The Slide Starts.

[JAMESBJOHNSON]

http://www.tampabays10.com/news/local/article.aspx?storyid=68769

This state invested billions in sub-prime loans, and cities/counties want out while the getting is good. The governor stopped withdrawals.

 

[Handprints]

http://www.tampabays10.com/news/local/article.aspx?storyid=68769

This state invested billions in sub-prime loans, and cities/counties want out while the getting is good. The governor stopped withdrawals.

Back of an envelope, it looks like that fund might be on the hook for something like 5-8% of its assets, were all of the sub-prime assets instantly and permanently written down to zero. That a bruise on the balance sheet of that size was enough to spark a run doesn't surprise me; that the governor closed the doors, rather than just imposing, say, a 5% penalty for early withdrawal, kind of does...

Best,
H

 

[Boxlicker101]

I think anybody who invests public money in something that risky should be either fired or recalled, depending on whether they were hired or elected.

 

[Handprints]

I think anybody who invests public money in something that risky should be either fired or recalled, depending on whether they were hired or elected.

What if someone showed you evidence that having about 5-10% of your portfolio in really risky stuff - stuff you know is going to blow up regularly - actually reduced the volatility of the overall portfolio, while increasing its total return?

Best,
H

 

[Jenny_Jackson]

In the hay day of sub-prime mortgages, 1997-2001, were they a bad investement? Or, as I believe, is the sub-prime market taking the hit for other sicknesses in the economy?

I look at who are the people who are being foreclosed. Who are they? Industrial workers who's jobs have been shipped off shore and elderly who live on fixed pensions which are suddenly worth half what they were in 1997.

If you want to talk about the horrors of sub-prime mortgages, Jim, you need to start with AAFTA in 2002 and stop following the party line, blaming the mess on the banks and Democratic Congress.

 

[Boxlicker101]

Quote:
Originally Posted by Boxlicker101
I think anybody who invests public money in something that risky should be either fired or recalled, depending on whether they were hired or elected.

What if someone showed you evidence that having about 5-10% of your portfolio in really risky stuff - stuff you know is going to blow up regularly - actually reduced the volatility of the overall portfolio, while increasing its total return?

Best,
H

I wouldn't believe it, at least not in the long run. They might be good in the short term, and profitable, but they go down the toilet during any kind of business downturn.

 

[JAMESBJOHNSON]

JENNY JACKSON

Hahahahaha The party line?

You assume I'm Republican, and youre wrong. I've said many times I'm conservative, and conservative has little to do with Republican Neo Cons. Republicans play for a different team than Democrats do, but both are in the same league. Theyre all millionaires. What can they possibly know about ordinary people?

I want the paws of the perfessers AND the George Steinbrenners out of my pockets. When they rub my ass, it aint love; theyre feeling for my wallet.

JJ

In the 20s blue chip stocks were a good investment, and they were a good investment when the stock market crashed, but their price was all wrong. Ditto for real estate. Real estate is always a good investment, but since 2000 idiots (buyers and speculators) inflated the prices wayyyyy beyond the actual value of the property. As with stocks in the 20s, people assumed they could flip the property for some fast cash when the price soared.

Take my daughter. She bought a new house in 2003 for 150K. She sold it in 2005 for 300K. One hundred percent in two years. So she bought another house for 300K in 2005 and its value dropped 100K in 2007. She's filing bankruptcy. She used the house as collateral for a business loan, and the business failed. So she's 100K in the hole and the Mercedes is being repossessed.

 

[Roxanne Appleby]

What if someone showed you evidence that having about 5-10% of your portfolio in really risky stuff - stuff you know is going to blow up regularly - actually reduced the volatility of the overall portfolio, while increasing its total return?

Best,
H

I would say fine for a private sector investor, but not fine for a public sector ones, because the risk of corruption and cronyism is too great. Inbred big city political establishments with strong ties to corrupt unions are the most liable to this, but not the only ones. There is also the risk of politically motivated "investment" - or disinvestment. Or, just playing fast-and-loose with other people's money in an atmosphere of low accountability - unlike private fund managers those government ones suffer not a thing if their fund tanks, and their own pensions are protected by the greatest risk management tool imaginable - well armed tax collectors.

Bottom line: Government pension funds and the like should be held on a tight leash, allowed to invest only in blue chip, AAA-rated stuff. If that shaves a few basis points off total return over the decades, it also prevents the strong possiblity of total loss at some point. Orange County derivatives ring a bell?

 

[trysail]

Having spent a lifetime as a "professional" (and I don't claim to know what the hell that word describes- let's just say I made my living [NOT as an effing salesman, for god's sake] studying, analyzing, and observing investments and investing) and having committed every word "Uncle" Warren [Buffett] ever wrote to memory, I will tell you that I have yet to see anybody produce a universally applicable and useful definition of the word "risk." I submit that the abstraction defies a rigorous, quantitative definition. Those who seek to apply the academic framework of statistics to the matter, describing risk in terms of volatility around a central tendency, need to address the conundrum of "upside risk."

The academics have a broad brush definition (that is, regretfully, widely accepted) but its utility is limited and, in some cases, downright dangerous. Ninety-nine percent of the high falootin' investment Greek symbology serves as nothing more than a cover for the sheer laziness of failing to perform rigorous, thorough, and diligent investment analysis. ("Most men would rather die than think..." -Bertrand Russell) Incompetence is compounded by the tendency of institutions to make investment decisions by committee. I don't believe I've ever witnessed a committee make an intelligent investment (there are bound to be exceptions, I suppose, but I'll be damned if I'm aware of any).

By the end of my career, I was convinced that the majority of union and public pension funds were usually managed by buffoons who received their incumbent positions as the result of political patronage. Any pot of money is an irresistible source of power for most politicians to reward their friends and they are, largely, incapable of resisting the temptation. I can't tell you how many of these funds I've seen that were either constructively looted by outright incompetence or simply bamboozled by the likes of Goldman, Sachs, Morgan Stanley, Merrill Lynch, Salomon et al.

 

[Handprints]

I wouldn't believe it, at least not in the long run. They might be good in the short term, and profitable, but they go down the toilet during any kind of business downturn.

Weirdly enough - and it is completely counterintuitive - things like sub-prime only have that nice effect on overall portfolio risk over the long term. If you're not willing to hold them through good times and bad, you're better off not buying them.

Best,
H

 

[Handprints]

Unlike private fund managers those government ones suffer not a thing if their fund tanks, and their own pensions are protected by the greatest risk management tool imaginable - well armed tax collectors.

Bottom line: Government pension funds and the like should be held on a tight leash, allowed to invest only in blue chip, AAA-rated stuff. If that shaves a few basis points off total return over the decades, it also prevents the strong possiblity of total loss at some point. Orange County derivatives ring a bell?

I think it's very difficult for many local/state authorities to accept this sort of leash when they see well-run, well-managed peers (Calpers, GIC, certain university endowment funds) earning substantially better - and smoother - returns because they're playing with a fuller deck.

Your proposal, to my mind, runs uncomfortably close to the old saw that "no-one ever got fired for buying IBM." It seems odd to me that public investment officials should be encouraged to strive for a well-covered ass rather than a better understanding of the tools of their trade... Of course, I'm not from a culture that expects public sector brains to run a distant second to their private sector equivalents.

Best,
H

 

[Handprints]

I can't tell you how many of these funds I've seen that were either constructively looted by outright incompetence or simply bamboozled by the likes of Goldman, Sachs, Morgan Stanley, Merrill Lynch, Salomon et al.

I closely resemble this remark. Therefore I wave my wand of low-beta unintelligibility and order the bankrupting of a thousand treasurer-electing counties in order to avert the wrath of the great god Sortino...

What? You thought we did this stuff with computers?

It's probably worth noting here that the population of financial professionals who don't believe in market timing will be putting more of their assets into sub-prime and other currently plagued forms of debt the next time they rebalance their portfolios. I expect to be doing it in March...

May the blessings of Markowitz flow unto you (should you propitiate him with well-chilled martinis),
H

 

[JAMESBJOHNSON]

HANDPRINTS

The whole thing reminds me of 1929. The dynamics seem to be identical. Storms in Florida pushed banks into a depression/storms in Florida pushed insurance companies into a depression. The value of real estate collapsed and people couldnt sell property for close to what they paid for it. So they default or the banks foreclose because the cost of insurance is impossible for many homeowners to afford.

And thats where we are here. The state is holding the bag for the subprime mortgage loans, and most local government bodies bought chunks of the action. Now they want out, and the stampede has begun.

 

[trysail]

I've watched with amusement time and time again as people put 100 pennies at risk in order to take a shot at earning an extra 1 penny. If the whole object is to be 100% sure that you get your 100 pennies back, there's only one way to do it.
____________________________________________

Florida Says Unfreezing Local Fund Would Spark a `Fire Sale'
By David Evans

Dec. 3 (Bloomberg) -- Florida schools and towns with money frozen in a state-run investment account are unlikely to get their cash back tomorrow, when officials meet to discuss a crisis prompted by withdrawals that drained almost half of the fund's $27 billion in assets, a policy officer said.

``If we reopen the window without limitations on Tuesday, and we see behavior like we've seen up to now, there's simply no way to meet that demand without having a fire sale on assets,'' said James Francis, senior policy officer for the State Board of Administration, manager of the Local Government Investment Pool.

Officials raised the possibility of paying less than 100 cents on the dollar to governments seeking cash in a conference call with participants Nov. 30, a day after freezing withdrawals. The board also hired BlackRock Inc., the largest U.S. publicly traded money manager, as an adviser.

Florida counties and schools pulled out $13 billion in assets last month after learning the pool, described by state officials as a money-market fund, held $1.5 billion of downgraded and defaulted debt tainted by the subprime mortgage market collapse. The crisis shows the far-ranging effects of the housing slump, as complex investments once sold as high-yielding havens are now backed by collateral investors don't want.

The Florida fund's daily yield plunged to 2.77 on the day withdrawals were banned from 6.25 percent on Nov. 16.

Money Back
A newly formed advisory panel of school and local governments still stuck in the Florida pool told officials on the Nov. 30 call they expected to get all of their money back. The panel rejected the board's plan to survey participants to see if they would accept as little as 90 cents on the dollar as the price for getting access to their money this month.

The two-and-a-half hour call ended with a decision to poll pool investors on how much cash they absolutely need to withdraw over the next 90 days, as well as how much they plan to deposit. Governments are accustomed to drawing on the fund for routine expenditures.

``The very fact that you're out here talking to us about taking less than 100 percent is in my mind unacceptable,'' said MaryEllen Elia, superintendent of Hillsborough County Public Schools, which has $573 million tied up in the pool, more than any other school district. ``You need to figure out how to make the taxpayers in Florida whole.''

Meeting Tomorrow
The State Board of Administration's three trustees, Republican Governor Charlie Crist, state Chief Financial Officer Alex Sink and Attorney General Bill McCollum, will meet tomorrow to discuss possible solutions to the crisis. The board also manages $37 billion of additional short-term investments and Florida's $138 billion pension fund.

``We do need our political leaders to muster up some intestinal fortitude,'' said Dave Gaylor, superintendent of Charlotte County Public Schools and a member of the new 16- member advisory panel of participants, on the Nov. 30 call. ``You have leadership from the soldiers, that's who we are. It's not going to help if the generals aren't providing us with some leadership.''

About 94 percent of the fund's remaining $14 billion is invested in corporate floating-rate notes, maturing in an average of nine months, board employees told the panel.

Kevin SigRist, deputy executive director of the State Board of Administration, said the board can't promise to make pool participants whole, because of the pool's ``problematic'' securities. ``We have securities in the pool that clearly have credit risk associated with them,'' he said.

``We don't ever want to be in a situation here at the SBA where we are somehow issuing guarantees or suggestions that everyone will get dollar for dollar,'' said SigRist, who said executive director Coleman Stipanovich was tied up at the capitol and would join the call later.

Pension-Fund Proposal
The same day they voted to freeze withdrawals, the trustees rejected a plan by Stipanovich to solve the problem internally, using pension-fund money.

``We're fiduciaries, we're investment professionals, we know what we're doing,'' Stipanovich said Nov. 29. ``The commercial paper defaulted, but the collateral is different,'' he said, describing it as AAA.

Instead, the trustees decided seek advice from an independent financial adviser, hiring New York-based BlackRock on Nov. 30. Brian Beades, a spokesman for Blackrock, declined to comment.

Short-Term Funds
The fund had invested $2 billion in structured investment vehicles, or SIVs, and other debt tainted by the subprime mortgage collapse, state records show. Connecticut, Maine, Montana and King County, Washington, are among other governments holding such investments as part of $200 billion assets in more than 100 similar pools across the U.S.

The Florida pool was the largest of its kind in the U.S. at $27 billion before the withdrawals.

Its mission statement, as described in the state board's 2005-2006 annual report, was ``to help local governments maximize earnings on invested surplus funds, thereby reducing the need to impose additional taxes'' by investing in ``short- term, high-quality money-market instruments.''

It promoted itself as a place for governments to park cash, ``where liquidity and preservation of capital are the primary importance.''

 

[trysail]

It's probably worth noting here that the population of financial professionals who don't believe in market timing will be putting more of their assets into sub-prime and other currently plagued forms of debt the next time they rebalance their portfolios. I expect to be doing it in March...

May the blessings of Markowitz flow unto you (should you propitiate him with well-chilled martinis),
H

The investment philosophy and discipline first postulated by Benjamin Grossbaum (Ben Graham), as adapted by "Uncle" Warren is- in essence- as eternal as, say, the Second Law of Thermodynamics.

"Risk" (don't ask me to define it) is, ultimately, unavoidable. The trick is to take "intelligent" risks. I have an equal inability to describe "value;" however, akin to obscenity, though I can't define it- I know it when I see it!

Very few talented investors thrive in large organizations for the very simple reason that independent thinking and opportunistic investing require (almost by definition) that one be a bit of a sociopath.

Regards,
___________________
ETA: As one of the very few honest, competent investors I met along the way once put it, "A good analyst will spit in your eye."

 

[JAMESBJOHNSON]

It looks like government folks here are antsy about how many foreclosures will be harvested in the next batch of subprime rate increases. Something like 362 BILLION is coming up for rate adjustment.

 

[Handprints]

I understand that the treasurer responsible for the fund resigned immediately before a meeting where it was decided to beg for a bailout rather than face the music. I suspect we will be able to measure in minutes the gap between his leaving the building and first offer from my side of the fence.

Best,
H

 

[Handprints]

ETA: As one of the very few honest, competent investors I met along the way once put it, "A good analyst will spit in your eye."

Then write 800 words that leads to a queue of suddenly clued-up spitters....

Best,
H

 

[trysail]

There are still a lot of rocks yet to be turned over.

These guys??? Again!!!

"As the bitch returns to her vomit,
and the sow to her mire,
so, the poor fool's bandaged finger
returns to the fire."
___________________________________________

Orange County Funds Hold SIV Debt on Moody's Review
By Michael B. Marois and William Selway

Dec. 5 (Bloomberg) -- Orange County, California, bankrupted in 1994 by bad bets on interest rates, bought structured investment vehicles similar to those that caused a run on funds invested by local governments in Florida.

Twenty percent, or $460 million, of the county's $2.3 billion Extended Fund is invested in so-called SIVs that may face credit-rating cuts, said Treasurer Chriss Street. In all of its funds, the county holds a total of $837 million of SIV debt, including $152 million in its $3.5 billion of money-market funds that isn't under ratings review, said his spokesman, Keith Rodenhuis.

Orange Country joins a growing list of state and local governments at risk of losing money from investments sold as high-yielding havens that have been contaminated by the collapse of the subprime mortgage market. Florida, Connecticut, Massachusetts, Montana, Maine and King County, Washington also have disclosed investments in SIVs.

``We'll find out real quick if we have a problem,'' said the county's former Treasurer John Moorlach, who is now a county supervisor. ``But for now I need to be patient and wait and see.''

Cities and school districts in a $27 billion Florida local- government investment pool withdrew almost half of their deposits last month after they learned the fund held downgraded and defaulted commercial paper sold by SIVs. Florida officials froze the pool Nov. 29 to prevent a further run on assets.

BlackRock Hired
Much of the debt held by the Florida local government fund is worth less than 100 cents on the dollar and the rest is so troubled that its value can't be determined, according Chris Stavrakos, co-managing head of cash management for BlackRock Inc., the New York-based company hired to turn around the fund.

``I don't think there are very many securities in this market we can liquidate at par,'' Stavrakos said in an interview yesterday.

Finance officials with the Orange County Treasurer's office said its SIV debt continues to meet obligations. The securities have top credit ratings and limited exposure to risky mortgages.

``We don't have the same kind of debt that Florida has,'' said Paul Cocking, the chief portfolio manager for the county. ``They're all highly rated assets.''

SIVs are typically offshore companies created by banks and other firms to sell low-yielding short-term debt, using the proceeds to buy higher-yielding securities, backed by subprime mortgages, credit card receivables and finance company bonds and other assets.

Whistlejacket, Tango
Orange County's money is invested in commercial paper under review by Moody's that was issued by Centauri Corp.'s CC USA Inc., Citigroup Inc.'s Five Finance Inc., Standard Chartered Plc.'s Whistlejacket Capital Ltd. and Tango Finance Corp., according to Rodenhuis.

Whistlejacket sold assets, reducing the fund by 40 percent to $10.8 billion since August, London-based Standard Chartered said in a statement today. Moody's is evaluating $105 billion of SIV debt as the declining value of their investments impairs their ability to pay obligations.

Whistlejacket's net asset value, the amount that would be left after selling assets and repaying senior creditors, fell to 69 percent from 80 percent in the past three months, Moody's said last week.

Orange County, home of the Disneyland resort, became the biggest municipal bankruptcy in 1994 after then-Treasurer Robert Citron made a wrong-way bet on interest rates. Moorlach, who warned about Citron's gamble before the bankruptcy, replaced him in 1995 and held the job until he was elected to the county's board of supervisors last year.

Citron's Gamble
Citron used money in the county's investment pool to bet on the direction of interest rates by purchasing longer-maturity derivative securities. The strategy, which generated high returns initially, backfired as rates rose in 1994, resulting in losses of $1.6 billion. A derivative is a financial contract whose value is derived from stocks, bonds, currencies or commodities, or linked to events such as changes in interest rates or the weather.

``It's nothing like what happened in 1994,'' Rodenhuis said, about the county's SIV debt holdings.

Rodenhuis said the county was told by Moody's on Nov. 30 that the securities were placed on credit watch. The information was disclosed by Street at a board meeting yesterday.

Moorlach, Street
Moorlach sought to have Street stripped of his authority to manage the county's $6 billion of investments in September amid federal and local corruption probes. He said Street was too distracted by the probes to manage the county's money.

The U.S. Justice Department is investigating Street's spending from a bankrupt trucking company, allegedly for his personal use. He was its court-appointed trustee before taking office. He also faces civil lawsuits associated with his management of the operation. The county district attorney also is looking into whether Street improperly awarded a government contract while treasurer.

The board rejected Moorlach's proposal, instead deciding to consider the issue during the annual review of the treasurer's powers. They will consider changes Dec. 11.

 

[trysail]

Then write 800 words that leads to a queue of suddenly clued-up spitters....
Best,
H

LOL! There is no queue; there never was.

In twenty-five years I must have met several thousand people in the investment field. In that entire time, I only met four or five who were both honest and competent. The rest were either used car salesmen, well-meaning dolts or some combination thereof. It was my insanely good luck to have had the wonderful fortune to have been associated with two of the good ones.

I pursued a career in mathematics and (purposely) avoided one in sales!