Credit Crisis

The first, harbinger wave struck in early September with the nationalization of Fannie Mae and Freddie Mac. In the following weeks, the full tsunami hit with the bankruptcy of Lehman Brothers, Merrill Lynch selling itself to Bank of America, AIG accepting an $85 Billion federal credit infusion, Goldman Sachs and Morgan Stanley becoming banks and WAMU and Wachovia collapsing into the hands of stronger institutions. It’s difficult to put a period at the end of that last sentence since many fear that there is more to come in this stunningly vast and rapid transformation of the US financial services landscape.

In the article that follows, Rich Palmer traces the history and denouement of the government sponsored entities, Fannie and Freddie, that illustrates the risk of unintended consequences that can result from inadequate design and oversight. Each one of those subsequent events could (and no doubt will) spawn several books. Our remarks will be relatively brief.

While it’s difficult to be optimistic about near-term outcomes from here, we still believe long-term optimism is appropriate. In our view, an energetic and creative global government policy response will combine with a resilient private sector to galvanize and…eventually…move the economy and capital markets back to a growth-oriented equilibrium. We plan to communicate our thoughts about this road map in more detail soon.

For the present, however, the story for clients’ investment portfolios is grim. With a July and August that overall were relatively flat for equities, the third quarter ended with deep losses in September.

In contrast to more normal times when diversification can easily demonstrate its investment advantage, recently there has been “nowhere to hide”. Virtually all asset classes suffered significant losses for the quarter. A sad adage of the investment world is that, in times of great stress, all correlations approach one. Still, some of the subtle differences even here have given us opportunities to rebalance portfolios to remain in line with their target long term strategic allocations. continue story

THE GSEs: GOOD INTENTIONS, BAD RESULTS

“What we know about the global financial crisis is that we don’t know very much.”
Paul A. Samuelson, 1970 Nobel Economics Prize Winner

Nationalizing the Single Family Mortgage Market
Almost lost now in the shadow of more recent news, the US government effectively nationalized the Federal National Mortgage Association (Fannie Mae, FNM) and the Federal Home Loan Mortgage Corporation (Freddie Mac, FRE) on September 7, 2008 by placing both into conservatorship. Combined, they had either bought outright, securitized and sold to others, or guaranteed single and multi-family mortgages summing to over $5 trillion, representing over 40% of the $12 trillion of all such mortgages outstanding. This is immense: the entire United States public debt is “only” $9.5 trillion currently. read more

The Rich Get Richer by “Giving It Away”

Today’s unnerving volatility in global stock and bond markets, combined with low prevailing interest rates and the prospect of higher income taxes ironically creates an unusually good opportunity to effectively transfer wealth to family members and benefit charity in the bargain. Some of the most effective family wealth planning tools involve the companion act of giving to charity. One such vehicle is the Charitable Lead Trust (“CLT”), a lesser-known relative of the “charitable remainder trust” often used by the rich, famous, and well-advised. In fact, Jacqueline Kennedy Onassis is sometimes credited with making the CLT fashionable when, upon her death in 1994, it was revealed that a large portion of her estate was designated to fund “The C & J Foundation”, a CLT named for her two children.   read more

Commodities…Part of the Problem or Part of the Solution

We have commented in past issues of Insight on commodities as an asset class that we continue to introduce into client portfolios and the implementation vehicles that we use for our clients’ investments in them…as recently as last quarter. However, recent market events have provided a dramatic reminder of the unique relationship between commodities, the rest of the economy, and the behavior of financial markets. read more

Planning for Year-End 2008

As another year-end approaches, we remind you of certain year-end transactions that we stand ready to help you execute: read more