Investing Warning: Financial Sector Problems are Just Beginning
November 27, 2007 by Miranda Marquit
Filed under Investing, News, Trends
The big news right now is that Citigroup has agreed to sell a stake to the Abu Dhabi Investment Authority. This is having the current effect that Citigroup’s stock, which was in the toilet yesterday, is getting quite a boost. And it’s bringing back the rest of the stock market as the “interpretation” of the move is seen as positive for the financial sector. Reuters reports on the implications of the Citigroup deal:
Investors interpreted Citi’s move as a sign that financial institutions were repairing the damage from a meltdown in the U.S. subprime mortgage market and the resulting credit crunch, which has been a big factor behind recent dollar weakness.
Unfortunately, just because things look good for the financial sector today, doesn’t mean that they’ll look the same tomorrow. Fortune on CNN Money points out something that has yet to really hit the fan in the financial sector:
One likely new trouble spot: Conduits, the opaque structures banks set up to provide debt funding to borrowers. Often, the debt issued by the conduits is collateralized with assets, like mortgages.
Conduits typically aren’t consolidated on a bank’s balance sheet. But banks are often on the hook to fund them if investors stop buying the debt they’ve issued. When that happens, a lot of risk can get moved onto the balance sheet.
This is a continuation of the disclosure issues plaguing the financial sector. In Quarter 3, it was losses due to under-disclosed CDOs (collateralized debt obligations) that blindsided investors and added an extra helping of blood to the bloodbath following the subprime mortgage mess.
So, are the financial sector problems really at an end? Or have we just seen the tip of a rather large iceberg? Only time will really tell, but I think that more substantial changes to the way companies in the financial sector do things are needed. A “cash infusion” from a foreign investor is really band-aid.
The good news is that eventually the financial sector will probably recover. Just choose carefully which stocks you buy at a bargain price, and make sure you have the risk tolerance to hold onto them for the next couple of years. It’s going to be a bumpy ride.
Disclaimer: I am not an investing professional, merely an enthusiastic amateur. All investment carries risk, and you should do your own research and/or seek advice from an investment professional.
All of this “lingo” (conduits, and “under-disclosed CDO’s”) is confusing. I appreciate your “bottom line” reminders.
As in the past, if we can hold on for the bumpy ride you predict, the market will recover. It always has, since 1929, hopefully always will. i’m not doing anything with my investments. I figure you can’t lose if you don’t sell. Is that still a pretty reasonable strategy?
I’ll address CDOs in tomorrow’s post :0)
At any rate, it is usually good to hold on, especially if you have automatic withdrawal from your paycheck or bank account into your retirement account. But it doesn’t hurt to go through your holdings (if it’s not managed — and even if it is) and double check to make sure you have some solid companies that are more likely to recover.