- Next Fire Sale Will Make Some Investors Rich

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Next Fire Sale Will Make Some Investors Rich

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Next Fire Sale Will Make Some Investors Rich

Wednesday, 24 September 2008

Andrew Gordon
I’m writing to you from Seattle this week. I’m on a mini-vacation but it seems there are no breaks from the market. What has happened over the past few days is stunning, but only because of the condensed timeframe that it happened. Lehman, Merrill Lynch, and AIG were preceded by eight bank failures this year. And none of them were big.
But now we have the big boys failing ... or getting bailed out ... or being taken over. And each day brought news of another big and powerful institution taking a fall.

As it happens, I’m staying at a hotel which is just a couple of blocks over from Washington Mutual’s headquarters (I’m staying on Fourth Avenue and WaMu is on Second Avenue). I walked over there yesterday and today. It’s a gorgeous high rise – concrete gracefully interwoven with glass from bottom to top.

Until recently it was seen as a fitting tribute to the power of the American banking system. As I looked at it this morning, however, I thought it was very possible that it will ultimately be viewed as a fitting symbol of the excesses of Wall Street and the big banks it was in cahoots with.

Unlike Lehman – where tourists were snapping away at the soon-to-be defunct bank – there was no unusual activity outside the bank during the day. But when I came back in the evening, I saw a local television crew getting ready to broadcast in front of the building.

Make no mistake. WaMu is in trouble. They need capital desperately to shore up their sagging books. And they’ve put themselves up for sale.

That’s too bad because Seattle is a beautiful city with a high-tech industry which is holding up well under the circumstances. We don’t know the details yet, but it’s inevitable that many cities and towns, sectors and companies and individuals that up-to-now were unaffected, will be hit.

Without sounding callous, is it too soon to talk about the “day after”? What happens when this crisis finally plays out (I believe we’re only in the third inning right now)?

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Picking up the pieces will be an extremely lucrative business. Assets will be selling for pennies on the dollar. Some will only be worth that. But many assets will be huge bargains – the equivalent of fire-sale prices.

Investors with money, and hedge funds with the foresight to raise money to make such investments, should make huge profits from these deeply distressed assets.

How can you make out? Well, you can invest in closed-end funds (CEFs) that specialize in investing in distressed assets – funds like Highland Credit Strategies (HCF). But be careful. HCF has moved down this week.

Well, that makes sense. Assets under duress are getting sold at a furious pace. Their price is being driven down. These funds won’t start pulling in the profits until there is a turnaround.

But it’s good to know that when the turnaround kicks in, there’s a way for you to participate.

Invest well,
Andrew Gordon

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