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Cash Management In Turbulent Times

Cash Management In Turbulent Times. Richard Rokus, Director, Great Lakes Advisors. Cash Management In Turbulent Times. Financial crisis recap (How did we get here) Current State of the Short Term Markets (Where exactly is here) Strategies for Investing Cash (Where are we going).

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Cash Management In Turbulent Times

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  1. Cash Management In Turbulent Times

    Richard Rokus, Director, Great Lakes Advisors
  2. Cash Management In Turbulent Times Financial crisis recap(How did we get here) Current State of the Short Term Markets(Where exactly is here) Strategies for Investing Cash(Where are we going)
  3. Financial Crisis Recap What began with unusually high levels of mortgage defaults in late 2006 and early 2007 quickly snowballed into an investor panic Numerous AAA-rated SIV structures failed Financial leverage across banks and brokerage firms was too high Bear Stearns was sold to JPM Countrywide and Merrill Lynch were sold to Bank of America Fannie Mae and Freddie Mac were nationalized Wachovia was bought by Wells Fargo A number of mortgage originators failed Lehman Brothers defaulted Washington Mutual failed and was sold to JPM AIG required a federal loan package
  4. Financial Crisis Recap As a result of the Lehman bankruptcy a large money market fund “broke the buck” and suspended redemptions Due to the run on prime (corporate) money market funds, the Treasury stepped in to offer a guarantee to the funds FDIC insurance was increased to $250,000 Auction Rate Preferred Market seized up Municipal bond insurers Ambac and FGIC have filed for reorganization Unprecedented losses in Ultra-Short mutual funds and Securities Lending programs As a result of the financial turmoil, the US economy entered the deepest recession since the 1930’s depression
  5. Current State of the Short-Term Fixed Income Markets 2a-7 Money Market Funds Auction Rate Preferreds Commercial Paper Markets Economic Situation
  6. 2a-7 Money Market Funds Reforms instituted in 2010 WAM shortened to 60 days WAL instituted at 120 days 10% of the fund is due overnight 20% of the fund is due within 1 week Full NAV published on a 60 day lag Dodd Frank prohibits another government guarantee Question of further reform and whether it is needed Floating NAV Capital Buffer Industry sponsored liquidity bank
  7. Auction Rate Preferreds Long term municipal bond with a short-term auction to reset rates and provide liquidity Many issues had insurer guarantees Most, if not all issues that had reset at the maximum rate in the indenture have been retired Rest of the universe is resetting at very low rates Numerous lawsuits against brokerage firms to force repurchase based on sales practices Outstandings were approximately $330 Billion pre-crisis and now are at approximately $100 Billion Only source of liquidity is repurchase by the selling firm or vulture investors
  8. Commercial Paper Markets Number of issuers is down dramatically SIV structures Regional Banks Defaults/Mergers European Banks Difference in yields between financial and non-financial names Moody’s review of global capital markets intermediaries Review will cover both European and US financial firms Most are expected to be downgraded to the Baa range European issuers are constrained due to headline risk from the Greek crisis
  9. Current Economic Situation Sustained period of sup-par growth High Unemployment levels have begun to subside High levels of people no longer seeking employment Spike in retired individuals Long-term unemployed a real concern Manufacturing leading the economy Devalued dollar Energy infrastructure Real estate markets remain a challenge Rates are low but mortgage availability is tight Replay of Japan? 0.6% growth in consumer demand over the last 17 quarters
  10. Investment Strategy Start with an investment policy Minimum rating Maximum maturity Approved security types 2A-7 money market Non money market securities Benchmarks Manage assets internally or hire an outside manager Do you have the expertise in house? Can you afford the systems that are needed? Outside manager evaluation Utilize current financial service provider or hire a specialist
  11. Investment Strategy Monitoring the portfolio is key but often overlooked Money market funds Understand the minutiae of holdings Databases and portals have the ability to aggregate exposures and detail holdings Ultra-short and short-term bond funds Difficult if not impossible to figure out individual holdings and exposures Understand what is in separate accounts Where is the Alpha in the portfolio coming from? Keep management informed Not enough just to detail performance Go through holdings and exposures
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