Harry Newton's In Search of The Perfect Investment
9:00 AM EST, Monday, September 15, 2008: As
2008 began, Richard S. Fuld, Jr., Lehman chairman and CEO, had 10.9 million
shares of Lehman, worth $708 million. This morning his shares will be worth
virtually nothing! Yes, you read correctly. Zilch. Nada. He hasn't sold a single
one board member, Henry Kaufman, an economist, sold any. All the other board
members -- and most of the people who worked at Lehman Bros -- did not sell.
All have suffered gigantic losses.
was a bond trader, a high stakes gambler. Even at its bankruptcy this morning,
Lehman's leverage was 24 to 1. For every dollar in equity, the firm had $24
in loans. If the value of firm's assets dropped by just 4%, the firm's equity
would be wiped out, and hence broke. Once the perception of this got through
to Wall Street, no one on Wall Street wanted to trade with Lehman, since they
felt Lehman wouldn't have the resources to back up the trades. And since trading
is Lehman's business, that was the end of their business. Lehman
actually was the fourth-largest securities firm in the U.S. until the past week,
Lehman has thousands of "trades" (also called gambles) outstanding
in credit, equity, commodity, interest rates and currency derivatives.
me, the overarching conclusion from the Lehman mess, the Bear Stearns mess,
the auction rate securities mess, the sub-prime mess and the present mess on
Wall Street is: If
they can't manage their own money, how can they manage yours?
Wall Street has
consistently substituted optimism for reality. For example, on April 8, Mr.
Fuld told us that the worst of the credit crisis was behind us. Who knows what
he was smoking.
are Wall Street's problems? As I've written before, we know two things:
1. This is the
worst financial crisis since the Great Depression of the 1930s.
2. No one knows
how much toxicity is out there. But we do know that it's more than
most people are willing to admit (or capable of admitting).
Nouriel Roubini, an eminent professor of Economics at New York University,
Bear Stearns and Lehman had the highest mortgage toxic waste ("residual
balance") exposure as percent of adjusted equity on balance sheet: BSC
= 54.5%; LEH = 53.3%; GS = 21%; MER = 17.8%; MS = 8.3%. LEH is the biggest
mortgage underwriter and commercial paper dealer. Roubini (and others) think
the next to go will be Morgan Stanley.
What we are
facing now if the beginning of the unraveling and collapse of the entire shadow
financial system, a system of institutions (broker dealers, hedge funds, private
equity funds, SIVs, conduits, etc.) that look like banks (as they borrow short,
are highly leveraged and lend and invest long and in illiquid ways) and thus
are highly vulnerable to bank like runs; but unlike banks they are not properly
regulated and supervised, they don't have access to deposit insurance and
don't have access to the lender of last resort support of the central bank
(with now only a small group of them having access to the limited and conditional
and thus fragile support of the Fed). So no wonder that this shadow banking
system is now collapsing.
This is indeed
the most severe financial crisis since the Great Depression and occurring
at a time when the US is falling in a now severe consumer led recession. The
vicious interaction between a systemic financial and banking crisis and a
severe economic contraction will get much worse before there is any bottom
to it. We are only in the third inning of a nine innings economic and financial
crisis. And the only light at the end of the tunnel is the one of the incoming
As I've said before
(too many times),
Cash is King.
When in doubt,
I pray you shorted
some of the financials I've mentioned in recent weeks, including Lehman and
leave a GPS unit attached to your windshield: My
daughter did on the weekend. A thief smashed her driver side window, grabbed
the GPS unit and fled. According to the police, stealing them is popular.
Spencertown Academy Festival of Books. A totally
brilliant idea. Our local museum/concert hall holds an annual ...
books. They go on sale for a couple of weekends and raise money for charity,
including much-appreciated arts education at local schools. The festival receives
about 10,000 books. It's huge fun to rummage through the books. I always buy
a bunch. My favorite this weekend was this one. I admit I bought it solely for
the cover. The author also wrote a book called "Deliciously Wicked."
My friend George
Jahn bought two books at the Festival. He brought them home and burbled to his
wife, Karen, about his excitement with his great "find." She looked
at him quizzically and said, "Schmuck, they're your books. You have read
them. You donated them to the Festival."
What goes around
religious traffic sign.
Ranger and Tonto - - 3
The Lone Ranger and Tonto were riding in the hills. The Lone Ranger
goes to take a piss against a rock, and suddenly a rattle snake jumps out from
behind the rock and bites him on the penis.
sends the Tonto to get help, to find a doctor to find out what to do.
Tonto rides as
fast as he can to the next town to find a doctor. The doctor tells him that
the way to treat a snakebite is to take his knife and make a small x on the
bite marks, and suck out the poison.
Tonto rides back
to the lone ranger as fast as he can.
When he arrives,
the The Lone Ranger asks "What did the doctor say?"
"Doctor says you going to die."
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
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