Credit crunch

Credit crunch started as a US mortgage problem and it rooted by the falling house price.

Between 1997 and 2006, American house price rose by 124%, while prices in Britain went up by 194% and in Spain is 180%. Average prices rose steadily during 5 years and peaked in mid 2006. Ignoring other risks, People had thought that housing price would increase forever. Banking was so rich and it made easier for people who did not have money to make a loan to buy houses in hand. That is the reason why Banker set up a low interest rate therefore all people, including the poor were afford to buy a house. “Lenders relaxed their standard and borrowers signed for loans that they couldn’t afford” (Zuckerman, 2007).

However, the fact is not as people expected. Sales of new homes are down 22% after 1 year. It makes the loans are more valuable rather than the property. Due to the credit crunch, market losses in 2008 more than $6 trillion, average house prices had fallen back to 170%, the Dow Johns is off by around 40% from its Oct. 8, 2007, home values continue to seek a floor (Roybal, 2008).

The overconfidence of Banking led to serious situation of credit cruch, with the huge losses of billions of Dollars in many giant organizations like Northern Rock, Bear Stearns or even the collapse of Lehman Brothers.

Lehman Brother had both residential and commercial mortgage risks, which lead to a negative performance of the firm in 2008. The firm reported a significant losses during the second quarter of 2008. Its shares fell by 45% on the 9^th September, 2008 and went bankruptcy on 15^th September.

To cope well with the crisis, the function of Central Banks is very essential to solve the mess. Two clear tasks for Central Banks are keep the financial system working smoothly by ensuring that the banking system has enough liquidity. If the system gets jammed, credit will become scarce and market interest rates will rise--and the economy may become jammed too. On the other hand, pumping in liquidity too eagerly may create moral hazard: if banks think that central banks will bail them out come what may, they will be more inclined to lend recklessly.

Central banks' second function is macroeconomic stabilization, setting interest rates to keep inflation in check without causing the economy to stop and start. Because a credit squeeze raises market interest rates, it will slow the economy down. On the other hand, if a central bank responds by cutting official interest rates too drastically, it may push up inflation, or cause expectations of future inflation to rise. The medium-term goal of price stability might be put at risk.

In seeking to resolve these dilemmas, central bankers have tried to keep their two tasks separate. That is a hard distinction to sustain. Although liquidity crises are short-term emergencies and macroeconomic stability is a medium-term goal, locked credit markets soon have wider economic effects (The Economist, 2007).

Merge and acquisition actually create value or not?

Merge and acquisition (M& A) is one part of the Foreign Direct Investment (FID), the topic I mentioned last week. Merging activity is the creation of a new organization out of two or more organizatons of more or less equal stature, pooling all resources. Meanwhile, acquisition is the activity of adding a small firm into the existing structure of a large organization.

Merge and acquisition becomes a trend with an increasing in number up to 74,000 acquisitions between 1996 and 2001. It is predicted to continuing increasing in future (Quittner, 2008). The deal bases on the market price, and can be risky, and usually aim to increase sales, cut costs.

The purpose above totally was achieved in case of J. P. Morgan and Chase Manhattan Bank. Although the merge was not equal as it planned, it can not be denied the effective result as the company ranked second in size of assests among all American banks.

However, it is not always successful in every case of merge and acquisition. Author Quittner (2008) states that around 50% of acquisition  companies will have failed. A fail example is the case of Cocal-Cola and Proctor and Gamble, in which after 5 months of acquisition, Coca-Cola’s stock had dropped and Proctor and Gamble’s share price risen. Or the Daimler-Chrysler partnership lost the two firms $60 billion of market value

Another obvious example is America Online (AOL) merged with Time Warner at the value of $164 billion (Quinton, 2000). It is overoptimistic when the two organizations set an aggressive goal of 30% growth rate. In positive situation, Time Warner shareholders will get 1.5 shares of AOL for each share they own; at the end of January, the spread between Time Warner's price of $80 and the value of 1.5 AOL shares was about 7%. But if the deal collapses, Time Warner stock could fall more than 17% to its pre-deal price, while the growth investors who have fled AOL would presumably return, pushing it over $70, or more than 20% higher (Galarza, 2000).

In fact, it is recorded that AOL Time Warner worth $54 billion after the merge. A professional analyst Ethan McAfee questioned why AOL made that decision as “their investors buy the stock only because of its growth”.

So, I myself wonder whether merge and acquisition create value or not? Merge and acquisition brings benefits or drawbacks to firms?

According to a report by Schweiger (2002), trillions of dollars in deals have been struck and tens of millions of people have been affected. In the view of financial measures (profit or stock price) or non- financial measures (firm reputation), M&As creates no gain or even a slight loss in both stock price and profit (Schweiger, 2002). M&As also has a negative impact in employees. Thousands or eve tens of thousands people are being unemployed due to the M&As. Studies demonstrate the affects of M&As on employees’ health, stress, loyalty to their organization, productivity, absenteeism.

It is said that organizations must have a careful considerations before making decisions of M&As. There are some factors that managers may concern like the type of resources to be combined, the synergies sought, the extent of redundant resources, the degree of market uncertainty and the level of competition faced.

The impacts of foreign direct investment (FID) on the economic growth in Vietnam

Foreign Direct Investment (FDI) is an economic term describes an investment from foreign business. FDI brings benefits to both two sides. In aspect of multinational companies, it is a chance for them to expanse its market share as well as gain more profit. Governments also take advantage for the development of the country.

Vietnam now attracts a large number of foreign investments. It is a good chance to review the effectiveness of FDI to Vietnam’s performance.

Due to the effectiveness of the Law on Foreign Investment in 1987, Vietnam successfully attracted FDI inflows. At the end of year 2004, there are 6.164 FDI projects invested in Vietnam with the total of capital is approximately USD 59.8 billion.

According to figure provided by Ministry of Planning and Investment (2012), in 2012, the capital pledged for disbursement is USD 1 billion, equals 91% to the same period in 2011. Areas attract most of investment is Seafood Processing and manufacturing industry, increasing 994.29 million dollars, made up 80.8% total investment in the first two months of the year.

By February, 2012, FDI in Vietnam comes from 23 nations around the world. Japan is leading with USD 1.07 billion- 87.5% proportion of the investment. Taiwan is at the second position with 30.9 million USD.

FDI attraction now becomes a new trend in Vietnam. But, is it good or bad? What benefits does FDI actually bring to Vietnam?

Generally, according to a research by Nguyen Mai (2003), he affirmed the good effect of FDI on economic growth at national level. FDI companies contributed 13.3% to GDP, 35% to the industrial output, 23% to export, 25% to total state budget revenue He suggested Vietnam should continue expanding the market and seeking more new partners.

Alfaro (2003) pointed out that FDI has positive effect on the productivity in manufacturing industries, whereas its effects on growth of agricultural and mining sectors are negative. As mentioned above, vast of investment is for Seafood Processing and manufacturing industry, therefore, organizations can take all benefits from their activities.

In my opinion, FDI also brings chance for the development of infrastructure as more 67 industrial zones had built in 2002 in order to provide appropriate infrastructure for investors. FDI also spans a range of other non- financial attributes such as the new technological innovation, jobs for employees, improvement in skills and designs…

However, FDI in Vietnam has one drawback, which is the weakness in Vietnam’s FDI policy regimes. The idea is supported by the author Freeman (2002) as he stated that importance of effective policy as it “reform and trade liberalization positively affect the business environment for the investors”. He also recommended Vietnam to strengthen the co- ordination and improvement.

In fact, it can not be denied the potentiality of Vietnam in FDI area. A recent report by Citygroup on the Wall Street Journal affirms the potentiality of Vietnam in 2012 although Vietnam’s market was suffered by the global crisis in 2008. City groups as well give a judgment a decreasing in Vietnam’s inflection below 9%, compared with 23% in the last year. The organization suggested investors to have a long- term view about the potentiality of Vietnam, with the development of society, as well as an improvement in Vietnam policies such as the reducing in procedures to foreign investors (Bao Linh, 2012). The Chief Operating Officer of the European External Action Service David O’Sullivan also confirms that there is no change in vestment from EU to Vietnam (Thanh Thu, 2012).

 Source:

http://vef.vn/2012-02-24-citigroup-da-den-luc-dau-tu-vao-viet-nam-

http://www.thesaigontimes.vn/Home/kinhdoanh/giaothuong/72417/Von-dau-tu-tu-EU-vao-Viet-Nam-du-bao-khong-bi-anh-huong.html

http://fia.mpi.gov.vn/News.aspx?ctl=newsdetail&p=&aID=1135

http://fia.mpi.gov.vn/News.aspx?ctl=newsdetail&p=&aID=1132