The tactical asset allocation in credit portfolios combines top-down- and bottom-up analyses in order to arrive at medium- to short-term investment decisions. In this step of the investment process three major subjects are tackled:
- Spread class selection,
- Sector allocation, and
- Credit curve positioning.
When making a decision about the allocation of resources to different spread classes, elements of the top-down analysis clearly have a substantial impact, since the assessment of the fundamental and technical environment for credit and the valuation relative to other asset classes have significant influence on the positioning within the credit asset class. Conversely, credit curve decisions are usually implemented on a sector or, probably even more frequently, on a single issuer basis. Although elements of the bottomup analysis clearly influence the positioning on the credit curve, there are also some economy-wide indicators that have to be considered. Therefore, and with respect to the time horizon of investment decisions and their potential impact on active portfolio performance, the three abovementioned issues should constitute an own step in a structured investment process for credit portfolios.
The most significant component of EESA is the Troubled Asset Relief Program (“TARP”). TARP permits the Treasury, through the new Office of Financial Stability, to use up to $700 billion to purchase troubled assets from financial institutions. The Act defines “troubled assets” and “financial institution” very broadly, allowing great flexibility for the Treasurer’s activities. The financial institutions covered under EESA include banks and credit unions as well as insurance companies and securities broker-dealers. The troubled assets that are covered include residential and commercial mortgages, any securities based on the mortgages and, importantly, other financial instruments the purchase of which will promote financial market stability. TARP was initially focused on the purchase of troubled assets such as mortgagebacked securities, but, after passage of EESA, the Treasury determined that the severity of the crisis required more powerful steps to stabilize the financial system and restore the flow of credit. The Treasury’s plan to use part of the $700 billion to purchase troubled assets was subsequently put on hold in favor of a new plan. The Treasury enumerated three critical priorities for the TARP funds.
- First, use the TARP funds to continue to strengthen the capital base of financial institutions. The Treasury indicated that banks and non-banks may need more capital given troubled asset holdings and stagnant economic conditions.
- Second, use the funds to reinvigorate the securitization market. The market for securitizing student loans, auto loans and other consumer credit has ceased to function and thereby reduced the availability of consumer credit.
- Third, explore ways to reduce foreclosures by developing a plan to maximize loan modifications.
The federal government and its agencies have taken, and continue to take, a variety of steps to thaw credit markets, restore confidence in financial institutions, and stimulate the economy. Secretary of the Treasury Henry M. Paulson remarked that there is no “playbook” for responding to the turmoil in the economy. Federal actions are by no means limited to banks and credit unions. The crisis extends to other financial organizations and other parts of the world economy due to the seemingly ubiquitous presence in investment portfolios of mortgage-backed securities and the instruments insuring those securities, credit default swaps.
Federal stimulus programs, policies and rescue packages have come rapidly and on a grand scale. Programs have been announced and then changed or abandoned as the federal government searches for the most effective use of its resources. Though the government has done much thus far, there will be more initiatives to come as ideas are translated into action and a new U.S. President implements his own national economic policies.
The Emergency Economic Stabilization Act of 2008 (“EESA”) was passed on October 3, 2008 and is one of the most notable efforts, thus far, to stabilize the credit markets and restore investor confidence. The purpose of EESA is to restore liquidity and stability to the U.S. financial system and to ensure that the newly granted authority is used in a manner that:
- a) protects home values, college funds, retirement accounts, and life savings;
- b) preserves homeownership and promotes jobs and economic growth;
- c) maximizes overall returns to the taxpayers;
- d) provides public accountability for the exercise of the new authority.
As the U.S. real estate markets decline and certain mortgage terms become onerous, many loans, particularly subprime and predatory loans, stop performing and enter foreclosure. These foreclosures are causing severe hardship and dislocation to many individuals and families. As mortgage loans continue to fail, the institutions that made or invested in the loans, as well as those institutions insuring the investments, experience significant losses and financial stress.
In reaction to the crisis, financial institutions in the U.S. have
- written down the value of assets,
- increased loan loss reserves
- assumed a cautious approach to lending, including inter-bank lending.
Some financial institutions around the country have experienced difficulties with liquidity, struggling to meet depositors’ withdrawal requests and borrowers’ credit needs. Liquidity pressure arises from a number of factors including the decline in value and marketability of mortgage-related investments, the reluctance of banks to lend to one another, and deposit flight. No deposit institutions have failed in Maine, but liquidity problems played a large role in some highly publicized failures of large banks outside the State. These actions and economic circumstances have frozen the credit markets, and made it difficult for businesses and consumers to borrow. Given the importance of credit in the economy, the curtailment in lending has a direct impact on business activity, consumer spending and employment. The declining economic activity creates a negative spiral as more homeowners encounter financial problems and havedifficulties repaying their mortgages.
The U.S. and world financial systems are undergoing the most significant market and credit disruptions since the Great Depression. Though economists will debate the origin of the crisis for years to come, it is apparent that the cause is due, in part, to the combination of low interest rates, excessive risk-taking and investor demand for mortgage-backed securities that existed earlier in the decade. Low interest rates and
strong secondary market funding sources drove up mortgage lending volume and real estate markets throughout the U.S. Mortgages, both prime and subprime, were sold into the secondary market where they were packaged into mortgage-backed securities and purchased by investors all over the world. Maine was an early adopter of laws designed to control this increased loan activity, curb predatory lending and prevent
consumer hardship when the Maine Legislature passed the Act to Protect Maine Homeowners from Predatory Lending in 2007.
The rhetoric of both the U.S. administration and U.S. banks increasingly annoying. The people want the Hau-jerk politics fortunately no longer follow.
Fortunately, an early election in the United States of America. The country is manageable in that phase of approximately two to three months in which the White House and Capitol Hill times not only to the mass of money, but according to the mass of voters must. Or at least it must do. That Hank Paulson in Congress are left, from members of both parties, shows that their representatives know how badly the 700-billion .- $ packet arrives in the population. Meanwhile, you can also convince you a little if the U.S. financial blogs durchstöbert.
Even if we repeat: But the current crisis is not only because of their preventable causes such enervierend. Just annoy the pathos and the hypocrisy with which the U.S. administration called their rescue operations to the public. Paulson mainly by I-need-now-quite-quick-a-blank check-else-are-we-all-be lost rhetoric one feels at George W. Bush ante portas Iraq recalls. Either you’re with us or you’re against us. But in the case of the rescue of high finance by the taxpayer in circumvention of all lessons, which the Americans after the Asian crisis in the local countries or even China recently issued, the U.S. seems the people cheer patriotism anheimzufallen less than initially when the Iraq invasion.
Not only the government, even in their own junk products drown banks erblöden not a style to choose which – mildly – quite the situation under it. So Goldman Sachs hailed the new shareholder as “the world’s most esteemed and successful investor.” His entry to confirm Goldman’s “fantastic statement” and strengthen “the already strong capital and liquidity base.”
Wow, if the dot is so strong, the financial gurus of Goldman one time to explain why they Buffett lush ten per cent dividend guarantee and with the option package still an ordinary lay it snaps.
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