Weathering the Storm

Jonathan Curry, Head of Cash Management, EMEA and James Finch, Head of Cash Sales, EMEA, Barclays Global Investors Ltd

The recent market turmoil has created new challenges for clients with large cash balances to manage. The origin of these events can be traced back to the US sub-prime mortgage market. Since February 2007, the value of securities in this part of the US residential mortgage-backed securities (RMBS) market has declined, in line with a downturn in the performance of the underlying mortgage loans.

Recent events have led to a continued cycle of risk aversion, uncertainty, illiquidity and price volatility across most major asset classes, including traiditional money market securities.

Initially, this issue was contained largely in the US sub-prime mortgage-backed market. However, as hedge funds have been forced to close, banks have taken significant hits to their profits and monoline insurance company credit ratings have come under pressure. These and other problems that markets have faced caused concerns to spread quickly to other sectors.

Investment funds and banks around the world have been impacted and investors are becoming increasingly cautious regarding where and how cash is invested. Banks also became less willing to lend to each other, creating illiquidity in the money markets and threatening the funding on which the banking system depends.

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