The first letter stands for “Safety.” This means we seek high quality investment instruments that provide a safe investment opportunity. It is comforting to know when describing an investment, that it is safe. The definition of safe is “freed or secure from danger.” It is the first thing I look for when considering a new investment.
The second thing is “Liquidity.” Our main charge here at your Corporate is to be a liquidity facilitator. Over the past few years, your liquidity needs have, on occasion, caused our balance sheet to go up or down as much as a billion dollars over a six month period. However, as has always been our policy, we are diversified among several sources of liquidity to meet our members’ needs.
The third thing we consider when investing is “Yield.” While yield is certainly very important, it has to be the third thing we consider in our investment decisions. So often we have seen a yield that seems too good to be true, and usually there is a reason for that. We have to remember that risk equals reward, but we must also balance the two. It is important to remember that a phenomenal yield on an investment that is unable to return the principle is not a wise choice.
Another consideration regarding yield is from the asset and liability side of the equation. If the investment has a good yield, but it has a much longer maturity than our liabilities, then we must consider our interest rate risk and the liquidity of the investment. Take for instance, a thirty-year treasury bond that is yielding over four percent or two hundred basis points over the cost of funds. Is it safe? You bet! Is it liquid? Not if overnight rates were to rise and our four percent was no longer the thirty-year rate. If the new rate is higher, the sale of that thirty-year bond, while liquid, could result in huge losses.
As I stated above, “in these trying times,” and of course I am referring to the elimination or reorganization of financial institutions that have been around for many years, and in some cases, in business for as long as 165 years. Some of those names include: Bear Stearns, Lehman Brothers and Merrill Lynch. Not to mention the take over of FNMA, Freddie Mac, and the bridge loan to American International Group (AIG), the largest United States insurance firm. This loan left the U.S. government owning 79.9 percent of AIG.
The housing crisis, which is at the root of these horrific problems, has been referred to as “the worst crisis since the Great Depression.” While that may be true, let me say again it is my opinion that as a nation we are not in a depression, great or otherwise. We are faced with unbelievable swings in the markets. However, we are seeing the Federal Reserve and the Treasury Department taking actions that are, in some cases, historic. But that is the point. Actions are being taken and efforts are being made to resolve the problems.
Personally I think we all need to remain calm.
