Harry Newton's In Search of The Perfect Investment
Technology Investor. Auction Rate Securities. Auction Rate Preferreds.
8:30 AM EST Thursday, June 12, 2008: The
BIG message is to continue to stay away from today's seriously infected Cockroach
Stocks -- the financials. The infestation is acute. For example, this morning
Thornburg Mortgage reported a $3.3 billion loss. Sadly, you can't short Thornburg.
(Or maybe you can. Is it going to zero? I don't know. Need to check.) It's already
tanked 90%+ this year:
are great shorting opportunities elsewhere, like Lehman Brothers (which
I recommended to short when it was much higher). What a delicious ride....down.
This graph shows daily movements down to last night's close -- now about 70%
off its one-year high. I bet all those people who recently bought Lehman's equity
to the tune of $6 billion or so are seriously pissed. When will the world learn
you can't catch a falling knife?
chart shows yesterday's humungous 13.6% drop.
As to how much
lower Lehman is going now, I have no idea. But lower it's definitely going.
Lehman has all the attributes of a classic Cockroach Stock. Every day another
cockroach problem appears. And this one -- drumroll, please -- is the best.
From my mate in Australia comes this:
a debt instrument called Federation in Australia to shires and
It was rated AAA.
Gosford City Council, Wingecarribe Council (Bowral), etc. all piled in.
Not much only $25 million.
Unfortunately the Federation securities were invested in U.S. sub-prime loans.
The value has dropped to as low as 10 cents in the $.
The investors are now suing Lehman for misleading and deceptive conduct.
Lehman has offered a compromise settlement.
It enables the shires to recoup 100 cents in the dollar of capital invested.
One small problem.
The actual re-payment to the shires will not occur for ten years.
Ya gotta love em.
As my learned
friend and financial guru Dan Good said, "There is no end to Wall Street's
Waldo, the giant cockroach? Answer: everywhere
on Wall Street, it seems. This story
is from this morning's Wall Street Journal. I don't make this stuff up.
I just report the facts.
to Shut Fund, In Blow to CEO Pandit
By DAVID ENRICH and JENNY STRASBURG
is closing a hedge fund co-founded by Chief Executive Vikram Pandit, 11 months
after Citigroup bought the fund's management company for more than $800 million.
Old Lane Partners
has been dogged by mediocre returns and the loss of top managers. Citigroup
plans to shut it and buy what is left of its assets, according to people familiar
with the matter.
Mr. Pandit personally reaped at least $165 million when Citigroup bought
Old Lane in July 2007, following its founding the previous year. At the time,
many large banks and brokerages saw hedge funds as a lucrative new business.
Citigroup was also willing to pay a premium to land Mr. Pandit, who quickly
moved up the ladder and became chief executive in December.
But as the fund
struggled, Citigroup was forced to choose between pumping new money into it
or shutting it down. That created an awkward situation for the new CEO. Mr.
Pandit removed himself from the deliberations to avoid the perception of a
conflict of interest.
considered a plan to replenish Old Lane with anywhere from $1 billion to $3
billion of the bank's own capital. In a memo last month, Old Lane's CEO, Guru
Ramakrishnan, told trading partners and lenders that the fund had secured
a "substantial" amount of fresh capital, according to people who
saw the document.
The memo was
premature. Citigroup later decided against an infusion, in part because its
resources were too strained to devote new capital to Old Lane, people familiar
with the situation said. Pummeled by falling housing prices and the credit-market
mess, the bank has reported losses of nearly $15 billion for the past two
quarters, forcing it to make layoffs and other cutbacks. Citigroup has responded
to those losses by raising about $39 billion in capital since last November.
comment: I'm betting that all the people who bought stock to the tune of $39
billion could now buy the stock cheaper on the market. Here's a daily chart.
Stay away from falling knives.)
demise is the latest embarrassment for banks that operate hedge funds or have
bought stakes in them. Bear Stearns Cos., Goldman Sachs Group Inc. and UBS AG
also have stumbled badly in hedge funds during the credit crunch, piling up
billions of dollars in losses for themselves or their clients. The problems
suggest that hedge funds, typically known for their independence and entrepreneurial
spirit, may have trouble thriving within huge financial institutions.
Mr. Pandit was
a longtime Morgan Stanley executive and seen as a CEO contender there until
his ouster in 2005. The next year, he co-founded Old Lane. Mr. Pandit delivered
a sterling reputation, a thick Rolodex of contacts around the world and a
team of hedge-fund colleagues with deep expertise in India and other fast-growing
Old Lane was
one of the biggest hedge funds to open its doors in 2006, boasting in marketing
materials that it raised $4 billion in fewer than nine months. The list of
marquee investors lined up by Mr. Pandit included Singapore's government investment
fund and Harvard University's endowment.
At the time
of its purchase by Citigroup, Old Lane had amassed about $4.5 billion in assets.
Charles Prince, then Citigroup's CEO, touted the deal as "a unique opportunity
to continue our growth in the highly competitive alternative investment area."
After the purchase was completed last July, Mr. Pandit took the helm of Citigroup's
alternative-investments division, which offers hedge funds, private-equity
funds and other products to sophisticated investors. (Harry's comment:
i.e. rich, dumb investors)
Once the credit
crisis erupted late last summer, Mr. Pandit was increasingly removed from
Old Lane, spending most of his time working with Citigroup's investment bank.
He turned over operations at the hedge fund to its chief executive, Mr. Ramakrishnan,
a confidant since their days as Morgan Stanley traders.
Old Lane has
essentially broken even since its inception. That isn't terrible, considering
the perilous financial markets of the past year. But it fell far short of
the highflying performance craved by hedge-fund investors. Citigroup never
marketed Old Lane to new investors, even after the fund was designated by
Citigroup as its primary hedge-fund vehicle last summer, replacing the struggling
Tribeca Global hedge fund.
of Mr. Pandit and other high-ranking Old Lane officials for bigger jobs at
Citigroup triggered a provision allowing outside investors to withdraw
their money from the fund. In April, "substantially all" of
them moved to do so, pulling nearly $3 billion, according to a securities
filing. The exodus left Old Lane with less than $2 billion in capital -- all
of it from Citigroup and Old Lane's founders and employees. ...
Old Lane's shutdown
is likely to result in a second-quarter charge for Citigroup. In the first
quarter, Citigroup wrote down the value of Old Lane by $202 million to reflect
investor departures from the hedge fund.
Why did Citigroup
buy Old Lane, if -- by buying it -- it would immediately lose all its outside
money? Answer: someone at Citigroup didn't do their due diligence. Or they just
simply didn't care. Go figure.
Search of the Perfect Investment -- Update 703 (or thereabouts).
This is from The New York Times of June 5.
I just read it last night. It's almost as good as the Citigroup story.
Places F.C.C. Aide Amid Fraud Inquiry
By STEPHEN LABATON
WASHINGTON - For the last three years, Daniel Gonzalez has been the loyal
lieutenant and gatekeeper to Kevin J. Martin, the chairman of the Federal
Communications Commission. He has kept the agency humming, the paper flowing
and the staff vacancies filled as Mr. Martin's chief of staff.
Described by some as the sixth commissioner, he has helped shape policy on
regulations that decide winners and losers among the nation's broadcasters,
telephone companies, wireless carriers and cable providers.
As largely unheralded officials like Mr. Gonzalez prepare to exit the government
in the final months of the Bush administration to seek high-paying jobs at
law firms or companies, Mr. Gonzalez faces a far more uncertain future. Instead
of cashing in on his access and expertise, he faces the possibility of financial
Hoping to pursue a career in an entirely different field from telecommunications,
Mr. Gonzalez invested in a small energy company three years ago and then joined
the company's board in 2006. The company, law enforcement officials say, turns
out to have been a fraudulent venture that took more than $54 million from
There is no evidence that Mr. Gonzalez committed a crime or violated federal
ethics rules. But many of the company's lenders say in lawsuits that he, along
with other board members, personally guaranteed millions of dollars in outstanding
loans to the energy company, even though his financial disclosure statement
indicated that his net worth was only in the hundreds of thousands of dollars.
Mr. Gonzalez has denied the lenders' accusations. But commission officials
said they were baffled by how one of the most important telecommunications
regulators in Washington - one known to be a cautious lawyer leading a seemingly
modest lifestyle - could be accused of being so careless.
A friend and two commission officials said that Mr. Gonzalez appeared to view
the energy investment as his exit strategy from the commission. A taciturn
bureaucrat, Mr. Gonzalez never seemed to like the trappings of the job, associates
said. He avoided many of the parties, conventions and social functions held
by industry lobbyists, and he had no interest in becoming a lobbyist or even
staying in telecommunications.
He also made enemies of some powerful companies, particularly in the cable
industry, by working with Mr. Martin against their interests. Within the commission,
he has alienated career officials for executing Mr. Martin's plan of consolidating
power in the chairman's office, taking much of the authority from the staff
So Mr. Gonzalez decided to try his hand in the energy industry. With the permission
of the commission's chief ethics officer, he joined the board of a small company
in Seattle that purported to be involved in oil and natural gas exploration
in Indonesia and Malaysia, a company in which, a year earlier, he had invested
$100,000 from the sale of his small Virginia town house.
Federal authorities say that the company, MCube Petroleum, is largely a $54
million Ponzi scheme that used the newer investors to pay previous ones. The
lawsuits say that during his seven months as a director, Mr. Gonzalez personally
guaranteed more than $7 million in promissory notes from lenders who have
not been repaid. They also say that he and others violated state law by overseeing
a company that sold unregistered securities.
| After MCube Petroleum was accused by federal law enforcement officials of
being a fraudulent business late last year, Mr. Gonzalez privately offered
to resign from the commission. Officials said that Mr. Martin, who had no
prior knowledge of Mr. Gonzalez's ties to the company, declined the offer.
Mr. Martin said he could not comment on the pending investor lawsuits. He
said that Mr. Gonzalez was a highly valued member of his staff and that he
had declined the resignation offer because there was no evidence that Mr.
Gonzalez violated any ethics rules or criminal laws.
Mr. Gonzalez's lawyer, Stephen Willey, said that his client had been duped
by MCube's founder, Robert L. Miracle, who is under investigation by federal
authorities for fraud.
"This illustrates to me that anyone is vulnerable to an effective scam
artist," Mr. Willey said. "It also shows that people who act as
outside independent directors face real pitfalls. If you are not dealing in
a company's day-to-day operations, you have to rely on the good faith of the
Mr. Miracle's lawyer, Greg Hollon, denied that his client had committed fraud.
"We are confident that when the whole story is heard, and all of the
facts of this matter properly understood, he will be vindicated," Mr.
Hollon said. He added he could not discuss the details of the case because
of the pending criminal investigation.
Friends and other lawyers and investigators involved in the collapse of MCube
said Mr. Gonzalez had been duped as much as the investors - in addition to
the lawsuits, he lost most of his $100,000 investment.
"He's a fine man, and I believe he was completely deceived and victimized
like others," said Barry Fink, a lawyer in Los Angeles who in 2006 oversaw
an internal investigation into financial irregularities at the company at
the request of its outside directors, including Mr. Gonzalez. "His big
crime is that he was at the wrong place at the wrong time," Mr. Fink
By all accounts, Mr. Gonzalez, a 42-year-old bachelor from Queens, is married
to his commission job and is fiercely loyal to Mr. Martin. He arrived at the
commission as a junior lawyer in 1990 after graduating from State University
of New York and Hofstra University School of Law. Except for a brief stint
as a vice president at XO Communications, a telecommunications company based
in Herndon, Va., he has spent his career at the commission.
Friends said that Mr. Gonzalez had learned about MCube from a childhood friend,
who persuaded him to invest $100,000 and introduced him to Mr. Miracle. The
company was promoting the prospect of big returns - a $100,000 investment
offered the expectation of average annual returns of more than 24 percent,
or more than $5 million, over 18 years.
A year later, in the spring of 2006, Mr. Miracle recruited Mr. Gonzalez to
the company as one of three outside directors. Mr. Gonzalez received no compensation
for his service. Unlike presidential appointees, senior government officials
are permitted to serve on boards as long as they are not paid and the companies
have no business before their agency.
Mr. Miracle, who was born in 1960, represented himself as a seasoned businessman.
In a company overview, he said he had more than 20 years of experience at
Toyota and NASA and served as an adviser to Frank G. Wells, the former president
But an affidavit by a criminal investigator for the Internal Revenue Service
said that Mr. Miracle had never worked for Mr. Wells, and that in 1994, Mr.
Miracle had been convicted of felony theft in Oregon for stealing textbooks
from a community college. The affidavit said that, rather than working at
Disney, Mr. Miracle might have been involved in reselling textbooks from universities.
The internal MCube inquiry overseen by Mr. Fink started in the fall of 2006,
after Washington state regulators began looking into accusations that MCube
had been violating state securities laws, an inquiry that began just days
before Mr. Gonzalez joined the company.
In January 2007, Mr. Gonzalez resigned from the board after state officials
concluded that the company had violated securities laws. At the end of last
year, federal authorities seized many company documents as part of a criminal
In an affidavit in support of a search warrant, a federal agent with the criminal
division of the I.R.S. accused Mr. Miracle of violating federal fraud laws.
"Although Miracle and his associates may have acquired contractual rights
to certain oil fields and may even have received some revenue from oil and/or
gas production, the overwhelming majority of the payments made to investors
have derived from other investors money," the affidavit said. "In
other words, Miracle and his associates have been operating a type of fraud
known as a Ponzi scheme in which later investors' money is used to pay earlier
investors supposed profits on their investments."
Lawyers involved in the proceeding said that, in addition to the potential
legal liability, Mr. Gonzalez faced significant legal bills since the company's
insurer declined to cover his expenses. The lawyers said there was a remote
possibility that investors could get some money back - limiting the potential
size of the lawsuits against Mr. Gonzalez and the other directors. The company
owns two undeveloped fields in Indonesia that have become more valuable as
the price of oil and gas have risen.
But that prospect is speculative, leaving Mr. Gonzalez facing a possible bankruptcy
filing if the lawsuits result in a judgment in favor of the lenders. A trial
is set for next March.
Although he disputes signing guarantees that are at issue in the lawsuits,
Mr. Gonzalez did guarantee other big loans, which were repaid by MCube. One
of them, for instance, was a $10 million note to Paul Rusnak, a wealthy car
dealer in Southern California, whose daughter had joined MCube's board. Mr.
Rusnak was repaid before MCube's troubles surfaced.
Friends and colleagues are puzzled about why he took such a large risk. Asked
why his client would guarantee a promissory note of $10 million when his net
worth was so much smaller, Mr. Willey said, "I cannot give an answer."
of first refusal is a dumb idea. The board
hired a new president. His first job was to raise money. He did. He secured
a hefty loan from a hedge fund. The hedge fund argued for hefty warrants and
the right of first refusal to buy the company. The president agreed. The right
of first refusal to buy the company may be good for them (it isn't). But it's
horrible for the board which can't seriously shop the company. No one will negotiate
to buy the company, knowing that they'll probably never be able to buy the company.
Someone else will. The whole right of first refusal chills the negotiation process,
knowing that someone else can step in and match; the bidder doesn't know that
someone WILL buy the company, but that someone could.
don't make this stuff up.
Moishe and Ruth are on their first date. As they are walking to the cinema,
Ruth says, "If you give me a kiss, Moishe, I promise Ill be yours
for ever and a day."
Moishe replies, "Thanks for the early warning."
vacation in someplace new
Diane, the summer holidays will soon be with us and I was wondering
where youll be going this time?"
"Well, as you know Fay, we took a trip around the world last year. This
year, were thinking of going somewhere different!"
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
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