Value Investing News

* Yahoo! Finance reports that foreclosure filings doubled between the current quarter and the previous quarter. As any literate fool could have predicted years ago, the ARMs are resetting and are going to continue to do so for another year or two, leading to increased foreclosures. The real estate bubble was interesting in its predictability. While it was easy to predict THAT the 1990s tech bubble was going to collapse, it was hard to predict WHEN (incidentally, this is why I never short any company's shares - the only thing worse than being wrong is being right, but losing your money anyway, only to see that, later on, you'd have made vast profits). It is obvious that a billion-dollar company with no profits, or real plans for how to make any profits, will fail. The problem is that it's virtually impossible to know when that will happen. With the housing market, it was easy to predict exactly when the downturn would start. One only had to read the news and few banking publications to find out when the first wave of ARMs were written in earnest. Three years later, like clockwork, those rates were going to reset. While it was possible in theory that those who had taken 105% loan-to-value, no-money-down, no documentation, adjustable rate mortgages for five times their combined incomes, on a house that had been increasing in price at 20% per year, would miraculously come into a fortune, the smart money didn't bet on it.

o Note that today's version of Value Investing News cites remarks by David Einhorn, which discuss the above issue and provide an excellent explanation of the problem. The Einhorn article correctly notes that the problem is more about systematic failure (versus my intentionally simplistic version of the problem as merely a borrower failure).

* CNN Money discusses the role Merrill Lynch's board played in the recent losses taken by the venerable brokerage after massive bets on mortgage-backed instruments fell apart. As you know, Merrill recently fired Stan O'Neal as CEO. O'Neal took much of the blame, but, as the article rightly points out, the board of directors should also be scrutinized. Generally, the board of directors is responsible for setting general corporate policy and setting the amount and timing of any dividends to be paid. Post-Enron, companies put up splashy "corporate governance statements" and such on their websites, noting the existence of things like audit committees and finance committees to provide oversight (Merrill had both). At the end of the day, though, there's only so much that can be done. You can gin up all the statements you want, but the politics of corporate governance/ policy always plays out far differently from the clean separation of powers envisioned by Delaware corporation law.

* Marketwatch cites analysts at CIBC World Markets as saying that mega-bank Citigroup may have to cut its dividend or take other drastic measures (i.e. selling off assets or issuing shares). The analysts noted that, in recent history, C has made high-dollar acquisitions, taken big charges (related to foolish subprime bets), and increased its dividend in the face of little growth in net income. Tsk, tsk. This is bad news indeed, particularly for a firm that has a department dedicated to managing others' assets.

* Baron Rothschild said to buy when there's blood in the streets. Another year or so of subprime panic, and investors will be like Buffett's fabled "oversexed man in a whorehouse."