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8:30 AM EST, Tuesday, July 31, 2007: The credit markets are in turmoil. What this means is that deals aren't being done because borrowed money is not readily available. An example: Two months ago, a developer friend went to borrow money. He got seven bids. This week he went out again on virtually an identical deal. He got one bid. The interest were much higher. The financing was at 80% loan to value. The previous loan had been at 90%. He felt he was lucky to get even one bid. One side note: The terms on this new loan were "good for two hours."

Here's the basic problem. Think back to my father's day. When he needed to borrow money to build a shopping center, he went to his friendly bank manager. (There actually was such a thing. My job as a youngster learning the business was to hand-deliver the bank manager's annual Christmas present, a bottle of Scotch whiskey.) The bank loaned father the money and every month father paid the bank some interest and some principal -- just like a normal house mortgage. The same bank loaned. The same bank through all the years.

These days, loans come from entities like investment bankers. These folks lend the money. Then they take a bunch of similar loans they've just made, bundle them up into packages (called collaterialized debt obligations, or CDOs) and sell the packages to institutions, hopefully at a profit. The bundling and sale takes time -- perhaps a month or so. If, within this period, interest rates or expectations (of what is a good deal) change, the seller of the CDO, instead of making 50 basis points on $100 million ($5 million) might now lose 100 basis points ($10 million). Multiply this by billions and you're talking real money.

With this prospect of losses facing them, bankers step back, sit on their hands and wait. This throws deals -- from leveraged buyouts to real estate development -- into disarray. Some deals won't get done. Some will cost the potential borrower a fortune in cancellation fees, lost deposits, etc. Think throwing a spanner into a bicycle wheel.

Here's a chart of long-term prices (and hence yields) in the past few days. It is very unusual to see this sort of movement -- also called volatility. (You've heard that word in the equity market in recent days also.)

Add all this volatility to the problems of sub-prime housing loans. I wrote about them yesterday. But now imagine you're an owner of CDOs. And you start worrying. What else "sub-prime" do I own that might be having difficulties? What about sub-prime (i.e. junk) bonds to corporations? So now you step back and examine where you stand. Maybe everything (or a lot of what you own) is junk? You get jaundiced. Maybe you won't buy any more CDOs? Maybe you'll spend your time chasing bum loans, and on it goes.

And then there are the hedge funds which borrowed money to buy stocks. A lot of them are now sucking wind (especially after last week's huge drop). And lenders are chasing them for the monies they owe (they violated their borrowing provisions) -- forcing them to sell their holdings, thus potentially creating more volatility in markets. Here's one. This story is from today's Wall Street Journal:

Sowood Capital Management told its investors that the hedge-fund firm suffered dramatic losses of more than 50% this month and that it will wind down its two funds -- becoming the most high-profile player to be cut down by the troubles roiling many parts of the bond market.

The losses dropped the Boston hedge-fund firm's assets to about $1.5 billion from what had been $3 billion, the firm told investors in a letter. Sowood, which was started by Jeffrey Larson, who helped pick investments for Harvard Management Co. before launching his own hedge-fund firm, said it will distribute its remaining cash to investors, closing down the hedge-fund firm.

Sowood was rocked by losses on various bond-related positions. Even though the firm's investors weren't able to withdraw money before the end of next year, Sowood moved to get as much as possible from its investments after seeing what it called "severe declines in the value of our credit positions and nonperformance of offsetting hedges."

The sudden troubles are a sign of how precarious the markets remain, despite a rally yesterday, and of how many hedge funds continue to deal with losses.

Earlier yesterday, Citadel Investment Group, the huge Chicago hedge-fund firm, agreed to buy certain bond and other positions of Sowood.

The Citadel transaction, likely worth hundreds of millions of dollars, is a sign that for all the recent troubles in the markets, and losses at a number of big investors, there remains ample money on the sidelines waiting to step in to buy cheap assets. That is potentially bullish for the markets.

Sowood said it was a "painful and difficult decision" to sell substantially all of the funds' investment portfolio to Citadel. "Given what we were facing and our uncertain ability to meet margin calls, we sought other buyers for some or all of the positions," the firm said.

Here's the letter Sowood sent its investors telling them of their misfortune: Sowood.pdf.

How long will the turmoil credit markets go on? Depends on what everyone turns up. Three weeks? Five years? Both scenarios are possible. No one is predicting. I'm guessing more volatility in markets. This is not a good time to be a borrower. Didn't Shakespeare say something about not being a lender or a borrower?

A gene here, a gene there: Science works genuine miracles. Awaiting FDA approval (investors) are bunch of major improvements in the food we could be eating -- fast-growing salmon, infection-resistant cows, anti-bacterial goat milk, Omega-3 enriched pigs and cleaner manure pigs. This picture from yesterday's New York Times blew me away:

Even though these Atlantic salmon are roughly the same age, the big one was genetically engineered to grow at twice the rate of normal salmon.

The fast-growing salmon is the transgenic animal that has been swimming upstream the longest at the F.D.A. Its developer, Aqua Bounty Technologies of Waltham, Mass., has been working to win agency approval for about 10 years. Aqua Bounty’s fish are Atlantic salmon that have been given a growth-hormone gene from the Chinook salmon. They have also been equipped with a genetic on-switch from a fish called the ocean pout, a distant cousin of the salmon.

Normally, salmon produce growth hormone only in warmer months, but the pout gene’s on-switch keeps the hormone flowing year round. That enables the Aqua Bounty fish to grow faster, reaching their market weight in about 18 months instead of 30.

Elliot Entis, Aqua Bounty’s chief executive, said the company had already given the F.D.A. studies showing that the fish were healthy and that the implanted gene remained stable over generations.

He said the company also had tests done to show that its fish contained the same level of fats, proteins and other nutrients as other farmed salmon and would not set off unexpected allergic reactions in people who eat them. The fish also taste the same as other farmed Atlantic salmon, Mr. Entis said.

“Nobody has ever analyzed salmon as closely as we have had done,” he said. But the F.D.A. is asking for more data on safety and potential environmental effects on wild salmon.

Mike replies, "God and I are tight. He knows I have poor eyesight, so he's fixed it so when I get up in the middle of the night to go to the bathroom, POOF! the light goes on. When I'm done, POOF! the light goes off."

"WOW, that's incredible," the doctor says.

A little later in the day, the doctor calls Mike's wife. "Martha," he says, "Mike is doing fine! But, I had to call you as I am in awe of his relationship with God. Is it true that when he gets up during the night, POOF! the light goes on in the bathroom and when he's done POOF! the light goes off?"

"Oh, damn," Martha exclaims, "He's peeing in the refrigerator again!"

What awaits us -- part 2
An older gentleman was on the operating table awaiting surgery and he insisted that his son, a renowned surgeon, perform the operation.

As he was about to be given the anesthesia he asked to speak to his son.

"Yes, Dad, what is it?"

"Don't be nervous, son; do your best and just remember, if it doesn't go well, if something happens to me, your mother is going to come and live with you and your wife..."

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. Thus I cannot endorse any, though some look mighty 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 Claire's law school tuition. Read more about Google AdSense, click here and here.
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