By James J. Green and Melanie Waddell
Lo, how the mighty have fallen, and who knows where it will end? This year is turning out to be one of a kind for the financial services industry worldwide, with banks, brokerage houses, insurance companies, asset management, and investment banking all turned on their respective heads. A subprime mortgage crisis that morphed into a strangulating liquidity crisis which in turn has devastated the stock and bond markets has led to Lehman Brothers’ bankruptcy, the nationalization of AIG, money market funds breaking the buck, the forced marriage of Merrill Lynch to Bank of America, the conversion of Goldman Sachs and Morgan Stanley into commercial banks, and a $700 billion bailout plan led by Treasury Secretary Henry Paulson–or King Henry, as Time magazine dubbed him on a September cover–under which the lender, and now buyer, of last resorts, the federal government, will buy up the “toxic” mortgage assets that started the whole cycle. At press time on October 13, the worldwide crisis has led the leaders of the 15 euro zone countries to announce partial nationalizations, I mean, infusions of capital, into the many major banks on the continent who have been weakened by their mortgage exposure. Those banks without that exposure are on the acquisition trail, buying up other banks and institutions like Neuberger Berman at firesale prices. Investors are fleeing stocks, bonds, even money market funds for the only safe investments around–Treasuries.
So what’s an advisor to do? Where can you invest? Who should you partner with? How did we get into this mess? How bad is it really, and is this crisis as unprecedented as the TV talking heads keep telling us? What will the regulators and the legislators do in response that will affect you and your clients? What will this mean for the value of your clients’ portfolios long term, and the value of your practice when you go to sell it? What should you tell your clients right now?
Conversations with leading observers and regulators, and the insights of the panelists in a series of Webinars that Investment Advisor sponsored from September into October, provide some wisdom and context that advisors can use to calm their clients and prepare for a post-crisis financial and economic landscape.
For instance, in the first of the Webinars, held September 22, Harold Evensky, president and CEO of Evensky & Katz Wealth Management in Coral Gables, Florida, counseled other advisors to do what he’s doing: Calling all clients to check in. “They want to hear from you,” he said.
Investors Are Shaken
Indeed, calming clients’ jittery nerves is precisely what advisors should be doing now, agreed business consultant and money psychologist Olivia Mellan. “People are afraid of these cataclysmic changes, and we’re in the midst of this Presidential election campaign that’s scaring everybody,” she said. “When people panic they tend to revert to their primitive survival mode, which is never rational.” She encouraged advisors to share how they’ve stayed calm during the ups and downs of their own financial journeys. “In the midst of panic, any decision is the wrong decision. It won’t be done in the right way.”
During a Webinar held October 8, just days after the markets saw a tremendous drop and the $700 billion rescue package–the Troubled Asset Relief Program (TARP)–was signed into law, industry officials were confident that the package would provide a remedy to the nation’s financial crisis. However, they believed a more difficult task would be restoring investor confidence. David Kelly, chief market strategist of JPMorgan Funds, said during the October 8 Webinar that the bailout “package is quite capable of dealing with the financial problem–the root of the financial problem, which is these hard to value subprime mortgages.” Once those mortgages are bought up, he said “that should encourage banks to lend, and they will lend.” On top of that, however, he said, “we have the psychological problem” of investor uncertainty.
The U.S. Treasury Department did recently set the ball rolling in appointing an investment advisor to implement TARP, authorized under the Emergency Economic Stabilization Act. Treasury announced October 13 that it had hired Chicago-based EnnisKnupp and Associates to serve as its investment advisor. In announcing the hire, Treasury said “the firm began work immediately to help the Department administer the complex portfolio of troubled assets the Department will purchase.” Also, Treasury said it hired the investment consultant “for assistance as it evaluates potential asset managers and other vendors. The firms’ duties also will include developing and maintaining investment policies and guidelines and assisting with the oversight of the portfolio’s multiple asset managers.”
Ben Warwick, CIO of Sovereign Wealth Management in Denver, wrote in his most recent Searching for Alpha e-newsletter (which is delivered to Investment Advisor readers) that the history of government interventions is a profitable one. “In the last six completed bailouts dating from the rescue of the Penn Central Railroad in 1970, the Treasury ultimately garnered a slight profit,” he wrote. “The situation we face today is certainly more grim than the crisis in 2002 (WorldCom debacle), 1998 (Long Term Capital Management/Russian debt default), or the recession of 1990. However, valuations–especially in the credit markets–have never been more attractive. Those companies able to survive will reap enormous benefits from this market dislocation.”