Back on the subprime/housing/credit front . . .

I’m still anticipating it to be worse than generally expected (even now). And, I continue to watch for the event that will drive us to the bottom.

As I described awhile back, I believe the final episode will be triggered when one of the involved parties decides to “make a run for it.” Hedge funds, securities dealers and financial institutions own huge amounts of bonds backed by weak mortgages. No one knows what these bonds are worth on the market because no one is willing to make an offer to buy them. So, the investors carry them on their books at what they claim are justifiable prices. For Merrill Lynch, justifiable prices required a $5 billion write-down earlier this month, but that grew to $8.4 billion this week (per yesterday’s Wall Street Journal).

Today’s estimated prices may, indeed, be reasonable approximations of the true economic value of the bonds if held to maturity. But, not if they aren’t held to maturity. If they were to be sold today, it would have to be at prices much lower than these book values.

And, that’s the risk. If one holder believes that this valuation charade is doomed and the market will soon be flooded with bonds in a sellers’ panic, that holder may decide to get out first -- take the best offer available today, then stand back and watch the rest of the market implode as more and more bonds are written down or actually sold at ever decreasing prices.

All the players, as well as their regulators and bankers, recognize the precariousness of this situation, and are doing all they can to prevent the dreaded sell-off. Mortgage lenders, for instance, are recasting loans to make them less likely to go into default. They’re giving up future income to avoid recognizing a current loss.

The nation’s largest banks are putting together a giant Structured Investment Vehicle (SIV) to buy some of the billions of dollars of bank- and broker-sponsored SIVs that are effectively insolvent due to losses in their holdings of bonds backed by weak mortgages. These premier banks will be putting over-valued, weak assets into a pool that they will carry on their books at full value. That helps?

The Federal Reserve is likely to make another cut in the Fed funds and discount rates – to send a signal that the Fed is there to help (no matter how irresponsible the financial services sector has been . . . again . . . and in spite of the fact that the price of money is not the problem).

Might these efforts succeed? Sure. But, I doubt it. Someone will make a run for it. Some investment pools, in fact, are required by their founding documents to liquidate if their value drops by a certain amount. Others must direct all mortgage payments received to only the senior-level investors once a specified value is breached, leaving the subordinated investors with a non-paying “asset” they might as well dump and get what they can while they can.

So, yes, I still think someone will bolt. Then we can get on with the real clean-up of this very messy situation.

Dreaming about retirement

I had the strangest dream last night. I had announced my retirement, and suddenly found myself standing on a stage in front of all my coworkers trying to explain what I was going to do next and how I felt about leaving my “home away from home” of the last 20 years. I fumbled through a few disjointed comments, got an overly generous round of applause, then shuffled back to my seat.

When I awoke, the prospect of retirement was more real than ever before. Then I realized that this dream was true. It had happened the day before.

Yes, I have made the tough decision – I will be leaving MEMBERS Capital Advisors at the end of this year. This in no way reflects negatively on MCA. In fact, the company is in the best shape it has ever been with more investment management talent and capabilities than ever before. And, the prospects look absolutely stellar from here. But, I have stayed “one more year” a couple of times, now. It is time for me to do some other things and live life more on my schedule awhile, before those options are lost.

I am planning to pursue a small investment-related project with some former associates on a very part-time basis, but mostly I’ll be free to do whatever I choose (or, as Michael Armour cautioned last week, whatever is chosen for me, which I will aggressively seek to minimize!). The rest of my list of potential to-dos is huge – way too long. And, I don’t want to spread myself thinly over a multitude of tasks-with-no-end as most of us do throughout our working years.

So, my plan for the first few weeks of retirement is to settle in to our cottage up North with Colleen, chop a little wood and move a little (?) snow, and focus on sorting through that ominous list of options . . . that we are so very fortunate to have.

Thanks for the advice!

I appreciate the ideas submitted by Mike Farner and Michael Armour (which you can see by clicking on “Comments” at the bottom of the prior entry) in response to my request of a few weeks ago. Each will receive a nice gift courtesy of MEMBERS Capital Advisors. (Guys, call or email me with your shirt sizes.) Their key points (paraphrased):

Mike – Don’t carry a lot of debt or frivolous spending habits into retirement, and don’t underestimate how long your money has to last (so you don’t outlive it).

Michael – Know what you’re going to do before you hang it up so that you are in control of your life, or others will make the decisions for you.

Some others shared their ideas, but were unwilling to go public with them. One of the most intriguing suggestions was to check out international living. Besides improving your climate, it can also improve your financial status with a much lower cost of living, including much lower (if any) taxes. Don’t move to Florida and avoid state income tax, move to Panama (among many other exotic locales) and avoid all taxes!

This idea has always struck me as unpatriotic – earning your fortune (?) here in the great U. S. of A., then running off to retire somewhere else, taking your nest egg with you. But, in a way, it is also a patently American thing to do. If emigrating will result in a significant improvement in your quality of life, get in the boat!

I personally am not anywhere near actually making this kind of move – we’re well set up with our condo here and cottage up North. But, I can’t help but poke around a little, out of simple curiosity and just in case the political/economic system here gets (how shall I say it?) . . . too Un-American?

Anyone similarly curious might start by taking a look at this website:
http://www.internationalliving.com/


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