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Harry Newton's In Search of The Perfect Investment Technology Investor. Auction Rate Securities. Auction Rate Preferreds.

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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.

Several 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 months.

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:

“I see 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…..There 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….[at the end of a bull market or bear market] there’s typically no logic to it; irrationality reigns supreme, and no class can teach you what to do during that brief, volatile, reign.”

Spread 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.

When 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 Times:

Tempest for a Bank That Bet on Risky Loans

CORAL GABLES, 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, Florida’s biggest regional bank.

By aggressively peddling a popular type of high-interest loan to risky borrowers, the bank tripled its profits in 2006 as real estate on Florida’s 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 bank’s shriveled value on the stock market. ...

In many ways, Bank United symbolizes the excesses exhibited by the nation’s 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 bank’s share price has plunged 93 percent, twice as much as the Standard & Poor’s 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 bank’s controlling shareholder, testily defended the bank’s strategy. “We did it for over 10 years,” he said, referring to the bank’s use of a risky but highly attractive product known as an option adjustable-rate mortgage.

“For a 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 bank’s practices have eroded the strength of the bank’s assets, despite a recent revision by one brokerage firm of its shares to underperform.

Around 2003, 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)

The strategy proved lucrative: Bank United’s 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 bank’s 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, Florida’s 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. ...

Indeed, the bank kept expanding. By the end of March, 48 percent of its $9.8 billion residential loan portfolio was outside Florida.

“By opening 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 bank’s board also appears not to have fully understood the risks the company was taking. Mr. Camner’s 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.

“Outrageous 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 can’t say no to outrageous pay requests can’t 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 disclosed.

It was apparently not the first time the bank had reacted strongly to questions it felt were critical.

When John Pandtle, then an analyst for the financial services company Raymond James, rated Bank United’s 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 bank’s 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.

Mr. Camner’s 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.

Meanwhile, Mr. 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.”

Today, Bank 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.

“There 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.

Good 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

1. For all Citigroup's suffering customers who got sold the toxic paper, and

2. 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.

On 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.

For more, Citigroup Is Expected to Buy Back Securities. For more, see

The lesson from the ARPS mess: Reader Joseph Svetics writes about the Citigroup ARPS mess:

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.

Regular gas works. It won't harm your car. For more, Premium Required? Not Necessarily.

Montana Rancher
A 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.

"No sir, he ain't," the boy replied. "He went into town."

"Well," asked the rancher, "is yer Mom here?"

"No, sir, she ain't here neither. She went into town with Dad."

"How about your brother, Howard? Is he here?"

"He went with Mom and Dad."

The rancher stood there for a few minutes, shifting from one foot to the other and mumbling to himself.

"Is there 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 fer Dad."

"Well," 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 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.

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