$700 Billion gone already? Is your mortgage backed by a covered bond or will it go too?
Okay, I hate to say I told you so, but there’s little joy in being right about the final US treasury approval of the $700 billion dollar bailout plan… doing virtually nothing. The rescue plan has done very little to calm jittery financial markets everywhere. I really didn’t think it would halt the downward slide when it was proposed and that certainly seems to be the case. Incredible way to blow nearly a trillion dollars of tax payer cash though - wow!
Yesterday in response, unconvinced financial minds, brokers and investors forced the FTSE to a gloomy new record - Monday 6th October 2008 saw the lowest drop in the FTSE value in one day that it has ever experienced.
The Asians are not convinced the cash injection has done the trick either - yesterday the Nikkei dropped to it’s lowest level since 2004. The Yen is rising whilst the Euro and GBP head in the opposite direction. Government Gilts are being snapped up as folks scramble for security.
Covered bonds are in sharp focus too. These are mortgages/loans to the public sector - which are ’secure’ or ‘covered’ by a pool of assets. They are subject to stiffer regulation and those issuing the bonds must make sure their assets reserves consistently cover/back their covered bonds. Institutions which have access to them are set to fare better in weathering the worsening credit/mortgage crisis here in UK.
For example when the UK Treasury nationalised the Bradford and Bingley PLC it guaranteed their covered bonds. If anything does go wrong the investor can call on the asset pool and the issuer to recoup their investment. Perhaps the most important point though is that under performing loans must be replaced within the asset pool to ensure it’s continued financial viability. Therefore how successful each financial product is, directly relates to how good their issuing institution is in keeping this asset pool in tip top shape.
Here in Europe The European Covered Bond Council (ECBC) was set up by the European Mortgage Federation (EMF) in 2004 and brings together covered bond issuers, analysts, investment bankers and rating agencies throughout 16 European Countries - in today’s turmoil it’s more important than ever.
By the looks of things Gordon Brown’s meeting with New York City Mayor Michael Bloomberg today is tricky too - as I write I’ve just heard that Mayor Bloomberg is even talking of a realistic threat to the banking system actually shutting down and denying any loans to consumers and businesses.
If that’s so and not more hysteria to add fuel to the fire, Covered Bonds could well be the only way some struggling banks may be able to secure the lending they require to keep their operations going.
You can discover more about European Covered Bonds here at http://ecbc.hypo.org where you can also download a free PDF which explains in detail what they do.
Simply put there’s no cash in the western system, even Asia is jittery, and the Chinese powerhouse is slowing too. So what to do - especially if you find that all this financial malaise is really getting you down?
These five steps should set a foundation…
1. Don’t be driven by fear regarding shares - mass hysteria triggers mass fear. If you are in shares for the long term, this huge shake out, will likely do you good in five years or so when this is all finally out in wash and the dirty linen gets ‘clean’. Don’t be afraid, any under-strength banks have gone down already and those that stay should receive Government backing. Jumping now doesn’t make sense when we could be at the lowest point anyway.
2. Short selling and dumping shares has been conducted for the most part by large financial institutions which in turn is triggering panic in private investors - you may wish to sell if you see values plummeting if your investment was just short term to raise money quickly for you. If this is the case then you may need to sell to recoup at least some of your original investment money. In time you could well look back and realise that buying shares at this time could have meant bargain prices with the wonder of hindsight when markets improve.
There is one thing to watch closely for though - as the Government moves in to purchase chunks of shareholdings in Banks, the overall value of the shares may devalue or dilute. Worse still if they completely nationalise them, their share value could well be nigh worthless - if you think that’s likely to happen to may wish to sell as quickly as you can before the double edged sword which will both save and slaughter the value of these stocks is wielded.
3. Don’t reduce your Pensions Savings - in fact these testing times may just be the right time to consider upping the stakes a little by setting up your earnings in a Salary Sacrifice Scheme. I’m preparing a PDF very shortly which will explain fully why it’s more than a little worth considering if you wish to be conscientious about your retirement planning options.
4. Shine a spotlight on the underlying liquidity and solidity of the funds you and your pension funds are invested in - asset reallocation is probably needed in a lot of cases reading this article. Speak to an Independent Financial Adviser - you need to know excatly what’s happening in detail with your pension fund, don’t leave it until you see it flash up on BBC Business News.
5. Get a regular check up with your Financial Adviser - with the astonishing volatility of what UK investors are facing, this is no time to go it alone. And as I mentioned in my last article, we are helping our clients fireproof their investments with the very havens we are using to ensure the continued viability and value of our own personal holdings. Be assured simple, solid and safe holdings are available - and please ignore the biggest fear of all, fear itself. Without fear you’ll make far wiser financial decisions, you can be sure of it.
Until next time, take very good care…
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