Fear and greed

The biggest world financial crisis in our lifetime is happening right before our eyes. For our grandparents, maybe the depression in 1936 is what they experienced. Are we headed for the same? How do entrepreneurs prepare? How should the Philippines prepare?

For the past months, this column has stated that we will see the worst situation happening in America. Basically, this arises from greed. Even when things are going well, human nature leads people to want more.

All these cause asset values to increase. Bankers, over the past many years, have created financial structures to push up their earnings, using derivative structures and complicated notes. This brought them huge earnings, which was sold all over the world to other banks, countries and investors. This is not just driven by the sub prime. Even CDOs and CMOs are part of it.

It is complicated for many of us to understand, but for so many years, the greed in the financial community did exist. This greed actually brought the value of bank and investment company shares at record levels. Now we see the reverse as the financial markets unfold. The exact opposite of greed is fear. The financial community is in so much fear that it has stopped lending to other banks. This is now causing a credit crisis on a world level. Banks do not trust other banks. Many of them are stuck with a lot of paper and instruments that they created during the time of greed, which are now difficult to value.

Fortunately, America has Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke. They are the right people to have during a crisis situation like this. If both will fail, then may God help us all. The Paulson rescue package will hopefully help the financial institutions, but more is to come as this is not enough to unfreeze the credit market.

America is composed of small and medium sized entrepreneurs. They are the people who make America what it is today. They will definitely be affected if the credit situation gets even worse. Many may close shops and stores, which will worsen the situation. This is a double whammy since consumers may now reverse their spending habits and trim down expenses.

The extreme fear of the banks is spreading all over. Many depositors and investors are selling to preserve whatever is left. Depositors are concerned if they will see their money disappear, with banks going down. Fortunately, after the Lehman Brothers incident – which I think they should have also prevented or remedied at the least, governments of countries are saving the banks and doing everything they can to prevent any collapse. This also happened during the Asian crisis, where many Philippine banks disappeared or merged.

The situation will only improve when fear gradually disappears. For those who have negosyos in the Philippines, we have less to worry about. Maybe more worries and challenges are for the larger businesses in the Philippines, which are highly leveraged and which borrow overseas to fund their bonds that may expire soon. It is not that their businesses are not doing well, but the credit market and the risk appetite for investors in emerging market bonds are not there for now, until such a time that this fear disappears.

As many of the hedge funds that lost so much money in commodities including oil have dropped, this will eventually benefit consumers in time. As I have also said time and time again, the Philippines should lower interest rates. We see this happening in other countries, and we shall soon see a coordinated action in lowering rates. This is good for business. We may see the peso weaken a bit more. This may be good for the OFW who would get more pesos for the dollars they remit. This is also good for the country. To those who can afford much more during these times of great fear, it will be good to invest. But, it is human nature that always prevents people from doing the opposite. One can be a great investor or negosyante if he is able to do the opposite.

Negosyantes are used to the ups and downs of business. This is part of life and they should always be prepared for the worst. It is their resilience, the determination to always search for new ways to do things better, faster, at lower cost that will keep them afloat and even grow. In these times, negosyantes are advised to focus on a core business or where they are good at or what they are known for, so they consolidate their resources and constantly review their cost structures. In maintaining a long-term view, one can defy conventional wisdom by even making investments in modern and more efficient plants that will deliver advantage in product quality and costs.

* * * * *

On Monday, RFM Corporation will celebrate its 50th anniversary.

My grandfather, Salvador Araneta, founded the first flour mill in the Philippines in 1958 – the year I was born. My lolo was a visionary and a philanthropist. He joined the government of Former President Quirino as the Secretary of Economic Coordination and the government of Former President Magsaysay as the Secretary of Agriculture and Natural Resources. He was one of the first who pushed for Federalism in the Philippines. He also wrote books about Philippine democracy – The Effective Democracy for All; and America’s Double-Cross of the Philippines.

He was a great man. Before he died, we shared the same room, as he lived with us coming from exile in Canada. This was when I got to know him more. But, it was his wife, my lola Victoria Araneta who was the entrepreneur. She was the founder of FEATI, which was the first airline that became a school, and the Araneta University that is now called De La Salle Araneta University. She started also the FEATI bank that became Citytrust and eventually was bought by BPI. Aside from these, some of her pioneering business ventures are the Feati Industries (Republic Dynamics) and the Admiral Apartments (Admiral Hotel). In a way, my father JoeCon and I inherited that entrepreneurial attitude, which became my father’s and my battlecry – YES! THE FILIPINO CAN.

On Monday’s RFM anniversary celebration, the first YES! THE FILIPINO CAN Awards will be launched. Eleven men and women will be awarded. They are the Filipinos who embody the right attitude, a heart for the Filipinos and fighting spirit despite the adversities they face in life and they continue to inspire many more people and help the communities around them. It is this same attitude that has brought about Namfrel and the Ten Outstanding Students of the Philippines (TOSP) and Go Negosyo. The names will be announced over the weekend. I give my congratulations to all of them who embody the right character and positive attitude that YES! THE FILIPINO CAN.