Harry Newton's In Search of The Perfect Investment
AM EST, Monday, December 22, 2008: The
economy continues to unravel, as ripple-down economics wreaks its havoc. A
friend emails this morning "We probably get a Santa Claus rally into
year end. I'm not so sure about january--An AWFUL lot of retailers will shut
their doors in January when it becomes apparent that XMAS was a disaster and
that the economy sucks the big suck." It's amazing to see 70% off sales
so close to Christmas Day.
next shoe to drop: If
you missed 60 Minutes on the $1.5 trillion of Alt A and Option ARM
loans now re-setting and defaulting, watch it here on YouTube.
Wall Street will never be the same: Wall
Street's job is to make products to sell to you and me. In doing so it makes
fees for itself and for its lawyers who craft the increasingly complex products.
Many of these "products" are now blowing up. There were two basic
problems. First, they were created in haste and desperation -- get the products
out the door to a world awash in investment dollars. That means little due
diligence. Second, often the deals were hugely complex. The documentation
overwhelmed anyone's ability to understand. As a result, the buyer relied
on assurances from Wall Street salespeople that everything would be "OK."
Whether it would be or not, it didn't matter, they had their commissions and
their bonuses. And they weren't obliged to give the commissions and bonuses
back if things turned sour later on -- as they did with so many Wall Street
"products" -- from auction rate securities to securitized sub-prime
started me on this track was a Sunday New York Times piece by talented Gretchen
Morgenson. Here are some excerpts:
This Deal Hoosier Baroque
damage from the credit crisis continues to crop up in the most unlikely
places. Consider southern Indiana, where the Hoosier Energy Rural Electric
Cooperative, serving 800,000 farm, small-business and residential customers,
is under threat.
other enterprises today, Hoosier is not in financial distress. It is, in
the cooperative is the kind of financial alchemy that has magnified our
money mess: an atrociously convoluted deal that Hoosier struck with
the John Hancock Life Insurance Company in 2002.
of that deal is now in jeopardy, John Hancock is trying to force a termination
payment of $120 million that could push Hoosier into bankruptcy protection.
electric cooperatives, Hoosier does not generate significant profits. Any
earnings are either kept to offset future losses or returned to members
of the cooperative. Its nonprofit status is central to the deal vexing Hoosier
The deal was
offered to Hoosier as a way for the cooperative to sell tax losses that
it couldnt use to a profit-generating company that could. John Hancock
was that company. Known as a sale-in, lease-out SILO for
short the arrangement was fashioned by Babcock & Brown, an Australian
4,000 pages of fine print, the SILO was a deal that only a Wall Street
contortionist could love. Its components included a sale and leaseback,
two credit-default swaps and a tax shelter similar to those that the Internal
Revenue Service has since deemed abusive.
In other words:
a veritable trifecta of tortured finance.
bankers and lawyers on the deal made out, of course; they generated $12
million in fees, court filings show. ...
The I.R.S. will certainly deny the tax benefits that Hancock is claiming,
testified Alan Joseph Bankman, an expert witness in the case who is a professor
at Stanford Law School. He told the court that the I.R.S. has offered tax
amnesty to entities that have struck SILO deals, if they give up future
benefits and return 80 percent of deductions taken.
About 80 percent
of companies involved in such deals have accepted the I.R.S.s amnesty
offer, the judge said in a recent opinion.
But not John
Hancock. Its general counsel said the company believes its deal would pass
muster with the I.R.S. It has no interest in unwinding it.
What a web
our financier friends have woven around us. Unhappily, it seems that no
one can escape its entanglements.
BIG lesson from the scandal Madoff. It is
foolish to concentrate your investments in anything other than your own business.
Those Madoff investors who put virtually all their money with him are wiped
out. Those who put a small percentage are OK.. Diversification is one thing;
concentration is another.
of $ufferers. Members of a "posh" Fifth Avenue, New York
synagogue lost $2 billion "investing" with Bernie Madoff. The New
York Post (a Rupert Murdoch newspaper) had a field day with the cover of its
raise the $50 billion all by himself. He had an elaborate collection of sales
agents who profited handsomely -- really handsomely. Try this from today's
New York Times:
L. Madoff was arrested 11 days ago in connection with a $50 billion Ponzi
scheme, the Fairfield Greenwich Group has portrayed itself as an unwitting
victim of the fraud, the biggest of Mr. Madoffs many losers.
Fairfield, a secretive hedge fund advisory company based in Connecticut,
lost $7.3 billion to Mr. Madoffs fund. But for Fairfield, working
with Mr. Madoff was hugely profitable.
from Fairfield show that the firm has taken more than $500 million in
fees since 2003 alone from the money it placed with Mr. Madoff. Nearly
all those fees went to a handful of Fairfield executives, including Walter
M. Noel, Fairfields founder, who used the money to build a glamorous
life, splitting his time between homes in New York, Connecticut, Florida
and the Caribbean.
As it raised
money all over the world, Fairfield also made detailed pledges about how
it would monitor and track Mr. Madoffs investments, the documents
show. Now, investors and regulators are sure to ask whether Fairfield made
good on those promises or whether it was a facilitator of the Madoff
scandal as well as a victim.
may arise for the dozens of banks and hedge funds around the world that
reaped extraordinary fees for steering investments to Mr. Madoff over the
last decade. None of them, however, earned more from their Madoff business
than Fairfield did during the firms 20-year relationship.
promised its investors that money could not be moved from its accounts with
Bernard L. Madoff Investment Securities without two signatures. It said
that it would independently calculate the value of the funds it invested
at Mr. Madoffs firm at least once a week. It promised to reconcile
statements from individual trades with Mr. Madoffs custodial records.
It is not
clear what Fairfield did to make good on those pledges.
for Fairfield, Thomas Mulligan, offered only a statement characterizing
the firm as a victim of Mr. Madoff.
Greenwich Group is in the process of gathering and reviewing all of the
factual information relevant to its having been defrauded by Bernard Madoff,
Mr. Mulligan said in a written statement. It made efforts to verify
the information it received from Madoff. Following its review, Fairfield
Greenwich expects to be in a position to provide more specifics.
also said that Fairfield Greenwich, and its partners, had about $60 million
invested with Mr. Madoff.
while significant, is less than 1 percent of the overall amount that the
firm placed with Mr. Madoff, and barely 10 percent of the fees that Fairfield
reaped since 2003 from its client investments with Mr. Madoff.
high definition signal is seriously great. In
the City, I have Time Warner. It's awful, but it's a monopoly -- until Verizon's
FIOS gets to me apartment (if ever). But in the country, I have satellite
DirecTV high definition. I'm showing it on a 50" $1,069 Samsung
DLP. It's a stunning picture. What's most interesting is that BubbleVision
(CNBC) shows its normal 4:3 picture on the left and a has a panel of useful
information on the right. You don't see that panel in low definition (i.e.
was the winter solstice, the shortest day of the year. We had a
big snowstorm at our country house. It stopped just before sunset. It produced
the most gorgeous sunset:
yesterday and continues for the next seven days. Plenty of time to buy the
Rosenbaums a gift.
is a crèche?
Normally it's the place they put the little
baby Jesus. But at this time of year, it's also the sound that a Hanukkah
bush makes when it falls over.
put LED lights on our Hanukkah bush yesterday. I'm told they'll last longer
than my grandchildren will -- if I ever get any.
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,
here and here.