sometimes there were false employers put on these applications; sometimes false information about assets they had in the bank.
Mark Gregory: And this was happening on a huge scale?
BR: It definitely was happening on a very large scale.
Mark Gregory: Outright fraud.
BR: Outright fraud. The mortgage broker was concerned about their dollar. For a lot of these subprime mortgages, brokers were making in between $5000 and $10,000 per person, per closing.
Mark Gregory: For every mortgage they did, they were getting $5000 or $10,000 personal commission.
BR: Between $5000 and $10,000. And Wall Street made billions. To me, it all comes down to greed. Rating agencies, 100 per cent are part of the process.
Mark Gregory: I was introduced to a 26-year-old single mother, she doesn’t want her name revealed, who lost her house. She showed me the form a mortgage broker filled in for her to get a loan that ultimately she couldn’t afford to repay.
Woman: Okay, so this is the form that, it’s pretty much the credit application that you fill, the loan application.
Mark Gregory: What had been put down for your income?
Woman: They put it for $4829.
Mark Gregory: Per month?
Woman: Per month.
Mark Gregory: And what were you actually earning?
Woman: I was earning $1920 per month.
Mark Gregory: So they doubled your income?
Woman: Um hm.
Mark Gregory: And what have they got down as your job?
Woman: They had me as a waitress.
Mark Gregory: And what were you actually?
Woman: I was an administrative assistant at a mortgage broker’s shop.
Mark Gregory: So the form doesn’t bear very much resemblance to what actually happened?
Woman: At all.
Mark Gregory: And you didn’t know about this?
Woman: No. I mean, they tell you to look at the forms when you’re signing them but the process is that you get your form, it was a big stack, about, I don’t know, 100 pages. They tell you, sign here, flip it over, sign here, flip it over, sign there. Flip it over, sign here. Flip it over, sign here. And so the last thing in my knowledge, this form was accurate.
Mark Gregory: So you feel a bit hoodwinked?
Woman: Oh, ya.
Mark Gregory: Cases like that were a tragedy for people persuaded into taking mortgages they couldn’t afford but also for the financial system.
BR: To me, what I had been seeing over the past few years, I knew it was like a house of cards and eventually it was going to implode.
Mark Gregory: Bridgette Russell of Neighbourhood Housing Services.
BR: On the ground level, it was very obvious to me because if I see someone who’s making $40,000 a year and they got a mortgage of $300,000 a year, it’s a no-brainer to me that there is no way they’re going to be able to make ends meet.
Mark Gregory: The ratings agencies say it’s not their job to check the accuracy of the information on which they base their grades.
BR: That sounds like malarky. I mean, if you’re going to rate it, then to say that you have no responsibility for the accuracy of the information that now you’re going to rate, that doesn’t make any sense to me. Does that make sense? That’s a ludicrous argument.
Mark Gregory: So why didn’t rating agencies look more closely at the credit worthiness of people getting loans that underpin the bonds they rated as safe. Jerry Fonz worked at Moody’s for 17 years.
JF: They took the position that they are not auditors, they rely on third parties for information and they trusted the originators. In many cases, when the originator said that this loan pool was Quality X, they took that at face value and incorporated that into their models and wa-lah! you had your Triple A rating.
Mark Gregory: So they ticked boxes but ignored the underlying facts.
JF: I think so. They were very interested in keeping their businesses going, in keeping volumes going and the revenues coming in. So the rating agencies were in a sense being played off one another by the bankers, the originators, in this market and that led to a systemic decline in standards and a willingness to not check the underlying accuracy of the information as thoroughly as you might otherwise because to do so might cause you to lose the transaction.
Mark Gregory: So there was plenty of incentives to kind of not look too closely at some of the underlying details.
JF: I think that’s fair, yes.
Mark Gregory: Rating agencies say they can’t be held legally responsible. All they offer is opinions. But the problem was investors gave more weight to them than that.
I’m on my way to Wharton, America’s most prestigious business school, to meet David Kotok (DK), chief investment officer of Cumberland, the money-management firm. He claims he never trusted the ratings. He always did his own research. But other investors were more gullible.
DK: Sure, they saw a Triple A, they said it must be safe, they didn’t understand the complexity or the construction of the product but they reached a decision, they surmised that the rating agency understood it and therefore if the rating agency understands it, I don’t have to understand it. If the rating agency did the diligence on the issuer, I don’t have to do the diligence on the issuer. If the rating agency was willing to put its own imprint material on the validity of the payment stream, I don’t have to worry about that anymore. And what they did is they ceded to the rating agency all of the elements which would go into a credit decision and they depended entirely on the rating agency. They would never make such a decision about loaning their money to their neighbour on a mortgage on a house.
Mark Gregory: So who is at fault, the people who bought the bonds for being gullible and not doing their homework or the credit rating agencies for giving bad ratings?
DK: Maybe both.
‘Coming up in the next 60 minutes, the major US investment bank Lehman Brothers goes bankrupt. It’s a financial earthquake on Wall Street.’
Mark Gregory: The ultimate sign of ratings agency failure you might think is grading a company as safe at the moment it goes bust. David Kotok says that’s precisely what did happen in the biggest event in the current crisis, the collapse of a major Wall Street investment bank last September.
DK: An example of a rating deficiency is Lehman Brothers. Lehman Brothers failed and it was rated Double A. The corporate rating was at Double A by one of the rating services on the day it filed bankruptcy. Unthinkable. What does it say about the rating agency that maintained the Double A credit?
Mark Gregory: It’s time to hear what the ratings agencies say in their defence. Moody’s refused to be interviewed by the BBC but another of the agencies, Standard & Poor, has agreed to talk. And I’m here to meet Martin Winn (MW), S&P spokesman, at their London office at Canary Wharf, the heart of London’s financial district.
MW: What we’ve seen is that house prices declined by considerably more than the deterioration that we anticipated. We stress-tested our securities to be able to withstand a storm but what we’ve actually witnessed is a Force 10 hurricane.
Mark Gregory: But surely you should have been in the business of forecasting the possibility of a Force 10 hurricane.
MW: I think that if rating agencies were to set their ratings assuming the very very worst possible case scenario, we would not be serving the market well.
Mark Gregory: But you would have saved people within that market several hundred billion dollars worth of investments that have gone sour and are now worthless.
MW: Well, I think again, these are judgments that are drawing a great deal of comfort from hindsight.
Mark Gregory: But the fact is it was widely known at the time surely in the marketplace that a lot of these mortgages, there was an element of fraud in them.
MW: I think there’s an element to being wise after the event here. We do though recognise there are issues around data quality and we are taking steps to seek more information from issuers about the processes they use to assess the accuracy and integrity of their data.
Mark Gregory: Martin Winn denies investment banks were able to play ratings agencies off against each other.
MW: Well, there is absolutely no evidence to suggest that we compromised our ratings standards in order to win business. If investors feel that we were compromising our standards, we would rapidly lose credibility and consequently the value of ratings from the point of view of an issuer would decline too.
Mark Gregory: There are several villains in this crisis. The rating agencies were one of them?
MW: Well, I think that that’s a judgment that others should make.
Mark Gregory: Lots of investigations into the role played by rating agencies are taking place on both sides of the Atlantic. Governments, regulators and legislators are involved. There’s a spirit of vengeance in the air. Europe’s response is led by Charlie McCreevy (CM), internal markets commissioner for the European Union.
We’ve been told by experts and analysts that actually the financial system would have been better off without the credit rating agencies over the last few years. Do you agree with that?
CM: I do.
Mark Gregory: We would’ve all been a lot better off if these credit rating agencies simply hadn’t existed.
CM: Well, let’s think about if they hadn’t existed. The investor community would have had to have structures in place themselves in their own credit risk departments to assess these particular products.
Mark Gregory: The rating agencies say they’ve got their act together but if you saw an asset that was rated a Triple A, would you now feel complete confidence in it?
CM: No, absolutely not. I’d do my own due diligence if I was a big investor, which I’m not. What the credit rating agencies have lost is reputation. The reputation of credit rating agencies has taken an awful battering over the past two years.
Mark Gregory: New regulatory rules to improve the performance of rating agencies are being introduced in both Europe and the US. These organisations are a crucial lubricant to the financial markets but it’s hard to see how confidence in them can be restored. When they come to write the history of the great crash of 2008, there will be chapters on various culprits and the ratings agencies will earn much more than just a footnote.
End
Read full post...by Jessica Cheam, April 16 2009
One-third of sales in the first quarter at or below valuation
GOOD news for home buyers eyeing the resale flat market: About one-third of HDB sales in the first quarter were struck at or below the flat’s valuation price.
The level in some areas was far higher. In Sengkang, for instance, up [...]
by Jessica Cheam, The Straits Times, April 15 2009
[Commentary]
HDB residents buying a condo unit have to do their sums carefully
IN THE midst of Singapore’s worst recession, people are still buying property.
Private condominium sales reached a recent high of 1,323 units in February – the highest since the 1,731 units sold in August 2007, which was the peak of the recent property bull run.
And though official figures are not yet available, the buying frenzy seems to have continued into March.
According to a recent report by DTZ Research, seven out of 10 buyers in the first quarter of this year are HDB upgraders.
This is a jump from the 48 per cent registered in the fourth quarter last year, and the highest number since the 86 per cent achieved in the second quarter of 2002.
HDB upgraders are home buyers with HDB addresses looking to move up the property ladder. They typically buy into mass-market condos, usually in the suburbs.
Experts say the recent brisk sales indicate a “pent-up demand” in the market, especially from buyers who held back during the recent property boom, when prices skyrocketed in 2006 to 2007.
They also point to a unique phenomenon that occurs in a property boom-and -bust cycle where the gap between the price of HDB resale flats and mass market condos has narrowed to an all-time low.
Private property prices fell a quarterly record of 13.8 per cent in the first quarter of this year, compared with the marginal 0.6 per cent drop for HDB resale flats.
This means that HDB flat owners own an asset that has appreciated to more or less record value, at a time when the prices of mid-tier condos have dropped to affordable levels.
Now, the jump from public to private home ownership has always been a tantalising proposition.
But is this really the right time for an HDB upgrader to buy?
The answer, say property experts, depends on two things – when the condo unit the upgrader is buying will be completed, and what view he takes of the Singapore property market over the next couple of years.
Let me explain.
Unlike an investor who is buying for rental yield, the HDB upgrader typically moves out of his HDB flat and into his new condo unit. This means that he sells his flat only when the new condo unit is completed and ready for occupation.
Therefore, it makes the most sense for an upgrader today to buy a completed unit – because he can sell his flat now for a relatively high price and buy the new private condo unit on the cheap.
The problem is that there aren’t many completed suburban developments on the market. Most new condos approaching completion today are in the prime districts, which were the focus of the property boom two years ago.
And the handful of suburban developments that are close to completion aren’t that attractively priced, so the HDB upgrader isn’t getting that good a deal on them.
The fact is: The cheapest suburban condo units today are those being sold “off plan”, meaning that they will be completed only two or three years later.
For HDB upgraders who buy these types of condo units, the fact that they can currently can get a good price for their HDB flats is moot, because they will sell their flats only two or three years down the road.
That brings me to the second point that HDB upgraders must consider before signing on the dotted line.
What will the global economy and the Singapore property market look like in two or three years’ time, when these projects are due for completion?
Home buyers today can no longer rely on the now-defunct deferred payment scheme introduced in 1997. This allowed buyers to pay a 10 or 20 per cent downpayment, and defer taking a bank loan until the project was completed.
Developers have replaced this with the “interest absorption scheme”. Here, the buyer also pays an initial 20 per cent downpayment and defers the rest until the property is completed.
But the big difference now is that the minute buyers commit to a property, they have to take a loan with a bank which the developer has selected. The developer then foots the bill for the buyer in interest payments to the bank during the construction period.
This arrangement carries new risks for the home buyer.
Firstly, if a developer goes under, it will no longer be able to pay the regular interest payments and the bank will go to the buyer for these payments.
This seems quite an unlikely scenario in Singapore as developers who offer this scheme generally have the financial muscle to ride out the tough times. Still, the risk of this happening is higher with smaller developers.
Secondly, the bank reserves the right to revalue a property at any point during the construction, or when the project is completed.
So if the property market heads further south, a bank may revalue properties downwards. This means that it will likely reduce the sum it had earlier agreed to lend to the buyer, who will then have to stump up a hefty sum of cash to make up the difference.
On the one hand, experts say banks are unlikely to revalue properties as long as buyers are able to make the monthly payments. Unlike high-end properties where prices could crash in as little as three months, prices of suburban units are less volatile, say analysts.
But on the other hand, if the market really crashes, HDB upgraders could be hit by a double whammy. They will have to fork out more cash to top up their loans at a time when the values of their resale flats would most likely have crashed along with the general market. And if they back out of buying the new flat, they will lose a 20 per cent deposit.
In the worst-case scenario, they could be saddled with two mortgages for properties, both in negative equity.
Such an optimistic gamble on the future is not for the faint-hearted nor the financially prudent, especially when unemployment is hitting a record high.
But if an HDB upgrader truly has the financial strength to hold on to his properties indefinitely for the long term, it could be a gamble that will pay off when the market finally recovers.
These are sums that one must do carefully, no matter how beautiful and attractive floor plans and showflats now look.
It will ensure that the leap you make from public to private home ownership won’t end up with you falling into the bottom of the chasm in between.
Read full post...by Jessica Cheam, The Straits Times, April 15 2009
Annual HR Day to celebrate Singapore’s most important asset
NATURAL resource-poor Singapore yesterday celebrated its most important asset – people – by holding a Human Resources Day and unveiling a centre dedicated to HR training.
The city-state’s first Human Resources (HR) Day was launched by Minister for Manpower Gan [...]
by Jessica Cheam, The Straits Times, April 14 2009
MARKET rents for HDB’s commercial and industrial tenants have fallen 5 per cent since January, Senior Minister of State for National Development Grace Fu said yesterday.
The drop is in line with market conditions and is part of HDB’s regular review of market rents, she told Parliament.
Ms Fu [...]
Got this from The Economist:
How green is your stimulus package?
THIS week HSBC, a big bank, published a report ranking 17 countries by the green elements of their economic-stimulus packages. South Korea is apparently allocating a whopping 81% of its fiscal stimulus to greenery and China is setting aside 34% for eco-friendly projects. By contrast, India is investing nothing of its $13.7 billion stimulus plan for green ventures. Italy and Japan are the least green of the rich G7 countries, allocating just 1.3% and 2.6% respectively.
**
I love how they described HSBC as “a big bank”.
Read full post...After writing my climate change report, where I highlighted the milestones oil giants have made in the last two years, in acknowledging climate change and taking action, all the news I’ve read recently just show them regressing.
Here is the latest story by The New York Times: “Oil Giants Loath to Follow Obama’s Green Lead.”
It’s great we’ve got a green US president for once, but we need green oil giant chief executives too. I wish they would all fail and have to beg for bailouts like the US automakers then Congress and Obama could twist their arm into behaving like responsible citizens.
Read full post...by Jessica Cheam, The Straits Times, April 8 2009
CORPORATE social responsibility (CSR) appears to be taking hold among Asian businesses but the awareness level is still low, according to a recent survey.
The online poll conducted across the region by Hong Kong-based firm CSR Asia assessed how the role of CSR professionals changes from country to [...]
by Jessica Cheam, The Straits Times, April 6 2009
Smaller firms and those relying on private projects most affected
CONSTRUCTION firms that rely heavily on private-sector projects face tough times ahead as more property developers delay building works.
Even public spending recently earmarked for infrastructure work may not be enough to tide contractors over the slump in demand, [...]
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