As a general rule, the four most expensive words in investing have always been, “this time is different.” Because markets are generally made up of people with very good memories, it has been unwise in the past to bet too much against market history eventually repeating itself.
Wealth Management - Page 2
While BankNews is being published just days before the Dec. 15 deadline for banks to apply for the Treasury’s TARP Capital Purchase Program, it was a hot topic during a general session presented by Jim Reber, president and CEO of ICBA Securities, at the Nebraska Independent Community Bankers Management Conference and Trade Show, Nov. 6–7 at the Embassy Suites Hotel in Lincoln. Reber provided attendees details of how participating in the program will affect their banks.
During the past year, we have endured some of the worst financial conditions since the Great Depression with losses to date of more than $500 billion due to the housing crisis. There has probably never been a better time to revisit your bank’s investment policy and make sure that it is current. Consider the following:
During the next 20 years, baby boomers will be transferring an estimated $20 trillion in wealth to their heirs. Properly positioned, you can go head-to-head with even some of the biggest full-service banks that are relentless in their quest for a bigger share of your prime customers’ wallets.
We are seeing more and more of what the street calls “structured repo” for funding purposes. These transactions are much like Federal Home Loan advances in that they provide funding, often at artificially low rates, which are collateralized with treasuries, agencies, mortgage-backed securities or investment grade corporate bonds. Usually, the haircuts on these deals are in the 90 percent to 99 percent range. That is, for a 90 percent haircut, the dealer will lend 90 cents on the $1. During the term of the repo, the dealer marks the position to market and may require additional margin to collateralize the repo if the borrower is seriously underwater due to changes in market rates.
Long before there were municipal insurers (of the seven AAA-rated municipal insurers, AMBAC is the oldest, established in 1971), the underlying quality of the municipal bond issuer was paramount. The current financial deterioration of those municipal bond insurers certainly drives home the importance of that point.
I am always looking for clues about the direction of interest rates. Although consistently outguessing the bond market is impossible, there are three very reliable indicators that can help you improve your rate guess, and consequently, your bond portfolio’s performance. Your goal as portfolio manager is to be vaguely right rather than precisely wrong on interest rates.
At first, it may seem counter intuitive for a community bank to sell its real estate. The misconception is that a bank must own its real estate to be profitable. In actuality, banks may be less profitable when they are literally sitting on an illiquid asset — the building and land beneath the branch or offices. A bank can benefit financially by selling its real estate through a sale/leaseback program, which increases net income and converts non-earning assets into funds that can be invested while still occupying and retaining control over it.
Bank stocks saw an unprecedented increase from the second quarter of 2000 until the end of 2006. The NASDAQ Bank Index was up 128 percent during the time frame, versus an increase of 19.3 percent for the Dow Jones Industrial Average and a decrease of 2.5 percent for the S&P 500. What is even more impressive is NASDAQ and NYSE publicly traded banks in the Western U.S. (Alaska, Arizona, California, Hawaii, Idaho, Nevada, New Mexico, Oregon, Utah and Washington) outperformed the NASDAQ Bank Index, increasing by 180 percent on average from the second quarter of 2000 until the end of 2006.
Randomly adding financial products to a portfolio is a surefire recipe for suboptimal results. Most experts agree that the most direct route to achieving financial objectives is through a wealth management approach – a style that takes into consideration a person’s risk tolerance, time horizon and the overall big picture for developing a long-term plan that leads to financial security.