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| 10 Questions for Your Private Banker |
03/01/2008
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The turmoil buffeting state-run money market and retirement funds from Florida to California highlighted the pervasive nature of the credit crisis. With even these nominally low-risk investments taking it on the chin from their exposure to subprime-tainted structured investment vehicles and collateralized debt obligations, how safe are my own money market investments? |
UBS’ surprise announcement of $10 billion in subprime-related losses in December—after the company owned up to $3.4 billion in October—reopened the wound for financial-sector investors. What’s the possible extent of the losses, and how will they affect my bank and my bank-sector investments? |
The international proposal to pump some $67 billion of liquidity into the bank sector met mixed reviews when it was unveiled in mid-December. The five central banks backing various aspects of the plan—which involves offering loans to troubled banks with rates set by auction—hope it will be a targeted cure for the seizure of the interbank lending market. But it raises a host of moral-hazard issues, because banks may be able to get loans more cheaply than through the normally punitive Fed discount window. If this leads to any bank bailouts on the scale of the UK’s Northern Rock, what will it mean for the soundness of the banking sector and the availability of credit?
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Is Web 2.0 Over? The withdrawal of an IPO filing by Classmates Media, which runs a social-networking site, at the end of 2007 threw into doubt the valuations of all such enterprises, including market leader Facebook. Indeed, that company’s $15 billion valuation, derived from the price paid for a sliver of the company by Microsoft, could begin to look substantially overblown. Will the headwinds challenging these firms have any effect on my venture capital investments? |
Junk bonds posted their worst performance last year since the last credit meltdown in 2002, and high-grade issues also underperformed. Both sectors were hurt by the unwinding of the subprime mortgage-backed securities market and related instruments such as asset-backed commercial paper, which pushed risk premiums out across the board. Will high-yield rebound this year, or should I stick to better-quality issues?
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Is the mining boom over? Companies such as Xstrata, BHP Billiton and Anglo American have been skyrocketing on the back of rising metals prices in recent years. But some metals, like copper and nickel, are now substantially off their highs. BHP and rival Rio Tinto are locked in a war of words over a potential merger, so arbitrageurs’ activity may distort their stock prices. Is the sector going to remain a good play, or should I diversify out of it? |
The drop in the value of the dollar has been a boon for private equity funds that invested overseas before the sell-off accelerated. The strength of the euro and sterling, for example, translate into greater dollar-adjusted returns. But new overseas investments suffer because of the pricey currencies. How are my private equity funds managing their currency exposures? |
Brazil is the latest emerging market to establish a sovereign wealth fund. Only its fund is designed not principally for investments—it’s meant to counter the appreciation of Brazil’s central unit of currency, the real. If successful, that could make investments in Brazil more attractive, because assets denominated by the real would be cheaper. But it would hurt the value of investments already made. Should I bet on the fund’s success, or will the commodity boom continue to push up the real? |
Fed chairman Ben Bernanke has half-holstered his put, at least temporarily. Granted, the Fed did cut rates by 25 basis points in December. That will only have a negligible effect on the real economy. But at least it’s only half as much as the market wanted—a welcome sign of restraint. Will the Fed start paying attention, finally, to asset-price inflation? If it does, how would a more conservative monetary policy affect my portfolio?
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The White House's Subprime Mortgage bailout plan was resoundingly criticized for its large dollops of moral hazard and litigation risks. But even if it works and lowers the aggregate default rate of subprime borrowers who wuld have been overwhelmed once their mortgages reset, that plan just pushes the day of reckoning off into the future. Will it depress the real estate market for longer than a flurry of defaults would? What does it mean for my real estate investment? |
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