September saw unprecedented moves to prevent global systemic financial failure. US mortgage giants Fannie Mae and Freddie Mac were taken into conservatorship, effectively nationalisation, Lehman Brothers collapsed and a rescue bid came from Bank of America for Merrill Lynch. AIG was rescued with an $85bn loan from the Fed who became its 80% owner. The US's oldest money market fund Reserve Primary Fund "broke the buck" i.e. was worth less than $1.Lloyds TSB moved to acquire HBOS and the LSE imposed a ban on short selling of financial shares. A $700bn TARP (troubled asset rescue programme) of US banks was proposed to Congress. Mitsubishi UFJ injected $8.5bn into Morgan Stanley, acquiring a 20% stake. The remaining investment banks in the US (Goldman Sachs, Morgan Stanley) became regulated bank holding companies. Washington Mutual's assets were seized. Rejection of the TARP triggered widespread panic.Citigroup proposed a rescue bid for Wachovia. Bradford & Bingley's deposit base was bought by Santander and their mortgages nationalised. Fortis was rescued by a Benelux consortium, Hypo Real Estate was offered a lifeline by the German central bank, Glitnir Bank in Iceland was nationalised, Dexia was rescued by authorities in Belgium France and Luxemburg and the Irish government guaranteed 100% of Irish bank deposits.The fund was down 8.6% this month against a benchmark return of -6.6%. The equity portfolio includes 17 stocks which were down more than 20% this month. This was spread across a number of sectors, but mainly included financial and technology shares; the worst being Vestas Wind Systems which was down over 30%. Fundamental economic data has not gained much prominence, but it is deteriorating rapidly as the credit crunch impacts the real economy.The implication for fixed income markets has been that government bonds have rallied strongly, whilst non-government debt headed in the opposite direction. Equities have made a step adjustment for lower future earnings. While the short term remains highly volatile, we believe the fundamental value of the portfolio will pay off once the current turbulence abates.
124.59p
