From The Aleph Blog:
I am going to reprint here the beginning of the article The Education of a Corporate Bond Manager, Part VI. I am doing this because it describes how our investment department dealt with 9-11. Here it is:
After 9/11, and and before the merger was complete on 9/30/2001, our investment team got together and came to an unusual conclusion — 9/11 would have little independent impact on the credit markets, so be willing to take credit risk where it is not well-understood by the market. We bought bonds in hotels, airplane EETCs (A-tranches), anything having to do with confidence in the system at that time. I consciously downgraded our portfolio two full notches from September to November.
I went to a Chief Investment Officers’ conference for insurance investors in October 2001. What I remember most is that we were the only company being so aggressive. In a closed-door meeting, the representative from Conseco told me I was irresponsible. To hear that from a company near bankruptcy rang the bell. I was convinced we were on the right track.
By mid-November, we had almost completed our purchases of yieldy assets, when I received a phone call from the chief actuary of our client expressing concern over the credit risks we were taking; the rating agencies were threatening a downgrade.
Well, what do you know?! The company that did not understand the meaning of the word risk finally gets it , and happily, at the right time. We were done with our trade.
....MOREWe looked like doofuses for three months before the market began to turn, and I began a humongous “up in credit” trade as we began to make a lot of money. By the time I was done in early June, I had upgraded the whole portfolio three full notches. A great trade? You bet, and more. What’s worse, it was what the client wanted, but not what it should have wanted.9-11 was a shock to the system, but one where our investment team concluded that everything would return to normal, and relatively soon. We thought that the terrorists had gotten lucky, and that there was no persistent threat. Thus, prosperity would return, well, as long as the economy would hold up, which was in question at that time. The second-order effects of the deflation of the dot-com bubble were more severe than 9-11 would ever be.
The Education of a Corporate Bond Manager, Part VI
From October 2001 through October 2002, our department bravely soldiered on, and during that time I played the speculation cycle relatively well, as noted in other episodes of “Education of a Corporate Bond Manager.”
The main challenge was trying to separate the transitory from the medium-term from the permanent. 9-11 was transitory. Deflation of the dot-com bubble was medium-term, and general prosperity was the long term — and definitely so at the valuations experienced in October 2002....
