Tag Archive for: economy

"The Current Financial Crisis: Why did it happen and what is being done?"

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Look at a typical investment bank’s balance sheet and you can understand how the collapse of housing prices took down those banks. 

That’s the message I took away from “The Current Financial Crisis: Why did it happen and what is being done?”,  an April 16 presentation by John Haigh, executive dean of the Harvard Kennedy School, to the Boston Security Analysts Society. Haigh said it didn’t take much to explode the investment banks’ model of highly leveraged balance sheets with lots of short-term debt.

I liked his simple diagram of the progress of the financial crisis.
“Home prices fall –>mortgages reset –> delinquencies –> foreclosures –> prices fall further –> mortgage equity withdrawals decrease –> consumer spend falls –> job market erodes –> recession”

Haigh made several statements that stuck with me.
* People are wrong about the rating agencies. “These are such fundamentally new financial instruments tht they don’t know how to rate them.” That’s because ratings agencies typically rely on historical data–which didn’t exist for the new financial instruments–to build models for rating.
* There’s a “hot potato theory” that investment banks tossed the hot potatoes off to pension funds. But, in fact, pension funds that got AAA notes got the better assets. Investment banks were left holding the worst assets. They thought they had insured against losses in those assets through credit default swaps. That turned out to be wrong. “That why they went overnight from being investment banks to being commercial banks.” Given their exposure, they needed the liquidity and support of the federal government.
* People tell me credit default swaps are like Las Vegas, except Las Vegas is regulated and credit default swaps aren’t.
To fix the near-term crisis, Haigh said, we must
1. Recapitalize banks
2. Restart interbank lending
3. Absorb “toxic” assets
4. Prevent bank runs

More regulation of financial services is coming. Haigh is concerned that the pendulum may swing from too little regulation to too much. He referred to an April 6 presentation by Barney Frank at the Kennedy School that discussed regulation.  However, Haigh said, “You have very smart, thoughtful people in the Obama administration. I don’t think you’ll get insane regulation unless Congress gets out of control.” 

You can email John Haigh for a copy of his slides, if you’d like to learn more.


"James Grant: A Positive Lesson from the Great Depression"

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Great price tags on a number of investments are the silver lining of the current recession, according to James Grant, founder of Grant’s Interest Rate Observer. 

Grant shared his “Thoughts on the Financial Markets and the Current State of the Economy” with the Boston Security Analysts Society on February 11. He spoke at length about the virtues of value investing, as exemplified by the Depression era strategies of Floyd Odlum of Atlas Corporation. Today’s investors can learn from Odlum’s strategy of underpaying for assets, Grant said.

Continue reading “James Grant: A Positive Lesson from the Great Depression,” my article in Advisor Perspectives.

Notable quotes from the Managing Retirement Income Conference

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Speakers expressed some interesting opinions at the Managing Retirement Income Conference on Feb. 10. Their comments are paraphrased below.

  • It’ll take at least two years at 5% equity returns for people to make back what their 401(k) plans lost in the 2008  stock market decline.–Jack L. VanDerhei, Employee Benefit Research Institute
  • Retirement will turn out to have been a twentieth century retirement phenomenon. Fewer people can afford our concept of retirement because of longer lives and all three legs of the retirement stool getting shorter.–Larry Cohen, SRI Consulting
  • Only one in six LIMRA survey respondents have taken action–mostly reallocating balances–related to the economic crisis. Respondents are planning to reduce debt, delay making investments, and reduce plan contributions.–Bob Kerzner, LIMRA International
  • A tremendous demand for financial advice is coming, but people lack confidence in financial advisors.–Bill Dwyer, LPL Financial Services
  • Top earners might be willing to give up receiving Social Security payments, which they don’t need, in return for not paying more for Social Security–John Murphy, Oppenheimer Funds
  • It’s a myth that income annuities reduce liquidity and your children’s inheritance. Used properly, they can allow your assets to grow. –Steve Deschenes, MassMutual
  • There are three categories of managed payout funds: perpetual horizon endowment, horizon targeted self-annuitizing, and dollar payout targeting.–Richard Fulmer, Russell Investments

Related post: “Highlights from the Managing Retirement Income Conference”


Highlights from the Managing Retirement Income conference

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The stock market’s decline has changed how individuals look at retirement income. They want more certainty. That was one of the themes I took away from the first day of the Managing Retirement Income Conference on Feb. 10. The conference was hosted in Boston by the Retirement Income Industry Association.

Some other takeaways
1. Retirees–and pre-retirees–are concerned about becoming a burden on others in retirement.
2. Advisors will have to change to accommodate Baby Boomers’ lifestyle and income needs. 
Desire for certainty vs. the cost of guarantees 
The desire for certainty means that individuals are becoming more willing to give up control of their investments in return for a guaranteed stream of income, said Robert Kerzner, president and CEO of LIMRA International.

Guarantees of principal or income were a theme of many product presentations at the conference. For example, Brian Perlman, partner, Mathew Greenwald & Associates, made a case for target date funds with a guaranteed minimum account balance (GMAB). He suggested that guarantees should go into effect five to 10 years prior to retirement. Perlman said a GMAB would reassure investors and make them comfortable about investing a higher percentage of their assets in equities, which is necessary to give them a better shot at meeting their retirement income needs.

The SunAmerica High Watermark Funds offer a GMAB, according to an audience member. They may be the only such funds currently on the market, though Perlman said more are in development. These funds came up again in a presentation on managed payout funds by Juan M. Ocampo, Trajectory Asset Management, subadvisor to the High Watermark Funds.

However, said Kerzner, demand for guarantees is ratcheting up just as the credit crunch and stock market decline are forcing insurance companies to reassess their risk tolerance and pricing. Synthetic annuities may be one solution, he added. Oppenheimer Chairman John Murphy, who also chairs the Investment Company Institute, said there’s a question of how much risk a provider wants to take and at what price. 
“I don’t want to be a burden” 
Financial services firms are obsessed with their products instead of meeting people’s needs, according to futurist Bruce Sterling. Old people say “I don’t want to be a burden,” not “I want a million dollars,” he added. Sterling recommended that financial professionals seek opportunities to provide “de-burdenizing” services.

Sterling posed a dilemma to the conference attendees. If you had to choose, would you rather have a really good financial advisor? Or would you rather have Google or Facebook or social networking?

Advisors must change
Many financial advisors could do a better job of communicating with their clients. According to LIMRA consumer survey research cited by Kernzer, only 15% of respondents had been in touch with their clients during the current crisis. Two-thirds of those consumers initiated the contact. 

Oppenheimer Funds is directing some of its marketing efforts to helping advisors talk to clients. Advisors want to know how to approach client reviews and start conversations with clients, said John Murphy. More communication will raise client confidence, he added.

Ann Connolly of Deloitte Consulting said that as retirement income provide more unbundled products, the role of the advisor will be critical. Individuals will look to their advisors to assemble the right package for them. But these products can be bewildering. Advisors will need modules of advice, new financial modeling tools, and consolidated retirement management accounts.


 

Visit the Tax Policy Center for analysis of stimulus package

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The Tax Policy Center offers report cards and other resources to help you understand the economic stimulus bills.


"Making Sense of the Dollar"

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The U.S. economy is in better shape than you think. It may even start coming back in the second half of 2009, and the dollar will end 2009 higher versus the euro and yen.

At least, that’s the optimistic outlook Marc Chandler, Brown Bothers Harriman’s global head of currency, set forth in his keynote address at NICSA (National Investment Service Company Service Association) East Coast Regional Meeting on January 15, “Making Sense of the Dollar.”

The U.S. will emerge from this crisis stronger than before, just as we emerged stronger from World War Two and subsequent crises, Chandler told his audience.

Continue reading my article, “Making Sense of the Dollar: The U.S. Will Lead the World Again” in Advisor Perspectives.

Dan Ariely on "The Financial Markets and the Neurospsychology of Trust"

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Individuals have lost their trust in financial institutions, says Dan Ariely in “The Financial Markets and the Neurospsychology of Trust.”

Everyone knows that. But Ariely also asserts that our stock market problems can’t be resolved until trust is restored–something that  bailout efforts don’t address. 

Ariely says:

I don’t have much faith in the legislation, but I hope that one of the banks will decide to step out of the herd and be the good guy–eliminating conflict of interests and creating complete transparency.

Ariely is the author of Predictably Irrational.

I like this financial crisis question

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“Can you think of ways that something good in your life can result from the financial meltdown?” 

I like this question, which concludes “Rising from the Financial Ruins” on the HBR Editors’ Blog. It’s probably easiest to answer if you’ve got a financial cushion, or at least a steady job.

"How to Live in a World of Black Swans: Nassim Nicholas Taleb’s Take on the Financial Crisis"

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What do a turkey being fattened up for Thanksgiving and Federal Reserve Board Chairman Ben Bernanke have in common?

According to Nassim Nicholas Taleb, author of the best-selling The Black Swan: The Impact of the Highly Improbable, both mistakenly act as if the past predicts the future. 

The turkey, getting fed for 1,000 days, expected only food from the farmer until the ax fell just prior to the holiday. Bernanke, author of “The Great Moderation,” mistook a lack of volatility for a lack of risk. 

They both failed to consider the potential for a “black swan,” the focus of Taleb’s speech on “How to Live in a World of Black Swans,” delivered to the Financial Planning Association’s annual conference in Boston on October 4. Taleb reviewed some of the concepts discussed in his book, and then concluded with a call for investing in robust “barbell” portfolios.

Continue reading my article, “How to Live in a World of Black Swans.”
_________________
Susan B. Weiner, CFA

Check out my website at www.InvestmentWriting.com or sign up for my free monthly e-newsletter.

Copyright 2008 by Susan B. Weiner All rights reserved

"The Surprising Winners in the Financial Crisis"

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Young people are “The Surprising Winners in the Financial Crisis.”

They’ll be better able to afford housing than their parents, says blogger Andrew O’Connell.

Moreover, “With more affordable housing, young people might actually be able to win back some of the earning power that the American middle class has been steadily losing to globalization and offshoring.”

There’s something positive you can discuss with your clients.
_________________
Susan B. Weiner, CFA

Check out my website at www.InvestmentWriting.com or sign up for my free monthly e-newsletter.

Copyright 2008 by Susan B. Weiner All rights reserved