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8:30 AM EST Wednesday, June 25, 2008: The good news about banks: they have zero idea about real estate. When they get stuck with it -- through foreclosures or givebacks -- they react like deer caught in headlights. They freeze. Then they screw up by forgetting or endlessly delaying basics like painting the lobby or repairing the roof. That makes things worse. Eventually they figure they're lousy managers and they sell it -- at bargain prices.

A simple example: two houses in a ritzy part of the Coachella Valley. One house is sold by the owner privately for $1.1 million. It's in good condition. The house next door, virtually identical in size, but with a slightly poorer view, is sold by the bank for $670,000 -- nearly 40% less. Why? Two reasons: First, the pool was a mess (the bank hadn't cleaned it) and second, the bank wanted to get rid of it -- at any price.

As more homes default, banks and other financial institutions are loading the boat. The are selling more and more homes at bargain prices. As I've said many times, the key to making money at real estate is the price you pay. Buy cheap. With banks, this is now a buyers' market. I'm guessing a good time to buy is close to the end of a quarter -- when pressures are highest at the bank to "make the numbers."

There are two reasons to buy a cheap house today. First, you want to live in it. Second, you want to rent it. There is a burgeoning rental market today, accommodating people whose houses have been foreclosed. But you'd better be very very very conservative about the rents they will pay and hence how much you'll pay for that cheap house.

Commercial properties are a different story. Most commercial owners are professionals and they'll work out their failing properties with the bank before the bank gets ownership. This workout typically takes time. My real estate friends, who are hovering like buzzards over road kill waiting for a break in the traffic, tell me we're about a year away from the "true" bargains. That's the bad news. The good news is that, when it comes, there should be a nice selection of distress properties, because few were secured by personal guarantees. God bless securitization.

Pesky little creatures these cockroaches. They continue to pop up everywhere. Today's news is full of them. Illinois is suing Countrywide. Barclays is looking for $8.9 billion in new capital. GMAC is at the brink of insolvency as it tries desperately to restructure $60 billion of its ailing debt, And the analysts are reversing themselves. I repeat: Don't go near financials. From Bloomberg this morning:

June 25 (Bloomberg) -- Wall Street analysts who only weeks ago were telling investors to buy bank stocks because the worst of the credit crisis was over are now flip-flopping.

Goldman Sachs Group Inc. reversed a call on financial stocks, saying on June 23 that its May 5 recommendation was "clearly wrong.'' Merrill Lynch & Co. on June 17 cut its rating on Lehman Brothers Holdings Inc. to "neutral,'' just a week after telling clients to buy. Barron's, the financial newspaper, said this week that its February advice to buy American International Group Inc. was a "mistake.''

"Analysts probably have less credibility than they did 10 years ago,'' said Charles Geisst, the author of "100 Years on Wall Street'' who teaches finance at Manhattan College in New York. "This has just eroded it a little bit more.''

The mortgage-market rout that began last year and led to almost $400 billion in bank writedowns and credit losses has lasted longer and cut deeper than bearish analysts predicted. Citigroup Inc., the biggest U.S. bank by assets, and UBS AG, Switzerland's largest lender, have lost $43 billion and $38 billion, respectively.

Citigroup dropped 67 percent since reaching a record $56.41 in December 2006, the biggest decline since December 1991, when predecessor Citicorp fell 75 percent to $8.63 from the prior peak of $35.13 in October 1989. Bank, brokerage and insurance stocks fell 19 percent from May 5 through June 20, more than any other group. The Standard & Poor's 500 Index slid 6.4 percent in the period.

"Very few people, not even the people who were bearish, would have anticipated a complete shutdown and freezing of the credit markets that really began in July,'' said Thomas Brown, chief executive officer of hedge fund Second Curve Capital in New York and a former bank analyst at Donaldson, Lufkin & Jenrette Inc.

Goldman's team of financial services analysts said on June 17, prior to the reversal, that financial stocks would probably keep languishing. The deterioration of credit won't abate until next year, and raising capital has become more difficult because most completed deals have failed to generate positive returns for investors so far, the group said.

"`We boosted our consumer discretionary and financials weights in May on the belief the sectors would benefit from bank recapitalization and fiscal stimulus,'' New York-based Goldman analyst David J. Kostin wrote in the June 23 note. "Our thesis was clearly wrong in hindsight.''

Goldman spokesman Ed Canaday and Merrill spokeswoman Susan McCabe Walley declined to comment.

Gauging Lehman

"My hat is off to the Goldman analyst who had the courage and conviction to reverse his position quickly and decisively,'' said Donn Vickrey, co-founder of research firm Gradient Analytics Inc. in Scottsdale, Arizona "It demonstrates a high level of objectivity and a desire to do the right thing, even if it could be unpopular with some investment banking and/or investment management clients.''

Merrill's Guy Moszkowski, the top-ranked brokerage analyst in Institutional Investor's annual survey, on June 11 changed his rating on Lehman to "neutral'' from "buy'' and cut his target price to $28 from $36. It was Moszkowski's fourth call on Lehman this month. He shifted to ``underperform'' from ``neutral'' on June 2 and recommended investors buy the stock twice, on June 4 and then on June 10, the day before he moved back to "neutral.''

Lehman, whose shares have dropped 63 percent this year, has been hit by speculation mortgage-market losses will continue to drag down earnings. The fourth-largest U.S. securities firm posted a $2.8 billion second-quarter loss on June 9.

Shrinking fees from brokerage commissions mean fewer dollars for research and more pressure on analysts to hang on to paying customers such as hedge funds. Clients covet information gleaned from meetings with company executives -- audiences that favored analysts can deliver. ...

"As long as housing values continue to drop from month to month, it's impossible to know when the end of the credit crisis will be,'' said Jack Ablin, who oversees $62 billion as chief investment officer at Harris Private Bank in Chicago. "I want to see housing prices stabilize and increase before I put a stake in the ground and say `our problems are behind us.'''

A ‘Bonfire’ Returns as Heartburn. From yesterday's New York Times, a truly charming story by Andrew Ross Sorkin.

Almost exactly a year ago, Tom Wolfe, the author of “The Bonfire of the Vanities,” was wandering the floor of the New York Stock Exchange. Dressed in his trademark white suit, he darted around traders and whisked past trading booths, shaking hands and waving, just before the market was about to open.

Tom Wolfe loves dressing as a Southern gentleman.

It was a sunny, ebullient morning. The Dow stood at 13,337. Deals were zipping across the ticker: Barneys, the luxury retailer, was sold that morning to an investment arm of the Dubai government. Investment bankers were getting ready to take a half-day Friday and drive out to the Hamptons.

But the real excitement — the reason, traders whispered, that Mr. Wolfe must be in attendance — was that the Blackstone Group, the big private equity firm, was minutes away from going public, the largest initial public offering in the United States since 2002. (At the time, he told The New York Observer that a friend was giving him a tour.)

Just then, a CNBC reporter pulled Mr. Wolfe aside to ask him what he made of all the hubbub. Mr. Wolfe paused for a moment to contemplate his answer.

And then, with a wry smile, he delivered a prophetic declaration: “We may be witnessing the end of capitalism as we know it.”

Here we are a year later, and while it may not be the end of capitalism, it looks as if Mr. Wolfe got it a lot closer than, say, the investors who plowed money into Blackstone. (I added the chart. --HN)

Capitalism today — at least as Wall Street defines it — is a very different, and worse, business. And it is only going to get tougher from here.

Sherman McCoy, Mr. Wolfe’s bond-trading protagonist — who always bemoans he is “hemorrhaging money!” — would probably be selling his 12-room apartment on Park Avenue right about now.

Or, as Mr. Wolfe told me during an interview Monday, “He would be eating his heart out wanting to run a hedge fund, but he’s not smart enough!”

Mr. Wolfe, who returned Monday afternoon to Manhattan from South Hampton on the Hampton Jitney, said he was mesmerized by what had happened to Wall Street in the last year. “Nobody understands where the actual value is — and they don’t care anymore,” he exclaimed.

Of course, Mr. Wolfe’s 1980s Wall Street — of privileged WASPs (and Jewish Anglophiles), the sons of Harvard and Stanford and Princeton braying for money on the bond market — is pretty much gone now. It was replaced, in part, by the world of private equity and hedge funds, by hypernumerate quants and bankers who think proprietary trading is more important than serving clients.

And now that world is crumbling, too.

Blackstone’s stock has gone nowhere but down since it went public, dropping nearly 50 percent from its high the day it started trading. But that’s the least of it.

The once mighty Wall Street investment banks have been brought to their knees, sending out pink slips to more than 83,000 employees worldwide, racking up billions of dollars in losses as a results of their foolish forays into subprime mortgages. Bear Stearns all but went out of business before being “saved.” Some hedge funds have gone belly up.

Those lords of private equity, many of which were preparing to follow Blackstone into the public markets, have been put on semipermanent hiatus. (Kohlberg Kravis Roberts & Company refuses to withdraw its I.P.O filing, almost a year after submitting it, with no immediate hope in sight.) Their deal-making has all but stopped.

As Mr. Wolfe nicely put it, “It sounds like even the firms that aren’t in trouble are in trouble.”

And yet, there has been a perverse, and misguided, optimism that somehow the situation will improve in the second half of 2008. How? Sure, the big banks may take fewer write-downs — but there is no way of knowing that. The news a few days ago that the big bond insurers were being downgraded will create new havoc — and losses — for holders of toxic subprime debt. Indeed, the bigger issue is what kind of business is going to generate any return for its investors. When you can’t lend or trade — and you can’t invest with the leverage that juiced returns to support seven- and eight-figure bonuses — how exactly are you going to make money?

“It has always interested me that the word ‘credit’ comes from the word ‘credere,’ which means ‘to believe,’ ” Mr. Wolfe said. “It only works if people believe in it.” He’s right, of course: one reason the credit markets have tanked is that people don’t believe anymore.

Foreign investors seemed to have too much faith last fall, pouring money into firms like Citigroup. But their stocks just kept falling, so much so that no big sovereign wealth fund came to the rescue of Lehman Brothers in its hour of need this month.

In truth, Wall Street is in for a radical makeover. Fewer people, lower margins, lower risk, lower compensation — and ultimately, fewer talented people. It is likely to change the culture of an industry that for nearly a century has been the money center of the world. “There would be a lot of firms leaving New York if it wasn’t for lunch,” Mr. Wolfe said with a laugh, remarking that bankers still like being fawned over by captains and waiters who speak in “movie French.”

Wall Street will clearly have to downsize. Citigroup is cutting 10 percent of its work force this week, and even the wonder boys over at Goldman Sachs are cutting 10 percent. And that may not be enough.

In 1973, Wall Street shrank by 15 percent amid a severe economic downturn. The bloodletting continued into the next year when 12 percent of the work force was booted out the door. That pinstriped massacre was caused by a stalling economy, amid skyrocketing oil prices, rising inflation and a faltering bond market — very similar to the problems that the economy is facing today.

Stir in a bit of globalization, and the world becomes more challenging. “I think that what’s going to come back to bite us is globalization,” Mr. Wolfe said. “It’s never been tested. It’s like a Ponzi scheme in which we are the Ponzi and everyone else makes money except us.”

Still, Mr. Wolfe remains cautiously optimistic. “This country is so rich,” he said. “I don’t see people cutting down much in New York City.”

When I asked Mr. Wolfe about his comment on the floor of the stock exchange, he said, “I didn’t realize anyone would take me seriously.” He says he has since made up an explanation of why he thought it could be the end of capitalism.

Citing Joseph A. Schumpeter, the economist, Mr. Wolfe said, “Stocks and bonds are what he called evaporated property. People completely lose touch of the underlying assets. It’s all paper — these esoteric devices. So it has become evaporated property squared. I call it evaporated property cubed.”

Then he cautioned, “Of course, I’m not an economist.” Maybe that’s why he’s gotten it so right.

Latest dumb Microsoft decision: In a letter to customers, Bill Veghte, the senior vice president who leads Microsoft's online and Windows business groups, reiterated that June 30 would be the deadline when Microsoft halts Windows XP shipments of boxed copies to retailers and stops licensing the operating system directly to major computer manufacturers, or OEMs (original equipment manufacturers). After June 30, you'll be stuck with Vista, which is awful.

Second 15 minutes of fame and glory: Anne Himpens deserves a second 15 minutes for her contribution of F4 as the most useful keyboard function in Excel. Remember yesterday? F4 repeats your last action. I now use it to insert rows. I insert one row the old way -- Alt IR. Then I hit F4 repeatedly to get the number of inserted rows I want. Ms. Himpens, certified Excel genius, says the key to Excel speed is never touching your mouse. Learn the keyboard shortcuts.

A second Himpens bonus: Control 1 (that's one) brings up the cell formatting menu. To my mind, "currency" is the only way to go, since you can easily make negative numbers show in red. I pray you have few reds.

How to reduce gas prices: The problem:

The solution. From Michael Marcus' blog, 4thefirsttime.

In 1923, gasoline was typically selling for 20 to 25 cents a gallon. In the summer, gas reached 29 cents a gallon in Rapid City, South Dakota. That price seems like an amazing bargain now, but by the standards of the day anything over 20 cents a gallon was considered exorbitant.

1923 car

South Dakota's Republican governor Bill McMaster responded by ordering the state highway department to begin selling gas for 16 cents a gallon. He directed state employees to buy gasoline in Chicago and ship it west it by tank car.

The oil companies were outraged, and complained of "socialism," but the "Governor's Gas War" was successful in forcing prices down at the commercial pumps. Thereafter every time the gas stations tried to raise their prices McMaster responded with another state sale.

South Dakota's war on high gas prices received nationwide attention and triggered price reductions throughout the Midwest and eventually from coast to coast. Motorists were delighted with the low prices. South Dakota's politicians involved the state in several other projects normally reserved for the private sector including a cement plant, a coal mine, and grain elevators. The US Supreme Court finally stepped in and ruled that selling gas was not a proper function of state government.

Wimbledon continues today. You can watch 14 hours of tennis today. That will be much more enjoyable than watching the ticker today. Here is the TV schedule. All times listed are Eastern Standard Time (L) = Live (T) = Taped

In today's world, Samuel Goldwyn's words are poignant.
He was born Shmuel Gelbfisz in Warsaw, Poland. He made great movies and great aphorisms, known affectionately as Goldwynisms:

"A verbal contract isn't worth the paper it's written on."

"Anyone who goes to a psychiatrist ought to have his head examined."

"Gentlemen, include me out."

"A wide screen just makes a bad film twice as bad."

"I can give you a definite perhaps."

"If I could drop dead right now, I'd be the happiest man alive."

"Pictures are for entertainment. Messages should be delivered by Western Union."

"I don't want yes-men around me. I want everyone to tell me the truth, even if it costs them their jobs."

"If I look confused, it's because I'm thinking."

"You fail to overlook the crucial point."

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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