A smart banker

[clifp]

Buffett has a famous saying that investment isn't like baseball you never have to swing at a pitch.

This guy must have been really paying attention.

Very good Forbes article The banker who said no

Andy Beal, a 56-year-old, poker-playing college dropout, is a one-man toxic-asset eater--without a shred of government assistance. Beal plays his cards patiently. For three long years, from 2004 to 2007, he virtually stopped making or buying loans. While the credit markets were roaring and lenders were raking in billions, Beal shrank his bank's assets because he thought the loans were going to blow up. He cut his staff in half and killed time playing backgammon or racing cars. He took long lunches with friends, carping to them about "stupid loans." His odd behavior puzzled regulators, credit agencies and even his own board. They wondered why he was seemingly shutting the bank down, resisting the huge profits the nation's big banks were making. One director asked him: "Are we a dinosaur?"


Now, while many of those banks struggle to dig out from under a mountain of bad debt, Beal is acquiring assets. He is buying bonds backed by commercial planes, IOUs to power plants in the South, a mortgage on an office building in Ohio, debt backed by a Houston refinery and home loans from Alaska to Florida. In the last 15 months Beal has put $5 billion to work, tripling Beal Bank's assets to $7 billion, while such banks as Citigroup ( C - news - people ) and Morgan Stanley ( MS - news - people ) shrink and gobble up billions in taxpayer bailouts.

 

[donheff]

You would think there would have been more shrewd players like that. The herd mentality is incredibly powerful. Sorta leaves us clueless civilians hanging with nowhere to look for good advice. It doesn't work to just look to the contrarians -- no way to know if they are Beal's or idiots.

 

[W2R]

You would think there would have been more shrewd players like that. The herd mentality is incredibly powerful. Sorta leaves us clueless civilians hanging with nowhere to look for good advice. It doesn't work to just look to the contrarians -- no way to know if they are Beal's or idiots.

And really, depending on how things work out in the future, they could be either. Beal could have been stuck with a real mess if the economy had continued to thrive a while longer.

Hindsight aside, I don't think rock solid predictions are easy to come by. Prediction of the market seems as difficult sometimes as predicting the weather, or moreso. In meteorology, predictions often take persistence into account, more or less biasing the prediction slightly towards more of the same. Last week when the market was up, a lot of the pundits changed their tune and started to say that we may have seen the bottom. Before when the market was plunging, it seemed like there were a lot more mega-bears wandering about. The herd mentality is indeed powerful.

 

[FIRE'd@51]

I don't necessarily think it was the "herd mentality". Many well-known contrarians failed to see this coming and continued recommending / buying financial stocks right down to zero (or near-zero) in many cases.

I think many people (myself included) thought home prices were too high relative to incomes back in 2005-2006, but never expected a drop of the magnitude we have had so far. Had home prices fallen only 10% peak-to-trough, we would have largely avoided this whole fiasco, IMO, since the banks' collateral would have been adequate to cover (or nearly cover) foreclosure losses, and the write-offs would have been more in line with historical experiences. I guess the really perceptive people (of which there were very few) saw that the leverage homeowners had taken on would result in a giant "margin call" in the housing market, leading to a vicious drop in home prices in places like California.

 

[CCdaCE]

Great article.

But he says he's still just picking off loans with a "rifle" not a "shotgun," buying only 3% of what lands on his desk while waiting for the financial system to further "unravel."

The only thing I don't understand is why he's scooping up all these "deals" if another blowup is right around the corner. I guess he's only taking the really "juicy" ones. We'll see if he left enough margin for error, I guess.

-CC

 

[clifp]

And really, depending on how things work out in the future, they could be either. Beal could have been stuck with a real mess if the economy had continued to thrive a while longer.

Hindsight aside, I don't think rock solid predictions are easy to come by. Prediction of the market seems as difficult sometimes as predicting the weather, or moreso. In meteorology, predictions often take persistence into account, more or less biasing the prediction slightly towards more of the same. .

I agree it is really hard to make money being a contrarian because you need knowledge, conviction and good timing.

Back in late 98, and early 99 I was absolutely convinced that internet stocks were widely overpriced. Now I was far from alone in my views, although in that time frame many people were saying "this time it will be different." However, given my job (running Intel's website) and industry contacts, and decent investment experience, how more knowledge than most of the analysts and certainly more than your typical mutual fund manager or retail investor.

I start shorting some of the big internet names, Yahoo, AOL, and Amazon. I could have used options but my problem was I didn't know when the bubble would burst only that it would. I was even smart enough not to short the Pets.com of the world, because acquisitions were happening that could permanently screw my short position. I continued to hold these position with some minor trade up until Jan 2000. At which after moving to Hawaii and selling much of my tech stocks, investing in TIPs and muni bonds, I decide that it was just too risky to hold short position in Internet stocks. as an early retiree. Because as the saying goes the market can remain irrelational longer than you can remain solvent. I ended up losing more than $100,000 on my short positions. A glitch in Schwab's website recently accidently displayed one of my ten year old trades a short 300 shares Yahoo@210. Boy would I have liked to cover that position now days!

I think W2R is right Mr Beals look really smart now. I think he has earned his accolades it must be very difficult to deliberately shrink your bank when all of your competitors are making money hand over fist. Just like Warren Buffett took much grief for not investing in tech companies.

Still if the housing bubble went on for a couple more years, or if the correction in housing prices and risk was only modest, Mr Beal would still be smart, but he would getting a glowing article in Fobes and his bank wouldn't be making a lot of money.

 

[Nords]

I agree it is really hard to make money being a contrarian because you need knowledge, conviction and good timing.

Remember the outright abuse, threats, & laughter that Jim Chanos took for shorting Enron? It wasn't so much that he shorted it as that he was accused of "talking his book" to manipulate their price. It turns out that Enron was more jealous of his manipulation than anything else.

I start shorting some of the big internet names, Yahoo, AOL, and Amazon. I could have used options but my problem was I didn't know when the bubble would burst only that it would. I was even smart enough not to short the Pets.com of the world, because acquisitions were happening that could permanently screw my short position. I continued to hold these position with some minor trade up until Jan 2000.

An ER'd member of my spouse's family came to a similar conclusion and shorted himself right back into the workplace-- starting in 1996 and "capitulating" in 1998. He's since retired again, but it wasn't by shorting stocks.

I think W2R is right Mr Beals look really smart now. I think he has earned his accolades it must be very difficult to deliberately shrink your bank when all of your competitors are making money hand over fist. Just like Warren Buffett took much grief for not investing in tech companies.
Still if the housing bubble went on for a couple more years, or if the correction in housing prices and risk was only modest, Mr Beal would still be smart, but he would getting a glowing article in Fobes and his bank wouldn't be making a lot of money.

I think his marketing needed a lot of work. I can only imagine how insulted a board of directors would feel at learning that their exec has "... cut his staff in half and killed time playing backgammon or racing cars. He took long lunches with friends, carping to them about 'stupid loans.' " In fact that's a sure-fire way to become an ex-exec.

Instead he could've scoured the globe seeking opportunities while bewailing the numbers to the board and swearing to go to the ends of the earth before wasting more money on the current bubble.

The whole story sounds as though it's been slanted to be a bit too good to be true. It would've been better to highlight the career/job risk he took in pursuit of being proven correct.

 

[NW-Bound]

Back in late 98, and early 99 I was absolutely convinced that internet stocks were widely overpriced. Now I was far from alone in my views, although in that time frame many people were saying "this time it will be different."
...
I start shorting some of the big internet names, Yahoo, AOL, and Amazon. I could have used options but my problem was I didn't know when the bubble would burst only that it would.

I wonder if anyone else remembers the story about Robertson (of the Tiger Fund) and Soros in 2000. Robertson was bearish on dotcoms and was shorting them, while Soros was bullish and invested in some of them.

When the Nasdaq surged in March 2000, it took out Robertson first, whose fund loss was in the billions, and he had to shut down his fund. Then, in April when the Nasdaq came crashing down, it was Soros's turn to cry "uncle" when he lost a billion or two.

I myself was holding lots of semiconductor and hardware stocks at that time, and was laughing at people who piled onto dotcoms. I thought that my companies were "real" and would not be greatly affected by the dotcom bust.

In a way, I was right. Investors of dotcoms lost it all, while I lost "merely" 1/2 of my portfolio, which was of course significantly better than the Nasdaq drop of more than 70%.