Harry Newton's In Search of The Perfect Investment
Technology Investor. Auction Rate Securities. Auction Rate Preferreds.
9:00 AM EST Wednesday, July 16, 2008 Update2: I
got a couple of free tickets to the U.S Tennis Open, a free safe deposit box
and a free checking account, but not a toaster, from opening a $95,000 account
with Chase yesterday. Them's not bad rewards given that the only thing I cared
about was getting a $100,000 of erstwhile uninsured cash to be insured. In simple
English I had more than $100,000 in one bank. And $100,000 is all that the FDIC
insures -- which it does by tax-ID number. It's true I could have opened accounts
using other tax IDs. But this way was actually easier. And I got all the goodies,
including being at a new branch, much closer to my house.
you have more than $100,000 at any one bank and don't have it in separate accounts
with different tax IDs (also called social security numbers) You need to get
your money out TODAY. There is no way of predicting IF your bank will fail.
Bank failures don't happen because of financial reasons (like lousy earnings,
big losses or toxic assets on the balance sheet), they occur because depositors
simply lose faith in the bank and demand their money back -- from one day to
the next. Rumors, not reality, bring down banks. No bank has enough cash money
to give everyone their money back. In fact, my erstwhile main bank, Sovereign
Bancorp has $2 billion in cash to meet $49 billion of deposits. They call that
24.5 to one leverage!
took the money out of Sovereign (SOV). I have no idea if I'm justified in worrying
about Sovereign, except for several factors:
Their stock price has plummeted. Mr. Market always know more than I do.
2. They took a
huge $1.6 billion write off in the December quarter.
3. I hear they've
been messing with loans in high-risk areas, like Florida residential real estate.
The bottom line
for all of us is that we all have money and securities and it's all sitting
in various banks and brokerage houses. How safe are our assets? This is a real
You know my answer
on the banks. Move your money around. That's what I did yesterday. If you decide
you don't like any of them, simply put all your money in cash into a suitcase
and send it to my new bank:
Thanks to Michael,
my son, the Photoshop expert for this fine logo.
are good places for money -- well, almost. In 1956, my grandfather accused his
grandson -- me -- of having stolen $9,000 from his mattress. He had lived through
Germany's hyperinflation of the 1920s and the Great Depression of the 1930 and
he didn't trust banks. Grandpa's stolen money became a major crisis in our family
-- until I found his money in another part of his mattress. Apparently he turned
in his sleep. And that turning had moved the money.
been a good place to have your money in recent months (i.e. out of the crashing
stockmarket) -- though the problem facing Germany in the 1920s has some horrible
analogies to what's happening here. Our wonderful government has simply been
printing money to finance its wastefully extravagant spending and woefully unbalanced
budget. Hence, the best mattress strategy is to convert the U.S. dollars into
gold, Australian and Canadian dollars and Euros and stuff them in your mattress.
of us has money and securities in various accounts. Which ones are insured?
Which ones are not? Answers:
1. Deposits in
banks are insured to $100,000 by the FDIC.
2. Brokerage accounts
are insured by something called the SIPC. Deutsche Bank's web site has this:
... the Securities
Investor Protection Corporation ("SIPC") protects each customer's
net equity, as defined by SIPC, in their accounts from broker insolvency and
our clearing firm, Pershing LLC, provides additional protection ("Excess
SIPC") through a commercial insurance company. Under regulatory rules,
SIPC and Excess SIPC coverage is provided by our clearing firm, Pershing LLC,
on all Deutsche Bank Alex. Brown customer accounts carried on their books.
Pershing LLC is a member of SIPC and Deutsche Bank Alex. Brown customer accounts
are protected by Pershing's coverage. The limit of SIPC protection is $500,000
per customer for covered securities. Cash balances are protected up to $100,000,
which is included in the $500,000 maximum. With additional protection (Excess
SIPC) purchased from Customer Asset Protection Corporation, a New York state
chartered commercial insurance company, you are protected for the total net
equity in your accounts. Excess SIPC protection also applies on a per customer
basis. A customer who has several accounts with Deutsche Bank Alex. Brown
in a single capacity would be considered a single customer for the purposes
of applying these limits. A customer who maintains separate accounts in separate
capacities would be deemed a different customer in each capacity.
A small number
of customer accounts are not carried on Pershing's books due to specific account
factors. These accounts are covered under Deutsche Bank Securities' SIPC membership.
Deutsche Bank Securities does not provide Excess SIPC coverage. Your customer
statement clearly indicates whether or not the account is carried on Pershing's
are held in a cash account or which are in a margin account but are fully
paid for would be distributed to you in the event of an SIPC liquidation.
Securities purchased on margin, if any, would be distributed on a pro rata
basis. Any shortfall would be reimbursed to you up to the total value as provided
by SIPC and Excess SIPC coverage. For further information, you may refer to
the SIPC web site is located on the Internet at www.sipc.org.
SIPC nor Excess SIPC covers losses in the market value of securities due to
market fluctuations, you can be confident that Deutsche Bank Alex. Brown will
continue in its efforts to give you peace of mind about the security of your
I'd never heard of the Customer Asset Protection Company. I go to their web
site and find:
I tried to read several
PDFs on CAPCO's web site
under the heading "Recent News and Events," but the PDFs were "damaged
and could not be repaired." This didn't please me. There also doesn't seem
to be any information on how much money CAPCO has.
I don't think I'm being overly paranoid. Only the paranoid stay solvent.
You can quote me on that.
Asset Protection Company
A Licensed Vermont Insurer
Protection Company ("CAPCO") was formed in late 2003 to provide
securities account protection for institutional and individual brokerage accounts
of certain securities firms over the protection limits currently provided
by the Securities Investor Protection Corporation ("SIPC") in the
United States. CAPCO issued its first surety bond in early 2004.
The excess protection
(sometimes referred to as "Excess SIPC") is provided to the securities
affiliates of the 15 participants in the form of bonding coverage. This protection
would be triggered only in the event of the financial failure and liquidation
of a participating securities affiliate and if the customer's securities are
not returned. This protection does not cover investment losses in customer
accounts due to market fluctuation or other claims for losses incurred while
these securities affiliates remain in business. The protection is also not
triggered unless the customer's account exceeds the limits of account protection
provided by SIPC. Other restrictions apply as contained in the applicable
a reader, emailed me yesterday:
Harry Am I correct
in figuring if I buy treasury bills in my brokerage account that money is
safe (with the bills held in the account) as opposed to brokerage cash held
in the brokerage money market?
I replied I
didn't know. But I certainly would not make ANY assumptions today about the
safety of ANY financial institution. I think the old rule of CHECK, CHECK,
CHECK can now be safely modified to SPREAD, SPREAD, SPREAD.
Lehman Brothers go private? That was yesterday's
speculation, which drove its price up slightly. Now comes a Wall Street Journal
piece today with all sorts of concoctions. Earlier in this column I wrote that
fear and fantasy are driving Wall Street. Read this stuff. I bet the Journal
didn't even talk to Lehman before writing this stuff (which may or may not be
Any Potential Buyer Would Need to Clear High Fiscal Hurdles
By DAVID REILLY
July 16, 2008
gripped Lehman Brothers Holdings Inc. Tuesday: The firm's battered stock jumped
6.6% partly because of talk that management could try to take the firm private.
shouldn't pin too much hope on the possibility of such a deal. Nor should
they assume that a bigger bank will rescue them.
Given the potential
for more losses in real-estate markets, any possible buyer has to consider
not just the price to be paid but also the possible need for a recapitalization
If that doesn't
scare off acquirers, it could cause them to pitch a price below the stock's
current, depressed levels -- or wait for the stock to fall further.
Taking the New
York firm private would be particularly tough. An unlisted Lehman wouldn't
be able to tap equity markets for funding should the need arise. That could
spook investors who buy Lehman's debt, raising the prospect that they could
end up shouldering losses if write-downs eat through capital.
Richard Fuld could alternatively look to continue selling assets and try issuing
more stock. But that could be costly, even if Lehman was able to find investors.
At about $14 a share, raising even $3 billion would dilute existing shareholders
by about 30% -- especially painful for those who bought new, common stock
at $28 a share last month.
A sale to a
bigger bank looks more credible, if Lehman's shares continue to reflect a
massive loss of investor confidence. But big banks, with problems of their
own, either haven't had the interest or the wherewithal to pursue a deal so
far. Plus, a purchase at Lehman's current share price could potentially contain
a big hidden cost.
market value of about $9 billion is equal to about 39% of the firm's stated
book value, or net worth of about $23.2 billion after taking into account
the firm's June capital increase.
would make the stock a steal. But given the state of real-estate markets and
the possibility of a severe recession, losses could continue to mount. Any
potential investor would likely want to discount the value of Lehman's assets,
and in turn its book value.
There is no
exact way to determine an appropriate discount. But consider, for example,
the affect of applying an aggressive 5% haircut to the firm's $161 billion
in difficult-to-value Level 2 assets and a 25% discount to its $41.3 billion
in extremely hard-to-value Level 3 assets.
That would result
in a further write-down of nearly $19 billion. Such marks would bring Lehman's
book value down to about $4 billion. At the current share price, a buyer would
be paying a hefty multiple of more than two times book value.
But a buyer
also would have to consider the additional equity the business would need.
Those nearly $20 billion in additional marks would bring total assets down
to about $620 billion.
the firm's current leverage ratio of 24 times would require about $25 billion
in total shareholders' equity.
$9 billion in preferred stock to the adjusted, $4 billion book value means
a potential buyer would have to fill a $12 billion hole in the firm's equity.
may be an overly pessimistic view. But Lehman's shareholders shouldn't expect
anything less from any potential acquirer.
news, bad news: Writes my broker, Todd, "We got called on some
of our ARP's Thats SUCKS--I WANT to hold these through the end of next year=
that's how long this disaster will last. Up 3% beats the hell out of DOWN 23%
UBS is talking
about redeeming all $3.5 billion of auction rate preferreds it, as a brokerage
firm, sold its clients. This is a huge story. I'm guessing the Mass authorities
found out some real dirt on the company. For more, go to my other web site,
What UBS is doing is the same thing that Nuveen and others are doing -- trying
to convert their auction rate preferreds into a security which money market
funds will buy. It's important to note that UBS
was not exactly an issuer of ARPS (it was the lead manager) and also, I believe,
a supporter of the auctions -- in a conflicted position. You can't tell your
clients the things were as good as cash and then drop out of the auctions, thus
making them no longer as good as cash. Some regulator is probably on their tushy
more on the disasters and semi-disasters facing us.... A recent story
Nirvana out of American Reach in The Australian and today's
USA Today Economic
pain: 'Payback' for debt-fueled growth? The USA Today piece contains
such depressing words:
If it wasn't
clear before Tuesday, it is now: This is no ordinary economic crisis, and
it won't be over anytime soon. In fact, problems are multiplying. A year ago,
the financial virus seemed confined to subprime mortgages, defaults on loans
given to those with less-than-perfect credit. Now, much of the banking system
appears rickety, and the U.S. economy has slowed to a crawl. But thanks to
robust demand from still-growing countries such as China, the prices of commodities
from oil to food have soared hitting Americans from the gas pump to
the grocery checkout.
no hope of an early recovery at this point," says economist Kenneth Rogoff
of Harvard University. "The best-case scenario is we have a long but
mild recession and that's the best-case scenario."
Print this image
out. Remind yourself to get your financial affairs in order, fast.
Moishe was recovering in hospital from prostate surgery. To make matters
worse, his surgeon had told him that it would be six weeks before he could be
sexually active again. Peter visited him to wish him well. Robert visited him
to wish him a speedy recovery.
His partner Abe
visited his wife.
Isaac was sitting at a table in his favorite restaurant when he called over
"Yes?" asked the busy waiter.
"Are you sure you're the waiter I ordered from?" asked Isaac.
"Yes, I am sure. Why do you ask?" replied the waiter.
"Because, by now, I was expecting a much older man."
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
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