The Aleph Blog » Blog Archive » The Education of a Mortgage Bond Manager, Part V

The Education of a Mortgage Bond Manager, Part V

Sometimes you have to do odd stuff for your client.  My boss and I were asked to come to a client meeting where there would be games (and a dopey speaker, I will leave that out).  As it was I found myself in a game where the one who moves his feet amid pushing loses.  I came in 4th (amid 60), I eventually lost to the tax guy… a very clever guy who should never be underestimated.  I ended up beating him in a game where we were all blindfolded, and those that were touched were out (we were the last two).

But the best part of the contest  was the square game.  We were blindfolded, and rope was around us, and they told us we had five minutes to form a square.  When the official said, “Go!” a marketing guy shouted out, “I know there has to be an actuary in our group.  What do we do?”

I shouted out, “I’m an actuary!”  “To the right of me, counterclockwise, count off, I am number one!” And so I heard, “two, three, four… fifteen.”

Fifteen? Uh-oh, that does not divide by four, so I shouted, “Okay, listen to me!  Five, Nine, and Thirteen, put your arms at right angles, and pull out.  You are the corners of the square.  Everyone else, put no pressure on the ropes.  Fourteen and Fifteen, make sure that you are not touching.”

After that, I shouted, “Has everyone complied with what I said!”  After agreement, I shouted to the judges, “Okay, we’re done!”

When we took off our blindfolds, behold, a square!  Way ahead of the other teams, who looked like blobs.

All actuaries are bright, but many lack courage.  I have courage, and a desire to learn more in areas where I am not an expert.

I needed all of my skills and my courage working for that difficult client. Here’s an example: I did not invest in a hedge fund structured note, with a guarantee from the AA insurer who was pushing it.  I said to them, “most hedge funds are short liquidity.  Why should I invest there?”  He disputed that hedge funds were short liquidity, but he dropped the case and we did not buy.

Here’s another example: A guy called me, asking me to let him pay at par a premium mortgage that we needed to fulfill our liabilities.  I said to him, “I can’t do that, we need the payment over time so that our shareholders are not badly affected.”  Then I said, “Why not get a second mortgage if you need to take money out?”  He said, “A second mortgage? Those guys wear ‘panky rangs.’”

I had the same experience on the most prominent building in Baltimore — the TransAmerica Building, which was the Legg Mason building when I was dealing with it.  Toward he end of my tenure at Dwight, they called me, asking to buy out the second mortgage, which was now the first mortgage.  They offered a slight premium to par, and I said no.  I told them that we needed 125% of par to make us whole, and we would be done.  They offered 110%, and I told them to go away; I would not counteroffer.

I had a strong position, and so I did not have to move.  Sadly, when I left, the company made a bad deal with the borrower, and lost a lot of money.

What can I say? I did my best, and they lost due to their stupidity.  They got more interest due to my intransigence at minimum.


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David Merkel is an investment professional, and like every investment professional, he makes mistakes. David encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong. Nothing written here, at RealMoney, Wall Street All-Stars, or anywhere else David may write is an invitation to buy or sell any particular security; at most, David is handing out educated guesses as to what the markets may do. David is fond of saying, "The markets always find a new way to make a fool out of you," and so he encourages caution in investing. Risk control wins the game in the long run, not bold moves. Even the best strategies of the past fail, sometimes spectacularly, when you least expect it. David is not immune to that, so please understand that any past success of his will be probably be followed by failures.

Also, though David runs Aleph Investments, LLC, this blog is not a part of that business. This blog exists to educate investors, and give something back. It is not intended as advertisement for Aleph Investments; David is not soliciting business through it. When David, or a client of David's has an interest in a security mentioned, full disclosure will be given, as has been past practice for all that David does on the web. Disclosure is the breakfast of champions.

Additionally, David may occasionally write about accounting, actuarial, insurance, and tax topics, but nothing written here, at RealMoney, or anywhere else is meant to be formal "advice" in those areas. Consult a reputable professional in those areas to get personal, tailored advice that meets the specialized needs that David can have no knowledge of.

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