I Have Become Comfortably Numb

It is official. I have become desensitized to the plight of troubled homeowners, distressed investors and beleaguered financial advisers. Basically, I have no sympathy for those who did not do their homework and got burned as a result. Here are three truths.

1) Adjustable rates mortgages can and do adjust higher.

2) Perpetual securities and securities with long maturities are just that. They are long-term investors. Call dates, auctions and other optional features should not be counted on.

3) Higher returns ALWAYS involve more risk (of some kind).

I also have no sympathy for commercial banks and investment banks who are being burned by subprime mortgages.

Banks deserve what they get for not doing their due diligence. Low documentation or no doc. loans (a la Rescap) are trouble. Who doesn't know that?

Investment banks who believed they could create safe vehicles backed by garbage collateral or other vehicles backed by garbage deserve their writedowns.

I have no sympathy for firms who, after being blown up by very brilliant quant mathematicians who have no financial markets experience. Using brilliant, but inexperienced math grads in the capital markets is like putting a rookie with a 100 mph fastball, but with no game experience, on the mound against the NY Yankees.

To make matters worse, Wall Street firms are still looking to hire the same people. A quick search on Bloomberg and EFinancial careers indicates that all firms want are new quants with better models. Management doesn't get it. Markets cannot be reduced to a formula.

Markets involve humans beings with human emotions such as fear and greed. Models and the computers on which they are run are logical. Market participants are not. I would rather have one trader with 20 years of experience than a team of rookie quants.

Why doesn't management get it? Because they are part of the Ivy League club.

Want to be successful in the fixed income markets? Be diverse. Don't jump in on every fad investment and know what you own.

Currently, CDs, government agencies, high grade corporates and preferreds (on the long end) are at home in most portfolios.

To some of my readers who are scared and confused: FNMA and FHLMC are AAA-rated, will remain AAA-rated and will not lose their implied government backing.