Previous Columns
8:30 AM EST, Monday, September 24, 2007: Hectic weekend, getting ready for next weekend's BIG daughter wedding. Surveying all the contractors -- new house and new wedding -- one fact stands out: You are your own worst enemy. And the biggest "shoot yourself in the foot skill?" Not staying in touch. So many people "in business for themselves" ignore email and forget to return their customers' plaintiff voice mails: "Where are you? We need you to finish up."

On the virtues of borrowing BIG: Look at this deal. The Macklowes buy seven New York City buildings for $7.6 billion. They borrow 99.34% of the $7.6 billion. Forty nine percent -- $3.86 billion -- must be repaid by next February. The only way they can repay that money is to sell some of the buildings. But no one will pay what they paid -- around $1,000 a square foot -- in today's market, especially after the Wall Street Journal so colorfully wrote about their plight (and the obvious upcoming fire sale)..

Harry Macklowe, the clan's patriarch, also has given a $1 billion personal guaranty on the deal. The guaranty is valueless if he threatens (or declares) personal bankruptcy. Such are the realities of today's changing real estate world.

Guess Who’s Feeling the Mortgage Pain. Gretchen Morgenson had this neat piece in the Sunday New York Times. I admire her. She's a talented financial writer.

DENIAL is a powerful thing, and nowhere is that more evident than among companies holding mortgage securities that are on the skids. Nine months into the meltdown of the home loan market, investors are still waiting for banks, brokerage firms and other companies to come clean on losses incurred on those securities.

Consider the announcement last week from the E*Trade Financial Corporation about problems in its mortgage operations. That E*Trade actually is in the mortgage business surprised those who thought it was a discount brokerage firm.

Late Monday, E*Trade disclosed that it was cutting its earnings forecast for 2007 by 30 percent because of higher provisions for loan losses and potential securities impairments related to mortgages.

Mitchell H. Caplan, E*Trade’s chief executive, said the company would likely take a $95 million charge in the second half of 2007 and a $245 million provision for loan losses. The company also expects to record an impairment charge of $100 million to reflect deterioration in the performance of second lien loans and collateralized debt obligations.

This disclosure didn’t do much damage to E*Trade’s stock: it closed Friday at $13.53, down 4.8 percent from its price just before the announcement.

But Sean Egan, managing director at Egan-Jones Ratings, an independent credit rating and research firm, said he expects that this was not the last of the bad news from E*Trade on its mortgage holdings. He said the roughly $440 million in charges and loan loss provisions reflect neither the troubled reality of the mortgage securities markets nor the size of E*Trade’s portfolio.

In the most recent quarter, which ended in June, E*Trade held $47 billion in mortgage securities, home equity loans and loans receivable, or three-quarters of its total assets. So the charges and loan loss provisions recently taken by the company total less than 1 percent of those loans.

Not enough, Mr. Egan argued. “They are still marking to model, not to market,” he said. (Harry's comment: This is a very important distinction.)

To be sure, E*Trade is not alone in valuing its holdings via a computer model rather than the fire-sale prices that characterize the current market. Still, Mr. Egan said, a benchmark for a more appropriate valuation of E*Trade’s holdings may be the 5 percent discount at which Thornburg Mortgage, a real estate investment trust, sold $20.5 billion of mortgage assets last month. Thornburg’s mortgages were of a higher quality than E*Trade’s appear to be, Mr. Egan said.

“A 4 percent hit would not be unreasonable at E*Trade,” Mr. Egan said, “which would probably cost them five years or more of normalized earnings.”

Dennis Webb, president of capital markets at E*Trade Financial, countered that Thornburg was in a liquidity crunch and that E*Trade, with its retail deposits and access to Federal Home Loan Bank borrowings, faced no such difficulties.

“Thornburg was forced to sell and they sold at distressed prices,” Mr. Webb said in an interview on Friday. “It’s important that our constituencies appreciate that we have a significant capacity to hold these loans to maturity, and we have $13 billion of excess capacity at the Federal Home Loan Bank.”

Indeed, E*Trade, as is common practice, does not recognize losses in problem loans until it considers them “permanently impaired.”

It showed $690 million in unrealized losses in securities held on its books at the end of June, a vast majority in mortgages. These losses represent temporary impairments only and are attributable to changes in interest rates, not a decline in credit quality, the company said.

In valuing its mortgages, E*Trade uses a model known as the principal-at-risk method, an internal approach that depicts the unpaid principal balances appropriately, its filing said.

“We do not exactly know where the real estate market is going,” Mr. Webb said. “What we attempted to do was give management’s best estimate of where we think the market is going. We are assuming if the market continues to get worse, those are the estimates we would ultimately incur.”

Mr. Egan said that he had no problem intellectually with the use of such a system, but that E*Trade may be using outdated measurements that reflect conditions before the market collapse and that continuing to use them now may understate potential losses.

As a bank and a brokerage firm, E*Trade must maintain a certain capital cushion set by regulators. Based on its size, E*Trade must have a minimum of $2.7 billion to be considered adequately capitalized; at the end of June, it had capital of $3.6 billion.

That leaves a $900 million cushion, which is not all that plump, considering the $690 million in unrealized losses on its books at the end of June.

“It is hard to draw the conclusion that they are not undercapitalized, under current market conditions,” Mr. Egan said.

Mr. Webb disagrees, arguing that unrealized losses are offset by unrealized gains on its deposits.

“We could withstand another $1 billion in impairments and still be well capitalized,” he said.

Let’s hope he is correct. Next week, fresh data on mortgage delinquencies and defaults will be issued. Nobody expects it to be pretty.

A month ago, E*Trade’s shares rose on takeover chatter; the company was said to be in merger talks with Ameritrade.

But the rumor died down, a result, Mr. Egan surmised, of the mortgage holdings on E*Trade’s balance sheet.

Valuations of its mortgage holdings were the main impediment to a merger, he speculated. “You have this millstone in the form of $47 billion in mortgages that don’t fit in the discount brokerage business,” he said.

In the meantime, E*Trade is reducing its home equity, consumer loans and mortgage securities and replacing them with margin debt and prime mortgages from its retail customers. It is exiting the wholesale mortgage market, in which it buys mortgages from others, and will focus on direct mortgage lending. And it will go back to being more of a brokerage firm.

These changes are expected to occur over the next two years. And while they do, E*Trade is essentially asking shareholders to trust that its mortgage models will be proved right. After the events of the last few months, that is asking a lot.

Weekend tips and tats:

1. Palmolive works. It's seriously boring to report that, at age 65, I find that cleaning things with warm water and Palmolive works better than Windex and most everything else.

2. Hanging pictures is a chore. To get things in the middle you have to divide by two. It's hard to divide our stupid feet and yards system by two. But it's easy to divide metric. The only place to get a fully metric measure is a place called Duckworks Boat Builders Supply.


What's ultra-fascinating is that the measures come in two widths -- 3/4" and one inch. Go figure.

3. The $260 Garmin Street Pilot c340 is the best. My country taxidriver says he paid off his Garmin in less than a month by letting him take fares to weird places. I tested this thing with him. This is the BEST GPS navigation system I've ever seen -- including those on high-end cars which cost oodles more. This thing is portable. Suction cap it onto your window, plug in the cigarette lighter and you're ready to go. The thing has all the roads for the U.S., Canada and Puerto Rico. Its screen is touchsensitve. You can find local restaurants, hotels, sights, airports, easily. I cannot be more impressed. Buy it from Amazon or eBay.

Garmin's stock has done well also:


My dumbest investment mistake: Falling in love with the company's products and not buying the stock because I thought it was "too high." Dumb me. I missed Garmin.
:
Sometimes (not often) I'm a nice guy: I'm at a charity event and I bid on a Sony eReader. The good news was that Sony didn't get my money. The bad news was that I bought another useless toy -- though I didn't know it at the time. This is the piece of junk I bought for $200.

The Sony eReader is about the size of a paperback book and weighs about 9 ounces. The big left hand button turns pages. The right hand button/toggle switch gives confusion a whole new meaning. The six inch screen is its major (and only) redeeming feature. The brighter the ambient light, the brighter the screen. In low light you can't read the thing at all. Unlike every other screen you use today -- cell phone, laptop, TV -- this one is not backlit. It reflects light. It reads best outside.

The thing will hold nearly 100 books. To get books you go to Sony's dumb web site, buy / download what you want. There are several problems. Sony's selection is abysmal. And its pricing is screwy beyond belief. You'd think that because you're saving Sony the paper and printing costs, the books would be cheaper. And in the main, they are -- a little. But -- try this -- Sony is selling Greenspan's Age of Turbulence for $28. Amazon is selling the hard cover version for $20.99. When I pointed out the insanity of this to my Sony man, he mumbled about Amazon buying the book cheaper by committing to buy more copies.

My Sony man, Dan Albohn, manager of the Portable Reader Systems/ebooks, was actually remarkably forthright about how difficult it was to get a big bureaucracy like Sony to be "innovative" in areas like:

1. The physical design of the unit. No color screen. Stupid buttons. Stupid software, e.g no way to add your own notes to your book (like you can with a laptop).

2. The lack of books. Most publishers are simply not interested in letting Sony have their books. Sony had sold too few eReaders to make it worthwhile.

3. The total user unfriendliness of the web site you buy eBooks from. If you buy a book, the software doesn't automatically synch it with your eReader. You have to drag and drop. Albohn sighed when I mentioned Apple's iTunes, which automatically syncs to a connected iPod.

There's no point in continuing, except to point out what's happened to poor Sony since its founder Akio Morita retired. Sony pioneered so many wonderful things like Trinitron and the Walkman -- but has done virtually nothing for the past 15 or so years. Think of the areas it could have done great things -- cell phones, PDAs, BlackBerries, iPod ... Sony once was a leader in design. But Samsung, Apple and Garmin and others has stolen that lead.

Check. Check. Check. Remember my friend and his new house? He writes:

Bank of America strikes again. I went to the closing for my condo Friday. Attorneys and sellers are very nice. Everything is cordial. I sign 40 pieces of paper, then pull out the certified cashier's check given to me by the bank. But it's a receipt not a check! It's a worthless piece of pink paper. I'm crazed, tearing apart my briefcase looking for it. Everybody's looking at me like I'm that Ferren "Mind Control" guy on TV who can buy things with ordinary sheets of paper.

A few frantic phone calls later and we discover that the teller at the bank took the actual check and filed it as the receipt, and gave me the receipt as the check! Fortunately, the sellers have a sense of humor.

Also, the bank fortunately voided the check (if they had lost it instead, it would have taken 90 days to generate a new one). So on Saturday I set up a wire transfer to kick in this morning to deposit the money into my attorney's account. The bank will call me as soon as it takes place (provided that they can do that correctly).

I love New York's subway. It's fast, reliable and cheap (only $1 a ride for alta kakas 65 and over). Two favorite subway stories:

+ John and Jane are arguing heatedly. Everyone stops speaking to listen. Finally, John says, "Be reasonable Jane, I made the date with Mary three weeks before we got married."

+ Last night the subway is ultra-crowded. There standing next to me is the largest and most muscled black man I've ever seen. He's decked out in sunglasses, large hat, rhinestone earrings and a black t-shirt that read: "Fear not white woman. I'm not after your purse."

3:00 AM and pouring rain
A man and his wife were awakened at 3:00 am by a loud pounding on the door.

The man gets up and goes to the door where a drunken stranger, standing in the pouring rain, is asking for a push.

"Not a chance," says the husband, "it is 3:00 in the morning!"

He slams the door and returns to bed.

"Who was that?" asked his wife.

"Just some drunk guy asking for a push," he answers.

"Did you help him?" she asks.

"No, I did not, it is 3:00 in the morning and it is pouring rain out there!"

"Well, you have a short memory," says his wife. "Can't you remember about three months ago when we broke down, and those two guys helped us? I think you should help him, and you should be ashamed of yourself!"

The man does as he is told, gets dressed, and goes out into the pounding rain.

He calls out into the dark, "Hello, are you still there?"

"Yes," comes back the answer.

"Do you still need a push?" calls out the husband.

"Yes, please!" comes the reply from the dark.

"Where are you?" asks the husband.

"Over here on the swing," replied the drunk.

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.
Go back.