Harry Newton's In Search of The Perfect Investment
Technology Investor. Auction Rate Securities. Auction Rate Preferreds.
8:30 AM EST Tuesday, August 5, 2008: Finally
a happy story. From today's Bloomberg:
Hermance Says Credit Crunch Isn't Worst He's Seen
Aug. 5 (Bloomberg)
-- Hudson City Bancorp Inc. Chief Executive Officer Ron Hermance, who built
the company into the largest U.S. savings and loan amid a worldwide credit
crunch, said the current crisis isn't the worst he's seen.
slowdown has been amplified by 24-hour media coverage and the reach of the
Internet, Hermance said in an interview. Delinquencies aren't "anywhere
near'' the level that fueled the savings and loan collapse of the early 1990s,
Back then, "Wall
Street had real problems, and confidence was one of them,'' Hermance said
yesterday. "If you weren't unemployed, you knew somebody that was.''
has more than quadrupled the stock price at Paramus, New Jersey-based Hudson
City since taking over as CEO in 2002. Earlier this year, Hudson City surpassed
Washington Mutual Inc. as the nation's biggest S&L by market value. It
boosted profit as the world's largest financial institutions reported more
than $480 billion of writedowns and credit losses tied to subprime mortgages.
declined 51 cents, or 2.8 percent, to $17.83 yesterday on the Nasdaq Stock
Market. It rose 19 percent this year.
subprime lending "never appealed'' to Hudson City. As other banks were
buying out-of-market home-equity, car and construction loans, Hudson City
built branches in areas ignored by rivals, he said.
thinking, indirect auto, indirect construction -- not on my worst day would
I have that idea,'' Hermance said. "Focus on your strength. Don't go
out and try to broaden your base so much you get outside your competency level.''
Net income has
climbed every year since Hudson City's initial public offering in 1999. The
140-year-old lender, which has never made a subprime loan, posted second-quarter
earnings last month that soared 52 percent, beating analyst estimates.
his 34-year career in banking as a branch manager, working his way up to running
originations at the now-defunct Home Federal Savings and Loan in East Rochester,
New York. When he was writing loans, borrowers understood that they needed
good credit, not just a down payment, Hermance said.
"might have a better handle of their own loan book than many of their
competitors,'' said Carlton Neel of Phoenix/Zweig Advisors LLC, which manages
just over $1 billion, including Hudson City shares.
looking for areas we could go that might be more immune to some of the things
that we still saw as problematic in terms of the mortgage crisis and subprime,''
Neel said. "Hudson City kind of piqued our interest.'' ...
he'd like Hudson City to expand in New York and Connecticut and spread into
Washington, D.C. and Boston. For now, the company operates 123 branches in
the New York City region, and is enjoying a period of growth as rival lenders
a shrinking market we're getting a bigger piece,'' Hermance said.
Bites the Bullet. This mindblower comes from
August 11 BusinessWeek.
CDOs for sale.
Real cheap. That sums up the strategy behind Merrill Lynch's decision on July
28 to offload the bulk of its collateralized debt obligations to vulture investor
Lone Star Funds. Lone Star is paying $6.7 billion for CDOs that were
once valued at $30 billion. The bargain-bin sale will prompt Merrill,
which already has absorbed upwards of $40 billion in losses on rotting mortgage-related
securities, to record another hefty writedown. Lone Star, which is putting
up a mere $1.68 billion in cash, takes on little risk in the transaction
because Merrill is loaning it the rest....
This means Merrill
Lynch is "lending" Lone State $5 billion to take $30 billion
of "assets" off its hands. Boy, those CDOs must be bigtime worthless.
John Thain said yesterday he's selling billions of dollars of toxic mortgage
investments for pennies on the dollar because he needed to shore up morale among
its 60,000 employees, and presumably its stock, which I personally think remains
a good short. Merrill is also being sued by Massachusetts for fraud because
of what it did with auction
never quite figured out what a collateralized debt obligation actually is. I
have a simple philosophy: Don't invest in things you don't understand. Don't
eat things you can't pronounce. So what are CDOs? From Wikipedia -- don't read
all this stuff. Just skim it. Get a feeling for the mind-boggling complexity
debt obligations (CDOs) are a type of asset-backed security and structured
credit product. CDOs are constructed from a portfolio of fixed-income assets.
These assets are divided into different tranches: senior tranches (rated AAA),
mezzanine tranches (AA to BB), and equity tranches (unrated). Losses are applied
in reverse order of seniority and so junior tranches offer higher coupons
(interest rates) to compensate for the added default risk. CDOs serve as an
important funding vehicle for fixed-income assets.
Some news and
media commentary blame the financial woes of the 2007 credit crunch on the
complexity of CDO products, and the failure of risk and recovery models used
by credit rating agencies to value these products. Some institutions buying
CDOs lacked the competency to monitor credit performance and/or estimate expected
cash flows. As many CDO products are held on a mark to market basis, the paralysis
in the credit markets and the collapse of liquidity in these products led
to substantial write-downs in 2007. Major loss of confidence occurred in the
validity of process used by ratings agencies to assign credit ratings to CDO
tranches and persists into 2008.
The first CDO
was issued in 1987 by bankers at now-defunct Drexel Burnham Lambert Inc. for
Imperial Savings Association. A decade later, CDOs emerged as the fastest
growing sector of the asset-backed synthetic securities market. This
growth may reflect the increasing appeal of CDOs for a growing number of asset
managers and investors, which now include insurance companies, mutual fund
companies, unit trusts, investment trusts, commercial banks, investment banks,
pension fund managers, private banking organizations, other CDOs and structured
investment vehicles. It may also reflect the greater profit margins that CDOs
provide to their manufacturers.
A major factor
in the growth of CDOs was the 2001 introduction by David X. Li of Gaussian
copula models, which allowed for the rapid pricing of CDOs.
the Securities Industry and Financial Markets Association, aggregate global
CDO issuance totaled US$ 157 billion in 2004, US$ 272 billion in 2005, US$
552 billion in 2006 and US$ 503 billion in 2007. Research firm Celent estimates
the size of the CDO global market to close to $2 trillion by the end of 2006.
CDOs vary in
structure and underlying assets, but the basic principle is the same. Essentially
a CDO is a corporate entity constructed to hold assets as collateral and to
sell packages of cash flows to investors. ...
definition of CDOs goes on and on. It's worth glancing over.
bigger the screen: eCost.com
is selling a 1680 x 1050 22 inch Samsung monitor
for $199. This is the largest monitor I can run as a second monitor on my various
laptops. I paid $260 for a similar Samsung a couple of weeks ago. This one is
a bargain. I'll use one in the city and one in the country. My desk layout in
both places will now look like this. Note the big Samsung in the middle.
on the China Diet (yesterday):
From reader Barry Merchant:
I still like
Jack LaLannes approach for its simplicity and practicality. LaLanne,
now almost 94 years of age said: Dont over eat. Eat fresh fruits and
vegetables and a little meat, poultry or fish. Stay away from anything that
comes in a box or a bag. If you look at the ingredients listed on the label
and you cant pronounce them dont eat them. It makes things
simple. I like simple.
you crave butter, try this stuff. It's mostly plant. It's much better for you
Hymie and Sadie, an elderly couple, go for their annual medical. Hymie goes
in first and after examining him, doctor Cohen says, "You appear to be
in good health, Hymie Do you have any medical concerns you would like to discuss?"
"Yes I do," says Hymie"After I have sex with mine Sadie, Im
usually hot and sweaty and then, after I have sex with her the second time,
Im usually cold and chilly."
"Thats odd," says doctor Cohen, "Ill ask Sadie about
it when I check her out."
Soon it was Sadies turn. After examining her, doctor Cohen says, "Everything
appears to be fine, Sadie. Do you have any medical concerns that you would like
to discuss with me?"
"No doctor," she replies.
Doctor Cohen then says, "Hymie has an unusual problem. He claims that he
is usually hot and sweaty after having sex with you the first time and then
cold and chilly after the second time. Can you think of why this might be?"
"Oh that stupid shmuck of a husband of mine," Sadie replies, "it's
because we have sex only twice a year - once in the summer and once in the winter."
Maurice and Hettie are out shopping one morning when Hettie says,
"Darling, its my mother's birthday tomorrow. What shall we buy for
her? She said she would like something electric."
Maurice replies, "How about a chair?"
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 on this site. Thus I cannot endorse, though some look 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 Michael's business school
tuition. Read more about Google AdSense, click
here and here.