Making money out of distressed financials

Michael Panzner has come across a real estate blogpost that includes this idea:

Several of the deal guys said that banks they contacted three months ago about buying assets are all of a sudden calling back. Three months ago they said everything was fine. The idea du jour is to buy the bank to get the bank’s real estate. Sounds screwy to me but I’ll write some more about this one tomorrow.

This reminds me of something I read many years ago in "Adam Smith" (George Goodman) and wrote about here almost exactly a year ago - buying bankrupt (or nearly so) stock that includes the rights to tangible assets.

I don't have the cash or sophistication for this one, but maybe one of you out there knows how to work out whether a bank's shares are selling at a discount to the value of its underlying assets.

There's always an angle, isn't there?

The big picture (as I see it)

Home economics: making a mint

Most of the people now managing our money - the money that we plan to retire on - are too young to remember the financial world of the 1970s. This hampers their judgement, and a debacle like subprime lending shows how they have underestimated both the likelihood and the impact of Black Swan events.

In one of George Goodman's books, the financial journalist author (aka "Adam Smith") is shown round a dealer's office by a friend, and the young people are all chirping away optimistically about how they're going to make fortunes for the company in this or that opportunity. His friend turns to him and smiles ironically. "See what I mean? Kids!" Of course, in a rising market you want optimists: the scarred old bears will tend to hang back and miss out on the bonanza. Which is why Adam Smith's friend was employing kids.

But the tide is turning.

I called it far too early (but how was I to know that governments would lose their sanity and print money as fast as their presses would work?). Here's what I wrote to a client on 21st October 1999:

As you are now around three years off the maturity date of your personal pension with XXX Life, you should be considering the security of your fund.

I went to a very interesting investment seminar yesterday, at which it was said that the American stockmarket could be as much as 50% too high, and a correction is overdue. It has already slid 20% off its highest point, by degrees, but a bigger drop could happen. If and when it does, this would have consequences for other markets around the world, since the US is the biggest stockmarket of all.

As you know, the XXX Fund is designed specifically as a safe haven for your investment in uncertain times, and I enclose a form for you to sign and forward to XXX Life, if you agree with my suggestion.

To those in the know, the crash of 2000 was not a surprise. What was your adviser telling you then? Yet the tone of that seminar was upbeat - the market's overpriced, so what?

If governments had maintained financial integrity, then following the mad tech boom, the Great Correction would have started in 2000 and the cleansing and healing process would be well under way. Instead, our politicians chose inflation.

If you were earning money in the mid-70s, you'll know what runaway inflation is like. To counter it, we had financially-motivated strikes: strikes for more money to restore real incomes, strikes to maintain pay differentials between different categories of worker, and strikes for pay parity by those who were left behind. Then settlement, paid for by inflating the currency further. Then more price inflation, and more strikes.

In the new globalized economy, strikes aren't going to work. Here in the UK (and Alan Greenspan has recently advocated the same), we simply allow the import of lots of poor people to undercut our indigenous skilled and semi-skilled workers. This keeps down wage rates and improves productivity. But it also earns little tax/National Insurance, and builds up massive obligations for Health, Education and Welfare (present, for those undercut; future, for all).

For a former Chancellor of the Exchequer keen on off-book financing, it's not a big issue: let the future take care of itself. For most of us, who have to move into the future without a bomb-proof PM's pension and lifelong special police protection, those debts will come home to roost.

I've often wondered how middle-class Germans coped when their money was wiped out by hyperinflation; and how the Russians on State pensions survived in the hinterlands, after the economy collapsed some years ago. Today I read (UK's "Mail on Sunday", page 31) an account by one of the few remaining whites in Robert Mugabe's Zimbabwe:

"The professional generation before me, the doctors and lawyers and the engineers who built Zimbabwe, are all starving to death on their pensions." (If you want to help them, please contact ZANE - they're on the Web. And there's millions of black Zimbabweans who are even worse off.)

But it's to the Sunday Express I have to turn, to get a serious warning about inflation for ourselves. Geraint Jones (page 10) notes that China is hinting at dumping the dollar wholesale; Saudi Arabia has refused to follow the Federal Reserve's interest rate cut; China and India are emerging as this century's budding supereconomies; oil's going up; food is getting pricier; the subprime disaster hasn't finished; mortgages are costing more.

The Express' Financial section wants to lock the stable door after the horse has bolted - much good a reformed Bank of England will do us now. Back in the main paper, Jimmy Young supports the suggestion that UK savers should be given guarantees for the first £100,000 of their deposits - again, too late: it's inflation guarantees we need - in the Germany of late 1923, 100,000 marks wouldn't get you a postage stamp.

The American Jim Puplava, on his excellent Financial Sense Newshour, thinks the latest desperate reflation will buy us a couple of years.

Use them.

Buffett, Soros, railways - a thought

Many years ago, I read a series of books by a financial expert calling himself "Adam Smith". In one, he spoke to an investment manager who had bought a holding in a railway, I think the Santa Fe, and asked him why so, since the company was somewhere around bankrupt. The manager replied that he was looking at the value of the tangible assets still owned by the company - land, rolling stock etc.

Railways tend to own a lot more land than the bit the rails run on. Is this a reason for Buffett and Soros to have gotten into that kind of business?