Safe guarding your investment

Cerlian “Maff” Russell 25.JAN.08

We have seen three of the top five U.S. commercial banks, including JPMorgan Chase & Co and Wells Fargo & Co, report damaging 4th quarter results and have set aside some US $12.5 billion in loan losses to cover current and future losses projected by the Subprime mortgage mess.{{more}} Subprime lending (also known as B-paper, near-prime, or second chance lending) is the practice of making loans to borrowers who do not qualify for the best market rate because of their deficient credit history. The phrase also refers to banknotes taken on property that cannot be sold on the primary market, including loans on certain types of investment properties and certain types of self-employed individuals. Subprime lending is risky for both lenders and borrowers, due to the combination of high interest rates, poor credit history, and adverse financial situations usually associated with subprime applicants If the US economy continues to slow down and consumers are unable to meet their mortgage and other credit payments, lending institutions would be unable to recover their investment from the sale of the security because the artificial equity, which was created when the market was up, is tumbling by the day. We may ask how this situation in the US relates to us in SVG and our two cents invested in a local financial institution?

Locally, the variance on interest rates on Fixed Deposits among financial institutions is wide, with some paying as low as 1% as against a high of 8%. The interest rate being the rate of return on your investment, the higher the rate the higher the risk and vice versa. The higher deposit rates offered is an indication that the financial institution wants to attract larger deposits. Some institutions use these deposits to re-invest on the secondary mortgage market overseas. In a nutshell, your monies invested in a fixed deposit and pension fund locally could well be invested in the USA to finance very large real estate projects. As the subprime mess continues to spread, the impact might soon hit home, creating liquidity problems which could affect your pension plan and the payment of your fixed deposits when they fall due or if early payout is needed.

While the local commercial banks operate in a highly regulated environment, there are still areas of the financial environment, namely the insurance companies, building societies and credit unions that are not as regulated as the commercial banks. Being cognizant of the situation, the Government in its 2008 budget has decided to pay attention to the improvement of the regulation and supervision of these financial institutions. Also in the 2008 budget are plans to strengthen the regulatory framework surrounding the administration of private pension plans. This could only be good news for the integrity of the entire financial system, investors’ confidence and their investments.

It is, therefore, imperative on you to ensure that your investment is in a safe place. The highest interest rate should not be the only factor to consider when making the investment decision but to pay attention to the audited financial statements. Ask about their investment portfolio. Do your own due diligence because the subprime mess in the US is unfolding and massive loan losses are being made by international financial institutions to deal with present and future losses.