Harry Newton's In Search of The Perfect Investment
Technology Investor. Auction Rate Securities. Auction Rate Preferreds.
9:00 AM EST, Friday, August 15, 2008: There's
a major bank that forces its employees to take two weeks vacation each year.
While on vacation they're not allowed to call, BlackBerry, email, fax or in
any way contact the office. The "logic" -- I don't make this stuff
up -- is that whatever naughtiness the employee has been doing all year long
will unravel itself during the two weeks of vacation.
heard of Risk Management systems. But this is a total dozy.
painful has it been? A hedgie wanted to check his miserable performance
for the first half of this year versus his peers. The results:
Whitman: Founder of Third Avenue Value Fund, generated 17% annualized returns
month performance: -43.38%
12 month performance: -34.61%
Pabrai: Warren Buffett was his mentor; generated nearly 30% annualized returns
prior to 2007.
month performance: -41.20%
12 month performance: -36.88%
Miller: Legendary portfolio manager for Legg Mason; established a 15 year streak
of beating the S&P 500 until 2007.
month performance: -37.05%
12 month performance: -40.90%
Greenblatt: Portfollio manager of well known and highly lauded hedge fund Gotham
month performance: -37.00%
12 month performance: -37.00%
Lampert: Widely acclaimed as the next Buffett when he took Kmart from the brink
month performance: -28.95%
12 month performance: -33.94%
Carl Icahn: The
original Corporate Raider.
6 month performance:
12 month performance: -3.98%
These people have
to be in the market. You don't.
As my father once
said, "The only sure way to make a small fortune is to start with a large
bothers serious people about Wall Street: When your friendly broker
"sells" you something, you don't know if he owns it or buys it on
the market for you. He may sell you stuff because it's good stuff and good for
you. Or he may sell you stuff that's bad stuff, but good for him to get rid
of. Also, knowing that you wish to buy something, or you actually are buying
something is also useful. It's like disclosing your poker hand to all the people
sitting around the table.
Most big brokerage firms now include a bank, an investment bank and a brokerage
firm. The potential for conflict of interest exists in virtually every transaction
they do with you as a client. Here's a story from today's Wall Street Journal,
which highlights conflict of interest.
UBS In Auction Complaint
New Hampshire securities regulators accused a division of UBS AG of urging
a nonprofit student lender to continue issuing auction-rate securities even
though the Swiss bank knew the market for them was on the verge of collapse.
bonds are a kind of long-term debt used by many student lenders to raise money
for loans. Since the collapse of the auction-rate market in February, a number
of lenders, including the New Hampshire Higher Education Loan Corp., have
had to suspend many college loans.
In an administrative
complaint that was filed Thursday with the state Bureau of Securities Regulation,
New Hampshire regulators alleged that as UBS saw investor demand for auction-rate
securities drying up last fall, it sought to unload its own inventory and
developed a fraudulent scheme to reduce its own position. The Swiss bank denies
To entice more
investors, New Hampshire regulators and student-loan officials said UBS advised
the lender to temporarily increase the monthly interest it pays -- in some
cases to nearly 18% from about 3.4%.
The New Hampshire
loan corporation estimates it paid an extra $25.5 million in interest, contributing
to a liquidity crisis that has forced the nonprofit to suspend loans for 6,500
students. "We thought UBS was looking out for our own interest,"
said Stephen Weyl, the attorney for the loan corporation. "It's our understanding
that UBS in fact had a separate agenda, undisclosed to us, of reducing its
In a statement,
UBS said "we will vigorously defend ourselves against this complaint
as we believe we worked in the best interests of our investor and issuer clients."
highlights another alleged victim of the auction-rate crisis: issuers of the
securities. Last week, following complaints by state and federal regulators
over their auction-rate-securities sales practices, UBS, Citigroup Inc. and
Merrill Lynch & Co. agreed to buy back a combined $36 billion in the investments.
But those buybacks
offer relief to institutional and investor clients, not issuers such as student
lenders, who pay the investment banks millions in annual fees for broker-dealer
services and guidance on how to structure and market debt offerings.
attempts to link a single client interaction with overall market conditions
which affected all student loan issuers," UBS said.
While not part
of the New Hampshire complaint, student-loan officials in Vermont and Illinois
said in interviews Thursday that UBS had also persuaded them to raise interest
rates temporarily as a way to bring in more buyers. Vermont and Illinois regulators
haven't filed any related complaints.
The New Hampshire
student lender said it still is paying UBS $2.5 million a year in broker fees.
The Vermont lender said it is paying $3 million annually for investment-banking
fees related to auction-rate securities. "It's hard to overstate our
unhappiness with this," said Mike Stuart, chief financial officer at
the Vermont Student Assistance Corp.
Mr. Stuart said
other investment banks, including Citigroup, also encouraged his agency to
raise interest rates. "They were all trying to increase demand,"
he said. "It made sense to us at the time."
directly address that claim but said in a statement it has "worked diligently
with issuers, investors, and regulatory authority authorities to obtain liquidity
for holders of illiquid ARS."
securities are designed to have short-term features. Their interest rates
reset at weekly or monthly auctions run by financial firms.
depend, however, on there being enough buyers bidding on the products. During
the fallout from the credit crunch, these buyers dwindled. When the $330 billion
market for auction-rate securities failed in February, customers couldn't
sell the investments, which plunged in value.
began to falter, UBS's own inventory of auction-rate securities began to pile
up, according to New Hampshire's complaint. "Clearly, student loans are
the problem pushing us over inventory limits," Ross Jackman, a UBS official
wrote to colleagues Sept. 5 in an email the complaint included.
fraudulent dangerous emails: This one came with an attachment.
Thank you for using our new service "Buy flight ticket Online" on
Your account has been created:
XXXX@XXXX.com. Your password: passJ6RA
card has been charged for $484.96.
We would like to remind you that whenever you order tickets on our website
you get a discount of 10%!
Attached to this message is the purchase Invoice and the airplane ticket.
To use your ticket, simply print it on a color printed, and you are set to
take off for the journey!
I bet that had
I opened the attachment, I would now be suffering from a whopping big, destructive
is a better Weather.com. For checking weather,
my family likes Wunderground
happened to The Customer is Right? The perfect
investment is your own business. You manage it. You control it. You fix it.
You determine how you treat your customer. Item: I called LLBean to order some
gear for tonight's trip. They couldn't (and wouldn't) ship it FedEx overnight,
no matter how much I begged and how many supervisors I spoke with.
measureable ads versus measureable ads. The reason Google is booming
and newspapers aren't is that Google's ads are measurable. Newspaper ads aren't.
really like Stickies. Once i used millions of paper
Post-It stickies. Now I use electronic ones. This is how my new 22 inch screen
looks. On the left Bloomberg. On the right Stickies. I have them sorted into
"To Do," "To Belgium," "Phone messages." "Shares
to buy or short -- maybe." I can add more. I can kill old ones. I can have
them always on my screen or have them disappear. You can pick up your own copy
for free (I kid you not) at Zhorn
to Belgium for a week with my son biking. My
next column will be next Friday. Belgium is pretty small. But it's also pretty
flat. That's good for alta kaka bike riders (like me).
I love looking
at maps. Can you name the six countries which Yugoslavia got broken up into?
They are Slovenia, Serbia, Croatia, Bosnia and Herzegovina, Montenegro and Macedonia
and soon (I'm guessing) Kosovo will be the seventh. Yugoslavia no longer exists.
Czechoslavkia also got broken up into two -- the Czech Republic and Slovakia.
And soon Belgium, tiny that it is, will be broken into two.
Did you hear about the Jewish mother?
Once, when she was on jury service, they sent her home. She kept insisting that
SHE was guilty.
-- Part 1
Abe is starting in business in Golders Green. He opens a lemonade stand. He
puts up a sign which says, ALL YOU CAN DRINK FOR one dollar.
Its a hot day and almost immediately some children arrive and pay him
boy quickly drinks the lemonade hes given, goes over to Abe with the empty
cup and says, "could you please refill my cup?"
Abe replies, "OK, but that will be another dollar."
"How come?" says the boy, "the sign says All you can drink
for a dollar."
"Nu?" says Abe, "you had a glass of lemonade, didn't you?"
"Well," says Abe, "that's all you can drink for a dollar."
-- Part 2
Joe: "Susan, will you please close the window. It's cold outside."
I close the window, will it get warm outside?"
about structured investments? So was the Fuhrer. Check this You Tube
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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