CASH MANAGEMENT
IN TURBULENT TIMES
Richard Rokus, Director, Great Lakes
Advisors
Treasury Management Essentials
Sponsored by:
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
CASH MANAGEMENT IN TURBULENT
TIMES
1. Financial crisis recap
(How did we get here)
2. Current State of the Short Term Markets
(Where exactly is here)
3. Strategies for Investing Cash
(Where are we going)
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
Treasury Management Essentials sponsored by Wintrust Commercial Banking
2
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
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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
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
Treasury Management Essentials sponsored by Wintrust Commercial Banking
3
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
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
Treasury Management Essentials sponsored by Wintrust Commercial Banking
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C U R R E N T S TAT E O F T H E S H O R T TERM FIXED INCOME MARKETS
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2a-7 Money Market Funds
Auction Rate Preferreds
Commercial Paper Markets
Economic Situation
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
Treasury Management Essentials sponsored by Wintrust Commercial Banking
5
2A-7 MONEY MARKET FUNDS
• Reforms instituted in 2010
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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
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
Treasury Management Essentials sponsored by Wintrust Commercial Banking
6
A U C T I O N R AT E P R E F E R R E D S
• 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
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
Treasury Management Essentials sponsored by Wintrust Commercial Banking
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C O M M E R C I A L PA P E R M A R K E T S
• Number of issuers is down dramatically
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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
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
Treasury Management Essentials sponsored by Wintrust Commercial Banking
8
C U R R E N T E C O N O M I C S I T U AT I O N
• 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
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
Treasury Management Essentials sponsored by Wintrust Commercial Banking
9
I N V E S T M E N T S T R AT E G Y
• 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
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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
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
Treasury Management Essentials sponsored by Wintrust Commercial Banking
10
I N V E S T M E N T S T R AT E G Y
• 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
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
Treasury Management Essentials sponsored by Wintrust Commercial Banking
11