Until I read the last sentence of this Wall Street Journal article on AIG’s risk models, I felt somewhat sympathetic for the guy who developed the models.? Having developed many models in my life, I have seen them misused by executives wanting a more optimistic result, and putting pressure on the quantitative analyst to bend the assumptions.? Here’s the last paragaph:
On a rainy morning last week, Mr. Gorton briefly discussed with his Yale students how perplexing the struggles of the financial world have become. About 30 graduate students listened as Mr. Gorton lamented how problems in one sector caused investors to question value all across the board. Said Mr. Gorton: “There doesn’t seem to be a fundamental reason why.”
When I read that, I concluded that the poor guy was in over his head for years, and did not have the necessary expertise for what he was doing at AIG.? All good credit models contain something for boom and bust.? Creditworthiness of borrowing entities is highly correlated, especially during the bust phase of the credit cycle.? That said, to get deals done on CDO-like structures, the modeler can’t assume that correlations are as high as they are in real life, or the deals can’t get done.
But to my puzzled professor, there are fundamental reasons why.
Overlevered systems are inherently unstable.? Small changes in creditworthiness can have big impacts.
Rating agencies undersized subordination levels in order to win business.
Regulators allow regulated financials to own this stuff with low capital requirements, partially thanks to Basel II.
Much of the debt was related to Financials, Housing, and Real Estate, and all of those sectors are under pressure.
When financials ain’t healthy, ain’t no one healthy.
Now, for another look at the problem from a different angle, consider this New York Times article on Wisconsin public schools buying CDOs for teach pension plans.? As a kid, I played against a number of the schools mentioned in sports, etc., so many of these names bring back old memories for me.
Again, what is clear is that the guy advising the school one of the school districts barely understood the ABCs of what he was doing, and the district trusted him.? I’ll say it again, if you don’t understand it, or you don’t have a trusted friend on your side of the table who does understand it, don’t buy it. Also, relatively high yields on seemingly safe investments typically don’t exist.? Beware the salesman that offers high yields with safety; there is usually one of four things involved:
Financial leverage
Options sold short
Low credit quality of the underlying debt instruments
Foreign currency risks
These deals fall far short of the “prudent man rule” in my opinion.? Not only is the salesman culpable in this case, so are the board members that did not do proper due diligence.? For something this complex, not reading the prospectus is amazing, even though it might not have helped, given the complexity of the beast.? At least, though, a board member should read the “risks and disclosures” section of the prospectus.? There is usually honesty there, because that is what the investment bank is relying on to protect themselves legally if things go bad.
The districts should have accepted a lower rate of return on their investments, and asked the taxpayers for contributions to the pension plans, etc., to make up any deficits.
We will probably see many more stories like this over the next year.? Politicians and bureaucrats are often short-sighted, and look for “that one little thing” that will magically close a gap in the budget.? It’s that little bit of fear of the taxpayers and other stakeholders that caused “that one little thing” to become so tempting.? But now they have to live with the bad results; heads will roll.
1) Where are we?? Is the equity market cheap or dear?? Personally, I think it is cheap, and though it might rally in the short run, it could get cheaper.? When the financials are compromised, all bets are off.? Here are some article indicating that things are cheap:
And, not cheap, consider the arguments of this humble student of the markets.? He considers survivorship bias and war as factors that investors should consider.? I agree, and I would urge all to consider that wars often occur as a result of economic crises.
2) The trouble is, quantitative finance is tough.? We don’t have enough data.? Our models are poor, and until recently, often reflected two major bull cycles, and only one bear cycle.? My view is that the equity premium is more like 3% over the long run, and not the 6% bandied about by careless consultants.
3) During the “great moderation,” I argued over at RealMoney that volatility and credit spreads were too low, and would eventually snap back.? Okay, we are there now.? Volatility is high, and so are credit spreads.? The brain-dead VAR models used by Wall Street have been falsified again.? Quantitative investors have gotten savaged again; it only works when implied volatility is flat/declining — it is an implicit credit bet.
4) This is a global crisis.? Where is it appearing?
The Gulf States (notable since they have had huge trade surpluses)
5) As I have mentioned before , the IMF, previously seeming irrelevant, has a new lease on life.? But how much firepower do they have, and will countries in crisis send them money to aid foreigners?
7) How do we pay back what we borrow?? Who will borrow more from us?? Those are? the great unanswered questions as we attempt to bail out many troubled entities.? I’m a pessimist here, and think that we will have higher long rates as a result, and that “Bernanke” will become a cuss word.? (Among the cognoscenti, only “Greenspan” will do as a proper insult.)? On the despondent side, will the US default in 2009?? Doom-and-gloomers are always early, and ignore the flexibility in the financial system prior to failure.? I see default as more of a 2017-2020 issue.
8 ) Uh, let Lawrence Meyer pontificate.? There is nothing good about a zero Fed funds rate.? Let him wax grandiloquent about Japan over the past two decades.? Consider how low interest rates destroy money markets funds.? Consider as well how much low rates destroy saving, sometyhing that we have had too little of.
9) In an environment like this, every M&A deal is open to question.? M&A is credit sensitive, and higher volatility impairs the flow of credit.
10) I don’t think that GAAP mark-to-market accounting has had a material impact on this crisis.? True, many accounting firms have interpreted mark-to-market as mark-to-last-trade, but that is not what SFAS 157 specifies, and firms can ignore their auditors (with some risk).? The truth is that the firms that have failed choked on bad balance sheets and inadequate cash flow.? It doesn’t matter what the accounting rules are when a company is running out of cash.? Cash is impervious to accounting rules.
11) Want a closer view of the Fed and politics.? Read this piece at The Institutional Risk Analyst.? While at RealMoney I espoused a view that the Fed was more political than economic.? This article confirms it.
12) How do I view Greenspan’s apology?
13) At a prior employer, we often commented that credit risk in credit cards appears late in the credit cycle.? Well, we are there now.? It is seemingly the last form of credit to default on.? In this environment, one can lose their home, but losing financial flexibility can be bigger.
14) The FDIC can modify many mortgages, at a cost to taxpayers.? It could cost a lot, and many people who made dumb decsions could be bailed out by the prudent.
15) If John Henry were alive, he would be smiling.? Let humans make markets, and not machines.
I have been on both sides of the table in equity money management.? I have hired and fired managers.? Now I am looking to be hired as a manager, and I face something that distresses me — the consultants that advise potential clients.? Personally, I think the consultants could do a lot better if they abandoned their overly simplistic model that categorizes managers on capitalization, value/core/growth, and domestic/international.? It does not serve their clients well — I believe the most fundamental risk model in a globally connected world considers industry exposures, and ignores other variables.
Why?? Industries tend to occupy specific areas of the “style box.”? At one firm that I worked at, external consultants complained that our risk control procedures were nonstandard, because they were focused on industries and sub-industries.? I counter-argued that our methods were better, because with a given industry, there was little variation in market capitalization and value/growth, but industry performance varied considerably.? Though I am no longer with the firm, it continues to do well, while many that used the consultants’ model have died.
Look at it another way. Isn’t investng about finding attractive opportunities, regardless of how big they are, where they are located, or how quickly they grow?? I think so, as does Buffett, Munger, Muhlenkamp, Heebner, Hodges, Rodriguez, Lynch, and many other successful fundamental investors.
Sometimes largecap names are attractive, sometimes smallcap.? Sometimes deep value is attractive, sometimes growth at a reasonable price.? Good managers analyze where the best value is, regardless of non-economic factors.
But if you have to cram me into the style box, fine, I am a midcap value manager that buys a few foreign stocks.? But there is a huge loss in constraining intelligent investors through the style box.? The better a manager is, the more one should ignore non-economic distinctions, and let him perform.
Since I wrote my last portfolio update two months ago, it is time for a new report.
New Buys
PartnerRe
Allstate
Assurant
Nucor
Genuine Parts
Pepsico
CRH
Alliant Energy
New Sells
Avnet
Lincoln National
YRC Worldwide
CRH
Jones Apparel
Assurant
Group 1 Automotive
Smithfield Foods
MetLife
International Rectifier
Cemex
Officemax
Universal American
Rebalancing Buys
Shoe Carnival
Charlotte Russe
Devon Energy (2)
RGA
SABESP
Ensco International (2)
Industrias Bachoco
Magna International
Valero
Kapstone Paper
Hartford International (3)
Cimarex Energy
Lincoln National
Smithfield Foods
Allstate
ConocoPhillips (2)
Tsakos Energy Navigation
Rebalancing Sells
PartnerRe
Safety Insurance
Devon Energy
Ensco International
Hartford Financial (3)
Kapstone Paper
Cimarex Energy
Nam Tai Electronics (2)
Honda Motors (2)
Lincoln National (2)
ConocoPhillips
Charlotte Russe
Shoe Carnival
I’ve had a lot of trades over the past two months, which is normal for me when volatility rises.
I have been asked by a number of parties why I don’t write about the insurance industry in this environment, given my past experience.? My main reason is that I have left it behind.? When I became a buyside insurance analyst, I had strong opinions about what made a good or bad insurance company.? For the most part, those opinions were correct, but there is a fundamental opaqueness to insurance.? One truly can’t analyze it from outside.? No boss would hear that, even if true.
I benefitted from the cleaning up of insurance assets 2002-3, and thought that the cleanup had persisted.? Largely, it has, but many life companies rely too heavily on variable products for profitability, and as the market has fallen, profits from variable products have fallen harder.? Thus my mistakes with Hartford, MetLife and Lincoln National.
That brings up two other possibilities where things can continue to go wrong in life insurance.? If fees are permanently reduced the companies might have to write down the deferred acquisition costs [DAC] that they capitalized when originally writing the business, if the expected cumulative fees are less than the DAC.? The second issue is hedging the guaranteed living benefits.? I will never forget the look that the CEO of Principal Financial gave me when I asked him how well the futures/options hedges during a month where the S&P 500 is down 20-30%.? It was not a pleasant look.? Not that that scenario could ever happen. 😉
My picks in pure P&C insurance have fared better.? Safety Insurance is a solid company; so is PartnerRe.? Would that I had done more there, and less in life companies, especially the equity sensitive ones.
So what do I hold today among insurers?
Allstate
Assurant (bought after the marginally bad earnings announcement)
Hartford (yes 🙁 )
PartnerRe
Reinsurance Group of America
Safety Insurance
Yes, I am overweight insurance, and I have paid the price, particularly with Hartford.? There is an uncertainty connected with life insurance holding companies about the ability to upstream dividends to service debt.? That uncertainty only appears in bear markets, and all the hubbub over optimizing the capital structure is so much hooey.? Assurant is in better shape because it ceased buying back stock because of the (somewhat bogus) investigation of a few of their executives.
Two final notes to close.? I had a bad October, worse than the S&P 500 by a significant margin.? My exposures in life insurance and emerging markets drove that.? Second, I may have my first equity client, and so I may be curtailing some of my discussion of individual names in my portfolio, and deleting my portfolio at Stockpickr.com.? My clients come first.
Full disclosure: long ALL AIZ HIG PRE RGA SAFT SCVL CHIC COP HMC NTE XEC KPPC ESV DVN TNP VLO MGA SBS CRH LNT PEP GPC NUE (what have I left out?!)
Okay, here’s a question that I don’t know the answer to.? Why are current coupon Ginnie Mae MBS yielding roughly the same as Fannie Mae MBS?? THe Ginnie Maes are government guaranteed, so they should have a lower cost of funds.? Why isn’t the spread bigger?
I write this because there are many who think that folding Fannie and Freddie into the US Government could lower their funding costs, and lower mortgage rates. Well, Ginnie Mae is already there, and it does not seem to be making much difference. The Feds could have put the pedal to the metal with Ginnie Mae, but there does not seem to be much advantage, and I don’t know why.
When I read the piece at The Capital Spectator, my response was “Huh, neat article, wonder how it would look with a larger data set?”? Given Eddy’s help, I had that data set, and so I got to work.? Here is the main result:
The results at The Capital Spectator went from 1995 to 2003. My results go from 1871 to 2003. His results give a tight relationship, while mine indicate a loose relationship.? His R-squared was far? higher than my 7%.? Why?
In aggregate, many relationships in finance are tenuous.? Do interest rates mean-revert?? Yes, but the tendency is weak.? In this case, high dividend yields foreshadow high five-year total returns, but that tendency is weak.
In the graph above I tried to highlight the eras for different alignments of dividend yields and future five-year returns.? Depending on the era, the relationship of dividend yield to future returns differed.? In the long run, there is a weak positive relationship between dividend yields and total returns, but in the short run, many other factors predominate.
So what does this tell us?
Use larger data sets when possible.
Realize that many relationships in finance are not stable.? Indeed, that is a strength of Capitalism.? It adjusts to changing conditions, and is not stable.
When dividend yields are high the market is attractive.? Of course, factor in how high bond and cash yields are at the time.
Beware relying on intermediate-term relationships in quantitative finance.? They last for less than a decade.
Beware trusting correlation coefficients calculated over short intervals.
In finance, we know less than we think, so we should be cautious in our conclusions.
The best forecasts come when we are at extreme values of the system.? In the middle, everything is a muddle.
I am a firm believer in dividends. My portfolio has an above average dividend yield.? In general, high dividend yields pay off in investing, subject to credit quality.? But, the payoff varies over time; a heavy reliance on the dividend yield of the market as a sole indicator is not advised.
The Federal Open Market Committee decided today to lowerkeep its target for the federal funds rate 50 basis points to 1at 2 percent.
The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures. Business equipment spending and industrial production have weakened in recent months, and slowing economic activity in many foreign economies is damping the prospects for U.S. exports. Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit.
In light of Strains in financial markets have increased significantly and labor markets have weakened further. Economic growth appears to have slowed recently, partly reflecting a softening of household spending. Tight credit conditions, the ongoing housing contraction, and some slowing in export growth are likely to weigh on economic growth over the next few quarters. Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth.
Inflation has been high, spurred by thedeclinesearlier increases in the prices of energy and some other commodities and the weaker prospects for economic activity, the. The Committee expects inflation to moderate in coming quarters to levels consistent with price stability.later this year and next year, but the inflation outlook remains highly uncertain.
Recent policy actions, including today?s rate reduction, coordinated interest rate cuts by central banks, extraordinary liquidity measures, and official steps to strengthen financial systems, should help over time to improve credit conditions and promote a return to moderate economic growth. Nevertheless, downside risks to growth remain.The downside risks to growth and the upside risks to inflation are both of significant concern to the Committee. The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman;Christine M. Cumming; Elizabeth A. Duke; Richard W. Fisher; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh. Ms. Cumming voted as the alternate for Timothy F. Geithner.
The Upshot:
They have finally concluded that the real economy is in trouble, and not just the financial economy.
They think inflation will move to stable levels (and perhaps they fear deflation — they have moved from a position of rhetorical uncertainty to certainty).? They no longer fear inflation.
They hope that all they have done so far will work.
My interpretations all, but this statement changed a lot from the last one.
I spend time watching the Fed.? Much of that time is wasted, but they are an important cog in the machine that is our economy.? Today, around 2:15 when the Fed’s policy statement is released, and the guy on CNBC at the Fed talks into the mike that sounds like it is a coffee can, many will focus on the change in the Fed funds target rate.? I am here to say that given the changes that have happened in our economy, and the new ways that the Fed conducts its policies, the Fed funds target rate is not all that relevant.? Why?
The Fed does most of its direction of incremental liquidity through special programs like the TAF, TSLF, PDCF, ABCPMM, rescues, etc.? It doesn’t send most of the liquidity out through the banks, and perhaps into the economy more generally (if the banks would lend).
The Fed is having a hard time targeting Fed funds in an era where they can pay interest on excess reserves.? Effective fed funds has been averaging 0.75% over the past 10 days.
The closer we get to the zero bound, the less punch the Fed has through ordinary monetary policy.? Expectations of policy failure swamp the cash flows involved, at least for a while.
Real short-term lending rates are at present not connected to Fed funds.? That includes semi-real rates like LIBOR, and somewhat more real rates like A1/P1 commercial paper, and real short term rates like A2/P2 CP, where only the free market is lending, and the Fed is not.
If the Fed funds target falls to 1%, and commentators trot out Greenspan’s name, remember this: the two situations are not the same.? In 2003, the banks were healthy, and there were still areas of the economy that could benefit from lower rates and lever up, thus boosting GDP and markets.? We got a housing bubble amid other consumer finance bubbles, and probably a bubble in commercial real estate as well.? All of that added up to a bubble in companies that did lending.
A 1% Fed funds target will not have any punch this time around.? Even 0% with “quantitative easing” a la Japan will lead to Japanese-style results, though again, only favored markets get the liquidity.
So, don’t expect much out of the rate.? Read the announcement for what little qualitative information it might yield.? I’ll be back with a compared version of the last and current statements later today.
1) Do Fannie and Freddie deserve some blame for the crisis that we now face? Yes, but not without blaming Congress and the Executive Branch for pushing homeownership far beyond the natural rate of ownership, which I wager is around 60% rather than the 72% that it touched for a brief time.
But here are some ways that F&F went out of their way to help create the current crisis:
F&F did push loan growth and growth of their retained portfolios in order to benefit their shareholders.
They bought significant amounts of Alt-A and other lower quality loans for their retained portfolio.
They aggressively lobbied to protect their position.
They argued for capital standards that were lower than would be needed in a crisis (so did many financial institutions)
They lowered underwriting standards in order to meet competition from private lenders. They could have given up business, delevered, and been stronger companies for when the crisis would hit.
They managed to their GAAP financials. A prudent financial institution manages to a stressed version of their most stringent capital constraint.
Finally, I would add that this was an area where Greenspan was right on policy, along with a few of the more conservative members of Congress. If you are going to have F&F at all, then use them contra-cyclically. When the mortgage markets are lending, F&F should sit on their hands, and let the market do its work. If F&F?s balance sheets weren?t impaired now, they could be doing some real good here, but because their credit quality is suspect, as well as the commitment to their solvency from the Federal Government, their cost of fresh capital is high, making mortgages more expensive than they otherwise would be.
Note the current rise in Fannie 30-year mortgage rates.? This series tends to peak out at 6.20% but I am expecting rates to exceed that and soon.
Personally, I don?t think the government should be in financial businesses. Government agencies tend to overlend, and lend to bad risks with insufficient compensation. Then again, I don?t think governments should be in the money business either; they abuse the privilege, stealing from us in the process.
2) Will contractual terms be honored by the courts? Some hedge funds will press for their rights. My guess is that they won?t win in this environment. The system has a tendency to fight individual rights in a crisis. But, there is no free lunch. To the extent that contractual rights are infringed, rates will rise when lending resumes to compensate for expropriation risk.
3) Get financing when you can, not when you have to. Others have pointed to this post, but it bears repeating.The banks ran for too long on capital bases that were too slender.Now they are paying the price.The only pseudo-equity capital available is that from government sources.
Now, there may be a competition for that capital from the government, and perversely, it might lead to banks using the capital to buy other institutions (PNC has already done it to Nat City), rather than make loans, and on net, I would expect that to result in still fewer loans being made than in the absence of a merger. So let the competition begin for who can gobble their cheap competitors with cheap government capital.
Though I have written on the changing balance sheet of the Fed [link] and its implications, Jim Hamilton of Econbrowser has a very good post on it as well. The only place where I think we differ is that I think this will eventually be inflationary to goods prices when the Fed is forced to stop sterilizing.
5) Now the Fed is in the business of short-term unsecured lending to corporations via buying CP. (I think this will help lead to the first real CP default since Penn Central.) Early indications are that CP funding costs are higher than before the crisis if CP is funded by the Fed.
6) Never buy something you don?t understand, unless you have a friend who is smart and trustworthy by your side to advise you. Many municipalities got bamboozled by investment banks in much the same way that homebuyers got swindled by those offering subprime loans. Through derivatives, they offered a way to lower the current costs of debt by having the municipality sell options against their position that would force costs higher under certain circumstances which seemed unlikely, but were more likely than not.
The same is true of many investment products created by Wall Street for retail investors.? Sell them something that offers a high yield with safety, subject to some options sold short that are unlikely to come into the money.? I see it often.? Don’t but complex structured products from your broker.? Odds are they are taking you for a ride.
7) Those who have read me for a long time know that I think GM and Ford are eventual zeroes for the equity, and the subordinated debt.? Even the senior debt will get whacked severely.? There is no value in corporations that have huge promises to their employees way out into the future, when competing against better capitalized and better run foreign competitors like Toyota and BMW.
So, don’t bother trying to rescue them.? Rather, let foreign competitors buy them out, if they want them.? That will be a good test as to whether there is value there or not.? Possible foreign buyers have worked under the assumption that the Big 3 cannot be bought.? If the US sends a message that they can be bought, would any of them be bought?? My answer is no, unless the US Government or the PBGC sweetens the pot.? Other notes:
We should not bail out the auto makers, regardless of how politically expedient is is.? Because of the employee benefit promises made, there is no way any US automaker can beat foreign competition.? It is time to let them fail, and let the unions take the rebuke that they royally deserve.
GM is not too big to fail.? Let them fail, and then expedite the bankruptcy process, so that senior debt becomes equity, the firm goes non-union, and the firm can compete globally for the first time in 40 years.
8 ) Greg Mankiw asks if we have learned enough.? My view is no, we have learned little, and what Bernanke thinks he learned regarding the Great Depression is wrong.? This is not a crisis of confidence and liquidity, it is primarily a crisis of solvency, which drains liquidity.? High levels of total leverage make a financial system inherently unstable, and the only way to cure it is through expedited bankruptcy procedures.? As it is now, Bernanke and Paulson are trying to save the financial system by wagering the credit of the USA.? (My opinion is that our nation is great enough that we whould risk another Great Depression rather than give up our liberties to the Government.)
9) A young friend e-mailed me from LIthuania (where she has a semester abroad), and asked me how serious the current economic situation is.? My response:
To give you the quick summary, we may be headed into Great Depression 2.? Or, as I sometimes call it, the Not-so-great Depression.
A Depression is a severe recession where the solvency of the banks is compromised.? Debt levels of financial companies, consumers and our Government have gotten to levels where repayment of debts in full is difficult if not impossible.? The system is overleveraged, and funded by leveraged institutions that could fail if they aren’t paid back.? There is kind of a “domino effect” here, where failures can cascade.
That’s why the Government has stepped in, encouraging financial institutions to shift their debts over to the Government.? That will work for a while, but eventually parties will become reluctant to lend to our Government as it becomes a bottomless pit of promises.? Then inflation of the currency will begin.
This is an ugly situation, one that is the product of sloppy monetary policy, poor regulation of financial companies (for two decades), poor risk controls, overlending by government institutions, and a cultural failure where we borrowed too much and saved too little.
I wish I could be more chipper here, but this is ugly, and what the government is doing is not likely to solve the problems at hand.
10) Slow moves tend to persist, sharp moves tend to mean-revert.? Don’t put much confidence in today’s sharp move up.? Strong one-day upside moves are characteristic of bear markets.
11) My post last night neglected one item.? Stable value funds have more flexibility than many other financial entities.? Be wary if the credited rate drops a lot.? Better to withdraw funds in that scenario, because it implies that the market value of assets is significantly less than the book value.
12) Be ready for a surprise in the GDP data, as I highlighted last quarter.? The implicit deflator for Gross Domestic Product will be extra high in the third quarter because of the fall in energy prices.? Just as it pushed “real” GDP higher in the second quarter, it will exact its pound of flesh in the third quarter.
13) My pal Cody is red hot, and though he is less measured than I am, I agree with much of what he says.? We need to vote out Republicans and Democrats.? We need new options.? Personally, I think we need to radically change the Constitution, and move to have a parliment, where the head of state is the head of the majority party.? That will create government that is closer to the consensus.? Eliminate the Presidency — it is too dangerous of an institution.
As Cody put it today: 2. Real headline today: ?White House Encourages Money-Hoarding Banks to Start Lending? ? I thought profit-motive was what was supposed to encourage banks to lend. And only profits make stocks go up, so why would shareholders want the banks to start lending if the bankers don?t think it?ll be profitable?
I can’t agree more, and the Treasury is pushing on a string if they are trying to force the banks that they have financed to lend.
14) Commercial Real Estate is the shoe yet to fall, yet the CMBS market has anticipated much of the decline.? Are the Fed and Treasury ready for this?? They weren’t ready for residential housing declines.
15) The foolishness that exists today regarding the government buying stakes in financial companies has now transferred itself to policymakers who think the equity market is now cheap, so invest the Social Security surplus in the equity market.? Problems:
We have always avoided Socialism like this in the past.
How can a bureaucrat with no profit motive figure out whether out whether this is a good decision or not?? Or, how will the bureaucracy extract maximum value for the taxpayers?
Is the market really cheap now, or, only seemingly so.? The time to invest is during a baby bust, not a baby boom as it is now.
As with so many of these decisions, the answer will only be clear in hindsight.
Have we survived the demise of Fannie and Freddie, Ambac and MBIA? It seems that way, but I would not be certain. These credits were crammed into stable value funds. How do you feel about life insurers? The stock prices of those that issue GICs have fallen significantly. Credit spreads have widened significantly.
Should you worry here?? My view is yes.? Any significant negative impact on the GSEs, Financial Guarantors or Life Insurers could affect the solvency of stable value funds to the tune of one year’s worth of interest.
This is similar to the way that I view money market funds.? It is possible that they could lose a year’s worth of interest.? Beyond that, I don’t see likely losses, unless the stable value fund had an unusual investment policy.
