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It’s still in the development process, but you will find early entries under
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Peter Geithner, LAFF president, welcomes your comments and
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Many investors are concerned about recent developments in the financial services industry and the increased volatility in the financial markets that has ensued. Investors are asking how these events will affect their portfolios and about the long-term health and viability of the financial services sector as a whole.
The following statement provides TIAA-CREF’s perspective on these events and explains their effect to date on our funds and accounts. It also highlights the strength and stability of TIAA-CREF and describes how our portfolios are positioned to seek to avoid or mitigate the types of problems that have hurt other financial institutions.
WEATHERING VOLATILE TIMES: TIAA-CREF’S KEY ADVANTAGES
TIAA-CREF’s combination of stability, strength and strategy offers important advantages for our participants and client institutions.
IMPACT OF SPECIFIC FINANCIAL HOLDINGS ON TIAA-CREF PORTFOLIOS
An important part of TIAA-CREF’s investment approach, which seeks consistent growth for long-term investors, is to recognize that unexpected events do occur and to position the portfolios we manage in such a way that seeks to minimize the effects of problems at any single company.
While some TIAA-CREF funds and accounts have been adversely affected by their exposure to specific financial companies, the impact of recent developments to date has generally been limited as a percentage of overall portfolio holdings. The following summary provides a snapshot of TIAA-CREF’s exposure to individual stocks that have become a cause of concern. Holdings are discussed as of August 31, 2008.
GENERAL EXPOSURE TO SUBPRIME CREDIT INVESTMENTS
Throughout the unfolding subprime crisis, TIAA-CREF’s fixed-income mutual funds, variable annuity accounts and the TIAA General Account have had, and have maintained, low exposures to subprime securities and other types of fixed-income securities that have been the focus of investor concern. As of August 31, 2008, losses or impairments as a result of such holdings have remained limited, reflecting the depth of fundamental credit analysis that TIAA-CREF applies in the selection of all securities purchases. Read more about our subprime credit exposure.
A NOTE ON TIAA-CREF’S MONEY MARKET PORTFOLIOS
In the wake of the failure of Lehman Brothers, some money market funds have reported that their net asset value (NAV) has fallen below $1.00 per share due to their holdings in Lehman-issued money market instruments, such as commercial paper and medium-term notes. (Most money market funds, such as the TIAA-CREF Institutional Money Market Fund, aim, but do not guarantee, to maintain a $1.00 per share NAV.)
It is important to know that none of TIAA-CREF’s money market mutual funds or variable annuity accounts, including the CREF Money Market Account and the TIAA-CREF Institutional Money Market Fund, has any exposure to commercial paper or similar securities issued by Lehman Brothers, AIG or Washington Mutual. Read a statement about our money market portfolios.
PERSPECTIVE ON CURRENT VOLATILITY IN THE FINANCIAL SERVICES SECTOR
Recent events in the financial services industry—distressed mergers, acquisitions, government bailouts and outright bankruptcies—are extremely unusual but not unprecedented. They reflect the special cyclical and structural dynamics of the financial services sector, which historically has been noted for rapid changes in products, services and sources of revenue.
Many people are familiar with the concept of investment cycles, in which different asset classes rise and fall depending on interest rates, economic growth, inflation, investor sentiment and other factors. These cyclical forces are a fact of life in the financial sector. Recently, financial services companies have also confronted major—and sometimes rapid—structural developments, such as the rise of new markets in mutual funds, the introduction of derivatives and structured securities, and increased international investing. At times like this, the combination of cyclical and structural forces can have a significant effect on investor confidence, which plays a special role in the financial services arena.
In the past, financial services firms of all sizes have come and gone in response to investment cycles, structural changes and investor perceptions—all of which pose challenges for financial firms and their regulators. As in past periods of volatility and heightened uncertainty, it isn’t surprising that some firms are better equipped than others to meet these challenges. Regulators and policymakers have recognized these issues in the current environment. They also realize that these events affect the thinking of all consumers, whether they have investments or not. They have therefore moved carefully to contain the turmoil and rebuild investor and consumer confidence.
Long-term investors know from experience that the special dynamics of the financial services industry can produce difficult periods from time to time. As a result, they avoid becoming overly enthusiastic during euphoric periods, weather the storms during corrections and anticipate the potential for calmer waters ahead.
1These highest possible ratings from these independent analysts are as follows: A.M. Best: A++ (Superior), as of 9/08; Fitch Ratings: AAA as of 8/08; Moody’s: Aaa as of 7/08; S&P: AAA as of 8/08. These ratings do not apply to variable annuities, mutual funds, or any other product or service not fully backed by TIAA’s/TIAA-CREF Life’s claims-paying ability.
2Diversification s a technique to help reduce risk. There is no absolute guarantee that diversification will protect against a loss of income.
The holdings information provided above is as of the date indicated, and may not reflect the current holdings of the respective funds and annuities.
All TIAA-CREF investment products are subject to market risk and other risk factors.
Annuity account options are available through contracts issued by TIAA or CREF. These contracts are designed for retirement or other long-term goals, and offer a variety of income options, including lifetime income. Payments from the variable annuity accounts [and mutual funds] are not guaranteed and will rise or fall based on investment performance. Mutual funds do not offer the range of income options available through annuities.
Certain securities may not be suitable for all investors.
TIAA-CREF Individual & Institutional Services, LLC and Teachers Personal Investors Services, Inc., members FINRA, distribute securities products.
You should consider the investment objectives, risks, charges and expenses carefully before investing. Please call 1 877 518-9161, or go to http://www.tiaa-cref.org/ for a current prospectus that contains this and other information. Please read the prospectus carefully before investing.
The CREF Money Market Account and TIAA-CREF Institutional Money Market Fund are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in the fund.
Insurance and annuity products issued by TIAA (Teachers Insurance and Annuity Association), New York, NY and TIAA-CREF Life Insurance Co., New York, NY.
Keeping Americans At Home
By Luis Ubiñas
Published in Forbes.com: October 9, 2008
The government’s effort to stabilize the financial system has started a long overdue debate about economic fairness in America. This conversation is important because how it plays out will determine how our financial system serves the aspirations of the American people for decades to come. Congress struggled to pass legislation to support financial institutions precisely because it found the public skeptical of a package that does not address the needs of families losing their homes.
Unfortunately, the debate on the mortgage crisis has given life to a damaging and unsubstantiated myth about how we got into such bad shape to begin with. The basic premise is that irresponsible households—most of them lower-income—are to blame for the bad debt that has brought down Wall Street. The myth maintains that far too many people who simply couldn’t afford to pay a mortgage took on the debt with abandon.
This explanation leads many to suggest a seemingly logical solution: Make sure the nation’s mortgage brokers avoid lending to families of modest means and modest credit scores. Once we cut these “undesirable” families out of the picture, the housing market will eventually recover (helped by the federal plan for big banks).
In most cases, however, this myth doesn’t hold. New research by the Center for Community Capital at the University of North Carolina suggests that, given an opportunity to access fair mortgages, most families who foreclosed under the burden of reckless loan products would still be in their homes.
The national study tracked two large groups of borrowers with similar risk profiles, the kind that would have prevented them from getting prime loans from traditional lenders. The first group wound up with sub-prime loans, while the second group received prime fixed-rate loans through a program seeded by the Ford Foundation to help banks serve low-income families. Both groups had the same financial background and the same ability to pay. Not surprisingly, the study shows that the loans with prepayment penalties, variable interest rates, and other sub-prime features were four times more likely to fail than the prime mortgages. Put simply, it’s the loan products that are the problem, not the families.
Such results have tremendous implications for the road ahead. First, we must reject the notion that helping homeowners facing foreclosure amounts to a bailout of “deadbeat” households. Instead, we should pursue a plan to stabilize American families with the same urgency that has been applied to the financial system. Such an effort should include counseling to prevent additional foreclosures, and a new mechanism to restructure mortgages into sensible loans that keep borrowers in their homes. The time has passed for a loan-by-loan, piecemeal approach to the crisis. The government must facilitate the bulk transfer of mortgages to institutions with the incentive to restructure them on viable and fair terms for the current owners.
Second, we must end predatory lending practices that made subprime mortgages destined to fail. Key features of these loans and the way they were marketed—such as prepayment penalties, escalating interest rates and hidden fees—made it next to impossible for families to stay current on payments. What’s worse is that many families did not need to pursue these products in the first place. Three years ago, researchers at Freddie Mac estimated that 20 percent of subprime borrowers would have qualified for prime loans at closing. Housing experts believe that this number is much higher. Whatever the figure, these practices must never be allowed again.
Third, we must act quickly to ensure that properties vacated by foreclosure are put back into use. If left vacant, these properties threaten all nearby families by driving down property values and putting precious home equity at risk. Getting these homes back in use will require creating a national entity that can acquire them in bulk and transfer them to cities for renovation and sale to private owners. Each abandoned house within 500 feet of an occupied home reduces the value of every surrounding home by 2.27%, according to a 2007 study by the Land Policy Institute at Michigan State University.
Finally, we must respond to the mortgage crisis not by closing the door to homeownership, but by ensuring that all Americans have access to fair and responsible financial services. Such services promote saving and the building of assets, which enable families to move up the economic ladder and boost the economic stability and opportunities of the next generation. Denying access to these opportunities would extend by years the impact of the current housing crisis, limiting the chances of a generation of Americans to reach the economic mainstream.
Over the last decade, innovative partnerships between the public and private sectors have proven that low and moderate-income Americans can be reliable borrowers and responsible homeowners. Turning back the clock on this progress is the exact wrong way to respond to today’s mortgage crisis. We know that responsible lending to these communities works. Now more than ever, we need the commitment to ensure it continues.
Luis Ubiñas is president of the Ford Foundation.
Read the article in Forbes.com
The Ford Foundation is an independent, nonprofit grant-making organization. For more than half a century it has been a resource for innovative people and institutions worldwide, guided by its goals of strengthening democratic values, reducing poverty and injustice, promoting international cooperation and advancing human achievement. With headquarters in New York, the foundation has offices in Africa, the Middle East, Asia, Latin America, and Russia.
Strengthen democratic values, reduce poverty and injustice, promote international cooperation and advance human achievement.
©2008 Ford Foundation. All Rights Reserved.
Jerry Anderson, a member of the Foundation’s General Counsel and Treasurer’s Office from 1973 to 1981, is now president of Boston Investment Advisers, Inc. and a LAFFer professionally qualified to comment on the current financial situation. This is drawn from his client newsletter dated October3, 2008, and updated for more recent events. He can be reached with questions or comments at jerry@boston-investment-advisers.com.
Introduction
For this observer, whose first job as a lawyer took him to 48 Wall Street 38 years ago (where he became the youngest member of Sullivan & Cromwell’s Goldman Sachs team), there were ten days that shook the world of finance this September to a degree not seen since the Great Depression.
As The Economist magazine described it, “Ten short days saw the nationalization, failure or rescue of what was once the world’s largest insurer [AIG], with assets of $1 trillion, two of the world’s largest investment banks [Lehman and Merrill], with combined assets of another $1.5 trillion, and two giants of America’s mortgage market [Fannie and Freddie], with assets of $1.8 trillion.”
If that were not enough, several days later the last two large, stand-alone investment banks, Goldman and Morgan Stanley, announced they would seek shelter and become deposit-taking bank holding companies. Then, almost as afterthoughts, first the country’s biggest savings bank, Washington Mutual, failed and was laid in a shroud at the door of JP Morgan Chase, and now Wells Fargo and Citi are fighting over Wachovia’s carcass like two hyenas.
In light of these Richter-busting events it seems appropriate to devote these few pages to a reprise and analysis of these extraordinary events rather than to the macroeconomy (in or near recession, almost certainly) and the capital markets (held hostage to the financial crisis).
What Has Happened
The roots of the crisis lie chiefly in the extraordinary rise of debt in American society in the last 20 or 30 years. Tellingly, it occurred in essentially only two sectors: the consumer and financial services. Thus, consumer debt was 163% of GDP back in 1980 but hit 346% by 2007. Over the same period the financial services sector’s debt as a proportion of GDP exploded from 21% to 116%.
That parallel rise is no coincidence, of course, for in a crude sense the financial services sector leveraged up and then on-lent the money to consumers—including, of course, for mortgages, many of them the now infamous subprimes. These mortgages—the good with the bad–in turn were sliced and diced in Wall Street’s sausage-making machine (i.e., securitization) and reassembled into whiz-bang instruments called collateralized default obligations. Based on the foolish notion that house prices, which had been skyrocketing, would never decline nationwide, they were festooned with AAA ratings and sold to gulls worldwide. Inevitably almost, house prices rolled over, and massive amounts of CDOs began to smell. In all of this–and especially through Fannie and Freddie–Wall Street became the off-balance sheet arm of the federal government.
Where did this cornucopia of capital come from? In simple terms, globalization and relatively free trade meant, in an era when the dollar is untethered to gold, our trading partners—petrostates and the new behemoths of Asia—had every mercantilist incentive to recycle their surpluses into the world’s sole reserve currency.
The U.S. financial services sector was happy to help them just as the U.S. government was pleased to take its portion in exchange for Treasury and other official or quasi-official obligations in order to fund its growing deficits. The result was a classic credit bubble, aided and abetted by deregulatory zeal and accommodationist monetary policy at the Fed. Essentially, our foreign friends issued us credit cards so we went on a shopping spree, and Wall Street went on a bender.
For all of these fun and games, mortgages provided the perfect combination of opacity and leverage, and little prevented originators and securitizers from going down market. And all of this machinery was greased by over-the-counter derivatives, which Warren Buffet called back in 2003 “financial weapons of mass destruction.”
In the sober light of dawn, which began to break in the heretofore obscure subprime subsector of the mortgage market nearly two years ago, the financial system—commercial banks, investment banks, hedge funds and other “players”—began the painful process of deleveraging. A lot of them did not make it, starting with Bear Stearns and, at this writing, including Wachovia. The list of fallen icons is astounding, and the end is certainly not in sight.
Why It Has Happened
The problem, known to economists as debt deflation, is that when everyone is over-leveraged and suddenly needs to sell—and when what they want to sell is, in some sense, distressed—prices will plummet and markets may seize up. This, of course, is exactly what we have been watching for almost two years, and the process has only accelerated and now is a full-blown, international banking crisis so profound that banks are afraid to lend to each other, much less to businesses and individuals.
This time the process has been compounded by complexity—the complexity of the instruments that provided the leverage in question. Many of them were not designed to be sold or, rather, resold by the initial purchaser in the “originate and distribute” business model that propelled Wall Street in the credit boom.
That circumstance had two baleful consequences. First, at a time when “fair value” accounting (that is, mark-to-market valuation) had been imposed on most financial institutions, these opaque securities left balance sheets exposed to the sheer “unknowability” of their value, and huge write-downs had to be taken. Second, when the pressures of deleveraging forced their sale, they could be sold only at massive discounts to par.
This opacity and complexity produced a final, fatal phenomenon: credulity among regulators, auditors and credit rating agencies. All wanted to believe, and for a while, they did, and there was no harm. One hears echoes of the 1990s’ tech stock boom.
AIG is a good case in point. Over a century in business, it was the world’s largest insurance company, but then it entered the “structured finance” business only a few years ago. A small group of people, mostly in London (out of a total workforce of over a hundred thousand), created a huge business in derivatives-based transactions and products—chiefly interest-rate swaps and the more nefarious credit default swaps—that accounted, at the peak, for only 5% of AIG’s revenues but between 20 and 25% of its profits.
A cynic—or a realist—would say that all they were doing was renting (one can think of a less polite term) AIG’s pristine balance sheet and AAA credit rating on the confident promise that nothing could go wrong. Alas, their own forced deleveraging as well as that of their counterparties and their counterparties’ counterparties created a cascade of asset write-downs, margin calls, rating downgrades and stock price free-falls. AIG, now effectively the ward of the federal government, is no more.
Where Do We Go From Here?
At this writing, Congress had finally adopted the Administration’s proposal—after many months of ad-hocery (“Sunday night specials”)—to buy up to $700 BILLION of the toxic waste that has nearly frozen the financial system. Alas, that bold move did not put out the fire, and the stock market suffered its worst week ever. So, in the financial equivalent of Nixon’s trip to China, the feds took $250 billion of that authorization and, in what bankruptcy lawyers call a cram-down and mafiosos gentle persuasion, they effectively nationalized the country’s nine biggest banks through a forced recapitalization.
Whatever happens from here, Humpty Dumpty–AKA Wall Street–will not be put together again.
Thus, back in June this observer made a speech here in Boston in which he made bold to say that the business model of the publicly held investment bank was broken. Well, little did he know that the four then still standing would all be gone by mid-September—either bankrupt, merged or, in two cases, reborn as commercial banks.
Looking forward, it seems likely that having signed up for the federal dole and insulted the electorate’s sense of decency, the investment banking business will evolve into some kind of regulated utility, as commercial banking has been for nearly a century (despite the lighter hand on the tiller felt in recent years as a result of deregulation).
Many of the functions of investment banking associated with raising capital will be performed by hedge funds and private equity funds in the “shadow banking system,” which in some sense are similar to old-fashioned merchant banks with the important distinction that they use the longest green of all, Other People’s Money. In this case, however, it comes mostly from large institutional limited partners and not public—and often fickle—shareholders.
Otherwise, it will doubtless take many months if not years for the banking system to resume normal functioning. One way or another, we will all pay the price—although the Chinese and other foreign friends will doubtless first lend it to us.
October 16, 2008
TIAA-CREF has determined that its two eligible mutual funds, the TIAA-CREF Institutional Mutual Funds Money Market Fund and the TIAA-CREF Life Money Market Fund, will both participate in the U.S. Treasury Department Temporary Guarantee Program for Money Market Funds.
The CREF Money Market Account will not participate because it does not maintain a constant $1.00 share price, which is part of the federal program’s requirements (See answer to Question 4 below.)
· To help support investor confidence in this time of market instability, TIAA-CREF is participating in the federal money market insurance program.
· Eligible funds will be covered by the new insurance program. The TIAA-CREF Institutional Money Market Fund and TIAA-CREF Life Money Market Fund are eligible to participate and will be covered by this insurance program.
· Because it does not seek to maintain a constant $1.00 share price, the CREF Money Market Account is not eligible to participate in this insurance program.
· We have confidence in all of our money market portfolios. We feel confident in the security of all of our money market funds and accounts because their portfolios:
· have steered clear of troubled companies
· invest in only high-quality holdings
· have experienced no defaults or downgrades.
· The cost of participating in this program will be paid by investors in each fund. The Treasury Department is charging one-one hundredth of a percent (or one basis point) of the total fund net assets as of September 19, 2008, the date when the guarantee begins.
· That means the cost for insuring a $1,000 investment in a money market fund is ten cents.
Background on the Federal Money Market Insurance Program
The U.S. Treasury Department’s Temporary Guarantee Program for Money Market Funds guarantees the $1.00 share price of participating money market funds. The guarantee will be triggered only if a participating fund liquidates its assets as a result of its net asset value falling below $.995, commonly referred to as “breaking the buck.”
Under the program, coverage is provided to shareholders for amounts that they held in participating money market funds as of the close of business on September 19, 2008. Any increase in the number of shares held in an account after the close of business on September 19, 2008 will not be guaranteed.
However, say a participant owned 200 shares of ABC Money Market Fund on September 19, sold 100 on September 22, and purchased 50 on September 30. If the fund breaks the buck on October 10, all 150 of the participant’s shares would be covered under the guarantee program—even though some of those shares were purchased after September 19. As long as it remains in effect, the guarantee program will protect investments in the ABC Money Market Fund up to the amount that was held as of September 19.
Investors cannot sign up for the guarantee themselves; the Treasury Department’s guarantee arrangement is made with the funds. The plan is scheduled to be in place for three months—ending December 18, 2008—but can be extended up until September 18, 2009, at the discretion of the Department.
Frequently Asked Questions about the Federal Money Market Insurance Program:
1. Is TIAA-CREF participating in the Treasury’s Temporary Guarantee Program for Money Market Funds?
Yes. All of TIAA-CREF’s eligible money market funds are participating in the program to help support investor confidence in this time of market instability.
2. Which TIAA-CREF money market funds and accounts are participating in the program?
TIAA-CREF Institutional Money Market Fund and TIAA-CREF Life Money Market Fund are participating in the program. The CREF Money Market Account is not eligible to participate in the program.
3. What investments are eligible for coverage?
Under the program, coverage is provided to shareholders for amounts that they held in participating money market funds as of the close of business on September 19, 2008. Any increase in the number of shares held in an account after the close of business on September 19, 2008 will not be guaranteed.
4. Why is the CREF Money Market Account not eligible to participant in the government’s money market insurance program?
The CREF Money Market Fund Account is not eligible to participate in the program because it does not seek to maintain a constant $1.00 share price, which is part of the federal program’s requirements. The rules governing the federal program state that, in order to be eligible, a money market fund or account must maintain a stable share price of $1.00, which the CREF account does not.
5. How then is the CREF Money Market Account valued?
The CREF Money Market Account does not maintain a constant unit price of $1.00, as it does not make distributions, and it values securities that are more than 60 days from maturity at market value.
The account’s value is calculated each business day, not as a net asset value (NAV), but at an annuity unit value (AUV). This AUV valuation method provides more detail on smaller value changes than the traditional one, based on a $1.00 share price. Using the traditional method, the share price is not adjusted unless the value of the share drops by half a percentage point, an event called “breaking the buck.” The largest drop in the account’s AUV over the last five years was less than 0.7 cents for the period ending October 7, 2008.
6. If TIAA-CREF has full confidence in its money market portfolios, why participate in the government money market insurance program?
TIAA-CREF is participating in the program to help support investor confidence in general during this time of unprecedented market instability. We believe that it is unlikely that we would ever need the guarantee offered by the program; however, we feel this additional protection will be reassuring to our participants.
7. How much does this program cost and who is covering the cost to participate in the program?
The cost of participating in this program will be paid by investors in each fund. The Treasury Department is charging one-one hundredth of a percent (or one basis point) of each fund’s total assets as of September 19, 2008, the date when the guarantee begins, to participate in the program. That means the cost for insuring a $1,000 investment in a money market fund is ten cents.
8. Can I join the federal money market insurance program on my own?
Investors cannot sign up individually. Each money market fund decides whether to sign up for the program.
9. Where can I learn more about the U.S. Treasury Temporary Guarantee Program for Money Market Funds?
For more details on the program, visit the U.S. Treasury site at: http://www.sec.gov/divisions/investment/mmtempguarantee.htm
The Fund currently participates in the U.S. Treasury’s Temporary Guarantee Program for Money Market Funds. For more information on this program, please go to www.ustreas.gov.
The CREF Money Market Account, TIAA-CREF Institutional Money Market Fund, and TIAA-CREF Life Money Market Fund are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the Institutional Money Market Fund and Life Money Market Fund fund seek to preserve the value of your investment at $1 per share, it is possible to lose money by investing in the fund.
The CREF Money Market Account is a variable annuity account options available to eligible participants only. Annuity account options are available through contracts issued by TIAA or CREF. These contracts are designed for retirement or other long-term goals, and offer a variety of income options, including lifetime income. Payments from the variable annuity accounts [and mutual funds] are not guaranteed and will rise or fall based on investment performance Mutual funds do not offer the range of income options available through annuities.
Annuity products are issued by TIAA (Teachers Insurance and Annuity Association), New York, NY.
TIAA-CREF Individual & Institutional Services, LLC and Teachers Personal Investors Services, Inc., members FINRA, distribute securities products.
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