Previous Columns
8:30 AM EST Tuesday, August 5, 2008: Finally a happy story. From today's Bloomberg:

Hudson City's Hermance Says Credit Crunch Isn't Worst He's Seen

Aug. 5 (Bloomberg) -- Hudson City Bancorp Inc. Chief Executive Officer Ron Hermance, who built the company into the largest U.S. savings and loan amid a worldwide credit crunch, said the current crisis isn't the worst he's seen.

The subprime-induced slowdown has been amplified by 24-hour media coverage and the reach of the Internet, Hermance said in an interview. Delinquencies aren't "anywhere near'' the level that fueled the savings and loan collapse of the early 1990s, he said.

Back then, "Wall Street had real problems, and confidence was one of them,'' Hermance said yesterday. "If you weren't unemployed, you knew somebody that was.''

Hermance, 61, has more than quadrupled the stock price at Paramus, New Jersey-based Hudson City since taking over as CEO in 2002. Earlier this year, Hudson City surpassed Washington Mutual Inc. as the nation's biggest S&L by market value. It boosted profit as the world's largest financial institutions reported more than $480 billion of writedowns and credit losses tied to subprime mortgages.

Hudson City declined 51 cents, or 2.8 percent, to $17.83 yesterday on the Nasdaq Stock Market. It rose 19 percent this year.

Hermance said subprime lending "never appealed'' to Hudson City. As other banks were buying out-of-market home-equity, car and construction loans, Hudson City built branches in areas ignored by rivals, he said.

"I kept thinking, indirect auto, indirect construction -- not on my worst day would I have that idea,'' Hermance said. "Focus on your strength. Don't go out and try to broaden your base so much you get outside your competency level.''

Net income has climbed every year since Hudson City's initial public offering in 1999. The 140-year-old lender, which has never made a subprime loan, posted second-quarter earnings last month that soared 52 percent, beating analyst estimates.

Hermance began his 34-year career in banking as a branch manager, working his way up to running originations at the now-defunct Home Federal Savings and Loan in East Rochester, New York. When he was writing loans, borrowers understood that they needed good credit, not just a down payment, Hermance said.

Hudson City "might have a better handle of their own loan book than many of their competitors,'' said Carlton Neel of Phoenix/Zweig Advisors LLC, which manages just over $1 billion, including Hudson City shares.

"We were looking for areas we could go that might be more immune to some of the things that we still saw as problematic in terms of the mortgage crisis and subprime,'' Neel said. "Hudson City kind of piqued our interest.'' ...

Hermance says he'd like Hudson City to expand in New York and Connecticut and spread into Washington, D.C. and Boston. For now, the company operates 123 branches in the New York City region, and is enjoying a period of growth as rival lenders must retrench.

"Even in a shrinking market we're getting a bigger piece,'' Hermance said.

Merrill Bites the Bullet. This mindblower comes from August 11 BusinessWeek.

CDOs for sale. Real cheap. That sums up the strategy behind Merrill Lynch's decision on July 28 to offload the bulk of its collateralized debt obligations to vulture investor Lone Star Funds. Lone Star is paying $6.7 billion for CDOs that were once valued at $30 billion. The bargain-bin sale will prompt Merrill, which already has absorbed upwards of $40 billion in losses on rotting mortgage-related securities, to record another hefty writedown. Lone Star, which is putting up a mere $1.68 billion in cash, takes on little risk in the transaction because Merrill is loaning it the rest....

This means Merrill Lynch is "lending" Lone State $5 billion to take $30 billion of "assets" off its hands. Boy, those CDOs must be bigtime worthless.

Merrill's boss John Thain said yesterday he's selling billions of dollars of toxic mortgage investments for pennies on the dollar because he needed to shore up morale among its 60,000 employees, and presumably its stock, which I personally think remains a good short. Merrill is also being sued by Massachusetts for fraud because of what it did with auction rate securities.

Personally I've never quite figured out what a collateralized debt obligation actually is. I have a simple philosophy: Don't invest in things you don't understand. Don't eat things you can't pronounce. So what are CDOs? From Wikipedia -- don't read all this stuff. Just skim it. Get a feeling for the mind-boggling complexity of CDOs:

Collateralized debt obligations (CDOs) are a type of asset-backed security and structured credit product. CDOs are constructed from a portfolio of fixed-income assets. These assets are divided into different tranches: senior tranches (rated AAA), mezzanine tranches (AA to BB), and equity tranches (unrated). Losses are applied in reverse order of seniority and so junior tranches offer higher coupons (interest rates) to compensate for the added default risk. CDOs serve as an important funding vehicle for fixed-income assets.

Some news and media commentary blame the financial woes of the 2007 credit crunch on the complexity of CDO products, and the failure of risk and recovery models used by credit rating agencies to value these products. Some institutions buying CDOs lacked the competency to monitor credit performance and/or estimate expected cash flows. As many CDO products are held on a mark to market basis, the paralysis in the credit markets and the collapse of liquidity in these products led to substantial write-downs in 2007. Major loss of confidence occurred in the validity of process used by ratings agencies to assign credit ratings to CDO tranches and persists into 2008.

The first CDO was issued in 1987 by bankers at now-defunct Drexel Burnham Lambert Inc. for Imperial Savings Association. A decade later, CDOs emerged as the fastest growing sector of the asset-backed synthetic securities market. This growth may reflect the increasing appeal of CDOs for a growing number of asset managers and investors, which now include insurance companies, mutual fund companies, unit trusts, investment trusts, commercial banks, investment banks, pension fund managers, private banking organizations, other CDOs and structured investment vehicles. It may also reflect the greater profit margins that CDOs provide to their manufacturers.

A major factor in the growth of CDOs was the 2001 introduction by David X. Li of Gaussian copula models, which allowed for the rapid pricing of CDOs.

According to the Securities Industry and Financial Markets Association, aggregate global CDO issuance totaled US$ 157 billion in 2004, US$ 272 billion in 2005, US$ 552 billion in 2006 and US$ 503 billion in 2007.[2] Research firm Celent estimates the size of the CDO global market to close to $2 trillion by the end of 2006.

CDOs vary in structure and underlying assets, but the basic principle is the same. Essentially a CDO is a corporate entity constructed to hold assets as collateral and to sell packages of cash flows to investors. ...

Wikipedia's definition of CDOs goes on and on. It's worth glancing over.

The bigger the screen: eCost.com is selling a 1680 x 1050 22 inch Samsung monitor for $199. This is the largest monitor I can run as a second monitor on my various laptops. I paid $260 for a similar Samsung a couple of weeks ago. This one is a bargain. I'll use one in the city and one in the country. My desk layout in both places will now look like this. Note the big Samsung in the middle.

Variations on the China Diet (yesterday): From reader Barry Merchant:

I still like Jack LaLanne’s approach for its simplicity and practicality. LaLanne, now almost 94 years of age said: Don’t over eat. Eat fresh fruits and vegetables and a little meat, poultry or fish. Stay away from anything that comes in a box or a bag. If you look at the ingredients listed on the label and you can’t pronounce them – don’t eat them. It makes things simple. I like simple.

If you crave butter, try this stuff. It's mostly plant. It's much better for you than butter.

Regular sex
Hymie and Sadie, an elderly couple, go for their annual medical. Hymie goes in first and after examining him, doctor Cohen says, "You appear to be in good health, Hymie Do you have any medical concerns you would like to discuss?"

"Yes I do," says Hymie"After I have sex with mine Sadie, I’m usually hot and sweaty and then, after I have sex with her the second time, I’m usually cold and chilly."

"That’s odd," says doctor Cohen, "I’ll ask Sadie about it when I check her out."

Soon it was Sadie’s turn. After examining her, doctor Cohen says, "Everything appears to be fine, Sadie. Do you have any medical concerns that you would like to discuss with me?"

"No doctor," she replies.

Doctor Cohen then says, "Hymie has an unusual problem. He claims that he is usually hot and sweaty after having sex with you the first time and then cold and chilly after the second time. Can you think of why this might be?"

"Oh that stupid shmuck of a husband of mine," Sadie replies, "it's because we have sex only twice a year - once in the summer and once in the winter."

Mother in Law:
Maurice and Hettie are out shopping one morning when Hettie says, "Darling, it’s my mother's birthday tomorrow. What shall we buy for her? She said she would like something electric."

Maurice replies, "How about a chair?"

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, click here and here.
Go back.