Big Banks Expect Ratings Downgrade

Last weekend started much like any other, with me tying up loose ends at the office while searching for a meaningful story to share with readers this week. The big headline on Saturday made it pretty easy for me. Apparently, Moody’s is expected to downgrade several of the largest U.S. banks in a move that has serious implications for conservative investors. Read the article here.

Here’s how this affects you…
The credit ratings of banks are tied to all other areas of the investment landscape. There are two areas of particular interest.

First, municipalities will have more trouble raising money when this pushes up bond rates which in turn causes a decrease in asset value. Cities and investors lose.

In Cleveland the city’s debt manager, Betsy Hruby, raced to replace Bank of America as the backer of $90 million of water-department bonds. “We realized that might have an impact on the rate” of the bonds, she said.

Second, money market funds will have more limited investment options because they are already restricted by law to the safest assets. Banks will in turn lose one of the most important funding sources.

Craig Mauermann, who manages the $850 million BMO Tax-Free Money Market Fund, said he recently has been buying municipal bonds backed by banks “not under the gun,” while selling bonds in danger of being hit by a downgrade.
“We manage the most conservative type of investment there is in the world,” he said. “We continue to reduce risk in all ways we can.”

It is likely that these banks will have to put up extra cash as collateral against default of certain debt instruments and opportunities to generate trading revenue will decrease. If banks are less capitalized and less profitable then it only adds another level of uncertainty to the already shaky economic outlook. On top of this, recent news of the economies of the U.S. and China slowing tells us that volatility is probably here to stay and options for conservative investors become more and more limited.

I think this excerpt sums it up nicely…

Many debt investors have rushed into safe-haven assets such as U.S. Treasurys and are avoiding any investments that have even an inkling of risk.

With heightened risk very much on the minds of investors and ratings agencies alike, why not get a middle man to shoulder the risk for you. That’s what an insurance company does. Available rates in most cases are much better than what you’d find elsewhere and the reserves are there to protect you in the worst case scenario.

The message from this is very clear: we continue to face wealth-eroding forces in today’s markets so elimination of risk is critical. We happen to specialize in guaranteed growth for the retirement assets you most want to protect. Gives us a call when you’re ready to shed risk in your portfolio.

Have a great week!

Bryan J. Anderson
 800.438.5121

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