Harry Newton's In Search of The Perfect Investment
8:00 AM EST, Friday, September 26, 2008: Cash
is king. But where to put it? Triple tax-free munis are now yielding 5% for
15-year paper. That's a "bargain." Muni yields have risen because
people are selling their munis to feed their need for capital -- to finance
their business, pay college bills, etc.
the biggest thrift, is gone this morning, unsaved by Paulson or Congress. I
gambled on my friend, the new CEO, and lost big. I sold my remaining WaMu shares
this morning at 21 cents. My only consolation is that others lost far more than
I did -- e.g. the hedge fund that came in some months ago with $2 billion at
$8.75 a share.
economy is suffering financial rigor mortis. Banks aren't lending. People who
need money can't get it. This limits everything they do -- from employing new
people, to expanding their businesses.
you have cash -- and I pray my readers do -- there will be extraordinary opportunities
shortly. Buffet found two -- Goldman Sachs and Contellation Energy. You will
find real estate your bank is dumping. You will find sound businesses strapped
for capital that will sell cheaply. We are at the trough of Gloom and Doom.
I am excited.
is futzing around with its $700 billion bailout plan. The irony is that even
if it is passed, it won't free up capital. Bank managements are like deer frozen
in the headlights. Confidence in lending is what's needed. And you can't legislate
that. Regaining confidence will take time. I figure another two to three years
for this mess.
sent yesterday's words to my congressperson. I got a "you're a 100% right"
reply. If Congress is to pass a bailout, it needs to define the new rules --
especially those on reforming the banking industry. And frankly, you can't do
this in one day. Yup, you read right. Congress is due to leave today to take
off October to go on campaigning for Election Day, November 4.
the New Yorker:
Today's New York
Times says it all:
By PETER S. GOODMAN
The words coming
out of Washington this week about the American financial system have been
frightening. But many have raised the possibility that the Bush administration
is fear-mongering to gin up support for its $700 billion bailout proposal.
In many corporate
offices, in company cafeterias and around dining room tables, however, the
reality of tight credit already is limiting daily economic activity.
are basically frozen due to the credit crisis, said Vicki Sanger, who
is now leaning on personal credit cards bearing double-digit interest rates
to finance the building of roads and sidewalks for her residential real estate
development in Fruita, Colo. The banks just are not lending.
With the economy
already suffering the strains of plunging housing prices, growing joblessness
and the new-found austerity of debt-saturated consumers, many experts fear
the fraying of the financial system could pin the nation in distress for years.
Without a mechanism
to shed the bad loans on their books, financial institutions may continue
to hoard their dollars and starve the economy of capital. Americans would
be deprived of financing to buy houses, send children to college and start
businesses. That would slow economic activity further, souring more loans,
and making banks tighter still. In short, a downward spiral.
Fear of this
outcome has become self-fulfilling, prompting a stampede toward safer investments.
Investors continued to pile into Treasury bills on Thursday despite rates
of interest near zero, making less capital available for businesses and consumers.
Stock markets rallied exuberantly for much of Thursday as a bailout deal appeared
in hand. Then the deal stalled, leaving the markets vulnerable to a pullback.
trust and confidence, business cant go on, and we can easily fall into
a deeper recession and eventually a depression, said Andrew Lo, a finance
professor at M.I.T.s Sloan School of Management. It would be disastrous
to have no plan.
The Bush administration
has hit this message relentlessly. On Capitol Hill, Treasury Secretary Henry
M. Paulson Jr. warned of a potential financial seizure without a swift bailout.
Federal Reserve Chairman Ben S. Bernanke an academic authority on the
Great Depression used words generally eschewed by people whose utterances
move markets, speaking of a grave threat.
In a prime-time
television address Wednesday night, President Bush, who has described the
strains on the economy as adjustments, put it this way: Our
entire economy is in danger.
pushback to the bailout reflects discomfort with the people sounding the alarm.
Mr. Paulson, a creature of Wall Street, asked Congress for extraordinary powers
to take bad loans off the hands of major financial institutions with a proposal
that ran all of three pages. Subprime mortgages have been issued with more
paperwork than Mr. Paulson filled out in asking for $700 billion.
is like that movie trailer where a guy with a deep, scary voice says, In
a world where credit markets are frozen, where banks refuse to lend to each
other at any price, only one man, with one plan can save us,
said Jared Bernstein, senior economist at the labor-oriented Economic Policy
Institute in Washington.
And yet, the
more he looked at the data, the more Mr. Bernstein became convinced the financial
system really does require some sort of bailout. Things are scary,
firms during the first three months of the year, the outstanding balance of
so-called commercial paper short-term IOUs that businesses rely upon
to finance their daily operations was growing by more than 10 percent
from a year earlier, according to an analysis of Federal Reserve data by Moodys
Economy.com. From April to June, the balance plunged by more than 9 percent
compared with the previous year.
This week, the
rate charged by banks for short-term loans to other banks swelled to three
percentage points above the most conservative of investments, Treasury bills,
with the gap nearly tripling since the beginning of this month. In other words,
banks are charging more for even minimal risk, making credit tight.
who have spent their careers arguing that government is in the way of progress
that its role must be pared to allow market forces to flourish
are calling for the biggest government bailout in American history.
in a very serious place, said William W. Beach, an economist at the
conservative Heritage Foundation in Washington. There is risk of contagion
to the entire economy.
the stunning events of recent weeks as the government took over the
mortgage giants Fannie Mae and Freddie Mac, Lehman Brothers disintegrated
into bankruptcy, and American International Group was saved by an $85 billion
government bailout credit was tight, sowing fears that the economy
The demise of
those prominent institutions and anxiety over what could happen next has amplified
is so big that if somebody doesnt step in, it will cause a panic,
said Michael Moebs, an economist and chief executive of Moebs Services, an
independent research company in Lake Bluff, Ill. Things could worsen
to the point that we could see double-digit unemployment.
This week, Mr.
Moebs said he heard from two clients, one a bank and the other a credit union
in a small city in the Midwest, now in serious trouble: Both are heavily invested
in Lehman, Fannie Mae and Freddie Mac.
going to lose about 80 percent of their capital if they cant cash those
in, and the other is going to lose about half, Mr. Moebs said.
The credit union
is located in a city in which the auto industry is a major employer
an industry now laying off workers. Yet as people try to refinance mortgages
to hang on to homes and extend credit cards to pay for gas for their job searches,
the local credit union is saying no.
become very restrictive on who they are lending to, Mr. Moebs said.
They cant afford a loss. Their risk quotient is next to zero.
You have a financial institution that really cant help out the local
people who are having financial difficulties.
Along the Gulf
of Mexico, in Cape Coral, Fla., Michael Pfaff, a mortgage broker, has become
accustomed to constant telephone calls from local real estate agents begging
for help to save deals in danger of collapsing for lack of finance.
are terrified and theyre dragging their feet, and making more excuses
not to close loans, Mr. Pfaff said. Basically, they just dont
want the deals.
ago, when Cape Coral was among the fastest-appreciating real estate markets
in the nation, Mr. Pfaff specialized in financing luxury homes with seven-figure
price tags. Now Im doing a $32,000 loan on a mobile home,
Finance is still
there for people with unblemished credit, he said. Mr. Pfaff recently closed
a deal for a couple in Indiana that bought a second house in Cape Coral, a
waterfront duplex for $300,000. Their credit score was nearly impeccable,
and they had a 20 percent down payment, plus income of nearly $8,000 a month.
For people like
that, conditions have actually improved since the government took over the
mortgage giants. A month ago, Mr. Pfaff could secure 30-year fixed rate mortgages
for about 7 percent. On Thursday, he was quoting 6 percent.
But those with
less-than-ideal credit are increasingly shut out of the market, Mr. Pfaff
said, and there are an awful lot of those people. So-called hard money loans,
for those with problematic credit but large down payments, were easy to arrange
as recently as last month.
has just dried up, Mr. Pfaff said. Im afraid. Im 54
years old, and Ive seen a lot of hyperventilating in my life, but I
absolutely believe that this is a very serious issue.
Several days ago,
Tom Brokaw said it even better in the Wall Street Journal
of People Could Use a Cash Infusion
Un" Baumgartner of Windblown, Wyo., invited the Federal Reserve and the
U.S. Treasury Department to take over his business, The Big Un 24 Hour
Tow Service and Trophy Taxidermy.
In a handwritten
press release, Mr. Baumgartner explained that with winter and hunting season
coming on, the good citizens of Windblown would be without his vital services
unless he found a way to deal with his escalating debts, fast.
not just about me or my neighbors in Windblown. Heck, we get three or four
tourists and out-of-state hunters here every 10 days or so. What if they need
a tow or a trophy mount? The consequences are too great to contemplate,"
Mr. Baumgartner explained.
He'd be willing
to let the government have 80% of his business for a quick cash infusion.
He thought something in the neighborhood of $1.8 million should do the trick.
That would be enough to gas up his two tow trucks, get some new taxidermy
stuffing and clean up that overdue account at the Number 10 Saloon and Casino
over in Deadwood, S.D.
officials had no comment on Mr. Baumgartner's request, but a source familiar
with the response to the bailout of American International Group said Treasury
has been inundated with similar requests.
+ A pawn shop
in Reno, Nev., has an excess supply of eight-track cassette players, flower
print shirts, broad white belts and Wayne Newton tapes, having gambled that
the '70s would come roaring back. The owner pleaded for a Treasury take-over,
arguing, "How can the government stand by and let such a rich part of
our American culture simply fade away?"
+ The owner
of an NFL poster shop in Green Bay, Wis., reports that he has given up on
divine intervention and is now asking for Treasury to take over his business
in a last-ditch effort to preserve the notion that whatever our differences,
we're all Americans.
Asked how his
business got into trouble, Karl Andursen of Muledeer, Minn., said he met a
man who specialized in printing Minnesota Viking and Chicago Bears posters.
Mr. Andursen said the man was willing to bundle his posters and sell them
at a discounted rate to anyone who would take over the Green Bay territory.
said in the back of his mind he knew that could be risky since Green Bay is
sacred ground for Packer fans who wouldn't cheer for the Vikes or the Bears
if they were promised a fleet of new snowmobiles and lifetime hunting rights
on Brett Favre's farm.
But, as he said,
everyone was in the NFL merchandise game and he figured he'd take the territory
and after 30 days flip the franchise for a big profit. A year later and he's
not made a sale, not one, but who knew?
He's offered his complete inventory of Go Bears! and Vikings Rock! posters
for 20 cents on the dollar or $500,000 in 30-year Treasury bonds.
+ Darlene Dalrymple
owner of the Shear Joy Hairstyling and Tattoo Salon in Rockhard, Vt., wrote
Treasury Secretary Henry Paulson, inviting him and Federal Reserve Chairman
Ben Bernanke to her shop for a free trim and tat if they'd also help with
her balance sheet.
said she's very busy, but her expenses somehow always exceed her income. She
suspects her boyfriend, who likes to use a lot of Wall Street lingo he picks
up watching business channels on TV, is shorting her cash register.
said her boyfriend also called her a moral hazard, and she'd like Secretary
Paulson and Chairman Bernanke to explain exactly what that means.
is the former anchor and managing editor of "NBC Nightly News."
His most recent book is "Boom! Voices of the Sixties" (Random House,
How long will
this mess last? Here's a relevant piece from Bloomberg.
Find Painful Parallels in Nordic Bailout (Update2)
By Simon Kennedy
Sept. 23 (Bloomberg)
-- If Henry Paulson and Ben S. Bernanke want to know what happens when central
banks and governments bail out financial institutions, they should be "learning
That's the suggestion
of Charles Dumas, a director at Lombard Street Research in London. He says
the effort by Finland, Sweden and Norway to save troubled banks in the early
1990s is the closest parallel to the market-rescue plan being engineered by
the U.S. Treasury secretary and Federal Reserve chairman.
The Nordic effort
-- similar in speed and scope to what the U.S. is planning now, though smaller
in size -- did manage to end the financial crisis. At the same time, it didn't
prevent a deeper recession and surging unemployment in all three countries.
long term, there were benefits, but it took half a decade before they began
to show in the economy,'' said Esko Ollila, a member of the Bank of Finland
board from 1983 to 2000.
With the U.S.
financial markets in tumult, Paulson is seeking to implement a $700 billion
plan that will allow the U.S. to purchase illiquid assets such as mortgage-related
securities from banks. Last week, the government and Fed pledged to insure
money-market funds, seized control of New York-based insurer American International
Group Inc. and intervened in the markets for commercial paper and short-term
debt for Fannie Mae, Freddie Mac and other agencies.
At the end of
the 1980s, the economies of Sweden, Finland and Norway had surged after deregulation
and low interest rates encouraged banks to lend more. Finnish house prices
jumped 80 percent in real terms, and its stock market soared 164 percent in
five years, according to JPMorgan Chase & Co.
was a mounting debt burden. As policy makers sought to slow inflation and
protect their fixed exchange rates, banks found their balance sheets decimated
by nonperforming loans amounting to 10 percent of the region's gross domestic
to the subsequent financial crisis was one of "rapidity and vigor,''
said then-Fed Chairman Alan Greenspan in a 1999 speech. Sweden guaranteed
bank obligations against losses and established a $14 billion restructuring
fund to provide failing banks with capital in return for equity. In addition
to taking over Nordbanken AB, the government created a ``bad bank'' that bought
troubled assets at a discount, while leaving financial institutions to manage
their more-liquid holdings.
took similar steps by insuring savings and seizing control of the country's
three biggest banks. Finland merged more than 40 banks, including Skopbank
Ltd., into a government-run entity and moved nonperforming assets to management
companies run by its central bank.
While the interventions
"were sweeping and ultimately a success,'' they didn't bring immediate
relief to the three countries' economies, as banks cut back on lending and
companies and consumers spent less, said Lauri Uotila, chief economist at
Sampo Bank, a unit of Danske Bank A/S in Helsinki.
and Swedish economies contracted in 1991, 1992 and 1993. Norges Bank calculates
that during the early 1990s, output fell 12.3 percent in Finland, 5.8 percent
in Sweden and 4.1 percent in Norway. Unemployment didn't peak in Finland until
May 1994, when the rate reached 19.9 percent, having fallen as low as 2.1
percent in 1990. Sweden's jobless rate averaged 9.9 percent in 1997, up from
1.6 percent in 1990.
measures implemented by the Scandinavian governments were not enough to prevent
deep recessions,'' said Nicola Mai, an economist at JPMorgan in London. The
Fed Bank of Philadelphia today announced it will host a conference next week
on the lessons of the Nordic experience for the U.S.
Mai says the
U.S. government and the Fed were quicker to ease fiscal policy and cut interest
rates as the crisis took hold, something Norway, Finland and Sweden weren't
able to do because they had to maintain currency pegs.
By acting quickly,
the U.S. may still avoid repeating Japan's "lost decade'' of deflation
after policy makers in the world's second-largest economy dithered in addressing
a banking crisis. The U.S. may even mimic Sweden whose government made money
when it was able to sell the assets at a later date, said Jim O'Neill, chief
economist at Goldman Sachs Group Inc.
stock- and property-market bubbles burst in the early 1990s, lenders were
left with trillions of yen in bad loans on their books. It wasn't until 1999
-- two years after the collapse of Yamaichi Securities Co. -- that policy
makers found the political will to use taxpayers' money to begin bailing out
the banking system.
It took two
more years for then-Prime Minister Junichiro Koizumi to demand that banks
accelerate the disclosure of bad debts and their disposal of illiquid loans.
procrastination unnecessarily increased overall costs in terms of asset-price
declines, damage to the fiscal position and lost economic growth,'' said Richard
Jerram, chief economist at Macquarie Securities Ltd. in Tokyo. ``The U.S.
seems to be responding with unusual speed and aggression.''
Rosenberg, North American economist at Merrill Lynch & Co. in New York,
predicts that the U.S., like Scandinavia, probably won't see an immediate
effective government solution, the process of extinguishing the bad debts
via government intervention was painful,'' Rosenberg said. "We're into
a new chapter indeed, but it's very tough to say at this point that the book
is watching Katie and Sarah.
You can find videos on YouTube
Here's bits of the Sarah
interview with Charlie Gibson. Use Internet Explorer.
conclusion (update 23)
Cash is king. Tennis is sanity. The family is wonderful. I see some
of them this weekend. Sorry about the length of today's column. But this stuff
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.
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is research for a book I'm writing called "In Search of the Perfect
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