Promotors and thieves go where the money is.

Ever hear of a scheme called, “portable alpha?” Most people haven’t and wouldn’t understand it unless they have had contact with the far side of the securities business. But many of us are affected by this complicated investment strategy which has invaded the pension funds of many states for billions of dollars of losses, most of which will probably never be recovered.

Who will make good on the losses? Well, depending on state law, most of it will be made up by the taxpayers of the states involved. Another crushing blow to the American taxpayer who is living in a bankrupt economy.

Portable Alpha is the name of an extremely aggressive strategy using sophisticated investments including various derivatives peddled to pension funds and other institutional investors when the stock market was rising to unheard of heights. Wall Street Journal reports an estimated 74 billion has been invested using portable alpha. Pension funds seem to be the hardest hit including Pennsylvania, South Carolina, San Diego County, Kansas, and Massachusetts. Unless a miracle occurs, investors in alpha funds will find they have bought into a highly leveraged bet on the market and in hedge funds. They will lose a LOT of money!

The idea was to use portable alpha is to match the market with a small dollar amount by using derivatives such as futures, and use other funds remaining for direct investments. Trouble is, (in my opinion) many managers of these funds didn’t understand what they were committed to. Portable alpha was a good idea when started in the late 80s, but no one seemed to know what would happen in a market that fell as fast as the current one. Even the pros that used portable alpha have been burned lately.

Years ago, when I managed investment accounts for two banks, I asked our governor why the state employees pension fund’s board of directors did not include any conservative bankers or investment people, and his answer was, “They tend not to take chances!’ The board was dominated by promoters, and other “Investment” people, who sold the state troubled real estate assets and even a failing business deal or two. I sure didn’t want the responsibility, but still, I wish he had listened. Wonder who oversaw the state’s investments in portable alpha.

Sorry this hasn’t been a spellbinder, but it is just the kind of mistakes that are exposed in tough times that can affect us all-a lot!

Later.

Banks Today

The last three weeks have made it difficult to get current information to write anything that will be accurate by the time you read it. The stock markets and the bond markets change daily and sometimes even faster that daily.

Just yesterday, the Dow was up nearly 1000 points, and will not doubt change in foreign markets during the night. Even Iceland seems to be somehow important and the Icelandic government has apparently taken over the banks there , I suppose because of the economic crisis which has spread over the free world, and maybe some of the rest of it, although I don’t read much about Russia or North Korea, or even China.

Obviously, things aren’t too tough in the oil rich countries in the Middle East, but I can assure you that the US banks are up to their necks in problems, and the only banks receiving any help in this mess are the mega banks, such as Chase, BOA, Wells Fargo, and a dozen or so others that have been deemed “Too big to fail.” Two weeks ago, I would have included Wachovia, but they were saved by Wells Fargo, with a large helping hand from Uncle Sam.

Why are they too big to fail? There are many valid reasons, but politics payed too heavily in the decisions. Some of these financial institutions should not have been bailed out by the taxpayers.

It started with the failure of IndyBank, which was never a bank, but the news broadcastes kept calling them banks, and the public does not understand the difference. Washington Mutual was not a bank, A.I.G. was not a bank, and then came some of the large brokerage houses, who our always kindly government rescued, merged with others, or sold them and their assets at bargain prices.

Here in our part of the world, a large regional bank was taken over by Mutual of Omaha, who is somehow in the banking business in a BIG way. Everyone in the local financial world, including builders and their suppliers knew these blunder head bankers were going down. They had no idea what they were doing, had originated so many bad loans, and had even tried to pass them on to some smaller banks, who wanted in on the action, but didn’t have the staff or expertise to get in on their own.

Once again our government is trying to solve banking and credit problems, by either approving the sale of marginal banks to just about anyone, or having the Federal Government buy them out. Either way, they are managed by the same people who took them down, or by management who may or may not have any experience in taking care of other people’s money. None of this has much to do with sub prime housing loans. We’ll get to that later.

My frustration with this knows no bounds!

What is a bank?

I spent most of my working life working for a bank-a real bank, not an S& L, not a credit union, and certainly not as a Wall Street investment banker, all of whom the media calls “Bankers.”

We financed business customers for accounts receivable, inventory,credit lines, and any other financing to keep our local manufactures, retailers, wholesalers, and all sorts of other enterprises going. We were “Community Bankers” in the truest sense. We financed church buildings, and even our local college with a line of credit when they needed it, usually just before tuition time. We financed the purchase and construction of homes, with tight controls of the builders. The money came from local depositors , both personal and business. We operated on the spread between the cost of funds, including expenses. Pretty simple.

Now we’ll make it a little bit more complicated. Most bankers kept a large amount of their deposits in reserves, (Liquidity) in cash equivalents in correspondent banks, and in required reserves in the Federal Reserve Bank(FED). For liquidity, they could borrow from these same sources, usually overnight only. Borrowing from the FED was the most difficult, and it became known as, “The bank of last resort,” and the overnight loans had to be secured, mostly by U.S. Government bonds…Most bankers would far rather be a lender than a borrower, or using another common term, we would rather sell fed funds, than to buy fed funds, but both sources were readily available to almost every bank. There were always a few incompetents running banks, but they were generally weeded out by good competition and the regulators.

Some money had to be left over for the “Bond account” which was generally composed of U.S. government and government agency bonds along with some municipal bonds, which represented investment in city, county, school districts, sewer districts, higher education facilities, and a long list of what were considered “Munis.” The interest on these bonds was generally free from taxes. helped the issuers provide for public need, and were considered a good investment for banks, although the bank purchaser was expected to check the credit of muni borrowers.

The system worked pretty well until all sorts of promoters, hustlers, and many without morals or reputation figured out how to get in the business, and even were able, through lobbyists, get the government to help them get to where the money was-in banks!

They started out like the famous small bank in Oklahoma City that loaned millions to oil promoters, drillers, and hustlers, and broke the bank! Before the bank was closed, it had become famous and legions of promoters either started, or bought up banks by the hundreds, which they promptly used to take unheard of risks, especially loans to their cohorts.

Next, the Savings and Loans, a previously well contained and well regulated business, were sought out for purchase by the same thieves, with the cooperation of the Federal government and congress who allowed abuses of the public trust almost beyond belief.

They were actually allowed to invest depositors money in their personal deals. They were allowed to issue, to their customers, debt securities on their own enterprises, and lead their investors to believe that they were protected by FDIC!

In the 80’s the whole thing blew up, and the public spent over 92 billion to straighten the mess out, and made a lot of unsavory people rich with the bargains they bought from the Resolution Trust Company (RTC) at few cents on the dollar, held them and sold them for enormous profit!

And the press called them bankers! These people were a lot of things, but they weren’t bankers.