"Global Crisis Averted?" by WCM 09/20/08 |
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This past week will go down as one of the most memorable weeks ever in the investment world. The events of the past week will be remembered for all time as the week that the global financial system was shaken to its core. As this is being written, Treasury and other government officials are meeting to discuss a rescue of the financial system that could cost between 700 billion and 1 TRILLION dollars. For investors, what is so startling is the destruction to the credit markets. Investments that historically were considered “safe” were not even spared. In fact, we saw complete panic, with some credit issues losing 30, 50, and even 75% of their value within days. This tells us that there was real fear and concern that we were staring at the possibility of a total global meltdown of the financial markets. Some money market funds even saw their normal “dollar for dollar,” value dropping to 95 cents on the dollar. We took actions to ensure all our client’s money market funds were in the safer Government Money Fund. The rush out of everything financial caused a flow to Treasury Bills, considered the safest haven for cash. T-Bill yields fell as low as 0.06%!
How could this all happen so fast? Only several months ago, many pundits were talking about the mortgage problems costing upwards of 50-100 billion dollars. Numbers, while staggering, could easily be absorbed by the global financial markets. However, with the continued deterioration of mortgage related products, company balance sheets suffered. Many financial companies hold these long-term illiquid mortgage assets as investments. The collapse of the housing market has driven down the value of these investments greatly. To compound matters, because of the illiquid nature of these investments, a “true value” is hard to establish. Regulations have forced companies to mark to market (state the current sell value) quarter by quarter. If you are forced to sell something by Wednesday, and can’t find a buyer, does this make the holding worth zero? So, for many still viable core businesses, their balance sheets have been deteriorating because of lower current asset values. The credit rating agencies, such as Moody’s and Fitch, have been lacking in their ability to recognize the confusing balance sheet asset valuations. Though some believe that government intervention should always be minimal, we applaud the actions to develop a plan to address these issues. Without some action to stabilize the markets, we believe there was a real chance that global financial markets could have easily been thrown into a freefall. With the interconnections of global banking systems, a meltdown could, and most likely would, have produced a major recession. We believe the current action plan will allow this worst case scenario to be avoided. |
