Harry Newton's In Search of The Perfect Investment
Technology Investor. Auction Rate Securities. Auction Rate Preferreds.
9:00 AM EST, Thursday August 7, 2008: You'd
think by now the world would be bursting with super attractive "distress"
real estate. Wrong! The "distress" is serious distress -- typically
raw land and construction loans that require gigantic amounts of capital to
keep afloat, that can't be borrowed against and then to wait out the sunny day.
My distress real estate fund specializes in income-producing properties and
it's done well by buying income producing properties secured by first mortgages.
But it's hard work and the returns -- 8.7% IRR -- aren't spectacular by measures
of three years ago. But they are solid returns -- unlike virtually all the hedge
funds which lost money in the first half of this year.
people have commented that 400 point gains on the Dow only happen during
bear markets. In short, don't be fooled. This chart shows them in the past several
Paul Tudor Jones
runs one of the largest and oldest hedge funds. His comments in the June 2008
of Alpha Magazine are resonating with many people in that business:
the younger generation of [hedge fund managers] hampered by the need to understand
and rationalize why something should go up or down. Usually, by the time that
becomes self-evident, the move is already over. When I got into the business,
there was so little information on fundamentals, and what little information
one could get was largely imperfect. We learned to go with the chart. Why
work when Mr. Market can do it for you? These days there are many more deep
intellectuals in the business, and that, coupled with the explosion of information
on the Internet, creates the illusion that there is an explanation for everything
are young men and women, graduating from college who have a tremendous work
ethic, but they get lost trying to understand a whole variety of market moves
the end of a bull market or bear market] theres typically no logic to
it; irrationality reigns supreme, and no class can teach you what to do during
that brief, volatile, reign.
your money around banks. Eight banks have gone kaput this year. Depositors'
money was lost. More banks will go before this is all over. There is no way
to predict which ones will go next -- despite the FDIC's "Watch List."
The only solution is to put $95,000 into multiple banks.
I have been inundated
by emails explaining convoluted schemes to get up to $700,000 FDIC insured in
one bank. Don't believe these schemes. Like much of what floats around
on the Internet, they're simply wrong. Worse, bank personnel are ignorant of
FDIC rules. True story: A dear friend opened multiple accounts at a local Chase
branch. The staff gave him advice on how to get the insurance on each account.
Later, he did research on the FDIC's web site. He discovered Chase's advice
was flat out wrong.
Just do the simple
thing: Open one account of no more than $95,000 in each FDIC-insured bank. Check
that your bank is FDIC-insured at the FDIC's web site -- Bank
Find. Check you spell your bank's name correctly.
End of story.
Don't get cute. Don't get lazy.
I was growing up, I thought banks were, well, banks. I thought they
were all solid. It was hard to get a loan. You got the third degree before they
loaned you money. No more. Read this piece on Bank United from today's New York
a Bank That Bet on Risky Loans
Fla. A cheerful sign outside the glistening offices of Bank United
beckons consumers to tap into Mortgage-ade. Another promises a
59 Minute Mortgage.
But easy money,
it turns out, has created enormous problems at Bank United, Floridas
biggest regional bank.
peddling a popular type of high-interest loan to risky borrowers, the bank
tripled its profits in 2006 as real estate on Floridas Gold Coast peaked,
only to lose nearly $100 million in late 2007 and early 2008 as the market
cratered. Now, its chief executive, Alfred R. Camner, is scrambling to raise
$400 million in capital, an amount nearly eight times the banks shriveled
value on the stock market. ...
In many ways,
Bank United symbolizes the excesses exhibited by the nations banks as
home prices soared in recent years and the pain that is afflicting
them now that home prices are falling. Florida has been hit especially hard
by the housing slump, and so has Bank United.
Since last September,
the banks share price has plunged 93 percent, twice as much as the Standard
& Poors 500 Regional Banks index. A year ago, the stock was $15.49
a share but closed on Wednesday at $1.50 a share, after gaining 19 cents.
In an interview,
Mr. Camner, who is also the banks controlling shareholder, testily defended
the banks strategy. We did it for over 10 years, he said,
referring to the banks use of a risky but highly attractive product
known as an option adjustable-rate mortgage.
very long time, it was an excellent performing package he said. It
gave the borrower a chance to manage his money. If they qualified, it was
an excellent loan.
He also dismissed
as completely absurd and idiotic concerns that the
banks practices have eroded the strength of the banks assets,
despite a recent revision by one brokerage firm of its shares to underperform.
as the Florida housing market took off, the bank, led by Mr. Camner and Ramiro
Ortiz, its president, began promoting option adjustable-rate mortgages. Such
loans enable borrowers to defer payments on interest as well as principal.
Many banks found a bonanza in these loans, whose full interest expense
can be counted as interest income by the bank whether or not the bank actually
receives the money, making the loans all but irresistible to promote. (I
don't make this stuff up. -- Harry)
proved lucrative: Bank Uniteds assets more than doubled to $15 billion
from $7.1 billion in 2003, while its total loans rose to $12.5 billion from
$3.9 billion. By last October, the end of the banks fiscal year, Mr.
Camner had allowed option adjustable-rate mortgages to dwarf overall mortgages
three to one.
When the national
housing market began to slide, Floridas imploded. And while the broader
banking industry struggled with mounting bad loans, falling home values and
a weak economy, Bank United found itself on a particularly slippery slope
as its newfound base of risky regional borrowers eroded. From mid-2006 to
early 2008, the percentage of its assets designated as nonperforming soared
more than fivefold to 4.75 percent. ...
bank kept expanding. By the end of March, 48 percent of its $9.8 billion residential
loan portfolio was outside Florida.
up offices across the country, Mr. Ortiz said in an interview, we
were diversifying risk. But, he added, we never anticipated a
national downturn. ...
For the Corporate
Library, an independent governance group based in Portland, Me., that is tracking
the bank, the banks board also appears not to have fully understood
the risks the company was taking. Mr. Camners compensation, which ballooned
to $5.64 million, including a salary of $475,000, had grown way
out of whack compared with other institutions its size, the group said.
compensation often signals a failure of oversight and backbone, so it often
correlates to poor performance for shareholders in other categories,
said Nell Minow, the editor of the Corporate Library. A board that
cant say no to outrageous pay requests cant say no to poor strategy.
In the interview,
Mr. Camner repeatedly bristled at the criticisms and grew angry when a reporter
asked questions about his compensation package, saying everything was fully
It was apparently
not the first time the bank had reacted strongly to questions it felt were
When John Pandtle,
then an analyst for the financial services company Raymond James, rated Bank
Uniteds stock as underperform in February, the bank declined to allow
Raymond James to participate in a meeting with investors and analysts.
In a note, Mr.
Pandtle told clients the banks executive management had repeatedly refused
to take phone calls and e-mails seeking information about several areas
where we have fundamental concerns, including rapidly deteriorating asset
quality. Mr. Pandtle declined to comment for this article.
family ties have also been questioned by the Corporate Library. One daughter,
Danielle, was previously at the bank but has left. Another daughter, Lauren,
is a senior vice president and still serves on the board.
Camner remains senior managing partner of Camner Lipsitz and Poller, a law
firm that reaped $12 million in fees from the bank over the last three years,
and where a third daughter, Errin, is the managing director.
Both Ms. Minow
and Mr. Rainwater wondered whether these relationships were in the interest
of shareholders. If you bid the business out to other law firms,
said Mr. Rainwater, perhaps you could save some money for shareholders.
United is sufficiently eager to raise money that Mr. Camner has agreed to
give up the supervoting shares that have given him control of the bank he
founded 24 years ago, if the bank is able to raise $400 million from investors.
is a reality, he said. We need to conform to corporate governance,
meaning that almost every company has one class of stock; there is only so
long that you can have two classes.
Still, he defended
his income and other benefits, saying that everything the company has done
was fully disclosed. There is an independent committee that passes on
everything, he said.
News from Citigroup. There is talk Citigroup will be forced by regulators
to redeem at par all the ARPS it sold -- between $5 billion and $8 billion of
them and pay a $100 million fine. This is great news
For all Citigroup's suffering customers who got sold the toxic paper, and
For all of us other sufferers. One has to assume that Citigroup will now apply
huge pressure on the issuers for them to redeem the paper which Citigroup will
now own and clearly doesn't want to keep.
August 1, Cuomo's office threatened to charge Citigroup with fraudulently marketing
and selling auction-rate securities and destroying documents that had been
subpoenaed. (Can you believe this? Our biggest bank would do this?
-- Harry Newton)
The office accused
Citigroup of wrongly telling customers that auction-rate debt was safe, liquid
and the equivalent of cash.
Is Expected to Buy Back Securities. For more, see auctionratepreferreds.org.
from the ARPS mess: Reader Joseph Svetics writes about the Citigroup ARPS
It won't harm your car. For more, Premium
Required? Not Necessarily.
This is an
ugly situation that the banks and brokerages would just look the other way
on, until their hand is forced. What about all of the money they are still
making on failed auctions? Is that right? There is no bidding, why are they
still making money on all of the money locked in the ARS? What incentive do
they have to fix the situation. I will never buy a structured product from
any Wall Street brokerage, nor will I sell them to my clients.
Montana rancher got in his pickup and drove to a neighboring ranch and knocked
at the door. A young boy, about 9, opened the door.
"Is yer Dad
home?" the rancher asked.
he ain't," the boy replied. "He went into town."
asked the rancher, "is yer Mom here?"
she ain't here neither. She went into town with Dad."
your brother, Howard? Is he here?"
with Mom and Dad."
The rancher stood
there for a few minutes, shifting from one foot to the other and mumbling to
any thing I can do fer ya?" the boy asked politely. "I knows where
all the tools are, if you want to borry one. Or maybe I could take a message
said the rancher uncomfortably, "I really wanted to talk to yer Dad. It's
about your brother Howard getting my daughter, Pearly Mae, pregnant."
The boy considered
for a moment. "You would have to talk to Pa about that" he finally
conceded. "If it helps you any, I know that Pa charges $500 for the bull
and $50 for the hog, but, I really don't know how much he gets fer Howard.
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
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