After a ten day stretch of complete and utter market turmoil as result of the near collapse of Bear Stearns and unprecedented action by the Federal Reserve to pump liquidity into the financial system to prevent similar run's on the big investment banks, I think it is time for a little perspective for the settlement community as to what is safe for their clients and what does the future hold.
My record as an interest rate, or general market savant, is pretty good on the big picture trends and I try to refrain from timing markets or discussing hot investments. I think market timing and investment advice for more of our clientele is not in their interest and I think it is contrary to the needs of the vast majority of settlement recipients, who should instead focus on obtaining guaranteed cash flow and security via a structured settlement.
However, as an industry that is highly dependent upon interest rate returns and security it's pretty obvious we all have a stake in the question as to what is safe and what should plaintiffs and settlement recipients do with their money at this time. A few suggestions and observations:
1. Fear creates opportunity. Essentially the unwind of the leverage used by the hedge funds and big players in the mortgage securities market is causing some extreme dislocations in the financial community. Witness the sale of Bear Stearns at pennies on the dollar. However, extreme fear of credit risk is driving the herd to run toward absolutely safety and liquidity, i.e. US Treasury obligations, with the impact being one of driving down interest rates on these most safe of investments. The 3 month T-Bill as I write this is yielding 0.514% and the 10 year Treasury yield is 3.34%. Not a lot of opportunity there, but comparable municipal bond rates or AA corporate yields are almost double those. Are the fears of economic and market collapse over blown at the moment? I'd say they are and that prudent investors can, with the help of a competent investment professional, look at alternative investments products.
2. Structured settlement rates are dramatically higher then other comparable fixed rate yields. Even with this weeks drop in interest rate yields, the fact that insurance company portfolios are diverse and allow them to purchase fixed rate investments of high quality that provide quality returns gives them a considerable edge in the "safe and secure" income market. Of course NOTHING is guaranteed other then U.S. obligations, but the credit quality, size and diversification of the major life insurance markets gives high quality credit security PLUS a competitive fixed income return to settlement recipients.
3. With interest rates sure to rise in the next few years due to the deficits and weakness of the dollar I would not want to have my clients in long bonds. It's simple math for all of us who lived through the late 1970's and early 1980's that when you have hard asset inflation, massive deficits, potential tax hikes being proposed and a weak dollar due to the huge influx of money to oil countries that we will soon see a run of interest rate hikes that the Fed will be quite powerless to control. If you put settlement recipients into long bonds now looking for yield you will probably regret it later, but not as much as your clients will regret it as the bonds sink in value as interest rates rise. One of the benefits of good settlement planning with a structure is the option now of having lump sums or cash flows to reinvest in the near future at what might be higher available rates of interest, but with out the loss of value that a bond portfolio might experience over the same period of time.
4. Tax rates are almost certain to rise, making the structured annuity even more valuable to clients in coming years. Whether McCain, Obama or Clinton get in we are looking at a Democratic controlled House and Senate. The pressure to deal with "deficits" or the recession we should be in at that time will likely lead to tax increases in my opinion. Unwise and foolish and guaranteed to make any recession worse, but the pressure will be there. Tax free income via a structure now will have even greater value to your clients.
5. In a recessionary world clients lose jobs, spouses lose jobs or have to take substantial pay cuts. How much value do you think your clients will put on guaranteed, reliable income during a recession?
In short, to structure now provides a much higher yield then ultra safe U.S. Treasuries, locks in tax free income that will be more valuable as states and the federal governments cope with deficits, you don't have the almost guaranteed loss of value bonds will experience as interest rates rise in the next few years and if you plan the structure properly your client will have tax free funds to reinvest in the next 3 to 6 years to take advantage of what ever market opportunities exist then.
In other words, despite the recent fear, it is as good a time for injury victims to go into a structure as it has been at any time in the last 20 years. Safety, competitive tax free yield, and guaranteed income. That's the foundation for almost all settlement recipients.