My name is Roscal. I live in a country called Bananasia Republic. I am the fund manager of Fruity Pie Mutual Fund. This is a story about me the fund manager and the gullible Bananasians. Fruity Pie Mutual Fund was founded in 1992 by me. My timing was immaculate because the local Pita Stock Exchange (PSE) was booming and the economy was flush with money. I convinced a lot of investors to invest in FPMF because the bank interest rate then was very low at miserable 5%, as compared to the return from PSE. I had the statistics to show that the average return from PSE for the past 20 years has been 20% per annum. Moreover in the year 1992, PSE has risen 300%!. Many people did not want to lose out in the race to invest and have limited knowledge so they let me help them. Many people have emptied their Fixed Deposits, sold their houses and shops to give me cash to invest, and very soon my fund size went up to BD500,000,000. With the management fee of 1.5%, I was living on a comfortable lifestyle of BD7.5million a year. Those were the days when the more I spend on fast cars and seen with beautiful people and powerful people, the more people are convinced that I have the ‘Midas’ touch’. Nothing could go wrong!

In fact I was also doing a lot of side deals. Hey! I am the guy with BD500 million. I was treated like an Mini Emperor wherever I go. Tycoons and Politicians all came to me to beg to do deals with them. Some of the deals I liked to do with them were :

1) shares propping - PineTart Plc was not doing so good at the moment, but their fundamentals were still intact, they needed desperately to prop up their shares, or else the bank is going to ask the major shareholder Mr. PinHead to increase his collateral or risk a massive sell down by the bank. The bank was holding the PineTart shares as part of the collateral for the personal loan to him. You see, Mr. PinHead became a major shareholder by borrowing money from the bank to finance the share purchase. After a disastrous business period due to bad publicity from a ‘contaminated tart’, the company’s share price dropped from BD3 to BD 2. I was asked by Mr. PinHead to push his shares back to BD3. Based on our estimation of the free float shares in the market, we would require BD10million to do the job. Mr. Pin had given me a consulting fee of BD1million upon agreement. On hindsight I charged too cheap, anyway Mr. Pin and myself became good friends since then and he recommended me a lot of other similar deals. It was literally a very lucrative friendship.

2) shares warehousing - GrandPrune Plc was a sleepy counter. The business was boring, but profitable. As time goes by, it acquired a considerable amount of assets, and its share price was about the same as its net tangible assets. One day its chairman FishFillet asked me for help. He needed some money. How much ? Well about BD20million. He owns 60% of GrandPrune and his block of shares was worth BD60million. The problem was he could not sell the shares to the market. If he were to sell the shares, the prices will definitely drop because few people are interested in investing in prune juice business. Moreover there might be a danger of some corporate raider or competitors acquiring all the shares he sold and gain majority control over his company. I offered to help him temporary ‘park’ his BD20million worth of shares with FPMP, and FPMP will pay him BD20million. He will need to return the money plus some reasonable return to the FPMF in 2 years time and I will return his shares fully intact. As consultancy fee, I charged him BD5million upfront. This was definitely reasonable because he would definitely lose more if he were to sell to the market.

That’s all for now, until next time …. so long s**kers…ha..ha…ha..

******“In an upcoming interview, Greenspan said he was aware of “sub-prime” lending practices where homebuyers got very low initial rates only to see them later jacked up, causing severe payment shock. But he said he didn’t initially realize the harm they could do.

“While I was aware a lot of these practices were going on, I had no notion of how significant they had become until very late,” he said in a CBS “60 Minutes” interview to be broadcast Sunday. “I really didn’t get it until very late in 2005 and 2006,” Greenspan said.

A meltdown in the sub-prime mortgage market has rocked Wall Street. Foreclosures and late payments have soared and lenders have gone out of business. Nervous financial institutions tightened credit standards, making it harder for even more creditworthy borrowers to get financing. This has increased chances the economy might slide into a recession.

Greenspan, who ran the central bank for more than 18 years — the second-longest serving chairman in history — left in 2006. His successor, Ben Bernanke, has had to deal with a credit and financial crisis stemming from the sub-prime mortgage mess. ****** http://www.time.com/time/nation/article/0,8599,1661820,00.html

The article gives me a sort of sense of deja-vu (or premonition?), our local banks are competing against each other to dish out ever lower interest rates to attract homeowners to take up huge loans or to refinance their existing loans. There is no doubt that the prime intention and benefits are good, however I am also of the opinion that a prolong session like that will somehow lead to abuse.Scenario 1

A family wants to go for an overseas holiday trip but got not enough of cash, so they refinance their house to get the extra cash, and moreover even after getting the extra cash, the installment for the next 3 years is much lower than the old loan. What a great deal! To top up the already sweet deal, some banks even ‘throw in’ a 42” LCD Screen TV!!!!!

The above family is a loving family with responsible parents. A holiday trip is good way to have quality time. The financial impact is that the wealth of the family has actually deteriorated. A US Disneyland trip will easily cost RM30,000 to a family with 2 kids. To refinance a house at a lower rate is a great idea. To use the refinancing to get out a chunk of cash for luxury is something else.

A family wants to move into a bigger house and one of the criteria of lending is the repayment sum should not be more than 1/3 of the household income. The low interest rate regime has allowed families to own bigger house (more expensive house) than before with same take home pay.

This is again good for the family because the members can now enjoy better living environment and have better pride of being in the ‘right’ neighborhood. Interest rates is as temperamental as mother nature or rather as human nature….. During the 1997 financial crisis, interest rates can go up to more than 10%! Some countries with not so good central bank, which experience a ‘runaway’ inflation, their central bank might have to raise the interest rates to ‘mop-up’ the excess cash in the economy. The rationale is , if prices of goods are going up it may be due to people have too much money to spend that’s why they buy stuff. So if the bank Fixed Deposit rates is very high say 15%, people will be more compelled to save money than to spend, therefore lesser demand for goods, thus price will eventually stabilized. This is of course if the central bank is a smart one like ours. Sometimes prices go up not because of demand, it is because of scarcity of the product or because the underlying raw material costs has gone up. The crude oil price now as i am typing this blog is ;flirting with USD80 per barrel!. People in Myanmar are cursing like mad. Imagine all of a sudden our petrol price is being raised 5 times the current RM1.97 per litre to RM10.00 per litre what will happen? Then again kudos to our government for doing such a wonderful job of protecting our economy so much so that we the population do not know the real danger of cheap loans. Do you know what is modern slavery ?

Car lovers are having a field time now, because the interest offered is very low compared to 10 years ago. I remember 10 years ago when I bought my first new car Proton Wira, it cost me RM56,000, paid RM9,000 deposit (including RM2,000 for getting the car immediately), RM45,000 hire purchase loan with interest of 7.5% over 5 years. The monthly installments I was paying was RM1,032.00. Now, for the same installment of RM1,032.00, hire purchase interest of 3.25% for a repayment tenor of 9 years, I can get a loan of RM86,232! This means that with my RM9,000 deposit (RM86k+RM9k = RM95K) I can now get a new Mazda 3, or Nissan Sentra for a lesser amount, or Honda City for an even lesser amount. I am not saying Proton cars are no good, I am just saying people have more choice now than before.

The financial impact is we are actually renting the car rather than buying the car when we sign up for a long repayment period, say 9 years. The resale value of the car during the first half of the loan tenor will usually be less or equal the outstanding loan amount. So if we are thinking of trading in the vehicle for a new one, be prepared to get nothing from the trade in or fork out some money to repay the shortfall between the price of the old car and the outstanding loan. I traded in my Wira after the 6th year and got it for RM40,000. A loss of RM16,000 over 6 years. Compare to today’s situation, I will be lucky if I can get back half the price of the original purchase price of the car after 5 years! (why is it so? Watch out for my future blog on whether getting a short term hire purchase is better or a long term one)

We are not certain on how long the ‘low interest rate regime” is going to continue. Our economy may be some what different from the US, nevertheless it is worth to note the danger before we get too comfortable with the idea of buying stuff using loan, keeping up with the Jones, following the trial of mega consumerism