Wednesday, January 27, 2010

The Political System in America

The American political system has its strengths - the elected leaders represent the will of the people and spend their full time in communicating with their voters and considering legislation and policies that govern the future of their country.

It has several weaknesses, that are outline by President Obama in his State of the Union address to Congress on 27 January 2010. These weaknesses are:

- gridlock, i.e. inability to govern effectively due to the separation of powers and difficulty in getting tough decisions to be taken
- power of the lobbyist in influencing the decisions by the members of Congress
- elected leaders spend too much time worrying about getting re-elected, rather than in governing

I hope that with the right leadership, these issues can be addressed and that the system can be made to operate more efficiently. It is better than an autocratic system that is adopted in many other countries. All the best to America in overcoming these challenges and setting a good example to other countries.

Tan Kin Lian

Funny financing

I am quite puzzled by the following situation. The US Government lent money to banks at very low interest rate, through the easy monetary policy. This funding was meant to make it easy for the banks to lend to small businesses and get the economy moving. The banks took this money but were not keen to lend to small businesses (or the small businesses were not keen to invest in a weak economy). The banks decided to use the money to buy US Treasuries, i.e. they lend the money back to the Government and pocket the margin.

The US Government is now considering to lend the money directly to small businesses. What then, is the role of the banks?

Investing in properties for rental

You have to be careful before you buy any residential, commercial or industrial property for rental. The developer or the marketing agent will usually release the available units in batches and they will try to push up the price by created a perceived scarcity of supply. They will pressure the buyer to commit to the purchase through a combination of the following techniques:

- pretend to get a special price from the developer
- ask the buyer to submit a cheque to book the unit
- tell the buyer that someone else is waiting to submit a cheque to book the same unit
- tell the buyer about the current market rental and that the property represents an attractive yield.

The market rental indicated by the property agent or consultant is likely to be exaggerated. It could be the highest market rental for a recent transaction, but the average rental from several transactions could be much lower.

The buyer may also overlook to consider other cost of purchasing or renting the property, such as stamp duty, legal fees, GST, agent's commmission (to secure a tenant) and other costs. After deducting these expenses and taking the actual market rental (and not the exaggerated figure), the rental yield is likely to be more modest.

It is better to invest in a REIT (real estate investment trust) to earn the yield on properties, rather than bear the hassle of being a landlord and having to deal with property agents. I found that REITS are able to provide an attractive dividend yield of 6%to 8% at current market prices.

Tan Kin Lian

SCMP:Regulator 'could have avoided minibond fiasco


27 Jan 2010
 
The Lehman Brothers minibond mess could have been avoided had the Securities and Futures Commission imposed the measures needed to properly vet their sale and suitability to investors, a former senior manager with the regulator said.

Harold Ko Ping-chung, the commission's former head of insurance-related policies and products, told lawmakers that he believed different standards used by the commission's investment products and corporate finance departments, and lax supervision and staff inexperience contributed to the Lehman minibond fiasco.

Minibonds were handled by the corporate finance department, which only required that necessary product information be disclosed, and not the investment products department, which looked at whether the various parties involved in the product were suitably qualified.

Since leaving the commission about five months ago, Ko has been keen for lawmakers to hear his evidence. He testified publicly yesterday for the first time before the Legislative Council subcommittee investigating what went wrong. He also met the subcommittee last week behind closed doors.

The collapse of Lehman Brothers in September 2008 left holders of minibonds linked to it virtually worthless. Minibonds are not corporate bonds, but are high-risk, credit-linked derivatives. They are marketed as a proxy investment in well-known companies.

Ko spent much of his two decades with the commission vetting investment products. His deep understanding of the regulator's work in authorising Lehman minibonds is seen as invaluable as lawmakers prepare to summon banking representatives to testify.

Ko is no stranger to politics. In the 1990s he was a core member of United Ants, a grass-roots human rights group. He also ran unsuccessfully for a seat in Legco in 1995.
 

Redemption of Pinnacle Notes

Dear Mr. Tan
I picked this up from Den of the Lion Investor. They are redeeming Pinacle Notes at 3% to 5% of the orginal value.