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Roundtable discussion

Panic in financial markets subsiding, but investors remain cautious

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Fallout from the financial crisis, current volatility and murky waters ahead make for interesting times for wary -- and sometimes weary -- businesses and those who serve them, several professionals agreed at a recent roundtable at The Daily Transcript offices.

“A number of our private wealth clients, since the market’s taken a downturn in the last three months, a lot of them have rekindled their fear of losing their money,” said Berkeley Harrison, a portfolio manager for Comerica Bank. “Preservation of capital is a hot topic again.”

However, clients are less panicky than they were in 2008, Harrison said -- they’re more open to discussion instead of bent on stuffing money in gold or the mattress. The trick is convincing them to not “chase yield” in seemingly safe assets.

For example, baby boomers are retiring in a zero-interest rate environment and will likely be looking for steady income via pensions, fixed-income assets and money market accounts. But with the threat of inflation looming, retirees could put themselves in danger by locking in at low interest rates, said Brett D’Arcy, CBIZ chief investment officer.

In the bond market specifically, clients can try to get a better return via lower-grade bonds or longer maturities -- effectively “getting out on thinner and thinner ice,” Harrison said. “We’re going to see a bond market crash that we’ve never seen before in our lifetime. Any bond trader is looking for signs of inflation, and then, it’s off. All the horses will head for the barn door.”

Roundtable participants agreed there is a pervasive lack of trust in “the system.” Clients seem to expect the stock market to simply continue its downward trek, eyeing any uptick with skepticism, D’Arcy said.

AKT Wealth Advisors principal Charlie Zieky agreed, noting that her clients weren’t as willing to put faith in the March 2009 market reversal as they may have in the past.

This lack of trust has also driven clients away from the major wire houses and into the arms of smaller advisory firms, said Shustak Frost & Partners managing partner Erwin Shustak, who noted that he hadn’t seen such an exodus since the “tech wreck” a decade ago.

Likewise, brokers with such wire houses are also leaving in favor of independent practice, Shustak added.

Accounting clients are also looking at smaller firms and seeking out more value, which has created a more competitive environment for accountants, said Squar Milner principal Michael Pihowich.

Financing still remains an issue for businesses, most at the roundtable agreed. It’s no surprise that barely surviving businesses have difficulty making a case for more debt, but some opportunistic businesses wanting to make acquisitions or otherwise expand are also struggling to find financial support, Pihowich said.

Many banks are retrenching rather than lending, venture capital is hard to come by and private equity is often a poor fit, he added.

CBIZ’s D’Arcy said that some of the firm’s larger clients are turning to nonpurpose loans or margin borrowing, which use securities and investments as collateral. The businesses often use the funds to buy business equipment at distressed prices as other businesses fail, D’Arcy said.

“With credit being so difficult to obtain from traditional lenders, our clients view margin as a reasonable alternative,” D’Arcy wrote in a later e-mail.

Silvergate Bank President and CEO Alan Lane explained that small community banks like Silvergate avoid keeping loans on their books: They may have the capacity to lend, but they’re limited by their ability to move the loans off their balance sheets.

“If we can’t find someone to sell them to as soon as that loan is made, we’re not going to make the loan,” Lane said. “If Fannie Mae and Freddie Mac have tightened their standards, then it trickles all the way through the system.”

Some conforming loans -- those that meet the mortgage companies’ loan limits, which often are too low for California mortgages -- are getting securitized if they meet the higher standards, and they’re of much better quality as a result, Lane said. However, he added, it’s still a somewhat risky bet for the large entities that are willing and able to carry the mortgage-backed securities on their balance sheets.

A 30-year loan would typically live on a bank’s balance sheet for seven to eight years. However, with a rather widespread lack of equity and inability to refinance, banks might end up holding on to a low-interest loan for closer to 12 to 15 years.

“If we see inflation down the road, that’s a tough pill to swallow” for those banks, Lane said.

Some businesses are beginning to feel better, though, a few roundtable participants said.

“There’s a glimmer,” Zieky said. Her clients are seeing some new business and are starting to loosen their purse strings, investing in new technology to improve productivity and profit or looking into opening a new office.

The depressed California real estate market and the state budget woes add a somber pall to the regional economic recovery, but her business clients are “doing what they can afford,” Zieky said.

Indeed, there is opportunity. For example, Sheppard Mullin partner Richard Kintz described how excited investment bankers were that a prospective real estate investment trust was a “California-only REIT.”


Roundtable participants

Brett D'Arcy, Director of Financial Solutions CBIZ Special Risk Insurance Services Inc.

Berkeley Harrison, Portfolio Manager Comerica Bank

Richard Kintz, Partner Sheppard Mullin

Alan Lane, President & CEO Silvergate Bank

Michael Pihowich, Principal Squar Milner

Erwin J. Shustak, Managing Partner Shustak Frost & Partners PC

Charlie Zieky, Principal AKT Wealth Advisors LP

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