Mr. Distress is ready to buy

NEW YORK (Fortune) — Whether it’s steel, textiles, or auto manufacturing, Wilbur Ross has built a lucrative career finding gold in industries left for dead.

He did it first at Rothschild, and since 2000 at his own investment fund, WL Ross & Co. To cite just one example, Ross bought bankrupt steelmaker LTV for $325 million in 2002, and sold it for $4.5 billion two years later.

As the economy continues to struggle, Fortune’s Katie Benner sat down with the master of distressed investing to hear where prospects can be found in this turbulent time.

Where do you think the biggest opportunities are now?

There are deep value opportunities in insurance stocks, which were beaten down because of their exposure to the subprime crisis, annuities, and commercial real estate. I won’t name names, but some well-managed life insurance and fire and casualty companies will come through this stronger. They used to trade at one or two times book value but now trade at three-quarters book.

Regional and subregional banks still have a lot of issues to resolve, and they have enough commercial real estate assets on their books to make most of them insolvent on a mark-to-market basis. Of course, they won’t all mark their assets to market and their loans won’t all go bad. But another several hundred banks will fail before we get through this cycle. We just bought Bank United in Florida for $925 million, and the FDIC is providing about $4.9 billion in assistance.

I still like TIPS (Treasury inflation-protected securities), and I think a big opportunity is coming in the municipal bond market. Even if it doesn’t default, some state or local government will come close enough to scare everyone to death. That will be a wonderful buying opportunity.

And as one of the public-private investment managers for the Treasury, we have been buying lots of residential mortgage-backed securities. The price often more than discounts the problems that are ahead. After another year or so of property value declines I think that market will stabilize along with the securitization market. Securitization is a fundamentally sound idea, even if it was poorly executed.

How can we fix the securitization market?

No one had skin in the game. That’s where things went wrong. My proposal then is that everyone has skin in the game. Ratings agencies’ fees and compensation should be paid over time and depend on the enduring quality of the rating. Employees at banks and brokerages should have their compensation tied to the long-term success of their products. If a trader is paid a big bonus for a portfolio that turns out to be a disaster a year later, did he really earn the money he was paid?

What about commercial real estate? There are reports that you want to buy the near-bankrupt apartment complex Peter Cooper Village/Stuyvesant Town in New York City.

At some point commercial real estate will become very interesting, but not yet. The declines in value are not over. Stuyvesant Town is an early indicator of what’s to come — it’s a poster child for the mistakes made during the boom — and we are interested in it.

In the original deal for the complex, the financing was predicated on the idea that the apartments would no longer fall under rent control and that they would start generating a lot more cash. That never happened. There were also 11 tiers of mezzanine debt on the complex, which probably have no value. The debt was distributed into six or so commercial mortgage-backed securities that were sliced up and sold to investors.

So there’s a huge pile of paper out there that is very affected by this deal. At some point these securities will fall in value enough to be attractive. But at the moment the prices don’t reflect the problem environment that we see.

What is the investment opportunity at Stuyvesant Town if you can’t significantly raise rents?

Eleven thousand middle-class families live in Stuyvesant Town — more than in a small town. New York City needs affordable, middle-class housing. If the debt put on the complex is the right size for the amount of cash the complex generates it could be a very good investment.

How do you see 2010?

This is going to be a volatile year. It won’t be a year of stock markets, but of the individual stock. Some will do very well, despite the environment.

What are the big challenges for investors now?

Government intervention is one. Washington, D.C. is the new Wall Street. No significant financial transaction of any consequence occurs without it. About 90% of all mortgages are granted through Washington. Health-care reform would mean another 16% of the economy under more government supervision.

But there is no evidence that more regulation makes things better. The most highly regulated industry in America is commercial banking, and that didn’t save those institutions from making terrible decisions.

The relationship between information and decision-making is a challenge. Everyone gets the same information at basically the same time, so the value of information has gone to zero. And there has not been proportionate growth in the investment community’s ability to sort through it all. People spend so much time absorbing that they don’t have time to understand what it means. This creates volatility.

For example, people suddenly decide Greece is the problem, and whack, the market is down 10%. If weeks from now people decide California is the problem, markets will move again. Everyone has known for over a year that both places are troubled. Why do we care now? How do we know that the problems of Greece or rescuing that country will make a difference in the economic landscape one way or the other?

That’s why the value of expertise and the ability to interpret information will someday go to infinity.

By Katie Benner, writerMarch 9, 2010: 4:09 AM ET

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43% of Americans say they have less than $10k for retirement

NEW YORK ( — The percentage of American workers with virtually no retirement savings grew for the third straight year, according to a survey released Tuesday. The percentage of workers who said they have less than $10,000 in savings grew to 43% in 2010 from 39% in 2009, according to the Employee Benefit Research Institute’s annual Retirement Confidence Survey. That excludes the value of primary homes and defined-benefit pension plans.

Workers who said they had less than $1,000 jumped to 27% from 20% in 2009.

Confidence in ability to save enough for a comfortable retirement hovered at 16% of respondents, the second lowest point in the 20-year history of the survey.

“Americans’ attitudes toward retirement have clearly tracked the economy the last couple of years, and that seems to be the case in 2010,” said Jack VanDerhei, EBRI’s research director and co-author of the survey, in a statement.

A drop in the bucket

The percentage of workers who said they have saved for retirement fell to 69% from 75% in 2009.

While VanDerhei attributed the decline in current savings rates to job losses, mortgage problems and the suspension of corporate 401(k) matches in 2009, he said the economy isn’t entirely to blame.

“In previous years, there were a whole lot of people who had nothing to begin with,” said VanDerhei.

The gap between what Americans have saved and what they’d need for retirement is forcing workers to prolong their working years.

According to the survey, 24% of workers said they have postponed their planned retirement age in the past year, up from 14% in 2008.

But even as fears over health care costs and job prospects mount, the survey found that only 46% of workers have tried to calculate what they need for a comfortable standard of living in their golden years.

“People just don’t want to think about this,” said VanDerhei. “Everybody thinks they’re too young to think about it, until suddenly they’re too old to do anything about it.”

In general, financial planners say that retirement savings, including Social Security benefits and pension, should be large enough to provide about 80% of pre-retirement income.

To reach that target, “most Americans need to be saving within the healthy range of 6% – 10% (of their salary),” said Beth McHugh, vice president of workplace investing for Fidelity Investments.

But the survey found that 54% of the workers with some form of savings said that they have less than $25,000 stowed away.

Delaying retirement, though not ideal, is a good sign that people are finally facing reality.

“People have figured out that they don’t have enough money,” VanDerhei said. “Still, I’d rather they bite the bullet today, rather than take the chance that they’d have a job when they are 65.”

The EBRI surveyed 1,153 U.S. workers and retirees, age 25 and older, in January.

To top of pageBy Chavon Sutton, staff reporterMarch 9, 2010: 3:47 AM ET


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Banks raise rates

Bankers say rate hikes based on recent adjustment

KUALA LUMPUR: Banks have begun raising their base lending rates (BLRs) following Bank Negara’s move to lift the overnight policy rate (OPR) by 25 basis points last week.

Five of the largest banks in the country raised their BLR to 5.8%.

Malayan Banking Bhd (Maybank) and CIMB Bank Bhd were the first two banks to announce their interest rate hike from 5.55%.

The two banks raised their BLR and base financing rates to 5.8% effective today following Bank Negara’s OPR revision last Thursday.

In a statement, Maybank president and CEO Datuk Seri Abdul Wahid Omar said the interest rate revision was based on the recent adjustment in the OPR.

“We expect to see better growth from our core business segments, leveraging on the improving economic environment and as more customers take advantage of the diversity of our product and service offerings,” he added.

Public Bank will also raise its BLR to 5.8% today, according to Bank Negara’s banking info website.

“We are supportive of Bank Negara’s move to normalise interest rates as the economy regains stability and are immediately transmitting it to both savers and borrowers,’’ said CIMB group chief executive Datuk Seri Nazir Razak in a statement.

Nazir said it was the right time to raise interest rates as the economic environment had normalised and growth momentum was strong.

“We saw the fourth quarter gross domestic product (GDP) numbers and we are looking at a GDP growth north of 4% this year potentially,’’ he told reporters at the launch of CIMB Twin Yield Income Investment structured product yesterday.

“Those conditions suggest that it is time to normalise interest rates. As best as I can tell, it is a good decision.’’

CIMB also raised its savings and fixed deposit rates by up to 25 basis points.

The RHB banking group also raised its BLR for RHB Bank Bhd to 5.8% today.

In a statement, group managing director Datuk Tajuddin Atan said RHB would be balancing the increased borrowing rates by offering more competitive rates for depositors.

Hong Leong Bank Bhd will increase its BLR to 5.8% effective March 10.

Bank Negara raised the OPR as the economy has improved significantly and returned to its path to recovery.

“Given this improved economic outlook, the Monetary Policy Committee (MPC) decided to adjust the OPR towards normalising monetary conditions and preventing the risk of financial imbalances that could undermine the economic recovery process,’’ said Bank Negara in its monetary policy statement last week.

“At the new level of the OPR, the stance of monetary policy continues to remain accommodative and supportive of economic growth.”

A rise in interest rates is usually greeted with trepidation as economists typically worry about its impact on growth and demand.

This time around, that apprehension is not yet visible.

“At the moment the impact will not be great as it is coming off historic lows,’’ said AmResearch economist Manokaran Mottain.

The Association of Banks Malaysia said the increase in OPR would not impede access to financing nor affect the industry’s lending activities.

The banking industry recorded a loans growth of 8.6% in January and 7.8% in December.

Analysts said the impact the BLR increase would have on bank’s profits would depend on whether deposit rates would be raised by the same quantum.

They said bank margins were squeezed when interest rates were cut but they expected net interest margins to widen as interest rates rose.

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U.S. Sitting on Mother Lode of Rare Tech-Crucial Minerals

By Jeremy Hsu, TechNewsDaily Contributor. posted: 08 March 2010 05:25 pm ET

China supplies most of the rare earth minerals found in technologies such as hybrid cars, wind turbines, computer hard drives and cell phones, but the U.S. has its own largely untapped reserves that could safeguard future tech innovation.

Those reserves include deposits of both “light” and “heavy” rare earths — families of minerals that help make everything from TV displays to magnets in hybrid electric motors. A company called U.S. Rare Earths holds the only known U.S. deposit of heavy rare earths with a concentration worth mining, according to a recent report by the U.S. Geological Survey (USGS).

Light rare earths include the minerals ranging from lanthanum to gadolinium on the periodic table of elements, while heavy rare earths range from terbium to lutetium.

Averting disaster

If developed, such deposits could help the U.S. avoid a possibly crippling rare earth shortage in the next decade. China has warned that its own industrial demands could compel it to stop exporting rare earths within the next five or 10 years.

“There is already a shortage, because there are companies that already can’t get enough material,” said Jim Hedrick, a former USGS rare earth specialist who recently retired. “No one’s trying to expand their use of rare earths because they know there’s not more available.”

U.S. Rare Earths practically stumbled upon its first rare earth deposit at Lehmi Pass, on the border between Idaho and Montana, about 15 years ago. The company founders coveted the area’s reserves of thorium — an alternative nuclear fuel — and took little interest in the rare earths that were only used, at the time, in lighter flints and tracer bullets for the military.

Their view changed over the years as rare earths became practically irreplaceable in high-tech products used by millions of people today. The company only recently changed its name to U.S. Rare Earths after staking out another deposit at Diamond Creek, Idaho.

“The fact is, the Diamond Creek property is today, the most accessible, undeveloped rare earth resource with significant [heavy rare earths] that there is in North America,” said Jack Lifton, an independent consultant who works with U.S. Rare Earths.

Recent USGS figures estimate that the U.S. holds rare earth ore reserves of up to 13 million metric tons. By contrast, the entire world produced just 124,000 metric tons in 2009 — but it would take both time and money for the U.S. to become self-sufficient in producing rare earths.

Deposits near civilization

The Diamond Creek location has the added advantages of being in mining-friendly Idaho and having access to nearby highways and power lines — factors that would make opening a mine much easier.

“We have power, light and roads, so we’re not in the middle of the wilderness,” said Ed Cowle, CEO of U.S. Rare Earths.

Cowle hopes to attract enough funding over the next six months to do some exploratory drilling at his company’s deposits. He also pointed to growing interest from national legislators in prodding the federal government to take action.

“Many times opening a mine takes a certain period of time, but if there’s a strategic need for material from government, that time period can be lessened,” Cowle told TechNewsDaily. “We’re hopeful of that because of the nature of what’s in the ground.”

An expensive proposition

Another company, Molycorp Minerals, has already begun processing “light” rare earths, such as lanthanum and neodymium, from a stockpile it accumulated at its mine in Mountain Pass, California. But it still has to ship its rare earths to China for final processing, because only China currently has the equipment needed for the job.

“No one [in the U.S.] wants to be first to jump into the market because of the cost of building a separation plant,” Hedrick explained. The former USGS specialist said that such a plant requires thousands of stainless steel tanks holding different chemical solutions to separate out all the individual rare earths.

The upfront costs seem daunting. Hedrick estimated that opening just one mine and building a new separation plant might cost anywhere from $500 million to $1 billion and would require a minimum of eight years.

Lifton has also suggested that many U.S. companies have not jumped into the market because China’s state-owned mines keep rare earth prices artificially low. But if U.S. companies do not begin mining American rare earth deposits soon, they may be left scrambling if China does one day stop exporting rare earths.

But Cowle, the CEO of U.S. Rare Earths, seems hopeful that momentum has already begun building for the U.S. government to encourage development of its own rare earth deposits.

“From what I see, security of supply is going to be more important than the prices,” Cowle said.

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