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8:30 AM EST, Tuesday, April 17: High offered returns equals high risk and the real chance of losing your capital. That's the lesson with high-interest loans to risky borrowers, like sub-prime borrowers and vacant land for development out west. Michael Lewis wrote this piece for Bloomberg. Lewis is a very successful financial reporter, and book author, one of our best. He's also a columnist for Bloomberg News.

What happened with subprime loans and their rewards?

April 16 (Bloomberg) -- The story line of the newest American financial debacle is now clear:

President Bill Clinton eased lending standards to encourage the rich people who run the mortgage market to embrace poor people with low credit ratings. Then these horrible rich people -- these unfeeling sharks -- went to work exploiting the poor.

First, they talked poor people into borrowing money they should never have borrowed. Then they brought in some other sharks to package the loans as bonds, who in turn talked some other only slightly less poor people into buying the bonds. The rich middlemen took their fees and left the poor borrowers and slightly less poor lenders holding the bag.

The moral of the story is also clear: No matter how much the government might try to help the poor, the rich people who run financial markets will find a way to screw them.

At any rate, that's how it reads to me in the many scandal-tinged accounts of the subprime loan-market collapse. And on its surface the moral is appealing: the story is always better, and easier to write, when the rich guys are the crooks. But this interpretation of current events does raise a few questions. To wit:

1) If the subprime home-loan market was a cynical conspiracy, why did so many of the putative conspirators wind up taking so much of the risk?

The single biggest collapse in the market has been that of New Century Financial Corp., the second-biggest subprime mortgage lender. When New Century collapsed it owed money to many, but the single biggest creditor, according to the London Times, was...Goldman Sachs Group Inc., followed by Morgan Stanley, Lehman Brothers Holdings Inc., etc., etc.

Interestingly, New Century's 10th-largest creditor -- again, according to the Times -- was another subprime lender, Countrywide Financial Corp. (Barclays Plc, out $1 billion, was a mere 15th on the list, which gives you an idea of the sums involved.) Given this, you just know that it's a matter of time before we learn of some hedge fund that's on the verge of collapse as a result of its investments in subprime mortgages.

2) Why does the most financially obsessed and presumably well-informed character on earth, the American Investor, insist on playing the fool?

Amazingly, in the wake of the Internet boom and bust, some meaningful number of American investors fail to ask why they are being offered fantastic returns on their investments. Paid six times the risk-free rate on the notes and bonds of a subprime lender called American Business Financial Services (a name that's a sign of bad things to come, if ever there was one), they don't wonder why it is that their investments yield such spectacular returns. Instead, they become outraged when American Business Financial Services collapses, then sue the Wall Street investment banks who sold them the bonds.

Then they go to the media. From Bloomberg News we learn the sad story of a small investor named Buck Meyer who lost $300,000 when American Business Financial Services tanks. The man has two children! He planned to use the amazingly high interest rates he earned on his American Business Financial Services bonds to pay the mortgage on his own new house in Chattanooga, Tennessee! How could they possibly fail to pay off?

No one suggests that Buck Meyer, in effect, gambled his savings away -- that he might as well have grabbed the special offer of a free hotel room and flown to Las Vegas, groped his way to the roulette table, plopped his life savings down on 00, and then sued the casino for losing his money. Then again, the Vegas gambler can't expect journalists and juries to take his case seriously.

Which raises yet another question: Did the knowledge that he could count on journalists and juries for sympathy embolden Buck Meyer to gamble his savings away? Even if Buck Meyer didn't consciously think ``If they don't give me my money back, I'll just sue 'em,'' was he not subconsciously aware that these lucrative if risky bonds came with a loose social insurance policy? Are the journalists and juries, therefore, partly to blame for his losses?

3) Why in this new drama is it so easy to imagine borrowers in a different role, other than the one in which they are currently cast: The Victim?

Moving is never pleasant or cheap, but that is the main cost to the subprime defaulter: He hands back the house, whose value has presumably plummeted, to the people who lent the money to buy it, and walks away. He rents. (Shrewdly!) In effect he bought a very cheap call option on the U.S. housing market.

While he waited to see if his call option made him richer, he lived in a much nicer house than he could otherwise afford and probably wondered why rich people had become so recklessly open- handed. His behavior was irresponsible, but the markets let him do it and so it's hard to blame him for taking a flier.

Am I the only one who wonders how a person who borrows money he can't repay, buys a house he can't afford, and then stiffs his creditors, is allowed to play the victim?

A more convincing victim, I would have thought, is the person with weak credit but strong resolve who stood to benefit from a subprime loan -- and who now can't get one because the market is scared of his shadow.

How can anyone be so downright dumb? Since becoming president of the World Bank, Paul Wolfowitz has made clean governance / anti corruption his main cause at the bank. When Wolfowitz was appointed he was in a personal relationship with a woman employed at the bank. The bank has called the woman his "domestic partner." Since working under Mr. Wolfowitz’s supervision would violate the bank’s conflict-of-interest rules, she was reassigned to the State Department, where she initially worked under Liz Cheney, the vice president’s daughter.

She remained on the bank’s payroll. And Wolfowitz helped arrange for her to receive a whopping $60,000 raise, bringing her salary to $193,590. The bank's staff association says her pay and promotions were "grossly out of line" with the Bank's staff rules. She is still employed by the bank. Wolfowitz has apologized.

IRS gives two-day filing extension to storm victims. This might be useful:

SAN FRANCISCO (MarketWatch) -- The Internal Revenue Service said late Monday that people directly affected by the storm that hit the Northeast will get to a two-day extension for filing their tax returns. Impacted taxpayers will have until midnight Thursday, April 19, to file their taxes. "Because this unusually forceful storm hit within 24 hours of the filing deadline, we are giving affected taxpayers 48 additional hours," IRS Commissioner Mark Everson said, according to the Associated Press. In order to avoid incurring late fees, affected taxpayers should mark their paper tax returns with the words "April 16 Storm," the IRS said. E-filers can use their software's "disaster" feature, if available.

ConocoPhillips to produce biodiesel from animal fat: From today's U.K. Telegraph newspaper:

Americans may soon be able to fill up their cars with fuel made from the fat of dead animals in the latest alternative energy craze to hit the United States.

Oil giant ConocoPhillips is setting up a venture with meat processor Tyson Foods that will soon produce more than 174m gallons of low-sulphur biodiesel using the fat byproduct of the cows, pigs and chickens that Tyson processes into food.

Most of Tyson's animal fat is currently sold for use in cosmetics, soap and pet food but, under the new venture, the company plans to ship more than half of it to Conoco refineries where it will be rendered into fuel.

Producing one gallon of renewable fuel will take, on average, two cows, 16 pigs, or 1,300 chickens.

Only a tiny fraction of the biodiesel currently on the market is made from animal fat. Most is produced from vegetable oils.

Even that is a small proportion of the amount of fuel actually used. Only 6 million of the 38 billion barrels of fuel produced a year is biodiesel.

For Tyson, the shift makes sense. Other alternative fuels such as ethanol are made directly from corn which is also needed as feed for livestock, resulting in higher prices for the company.

By making fuel from the animal fat byproduct of its operations, Tyson is able to offset some of those higher costs.

ConocoPhillips is facing increased federal requirements to produce alternative fuels and the benefit of biodiesel from animal fat is that it can be produced in its existing refineries, unlike ethanol.

Although the process is more expensive than creating conventional diesel, the federal government has granted the industry a $1-a-barrel tax credit, making it commercially viable.

ConocoPhillips chief executive Jim Mulva, who recently committed the oil major to becoming the first to back a cap on emissions of greenhouse gases, said it was too early to suggest the venture marked a radical shift in the means of American fuel production. "It remains to be seen just how good these are commercially," he said. "But you know, you have to start somewhere."

The "bible" on biodiesel is this book:



Kemp powers his car and his home entirely with biodiesel. He lives entirely off-the-electrical grid. The book shows in exhausting detail how you can also. He recently drove his diesel-powered car 4,000 miles on just $200 of fuel. My most efficient car (a Subaru Outback) would do fewer than 1,800 miles on $200 of conventional gas.

Since the process of making biodiesel fuel is well-known and works well, the key to making a biodiesel business is to find cheap, renewable feedstock. That's where much of the research is now happening. In addition to chickens, researchers are also looking at algae.

I'm dubious about the long-term future of ethanol made from American corn (unless there are huge government subsidiaries), but Brazil's ethanol made from sugar makes sense. I do like biodiesel. In short, alternative energy remains in flux, but exciting.

Harvard Business School goes with Windows XP: It does not recommend that its students use Vista, yet. Too many problems and upcoming patches before Vista is ultimately stabilized, according to the lady in IT I spoke with. My feelings precisely, also.

The story of the Australian and the Muslim cleric
A Muslim cleric was seated next to an Australian cowboy on a flight from London to Sydney. The plane got airborne, the drink cart came around. The Aussie asked for a rum and coke.

The flight attendant then asked the Muslim if he would like a drink.

He replied in disgust, "I'd rather be savagely raped by a dozen whores than let liquor ever touch my lips."

The Aussie then handed his drink back to the attendant and said, "Me too. I didn't know we had a choice."

The story of the perfect man
A man walks into the street and manages to get a taxi just going by. He gets into the taxi, and the cabbie says, "Perfect timing. You're just like Frank."

Passenger: "Who?"

Cabbie: "Frank Feldman. He's a guy who did everything right all the time. Like my coming along when you needed a cab. Good things happened Frank Feldman all the time."

Passenger: "There are always a few clouds over everybody."

Cabbie: "Not Frank Feldman. He was a terrific athlete. He could have won the Grand-Slam at tennis. He could golf with the pros. He sang like an opera baritone and danced like a Broadway star. You should have heard him play the piano. He was amazing."

Passenger: "Sounds like he was something really special."

Cabbie: "There's more. He had a memory like a computer....could remember everybody's birthday. He knew all about wine , which foods to order and which fork to eat them with. He could fix anything.....not like me. I change a fuse, and the whole street blacks out. But Frank Feldman, he did everything right."

Passenger: "An amazing fellow. How did you meet him?"

Cabbie: "Well, I never actually met Frank. I just married his widow."

This column is about my personal search for the perfect investment. I don't give investment advice. For that you have to be registered with regulatory authorities, which I am not. I am a reporter and an investor. I make my daily column -- Monday through Friday -- freely available for three reasons: Writing is good for sorting things out in my brain. Second, the column is research for a book I'm writing called "In Search of the Perfect Investment." Third, I encourage my readers to send me their ideas, concerns and experiences. That way we can all learn together. My email address is . You can't click on my email address. You have to re-type it . This protects me from software scanning the Internet for email addresses to spam. I have no role in choosing the Google ads. Thus I cannot endorse any, though some look mighty interesting. If you click on a link, Google may send me money. Please note I'm not suggesting you do. That money, if there is any, may help pay Claire's law school tuition. Read more about Google AdSense, click here and here.
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