Harry Newton's In Search of The Perfect Investment
Technology Investor. Auction Rate Securities. Auction Rate Preferreds.
For today's column
on Auction Rate Preferreds.
8:30 AM EST Monday, March 31, 2008: "Don't
fight the Fed" is an old tired cliché. It means if the Fed is boosting
the economy, the stockmarket will go up. The Fed is doing everything and more
to boost. The Fed is spending taxpayer money like a drunken sailor. The BIG
move was the Bear Stearns bailout. Two parts were critical (and new):
The Fed agreed to take on its books $30 billion of bad, worthless "securities"
Bear Stearns had on its books.
The Fed agreed to open its lending window to unregulated investment banks. Previously,
this window had only been available to regulated commercial banks -- like the
ones you see on every corner.
The Fed is now
entering uncharted territory. It seems to be willing to do anything and everything
to unlock financial markets and get the stockmarket moving.
As a result, my
friend, a brilliant security analyst on the buy side, emails me:
becoming relatively bullish on the stock market. You write every day about
doom and gloom. Everyone is focused on the financial meltdown. The thing is,
the stock market hasn't made a meaningful bottom since January and you'd never
know that by the way people talk about the market. I agree that the economy
is getting worse. I don't believe in "decoupling" of the non-US
economies, but I believe that the recession is already near its deepest point
and that it won't be that deep. If the Fed is proving anything it's that it
will go to great lengths to keep a financial crisis from becoming an economic
depression and I think they have the tools to do so. Margins are probably
too high, but they'd have to be WAY too high for stocks not to be cheap here.
I making a "jump back in" call? Not yet. I am saying it may be time
to nibble a tiny bit. Stockmarkets tend to be forward-looking animals. Will
things be better in 12 months time? I'm praying so.
ARPs fallout is broad: I already have stories
of brokers leaving their companies because they are disgusted with the way their
employers (UBS, etc.) are handling (or, more precisely, not handling) the auction
rate preferreds disaster which they
foisted on their clients. I have email after email from brokers who tell me
they put their clients in ARPs because they genuinely thought they were doing
the best thing for their clients, and they weren't doing it for the money /
commissions (which were negligible, anyway).
But I have been
bombarded by investors who are furious (in fact, beyond way furious) with their
brokers. They claim the brokers mislead them, lied to them, did not invest the
money in the safe, liquid securities they were instructed to. And the investors
are looking at all sorts of paybacks -- including formal SEC complaints. According
to one reader who emailed me, "The last thing a broker wants is a blemish
on their SEC account for inappropriate advice with clients, as new clients will
not work with someone who has a soiled SEC record. A soiled SEC record limits
a broker's ability to transfer to new firms and pick up new clients. ... I know
in my case I was clear with my broker I wanted no risk. He never took a customer
profile of me as required by the SEC when working with a new customer and should
be done on an annual basis to see if things with their customer has changed.
Also he never sent me a prospectus."
There are obvious
long-term implications -- like never believing a broker, (or anyone on
Wall Street), and for many people, never ever using a broker again. I'm reminded
of an old nugget: Some people are alive because it's illegal to shoot them.
has promised a big announcement by the end of the month, which is today.
more on auction rate preferreds -- including the weekend's extensive news and
latest recommendations -- on my sister site www.AuctionRatePreferreds.org.
Hot news: From
Forbes this morning:
$5.9 bln auction-rate securities; news on capital hike by Wednesday
ZURICH (Thomson Financial) - UBS AG said it held auction-rate securities
of $5.9 billion as of December, 31, 2007 but declined to comment on whether
the bank's own positions are also subject to reevaluation.
of auction-rate securities of clients do not allow any conclusion on our own
holdings,' a spokeswoman said.
Over the weekend,
the Swiss bank confirmed that it is cutting the value of auction-rate securities
in its brokerage customers' accounts adding to speculation of further writedowns
and a fresh capital hike.
The group declined
to disclose the total value of auction-rate securities held for clients.
Any news of
a capital hike is expected to come in by Wednesday, the legal deadline for
the bank to send out the AGM invitation along with the order of business for
UBS is one stupid
bank. UBS gives stupidity a whole new meaning. There's more on the web site
Auction Rate Preferreds.
what the Fed is doing: Roger Lowenstein wrote
the best-selling book, "When Genius Failed, The Rise and Fall of Long-Term
Capital Management." On Sunday he had this piece in the New York
Since the bank runs of the 1930s, federal protection of retail depositor
institutions has been a hallmark of American capitalism. The Federal Reserve,
in a sweeping extension, has now extended the privilege to gilt-edged investment
Its flurry of
interventions has prompted a double dose of unease. The central bank offered
a lifeline to Wall Street investors who, seemingly, deserved a worse fate.
And it arguably interrupted the cycle of boom, bust and renewal that leads
to a durable recovery.
What is the
true value of Bear Stearns? If the government-orchestrated takeover of Bear
goes through as planned, we will never know. As with Bear, so with the billions
of dollars of mortgage securities for which the central bank has suddenly
become an eager customer. So, too, perhaps, with the nations stock of
residential homes the prices of which, instead of reverting to more
realistic values, will get a boost from the Feds repeated rounds of
Government interventions always bring disruptions, but when Washington meddles
in financial markets, the potential for the sort of distortion that obscures
proper incentives is especially large, due to our markets complexities.
Even Robert Rubin, the Citigroup executive and former Treasury secretary,
has admitted he had never heard of a type of contract responsible for major
problems at Citi.
Bear is a far
smaller company, and, it would seem, far simpler. But consider that as recently
as three weeks ago, it was valued at $65 a share. Then, as it became clear
that Bear faced the modern equivalent of a bank run,
negotiated a merger with the figure of $10 a share in mind. Alas, at the 11th
hour, Morgans bankers realized they couldnt get a handle on what
Bear owned or owed and got cold feet. Under heavy pressure from
the Fed and the Treasury, a deal was struck at the price of a subway ride
$2 a share.
It is safe to
say that neither Jamie Dimon, Morgans chief executive, nor Ben Bernanke,
the Fed chairman who pushed for the deal, know what Bear is really worth.
For the record, Bears book value per share is $84. As Meredith Whitney,
who follows Wall Street for Oppenheimer, remarked, Its hard to
get a linear progression from 84 to 2.
supposed to work like this, and before the advent of modern finance, it usually
didnt. Market values fluctuate, but in the absence of fraud
billion-dollar companies do not evaporate. Yet its worth noting that
Lehman Brothers stock also fell by half and then recovered within a
24-hour span. Once, investors could get a read on financial firms assets
and risks from their balance sheets; those days are history.
Firms now do
much of their business off the balance sheet. The swashbuckling Bear Stearns
was a party to $2.5 trillion no typo of a derivative instrument
known as a credit default swap. Such swaps are off-the-books agreements with
third parties to exchange sums of cash according to a motley assortment of
other credit indicators. In truth, no outsider could understand what Bear
(or Citi, or Lehman) was committed to. The thought that Bears counterparties
(the firms on the other side of that $2.5 trillion) would call in their chits
and then cancel their trades with Lehman, perhaps with Merrill Lynch
and so forth sent Wall Street into panic mode. Had Bear collapsed,
or so asserted a veteran employee, it would have been the end: pandemonium
and global meltdown.
perhaps, after some bad weeks or months, Wall Street would have recovered.
What is scary is the degree to which the Fed assimilated the alarmism on the
Street: These guys are so afraid of an economic cycle, a hedge-fund
manager remarked. And without public airing or debate, it stretched the implicit
federal safety net under Wall Street.
intervention is not to dispute that markets need rules. But for nearly two
decades, Washington has trimmed its regulatory sails. The repeal of Glass-Steagall,
which once separated banks from securities firms, and the evolution of new
instruments that circumvent disclosure rules have loosened the markets
moorings. Huge pools of capital have been permitted to operate virtually unregulated.
Mortgages have been written to the flimsiest of credits. Swelling derivative
books have made a mockery of disclosure.
of oversight has implied an unholy bargain: let markets operate unfettered
in good times, confident that the feds will come to the rescue in bad. In
1998, the Fed intervened to cushion the collapsing hedge fund Long-Term Capital
Management; dot-com stocks immediately began their dubious ascent. Then, when
the tech meltdown led to a recession and the Fed cut rates to 1 percent, adjustable-rate
mortgages became as hot as the iPod. One rescue begets the next excess.
It is true that
Bears shareholders have suffered steep losses. But the Fed went much
further than in previous episodes to calm the waters. Notably, it announced
it would accept mortgage securities as collateral for loans enlarging
its role as lender of last resort. (Wall Street jesters had it that the Fed
would also be accepting cereal box-tops.) Then the Fed extended
a backstop line of credit to JPMorgan to tide Bear over; finally, it agreed
to absorb the ugliest $30 billion of Bears assets.
are as old as private enterprise itself, but we are well beyond the days of
guaranteeing loans to stodgy manufacturers à la Chrysler and Lockheed.
Those cases were contained; the borders of finance are more nebulous. However
pure of motive, Bernanke & Co. are underwriting overleveraged markets
whose linkages, even today, are dimly understood. The formula of laissez faire
in advance and intervention in the aftermath has it exactly wrong. Better
that the Fed, with Congresss help if need be, ensures that regulators
and markets have the tools to know what companies are worth before the trouble
frog -- part 1
Question: Where do you find a frog with no legs?
Answer: Precisely where you left him.
frog -- part 2
A friend conducted a scientific experiment:
He took a healthy
frog and said, "Jump frog." It jumped 20 feet.
Then he removed
one leg and said "Jump frog." The frog jumped 15 feet.
Then he removed
two legs and said, "Jump frog." The frog jumped 10 feet.
Then he removed
three legs and said, "Jump frog." The frog jumped 5 feet.
Then he removed
all four legs and said, "Jump frog." The frog didn't move.
My friend concluded
logically, "Frog with no legs can not hear."
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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