Proceed With (Extra) Care
September 19, 2011
The unstable economic, political and investing climate dominated the sessions at this year's Investment Company Institute Tax and Accounting Conference.
What normally only concerns portfolio managers and analysts is now also being scrutinized by tax, accounting, auditing and risk management and their boards.
Keynoter Peter Morici, former U.S. International Trade Commission economist, was the designated doomsayer of the event, warning that "there is no reason to believe" the U.S. economy will rebound. Despite the $2 trillion the Federal Reserve pumped into the banks and the billions corporations have reaped since streamlining their operations, all of that cash is just "sitting on the books," Morici said.
Lost in the Herculean efforts to revive the economy is the U.S. consumer, he maintained. "How can this economy possibly recover if one-quarter of the mortgages are underwater?" Morici asked.
"Banks are not interested in making loans," he continued. "We need to restructure the banks to separate depositories from investment banking. We need to get back to some version of Glass-Steagall. And the $300 trillion derivatives market should be securitized in light of the fact that the entire capital markets is $220 trillion. It sounds like government intervention-and it is."
"If we get to a second Great Depression, there will be 15% unemployment. You will have desperate people on your hands," Morici warned.
These threats to the lifeblood of the U.S. have made the jobs of chief risk officers and every individual working in tax, accounting and auditing much more critical today than ever before (see "Debt, Volatility Put Risk Officers Front and Center," page one). These professionals are taking a careful look at any security that could blow up. They are parsing through spreadsheets and questioning valuations.
The role of trustees has become more demanding, as well. Some boards are now meeting six times a year, rather than quarterly. They are requesting more details on holdings, valuation, audits, fees, vendor contracts and distribution agreements. They are worried about the potential dangers of alternative investments.
While traders resist heightened oversight, of course, they should welcome these additional checks and balances-lest they forget 2008 when the Reserve Primary Fund imploded and nearly took down the entire capital markets with it.
Proceed with caution, indeed.