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Swimming in a turbulent sea of change
Wall Street’s turmoil showed that even giant groups can collapse if they do not obey the principles of risk management.
Vietnamese corporate and state managers need to learn a lesson from the Wall Street story. The collapse of leading investment banks has been a terrible shock to the world. Investment banks like Bear Stearns, Lehman Brothers, Merrill Lynch have previously managed to overcome many trials and tribulations on the US financial market, including the great depression, but today it has also crashed. Other remaining empires in Wall Street are trying to find another path to survival. The image of Wall Street as the centre for top securities investors has disappeared.
So what is this turmoil’s lesson to Vietnam? Every investor knows that the basic principle of financial investment is “never put all eggs into one basket”. But colossal profits are too strong a temptation for many investors to resist and remember the principle. Financial companies on Wall Street became rich overnight thanks to venture investments without supervision, but it is these very investments that ruined the financial empires.
They ignored the principles of risk management and invested too much in subprime mortgage-related stocks. The Wall Street’s crash once more has made us understand that discarding a principle can cause an empire to collapse.
In Vietnam, many groups and corporations are aware of the huge profits generated from the stock exchange and property market. In fact, groups and corporations expanded operations to securities investment in 2006-2007 and established securities companies, invested in fund management companies, commercial banks and insurance companies to the tune of tens of thousands of billions of dong.
As many as over 85 per cent of enterprises took part in financial investment. But it is worth noting that the sources of funds for those investment activities were loans, raising the debt-equity ratio of many groups and corporations to as many as over three times, even more than 20 times.
According to statistics, most of enterprises listed on the two bourses of Ho Chi Minh City and Hanoi had a large proportion of debt and financial investment in their total assets. This will be a disaster if financial investments run into trouble. In fact, there was trouble and what remains is the obligation to pay debts.
Investing in the financial market are individuals and professional investment organisations (referred to as investors in general) and other investors who are listed enterprises. If investors are using their money to buy shares in listed enterprises, what are they buying when the companies they invest in use capital to re-invest in shares?
If investors think they are intelligent, success will be theirs. In other words, listed enterprises are those who fail but when listed enterprises fail in financial investment, they hold assets of low value. So where do profits come from when investors are holding an enterprise with assets of low value? Is it from within the enterprise?
Meanwhile, the company’s funds come from loans. So, the assets of low value of listed enterprises belong to creditors who venture their money too much when they lend it to listed companies for financial investment.
Conversely, if this game brings success to listed enterprises, it will be all the more irrational because the investors themselves have brought profits to the listed company from their own losses. In this case, is it really necessary for these investors to participate? They are buying a share whose profit is the very money they have invested.
Not having to suffer such a tragic end as that of the American groups, the decline of the Vietnamese stock exchange only caused many listed companies to suffer losses, but it indicated a big problem in risk management.
Firstly, many listed companies put many eggs in the financial investment basket. Financial investment is a risky activity, so paying too much attention to this activity may cause companies to suffer losses. Secondly, state management agencies’ supervision over financial investment companies is very weak.
There are no agencies strong enough to supervise these investment activities. The collapse of US financial companies showed that it is the investment banks which lacked supervision like Bear Stearns and Lehman Brothers that were doomed to collapse, but not the Bank of America and Citigroup which were closely supervised by Fed.
Now, nobody knows what consequences will happen to Vietnamese enterprises which have used loans for financial investment purposes.
Many said selling short was one of the instruments leading to Lehman Brothers’ crash. NYSE statistics from September 15-19 showed that the volume of shares sold short increased 41 per cent, from 32 million shares to 108 million shares. SEC (US Securities and Exchange Commission) immediately stopped the dealing.
Short sale itself contributes to increasing the liquidity of the market, but is very risky when the stock market is in trouble. In Vietnam, the stock repo activity has been allowed by the Law on Securities, but there is not any legal documents managing this activity.
There is no guarantee that the repurchase activity is not exploited when the Vietnam’s stock exchange rallies briskly. Attractive profits can cause a number of companies to proceed with repo activities even when they do not grasp the securities situation.
Securities collateral is still a lesson to managers. Belated supervision came when the securities collateral market developed strongly caused Directive 03 to become a tidal wave for the stock exchange. So the State Securities Commission and the Ministry of Finance should put it under supervision as soon as possible, rather than postponing the issuing of guiding instructions till 2009.
VNN
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