Previous Columns
9:00 AM EST, Friday, December 12, 2008: Skip treasuries, buy CDs. Treasuries are paying zilch. But FDIC-insured CDs are paying 4%. Instead of schlepping from one bank to another, there's a better way to buy CDs -- online with ETrade Financial.

The Senate rejected the auto bailout. Wall Street won't like that today. Overseas, the signs today are awful: The MSCI Emerging Markets Index lost 3.4%, extending its 2008 drop to 56%. China’s CSI 300 Index sank 4.2% after a government official said growth will slow more sharply next quarter. Says Bloomberg, bank stocks led today’s drop in the European benchmark, losing 7.4%.

Bloomberg reports that the S&P 500 P/E is 18.9. As I wrote yesterday, that's much too high to make stocks a bargain yet. For that to happen, we need to see single digits. We have a ways down to go.

Watch out for the financials' fourth quarter. My Elite black car limo driver yesterday told me his business is down 50%. His clients? J.P.Morgan, Nomura and Morgan Stanley. I flagged him on the street and he gave me a cheap ride (for cash). Writes my friend Mike O'Rourke, BTIG's chief market strategist:

Shhhh … we have a secret … the Financials are going to post bad 4th quarter earnings, it’s something about one of the worst financial markets since 1929. Well, at least the confidence in the market today was undermined by the executives of the Financial firms themselves and not garbage rumors. It started with U.S. Bancorp’s CEO Richard Davis expounding that, “The TARP money will not save anyone from an earnings problem.” The broad market was able to handle that but the Financials came under pressure. Later in the day, BlackRock’s CEO Larry Fink added that 4th Quarter earnings were going to be “shockingly bad.” The nail in the coffin was JPMorgan CEO Jamie Dimon’s CNBC interview in which he described December as “pretty terrible.” All three of these gentleman have had the distinction of being recognized by the markets as having done a superior job in steering their companies through the turbulent environment of the past year. Such stature and confidence affords them the luxury of speaking candidly to the markets, although their shares paid the price with declines in excess of 10% across the board. If the Financials are going to come under pressure and take the broad market down with them, it better be based on factual statements of executives rather than rumors and speculation. Of course, we find it difficult to believe that anyone can be surprised that Q4 earnings will be a bust, not just for the Financial firms but for all companies. ...

Lastly, just like in other bear markets, someone of prominence has been caught very naked with the tide out. It will be hard to gauge the market’s reaction until details are released. History repeats itself, on March 10, 1938 Dick Whitney was indicted for fraud. Whitney was the former President of the NYSE, and the hero of the Crash of 1929. As the broker for the JP Morgan Bank he started the buying for the banks to help stabilize the market in the midst of the crash. He had bilked his firm, friends, relatives, wife and charities of millions to support his lavish lifestyle.

O'Rourke is referring to yesterday's amazing Madoff arrest:

Dec. 12 (Bloomberg) -- Bernard Madoff (former Nasdaq chairman) confessed to employees this week that his investment advisory business was "a giant Ponzi scheme” that cost clients $50 billion before two FBI agents showed up yesterday morning at his Manhattan apartment.

"We’re here to find out if there’s an innocent explanation,” Agent Theodore Cacioppi told Madoff, who founded Bernard L. Madoff Investment Securities LLC and was the former head of the Securities Industry Association’s trading committee.

"There is no innocent explanation,” Madoff, 70, told the agents, saying he traded and lost money for institutional clients. He said he "paid investors with money that wasn’t there” and expected to go to jail. With that, agents arrested Madoff, according to an FBI complaint.

How commercial real estate value gets wiped out. When you buy an office building, you typically borrow money. Borrowing money juices up returns. If a building earns 10% raw -- i.e. with no borrowings. It can earn as much as 22% if you borrow 85% of the building's price and pay 6% interest on the loan.

Fast forward to today. Things have changed. Let's take a performing building -- lots of tenants paying their rents and the rents being sufficient to pay all the expenses and the loans. (There may be more than one loan to get to 85% or 90%). Here's what can happen:

One or all of the loans become due. You have to refinance. Today you won't get 85%. You may get 65%. But you need to repay the bank its 85%. Where do you get the money for the 20%? Out of your own pocket? Out of your investors' pockets? Or do you simply hand the building back to the bank? In which case you've lost your entire investment. You could theoretically sell the building. But for what? The value of the building will now have dropped, for two reasons:

1. Rents are dropping. Vacancies are rising. Subleases are proliferating, especially as the financials keep firing. Standard recession stuff.

2. If a buyer can only borrow 65%, then his return is lower. If his return is lower, then the building is worth less to him. He will offer to buy the building for less. Moreover, there are now fewer buyers because there are simply fewer buyers who can invest 35% in a building.

My real estate friends say new construction of commercial real estate has ground to a halt, since construction loans are no longer available. A friend in the business explained to me yesterday, "You could easily have spent the last five years developing your plans, paying architects, getting permits, begging for variances, getting tax deals.. You could have spent millions. Now it's all for naught. You can't move ahead."

Dumb, dumb real estate lending: It wasn't only sub-prime. It was also super high-end. Among the highest end was the Yellowstone Club where someone once planned a $130 million+ home -- the most expensive in the nation. You can read about ownership troubles at Forbes. The latest article focuses on the idiocies of Credit Suisse. This comes from a web site called New West Development.

Portrait of a "Toxic Asset"
At the Yellowstone Club and other big resort projects around the West, Credit Suisse has offered a case study in high finance gone wrong.

By Jonathan Weber

Tamarack Resort, To Be Continued?

My friend visited Yellowstone Club said it was "even more over the top than his tastes could handle." Amongst other extravagances, in the winter they delivered room service on skis.

If you want a stark example of the kind of lending practices that created the global credit crisis, you can hardly do better than banking giant Credit Suisse’s adventures in luxury mountain resort financing. At Tamarack in Idaho, at Promontory in Utah, and at the Yellowstone Club in Montana (to name just the few that I’m most familiar with) the bank doled out hundreds of millions in loans, which were than syndicated out to investors (just like those famous sub-prime mortgages). If the Yellowstone Club situation is typical, those loans were made with minimal due-diligence or oversight, and no plan for what might happen if the real estate market hit the skids.

The Yellowstone Club owes Credit Suisse (or rather its unfortunate clients) $307 million, and I’d say there’s a better than even chance that only a fraction of that will ever get paid back. If you’d been wondering what the “toxic assets” that are of such concern to the Treasury Department and the Federal Reserve actually consist of—and why they threaten the solvency of the entire banking system—there’s one answer.

The level of recklessness in Credit Suisse’s resort lending - and sources say it did more than dozen similar resort loan deals in the U.S. and overseas - is only now becoming clear. Even if you take the most charitable view, much of Credit Suisse’s Yellowstone Club loan financed exceptionally wasteful spending by the club and its owners, as well as a dubious scheme to develop a super-luxury vacation time-share operation called the Yellowstone World Club. Any busboy in Big Sky could have told Credit Suisse that its money was being squandered.

At Tamarack in Idaho, the situation is a little less scandalous, but similarly dire. The resort is now operating under a receivership, and is probably just a bad snow season away from total insolvency. One way or another it will probably survive, but you definitely wouldn’t want to be holding a $270 million note. Promontory, in Utah, is also staying open while in Chapter 11 proceedings, but as with its brethren, the financial model (and repayment of $275 million) depends on a real estate recovery that looks distant indeed.

It’s now conventional wisdom that the financial industry’s risk-assessment methods were fatally flawed because they understated the probability of a dramatic shock to the system—like, for example, a 30 percent fall in real estate prices. And Credit Suisse was hardly alone in its follies: Lehman Bros., for example, lavished $170 million on the Yellowstone Club’s Big Sky neighbor, Moonlight Basin. (We know how the Lehman part of that ended, and the Moonlight Basin part is still to be determined). Financial institutions of all stripes, looking to meet investor demand for loan products in the easy-money days of the 2002-2006, thought they could spread the risk by slicing the loans up into investment instruments (often collateralized debt obligations, or CDOs) that in some cases could then themselves be insured against default (via credit default swaps). Nobody thought too much about what might happen if underlying asset values collapsed across the board.

Yet all it took was a commonsense look at a resort market like Big Sky, where prices tripled from 2003 to 2007, to suspect that the buying frenzy wasn’t going to last. Credit Suisse only had to analyze its own portfolio to recognize that there was an awful lot of supply of multi-million-dollar mountain homes coming online.

And even if you accept the “everyone was doing it” defense, it still seems amazing that an institution like Credit Suisse, with access to the best legal and financial minds in the world, apparently had nothing remotely resembling a Plan B for these projects. For a while I wondered what the bank’s strategy might be as the loans defaulted: Did Credit Suisse think there was long-term upside, in which case it would be looking to own and operate the properties for a while? Or was it just aiming to get whatever it could as quickly as possible, even if that meant big losses?

From watching the proceedings in the Yellowstone Club bankruptcy, I think it’s now safe to say there was no strategy at all. First, Credit Suisse stood by while the club slipped into Chapter 11 in the first place. Then, it came forward with a $4.4 million debtor-in-possession financing that would last about three weeks, with no clear indication of what it planned to do then. When “then” arrived, about 10 days ago, Credit Suisse first said it would offer a few more weeks of funding, then said it couldn’t even raise the money for that, then proposed floating things for a week so it could shut the club and sell the assets.

The bankruptcy judge, not surprisingly, decided that was a pretty dumb plan, and approved a $25 million interim financing from CrossHarbor Capital Partners. (A liquidation plan involving the shut-down of the club would almost certainly destroy much of its remaining value). In fact, the restructuring specialist that Credit Suisse installed as part of the three-week loan deal actually testified against the bank’s proposed new interim financing plan. That has to be pretty rare.

The Credit Suisse lawyer, from Skadden Arps, has certainly been dancing energetically in the courtroom; top-dollar lawyers are evidently something the bank can still afford. But its apparent lack of attention to how it might rescue a series of loans that total in the billions is baffling. A cynic would say that since Credit Suisse doesn’t actually hold most of the paper, it’s just in it for the fees anyway, and therefore the more running in circles, the better. I’m not that cynical: I think it’s just incompetence.

Favorite point and shoot camera under $300. Heh. Great minds think alike. David Pogue, New York Times technology whiz, also loves the Canon SD880 IS.

He wrote yesterday:

CANON POWERSHOT SD880 IS ($252). This camera has a 4X zoom, wide-angle lens. Customizable top button; it can be a Movie button so you don’t have to change modes for video. Huge, bright three-inch screen, but too bad there’s no optical viewfinder.

Gorgeous and solid. Controls are beautifully thought-out. New processor chip makes this camera very fast. Not many gimcracks, but wow, those photos — in any kind of light, they have a presence, detail and vibrancy that puts the other cameras to shame.

Doggone that Canon. It wins this contest every single year. C’mon, people — where’s the suspense?

I also love the Canon G10. But it's $430 and heavier. It has a bunch of features that make it more of the professional's point and shoot, including the semi-useful optical viewfinder, a flash shoe and excellent manual controls. It also has the three inch screen, a new processor chip and shares Canon's excellent software, also on the SD880. Buy it at Abe's of Maine.

The donkey and Wall Street.
Young Chuck moved to Texas and bought a donkey from a farmer for $100. The farmer agreed to deliver the donkey the next day. The next day he drove up and said, "Sorry son, but have some bad news, the donkey died". Chuck replied, "Well, then just give me my money back". The farmer said, "Can't do that, I went and spent it already".

Chuck said, "Oh, then, just bring me the dead donkey".

The farmer asked, "What ya gonna do with him?"

Chuck said, "I'm going to raffle him off." The farmer said, "You can't raffle off a dead donkey!" Chuck said, "Sure I can, just watch me. I won't tell anybody he's dead."

A month later, the farmer met up with Chuck and asked, "What happened with that dead donkey?" Chuck said, "I raffled him off. I sold 500 tickets at two dollars a piece and made a profit of almost $900."

The farmer said, "Didn't anyone complain?"

Chuck said, "Just the guy who won, so I gave him back his two dollars."

Chuck now works for Credit Suisse, Lehman Brothers, Goldman Sachs ... substitute your favorite villain.

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.