The Bottom Line: Another Shoe? Opinions About the Coming Months
November 28, 2007
Elizabeth Johns, Managing Director, Communications

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From the November 2007 issue of Exchange magazine

These days, fallout from the subprime fiasco is on the minds of financial professionals. In the AFP Studio at the Annual Conference in Boston last month, nearly all the interviews swirled around the issue.

On camera, our guest columnist and derivatives expert, Pablo Triana, noted that as a result of the credit crisis, some people have described derivatives as "financial weapons of mass destruction." He did not think financial professionals should necessarily avoid them, however.

Kevin Roth, AFP's director of research and standards, reported that most AFP members who were surveyed at the conference did not indicate that their company had experienced a significantly negative effect. Yet, most of those queried also indicated that they did not think the worst had passed.

AFP's director of financial accounting and reporting, John Rieger, noted that he is getting a number of calls from AFP members, including a few who reported that broker dealers may have implied with a wink and a nod a guaranteed auction for auction rate securities when none in fact existed. His interview will be posted on the AFP Web site.

Jeff Glenzer, AFP's managing director of product development, summarizes the issue succinctly:

"Based on what I've heard at CTC Treasurers Roundtables, I expect that the credit market turmoil will have a long-lasting effect on both short-term investment policies and practices. I have heard from many AFP members that this has driven home the point that you need to truly understand the securities you are purchasing, regardless of the promised safety, liquidity or yield enhancement. The true risks associated with certain securities, including auction rate securities, were not adequately disclosed by those recommending them, nor by the rating agencies.

"Finance professionals will likely be very skeptical of anything other than plain-vanilla securities for years to come. They get few accolades for incremental yield improvements, but might be unemployed if left holding the bag on severely impaired or unmarketable securities.

"I also suspect finance professionals will adjust their thinking on what constitutes an adequate amount of available credit and the sources of the credit that they rely upon. Many commercial paper issuers were shut out of the market, and were forced to look for additional sources of credit. In some cases when they turned to their backup credit facilities, their lenders were very disturbed that they might actually draw on the credit they had available to them and implied that drawing on backup facilities would have adverse consequences on their relationship in the future."

Visit the AFP Web site for more information in the coming months.

Elizabeth Johns

Elizabeth Johns is AFP's managing director of communications. Send comments to exchange@AFPonline.org

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