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Handle With Care


"I saw Armegeddon," A. told me yesterday at lunch. We were having lunch at Union Square Cafe, where I had just delivered my oysters. I had not seen A. in years. We had the intimacy of men who had slept in the same bed: On September 11, A. lived in Tribeca two blocks from the WTC. He grabbed his wife and daughter and ran for their lives. I was just starting my oyster farm, so my apartment, five blocks from where he was head of mortgage trading, and later president, was empty. He moved into my place for four months while his new house in Westchester was being renovated.

A's bank was one of the few banks that took no bailout money. A. did his job for the bank and its shareholders. He was going to retire in fall of 2008, but when reviewing the book of a CDO trader, he found it mismarked by $2 billion. He stayed on until this April and is getting his Ph.D. in math at Columbia, something he's been telling me about for the last ten years. "That was the worst six months of my life," he said, referring to the CDO cleanup.

A. is in all cash now, a fact that frightens me. He has a similar look that returning G.I.'s from Vietnam had when they enrolled in college after their stint. "We shorted every market that was trading at $80 or $90 prices. Corporate and muni guys were screaming to get us out of their markets."

A. agreed that the super-senior tranches had been too cheap. But he winced when I said I had bought some senior mezzanine bonds, a notch below the super seniors.

"Those are some thin slices," he cautioned. “Once they start to go, they're done fast.”

"But at 20 cents on the dollar," I said. Originally, the market offered a 20 to 30 basis-point premium for super seniors. Now they trade 20 points higher than the Senior Mez bonds—a spread adjustment of 100 to 1. "The world has to go to hell for these bonds to lose," I defended my actions.

"That's what has surprised me," A. replied. "The actual lack of pain in the economy as a whole. With the defaults and liquidations we were seeing, I don't know why there hasn't been more pain out there."

For the economy to sink so low as to render my bonds worthless, I would be seeing people poaching my oysters, which has not happened. There was a run on gun-and-ammo purchases last year, but that has peaked. I don't see the class warfare that these prices imply.

No one is forcing me to buy CMOs. Despite the risks, the knowledge that a certain percentage of my bonds will be pounded by the coming defaults, I believe they are a good investment at current prices. We Americans are a resilient population and seem to be addressing our bad habits: We're saving, paying off our credit cards, and forsaking needless, idiotic vacations. Yes, homes in Las Vegas may have to be bulldozed. But was there ever a reason for a desert wasteland to be a booming metropolis? Most important, perhaps, the false concept of a home as the average person's major asset is now disgraced. A house, by definition, is a liability that demands tax payments, repairs, upkeep, and usually a large mortgage payment.

I'm selling more oysters this year than last. When I come into town to make delivers, I see people strolling the Village late at night, laughing and talking, instead of huddled at the bar whispering about who had been fired that day. The entire range of restaurants, from the power-lunch spots to the neighborhood bistros to the chic pizzerias, are enjoying a decent fall. Right now, I can't envision a scenario where I have to patrol my oyster beds at night, fending off hungry Americans.


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