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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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8:30 AM EST Thursday, June 12, 2008: The BIG message is to continue to stay away from today's seriously infected Cockroach Stocks -- the financials. The infestation is acute. For example, this morning Thornburg Mortgage reported a $3.3 billion loss. Sadly, you can't short Thornburg. (Or maybe you can. Is it going to zero? I don't know. Need to check.) It's already tanked 90%+ this year:

There are great shorting opportunities elsewhere, like Lehman Brothers (which I recommended to short when it was much higher). What a delicious ride....down. This graph shows daily movements down to last night's close -- now about 70% off its one-year high. I bet all those people who recently bought Lehman's equity to the tune of $6 billion or so are seriously pissed. When will the world learn you can't catch a falling knife?

This chart shows yesterday's humungous 13.6% drop.

As to how much lower Lehman is going now, I have no idea. But lower it's definitely going. Lehman has all the attributes of a classic Cockroach Stock. Every day another cockroach problem appears. And this one -- drumroll, please -- is the best. From my mate in Australia comes this:

Lehman sold a debt instrument called “Federation” in Australia to shires and municipal councils.

It was rated “AAA”.

Gosford City Council, Wingecarribe Council (Bowral), etc. all piled in.

Not much – only $25 million.

Unfortunately the Federation securities were invested in U.S. sub-prime loans.

The value has dropped to as low as 10 cents in the $.

The investors are now suing Lehman for misleading and deceptive conduct.

Lehman has offered a compromise settlement.

It enables the shires to recoup 100 cents in the dollar of capital invested.


One small problem.

The actual ‘re-payment’ to the shires will not occur for ten years.

Ya gotta love ‘em.

As my learned friend and financial guru Dan Good said, "There is no end to Wall Street's creativity."

Where's Waldo, the giant cockroach? Answer: everywhere on Wall Street, it seems. This story is from this morning's Wall Street Journal. I don't make this stuff up. I just report the facts.

Citigroup to Shut Fund, In Blow to CEO Pandit

Citigroup Inc. is closing a hedge fund co-founded by Chief Executive Vikram Pandit, 11 months after Citigroup bought the fund's management company for more than $800 million.

Old Lane Partners has been dogged by mediocre returns and the loss of top managers. Citigroup plans to shut it and buy what is left of its assets, according to people familiar with the matter.

Mr. Pandit personally reaped at least $165 million when Citigroup bought Old Lane in July 2007, following its founding the previous year. At the time, many large banks and brokerages saw hedge funds as a lucrative new business. Citigroup was also willing to pay a premium to land Mr. Pandit, who quickly moved up the ladder and became chief executive in December.

But as the fund struggled, Citigroup was forced to choose between pumping new money into it or shutting it down. That created an awkward situation for the new CEO. Mr. Pandit removed himself from the deliberations to avoid the perception of a conflict of interest.

Citigroup officials considered a plan to replenish Old Lane with anywhere from $1 billion to $3 billion of the bank's own capital. In a memo last month, Old Lane's CEO, Guru Ramakrishnan, told trading partners and lenders that the fund had secured a "substantial" amount of fresh capital, according to people who saw the document.

The memo was premature. Citigroup later decided against an infusion, in part because its resources were too strained to devote new capital to Old Lane, people familiar with the situation said. Pummeled by falling housing prices and the credit-market mess, the bank has reported losses of nearly $15 billion for the past two quarters, forcing it to make layoffs and other cutbacks. Citigroup has responded to those losses by raising about $39 billion in capital since last November.

(Harry's comment: I'm betting that all the people who bought stock to the tune of $39 billion could now buy the stock cheaper on the market. Here's a daily chart. Stay away from falling knives.)

Old Lane's demise is the latest embarrassment for banks that operate hedge funds or have bought stakes in them. Bear Stearns Cos., Goldman Sachs Group Inc. and UBS AG also have stumbled badly in hedge funds during the credit crunch, piling up billions of dollars in losses for themselves or their clients. The problems suggest that hedge funds, typically known for their independence and entrepreneurial spirit, may have trouble thriving within huge financial institutions.

Mr. Pandit was a longtime Morgan Stanley executive and seen as a CEO contender there until his ouster in 2005. The next year, he co-founded Old Lane. Mr. Pandit delivered a sterling reputation, a thick Rolodex of contacts around the world and a team of hedge-fund colleagues with deep expertise in India and other fast-growing emerging markets.

Old Lane was one of the biggest hedge funds to open its doors in 2006, boasting in marketing materials that it raised $4 billion in fewer than nine months. The list of marquee investors lined up by Mr. Pandit included Singapore's government investment fund and Harvard University's endowment.

At the time of its purchase by Citigroup, Old Lane had amassed about $4.5 billion in assets. Charles Prince, then Citigroup's CEO, touted the deal as "a unique opportunity to continue our growth in the highly competitive alternative investment area."

After the purchase was completed last July, Mr. Pandit took the helm of Citigroup's alternative-investments division, which offers hedge funds, private-equity funds and other products to sophisticated investors. (Harry's comment: i.e. rich, dumb investors)

Once the credit crisis erupted late last summer, Mr. Pandit was increasingly removed from Old Lane, spending most of his time working with Citigroup's investment bank. He turned over operations at the hedge fund to its chief executive, Mr. Ramakrishnan, a confidant since their days as Morgan Stanley traders.

Old Lane has essentially broken even since its inception. That isn't terrible, considering the perilous financial markets of the past year. But it fell far short of the highflying performance craved by hedge-fund investors. Citigroup never marketed Old Lane to new investors, even after the fund was designated by Citigroup as its primary hedge-fund vehicle last summer, replacing the struggling Tribeca Global hedge fund.

The departures of Mr. Pandit and other high-ranking Old Lane officials for bigger jobs at Citigroup triggered a provision allowing outside investors to withdraw their money from the fund. In April, "substantially all" of them moved to do so, pulling nearly $3 billion, according to a securities filing. The exodus left Old Lane with less than $2 billion in capital -- all of it from Citigroup and Old Lane's founders and employees. ...

Old Lane's shutdown is likely to result in a second-quarter charge for Citigroup. In the first quarter, Citigroup wrote down the value of Old Lane by $202 million to reflect investor departures from the hedge fund.

Why did Citigroup buy Old Lane, if -- by buying it -- it would immediately lose all its outside money? Answer: someone at Citigroup didn't do their due diligence. Or they just simply didn't care. Go figure.

In Search of the Perfect Investment -- Update 703 (or thereabouts).
This is from The New York Times of June 5. I just read it last night. It's almost as good as the Citigroup story.

Investment Places F.C.C. Aide Amid Fraud Inquiry

WASHINGTON - For the last three years, Daniel Gonzalez has been the loyal lieutenant and gatekeeper to Kevin J. Martin, the chairman of the Federal Communications Commission. He has kept the agency humming, the paper flowing and the staff vacancies filled as Mr. Martin's chief of staff.

Described by some as the sixth commissioner, he has helped shape policy on regulations that decide winners and losers among the nation's broadcasters, telephone companies, wireless carriers and cable providers.

As largely unheralded officials like Mr. Gonzalez prepare to exit the government in the final months of the Bush administration to seek high-paying jobs at law firms or companies, Mr. Gonzalez faces a far more uncertain future. Instead of cashing in on his access and expertise, he faces the possibility of financial ruin.

Hoping to pursue a career in an entirely different field from telecommunications, Mr. Gonzalez invested in a small energy company three years ago and then joined the company's board in 2006. The company, law enforcement officials say, turns out to have been a fraudulent venture that took more than $54 million from investors.

There is no evidence that Mr. Gonzalez committed a crime or violated federal ethics rules. But many of the company's lenders say in lawsuits that he, along with other board members, personally guaranteed millions of dollars in outstanding loans to the energy company, even though his financial disclosure statement indicated that his net worth was only in the hundreds of thousands of dollars.

Mr. Gonzalez has denied the lenders' accusations. But commission officials said they were baffled by how one of the most important telecommunications regulators in Washington - one known to be a cautious lawyer leading a seemingly modest lifestyle - could be accused of being so careless.

A friend and two commission officials said that Mr. Gonzalez appeared to view the energy investment as his exit strategy from the commission. A taciturn bureaucrat, Mr. Gonzalez never seemed to like the trappings of the job, associates said. He avoided many of the parties, conventions and social functions held by industry lobbyists, and he had no interest in becoming a lobbyist or even staying in telecommunications.

He also made enemies of some powerful companies, particularly in the cable industry, by working with Mr. Martin against their interests. Within the commission, he has alienated career officials for executing Mr. Martin's plan of consolidating power in the chairman's office, taking much of the authority from the staff offices.

So Mr. Gonzalez decided to try his hand in the energy industry. With the permission of the commission's chief ethics officer, he joined the board of a small company in Seattle that purported to be involved in oil and natural gas exploration in Indonesia and Malaysia, a company in which, a year earlier, he had invested $100,000 from the sale of his small Virginia town house.

Federal authorities say that the company, MCube Petroleum, is largely a $54 million Ponzi scheme that used the newer investors to pay previous ones. The lawsuits say that during his seven months as a director, Mr. Gonzalez personally guaranteed more than $7 million in promissory notes from lenders who have not been repaid. They also say that he and others violated state law by overseeing a company that sold unregistered securities.

| After MCube Petroleum was accused by federal law enforcement officials of being a fraudulent business late last year, Mr. Gonzalez privately offered to resign from the commission. Officials said that Mr. Martin, who had no prior knowledge of Mr. Gonzalez's ties to the company, declined the offer.

Mr. Martin said he could not comment on the pending investor lawsuits. He said that Mr. Gonzalez was a highly valued member of his staff and that he had declined the resignation offer because there was no evidence that Mr. Gonzalez violated any ethics rules or criminal laws.
Mr. Gonzalez's lawyer, Stephen Willey, said that his client had been duped by MCube's founder, Robert L. Miracle, who is under investigation by federal authorities for fraud.

"This illustrates to me that anyone is vulnerable to an effective scam artist," Mr. Willey said. "It also shows that people who act as outside independent directors face real pitfalls. If you are not dealing in a company's day-to-day operations, you have to rely on the good faith of the company's executives."

Mr. Miracle's lawyer, Greg Hollon, denied that his client had committed fraud. "We are confident that when the whole story is heard, and all of the facts of this matter properly understood, he will be vindicated," Mr. Hollon said. He added he could not discuss the details of the case because of the pending criminal investigation.

Friends and other lawyers and investigators involved in the collapse of MCube said Mr. Gonzalez had been duped as much as the investors - in addition to the lawsuits, he lost most of his $100,000 investment.

"He's a fine man, and I believe he was completely deceived and victimized like others," said Barry Fink, a lawyer in Los Angeles who in 2006 oversaw an internal investigation into financial irregularities at the company at the request of its outside directors, including Mr. Gonzalez. "His big crime is that he was at the wrong place at the wrong time," Mr. Fink said.

By all accounts, Mr. Gonzalez, a 42-year-old bachelor from Queens, is married to his commission job and is fiercely loyal to Mr. Martin. He arrived at the commission as a junior lawyer in 1990 after graduating from State University of New York and Hofstra University School of Law. Except for a brief stint as a vice president at XO Communications, a telecommunications company based in Herndon, Va., he has spent his career at the commission.

Friends said that Mr. Gonzalez had learned about MCube from a childhood friend, who persuaded him to invest $100,000 and introduced him to Mr. Miracle. The company was promoting the prospect of big returns - a $100,000 investment offered the expectation of average annual returns of more than 24 percent, or more than $5 million, over 18 years.

A year later, in the spring of 2006, Mr. Miracle recruited Mr. Gonzalez to the company as one of three outside directors. Mr. Gonzalez received no compensation for his service. Unlike presidential appointees, senior government officials are permitted to serve on boards as long as they are not paid and the companies have no business before their agency.

Mr. Miracle, who was born in 1960, represented himself as a seasoned businessman. In a company overview, he said he had more than 20 years of experience at Toyota and NASA and served as an adviser to Frank G. Wells, the former president of Disney.

But an affidavit by a criminal investigator for the Internal Revenue Service said that Mr. Miracle had never worked for Mr. Wells, and that in 1994, Mr. Miracle had been convicted of felony theft in Oregon for stealing textbooks from a community college. The affidavit said that, rather than working at Disney, Mr. Miracle might have been involved in reselling textbooks from universities.

The internal MCube inquiry overseen by Mr. Fink started in the fall of 2006, after Washington state regulators began looking into accusations that MCube had been violating state securities laws, an inquiry that began just days before Mr. Gonzalez joined the company.
In January 2007, Mr. Gonzalez resigned from the board after state officials concluded that the company had violated securities laws. At the end of last year, federal authorities seized many company documents as part of a criminal investigation.

In an affidavit in support of a search warrant, a federal agent with the criminal division of the I.R.S. accused Mr. Miracle of violating federal fraud laws.

"Although Miracle and his associates may have acquired contractual rights to certain oil fields and may even have received some revenue from oil and/or gas production, the overwhelming majority of the payments made to investors have derived from other investors money," the affidavit said. "In other words, Miracle and his associates have been operating a type of fraud known as a Ponzi scheme in which later investors' money is used to pay earlier investors supposed profits on their investments."

Lawyers involved in the proceeding said that, in addition to the potential legal liability, Mr. Gonzalez faced significant legal bills since the company's insurer declined to cover his expenses. The lawyers said there was a remote possibility that investors could get some money back - limiting the potential size of the lawsuits against Mr. Gonzalez and the other directors. The company owns two undeveloped fields in Indonesia that have become more valuable as the price of oil and gas have risen.

But that prospect is speculative, leaving Mr. Gonzalez facing a possible bankruptcy filing if the lawsuits result in a judgment in favor of the lenders. A trial is set for next March.

Although he disputes signing guarantees that are at issue in the lawsuits, Mr. Gonzalez did guarantee other big loans, which were repaid by MCube. One of them, for instance, was a $10 million note to Paul Rusnak, a wealthy car dealer in Southern California, whose daughter had joined MCube's board. Mr. Rusnak was repaid before MCube's troubles surfaced.

Friends and colleagues are puzzled about why he took such a large risk. Asked why his client would guarantee a promissory note of $10 million when his net worth was so much smaller, Mr. Willey said, "I cannot give an answer."

Right of first refusal is a dumb idea. The board hired a new president. His first job was to raise money. He did. He secured a hefty loan from a hedge fund. The hedge fund argued for hefty warrants and the right of first refusal to buy the company. The president agreed. The right of first refusal to buy the company may be good for them (it isn't). But it's horrible for the board which can't seriously shop the company. No one will negotiate to buy the company, knowing that they'll probably never be able to buy the company. Someone else will. The whole right of first refusal chills the negotiation process, knowing that someone else can step in and match; the bidder doesn't know that someone WILL buy the company, but that someone could.

I don't make this stuff up.

Promises, promises
Moishe and Ruth are on their first date. As they are walking to the cinema, Ruth says, "If you give me a kiss, Moishe, I promise I’ll be yours for ever and a day."

Moishe replies, "Thanks for the early warning."

A vacation in someplace new
Diane, the summer holidays will soon be with us and I was wondering where you’ll be going this time?"

"Well, as you know Fay, we took a trip around the world last year. This year, we’re thinking of going somewhere different!"

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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