Looking Back at 2008: The Year of the Deep Freeze

There’s a very good chance that future generations will look back upon 2008 and remember it as the year of this century’s most alarming financial meltdown, on par with the crash of 1929. With the benefit of hindsight, it’s very likely the Fed action through the end of 2008 will be critically viewed and some of the more than 40 policy initiatives will be judged ineffective, misguided, or even complete failures. On the other hand, some policy initiatives, most of those enacted in the latter half of the year, will likely be viewed as more successful in targeting those issues at the core of this crisis.

The year began with a expansion of the Term Auction Facility and a surprise 75 basis point, inter meeting cut of the fed funds rate to 3.50%. This action was followed by more than 30 separate liquidity measures during the year, continuing last week with the Fed’s creation of the Term Asset Backed Securities Loan Facility (TALF), which will lend up to $200 billion to holders of AAA-rated ABS securities backed by newly originated consumer and small business loans.

The Fed also announced last week that it will directly purchase up to $100 billion of GSE debt and up to $500 billion of GSE-backed mortgage backed securities. These recent Fed programs circumvent the frozen banking system and move to inject liquidity directly into the economy with the goal of lowering mortgage rates for the consumer. This action has, thus far, been the Fed’s most direct attempt to stabilize the housing market and is a welcome move since the consistent lowering of the fed funds rate has had little effect on the actual level of lending rates for consumers.

Certainly no one could have predicted the scope of this crisis, the policy initiatives that have been enacted to try to ease the pressure, and how these events would literally change the world. Cash investing once seemed like the “easy” piece of corporate treasurers’ responsibilities. Those once “safe” decisions, such as a reliance on pooled investment vehicles like money funds and a complete confidence in ratings, are no longer foregone conclusions. The shock to these simple conventions left many treasurers fleeing to the safety and liquidity of Treasuries and has since revealed that many are now stuck there without a strong infrastructure for future credit and liquidity analysis. Thus, there has been little to no interest in exploring additional cash investment avenues for many companies. While the immediate mass reaction was natural in this troubled environment, it is our hope that the events of 2008 will drive demand for a more methodical, research-driven and thoughtful approach to cash management in 2009.

Best Regards,

Ben Campbell
President & CEO