Posts filed under “Credit”

Advice for Rich Uncles and Others . . .

I am going to relate an anecdotal tale that, as far as I can tell, is true. The actual story matters much less than the lessons it teaches, clearly enunciated at the end of this post.

Several years ago, I helped a firm develop a new Distressed Debt/CDO department. The history of the group that I brought in was a strong ability to trade distressed paper, and the expertise to package and resell it institutionally.

Initially, this worked out well for the firm. They managed to do a number of deals, getting their names on the offering books as co-leads with the likes of Merrill Lynch and Goldman Sachs. Very prestigious, huge fees, all good stuff.

After I left, I kept hearing all sorts of sketchy tales about the group: big turnover amongst staff, disagreements about costs, fights with the bond desk, issues with compensation. I chalked this angst up to the usual Wall Street "eat what you kill" philosophy. 

Then I heard several stories: That the CDO desk was pitching their product to retail brokers, that this debt was getting placed in the accounts of individual investors where it had absolutely no business going into. Distressed debt and CDOs are sophisticated complex instruments that require a great deal of expertise to understand, and I was sure neither the retail brokers nor the clients knew these things.

Then, I hear tales that a retail broker from a rather disreputable shop joins the firm. He takes to the CDOs like a fish to water, placing them everywhere and earning huge fees. The rumor I keep hearing is that he even placed a $10 million block with a family member.

You can see where this is going: The $10 million dollar investment is now worth, best as anyone can figure, about $3 million — assuming you can find a bidder. The commission on that one placement was a cool $700,000. The relative/client has gone postal, litigation threatened, all manner of ugliness. You just know this is going to end badly . . .

Now its time for your 3 lessons to learn from this misadventure:

1. Advice for Investors: Never buy anything you do not understand. This is a very simple rule, regularly ignored by all too many people. If you don’t understand what a company does, DO NOT BUY IT. If an  offering doc comes with a 157 page set of disclosures, unless you understand all the risks it contains, stay far far away.

2. Advice for Brokerage Firms: Never place institutional products with retail investors:  As a rule, they do not have the sophistication to understand the product (see rule #1). More importantly, when this stuff gets offered to retail clients, it likely means INSTITUTIONAL CLIENTS HAVE REJECTED IT. Hence, the need to stick it somewhere other there where its supposed to go is likely proof that its got some bad mojo attached.

3. Special Advice for Rich Uncles: Don’t give money to relatives, instead buy them a new Rolex. This sounds like a quite odd bit of advice, but follow my logic. When you give, oh say, $10M to a relative, you are making a major financial decision based not on their skill set and experience, but rather, on a coincidence of a blood relation.

This is not a good basis for making a significant financial planning decision.

Next, speak to your nephew/niece/relative, with their parents present (one of whom is likely your sibling). Explain to the young ‘un that your money has been very carefully placed in the hands of top notch professionals you have painstakingly selected after great study of their long term track record (which the kid obviously does not have).

However, you want to help the kid become a success in their chosen career. So here is a small bauble to help get you started on that road to success: This Rolex Watch (I suggest this one).

Tell them to wear it with pride: It will subtly convey how successful they are to their employers, let their peer know they are a man of substance, and most importantly of all, convince their sales prospects of their status. It reeks of their soon-to-be inevitable success. Wish the best of luck in their new career!

And walk away knowing that the $5,000 you just blew saved you untold millions in losses, and no end of grief at all future family gatherings

You’ll thank me . . .


Buying this watch can save you $7 Million dollars:


Category: Credit, Derivatives, Investing, Markets

Open Thread: Bear Stearns

Category: Corporate Management, Credit, Derivatives, Finance, Psychology, Trading

A Short History of the Credit Boom & Bust

Category: Credit, Derivatives, Finance, Markets, Psychology, Real Estate

Notice to Loan Officers/Brokers

Category: Credit, Derivatives, Psychology, Real Estate

The “Chutzpah” of Bear Stearns

Category: Credit, Derivatives, Economy, Markets, Psychology

Understanding Credit’s Alphabet Soup

There were a couple of great graphics in the New York Times recently, explaining in some degree of detail, the machinations of the RMBS, CDO and CLO markets.

These are the packaged (and repackaged) holdings that are based upon the sub-prime mortgages that have been defaulting in such large numbers, and have been leading to hedge fund blow ups.

First up: todays front page article by Gretchen Morgenson: Mortgage Maze May Increase Foreclosures.



Graphic courtesy of NYTimes


Next up, the accompanying graphics to Floyd Norris’ The Loan Comes Due:


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Category: Credit, Data Analysis, Derivatives, Real Estate

Blaming the Retail Investor

Category: Credit, Derivatives, Financial Press, Investing, Markets, Psychology, Real Estate

Quote of the Day: “the stunning failure of responsibility”

Category: Credit, Derivatives, Earnings, Hedge Funds, Markets, Psychology

Credit-Market Tremors

Category: Credit, Derivatives, Finance, M&A, Markets

Cool! Residential Mortgage Backed Securitization Process

Category: Credit, Derivatives, Economy, Finance, Real Estate