Harry Newton's In Search of The Perfect Investment
Newton's In Search Of The Perfect Investment. Technology Investor.
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.
happened with subprime loans and their rewards?
April 16 (Bloomberg)
-- The story line of the newest American financial debacle is now clear:
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.
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
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.,
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?
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.
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.
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. Wolfowitzs supervision would violate
the banks conflict-of-interest rules, she was reassigned to the State
Department, where she initially worked under Liz Cheney, the vice presidents
She remained on
the banks 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
gives two-day filing extension to storm victims. This might be useful:
(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,
ConocoPhillips to produce biodiesel from animal fat:
From today's U.K. Telegraph newspaper:
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.
gallon of renewable fuel will take, on average, two cows, 16 pigs, or
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.
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.
process is more expensive than creating conventional diesel, the federal government
has granted the industry a $1-a-barrel tax credit, making it commercially
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."
"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.
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."
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."
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."
are always a few clouds over everybody."
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."
like he was something really special."
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."
amazing fellow. How did you meet him?"
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 .
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