Harry Newton's In Search of The Perfect Investment
Technology Investor. Harry Newton
9:00 AM EST, Tuesday, January 27, 2009: Long-term
there'll be more bubbles to enjoy. The next one will probably be new energy.
Short-term, however, we're stuck with a mess, as massive continuing firings
put pressure on the 70% of our GDP that the consumer accounts for. As world
economies crater --the Russian Ruble has been devalued 13 times in the past
two months -- gold looks increasingly tantalizing.
Alan S. Blinder
is a professor of economics and public affairs at Princeton and former vice
chairman of the Federal Reserve. His postmortem published in the New York
Times a couple of days ago is educational, if largely designed to protect
Swiss banks make their money. Marketing is wonderful.
It sets images in people's brains,
like Swiss banks are honest and competent. Based on personal experience, I'd
say they're less competent and less honest than all the U.S. banks
I've dealt with. Latest nail in the coffin of Swiss bank honesty is that many
of them ran fund of funds which funneled investor money to Madoff. Many of the
banks knew something was fishy about Madoff. But they thought it was because
Madoff was front-running -- which is 100% illegal in the United States. And
the Swiss banks conveniently ignored their fears in favor of their fees. From
today's Bloomberg piece, Madoff
Enablers Winked at Suspected Front-Running
on the Path to the Financial Crisis
WHATS a nice economy like ours doing in a place like this? As the
country descends into what is likely to be its worst postwar recession,
Americans are distressed, bewildered and asking serious questions: Didnt
we learn how to avoid such catastrophes decades ago? Has American-style
capitalism failed us so badly that it needs a radical overhaul?
I believe, are yes and no. Our capitalist system did not condemn us to this
fate. Instead, it was largely a series of avoidable yes, avoidable
human errors. Recognizing and understanding these errors will help
us fix the system so that it doesnt malfunction so badly again. And
we can do so without ending capitalism as we know it.
My list of
errors has six whoppers, in chronologically order. I omit mistakes that
became clear only in hindsight, limiting myself to those where prominent
voices advocated a different course at the time. Had these six choices been
different, I believe the inevitable bursting of the housing bubble would
have caused far less harm.
In 1998, when Brooksley E. Born, then chairwoman of the Commodity Futures
Trading Commission, sought to extend its regulatory reach into the derivatives
world, top officials of the Treasury Department, the Federal Reserve and
the Securities and Exchange Commission squelched the idea. While her specific
plan may not have been ideal, does anyone doubt that the financial turmoil
would have been less severe if derivatives trading had acquired a zookeeper
a decade ago?
LEVERAGE The second error came in 2004, when the S.E.C. let securities
firms raise their leverage sharply. Before then, leverage of 12 to 1 was
typical; afterward, it shot up to more like 33 to 1. What were the S.E.C.
and the heads of the firms thinking? Remember, under 33-to-1 leverage, a
mere 3 percent decline in asset values wipes out a company. Had leverage
stayed at 12 to 1, these firms wouldnt have grown as big or been as
SURGE The next error came in stages, from 2004 to 2007, as subprime
lending grew from a small corner of the mortgage market into a large, dangerous
one. Lending standards fell disgracefully, and dubious transactions became
this insanity stopped? There are two answers, and each holds a lesson. One
is that bank regulators were asleep at the switch. Entranced by laissez
faire-y tales, they ignored warnings from those like Edward M. Gramlich,
then a Fed governor, who saw the problem brewing years before the fall.
answer is that many of the worst subprime mortgages originated outside the
banking system, beyond the reach of any federal regulator. That regulatory
hole needs to be plugged.
ON FORECLOSURES The governments continuing failure to do anything
large and serious to limit foreclosures is tragic. The broad contours of
the foreclosure tsunami were clear more than a year ago and people
like Representative Barney Frank, Democrat of Massachusetts, and Sheila
C. Bair, chairwoman of the Federal Deposit Insurance Corporation, were sounding
Yet the Treasury
and Congress fiddled while homes burned. Why? Free-market ideology, denial
and an unwillingness to commit taxpayer funds all played roles. Sadly, the
problem should now be much smaller than it is.
LEHMAN GO The next whopper came in September, when Lehman Brothers,
unlike Bear Stearns before it, was allowed to fail. Perhaps it was a case
of misjudgment by officials who deemed Lehman neither too big nor too entangled
with other financial institutions to fail. Or perhaps they
wanted to make an offering to the moral-hazard gods. Regardless, everything
fell apart after Lehman.
the market often say they can make money under any set of rules, as long
as they know what they are. Coming just six months after Bears rescue,
the Lehman decision tossed the presumed rule book out the window. If Bear
was too big to fail, how could Lehman, at twice its size, not be? If Bear
was too entangled to fail, why was Lehman not?
went over the cliff, no financial institution seemed safe. So lending froze,
and the economy sank like a stone. It was a colossal error, and many people
said so at the time.
DETOUR The final major error is mismanagement of the Troubled Asset
Relief Program, the $700 billion bailout fund. As I wrote here last month,
decisions of Henry M. Paulson Jr., the former Treasury secretary, about
using the TARPs first $350 billion were an inconsistent mess. Instead
of pursuing the TARPs intended purposes, he used most of the funds
to inject capital into banks which he did poorly.
what might have been, consider Fed programs to buy commercial paper and
mortgage-backed securities. These facilities do roughly what TARP was supposed
to do: buy troubled assets. And they have breathed some life into those
moribund markets. The lesson for the new Treasury secretary is clear: use
TARP money to buy troubled assets and to mitigate foreclosures.
decisions all made the wrong way. Imagine what the world would be
like now if the housing bubble burst but those six things were different:
if derivatives were traded on organized exchanges, if leverage were far
lower, if subprime lending were smaller and done responsibly, if strong
actions to limit foreclosures were taken right away, if Lehman were not
allowed to fail, and if the TARP funds were used as directed.
All of this
was possible. And if history had gone that way, I believe that the financial
world and the economy would look far less grim than they do today.
For this litany
of errors, many people in authority owe millions of Americans an apology.
Richard A. Clarke, former national security adviser, set a good example
when he told the commission investigating the 9/11 attacks that he wanted
victims families to know why we failed and what I think we need
to do to ensure that nothing like that ever happens again. Im
waiting for similar words from our financial leaders, both public and private.
bank, Geneva-based Union Bancaire Privee, which had $700 million invested
with Madoff, told clients in a Dec. 17, 2008, letter that in essence,
the perceived edge was Madoffs ability to gather and process market-order-flow
information to time the implementation of the split-strike option strategy.
you wonder. John A. Thain, the former chief executive of Merrill
Lynch, spent $1.2 million renovating his office at Bank of America. The renovation
included a $35,000 commode and an $87,000 area rug. After the sh*t hit the
fan about his renovations, Thain said the renovation was a "mistake."
Thain is clearly a piece of work. He forgot to tell Bank of America about
Merrill's much bigger-than-expected losses in the fourth quarter, which caused
Bank of America to go back to the government for another round of financial
aid. He also paid discretionary bonuses to Merrill employees just a few days
before the sale of Merrill to Bank of America closed considerably
earlier than such bonuses were paid out in years past.
to live longer: Reporters
report on what interests them. Since most of 60 Minutes' staff is between
80 and death, they're obviously keen on living longer. Latest secrets: More
sleep, eating less, and drinking more red wine. You can watch 60
Minutes segments on the Internet -- CBS
News Videos. You can also listen to 60 Minutes via Podcasts
you get free on Apple's iTunes store.
son's latest discovery. He's living in an old, cold rented house
in Boston. In desperation he bought this $10 Duck Window Kit.
"It is great. Installs quickly. It made an immediate difference to the
temperature of my room. The temp has gone up by 5+ degrees without doing anything
else. I'm warm. I can study better. You are now getting more value for the
outrageous school fees you're paying for me."
Only $10 at
Open Tennis continues. The huge time difference
between us and Australia makes this ideal for TiVo.
M = Men, W = Women, D = Doubles. All times EST. The tennis is unbelievably
exciting. Sadly, every one of the players is better than I am. My wife points
out they're also younger.
Great spam is rare. But this one is the best.
A woman proudly told her friend, "I'm responsible for making
my husband a millionaire."
he before he married you?" the friend asked.
wife, "A billionaire."
the old days
A tour guide was showing a tourist around Washington, D. C. The guide pointed
out the place where George Washington supposedly threw a dollar across the
"That's impossible," said the tourist. "No one could throw
a coin that far!"
"You have to remember," answered the guide. "A dollar went
a lot farther in those days."
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.