- Editorial Market Commentary -

February 25, 2010 (FinancialWire) (By Dr. Joe Duarte) — Editor’s Note: Look for Dr. Duarte’s follow-up FinancialWire(tm) commentary on this article in the coming days (via http://www.financialwire.net/?s=djdrtregflp).

The Dow Jones Industrial Average got a nice bit of lost ground  back on  Wednesday. But wise investors may want to spend some time studying how Credit Suisse (NYSE: CRP) nearly doubled its money by investing in toxic mortgages.

In a perverse and ironic turn of events, a pool of toxic assets has returned 72% on its original investments, raising the question of whether if calmer heads had prevailed many of the bailouts engineered after the subprime mortgage crisis were necessary.

According to The Wall Street Journal: “Shares in a $5 billion pool of toxic assets distributed as 2009 bonus pay for Credit Suisse Group investment bankers returned 72% last year, people familiar with the situation said. Known as the Partner Asset Facility, the plan was originally billed as a way for Credit Suisse bankers to “eat their own cooking.”‘
Yeah, you’ve got it right. This was supposed to be punishment for the so called bad bankers who allegedly perpetrated fraudulent schemes on the unsuspecting public. Yet, after a couple of years, the punishment has turned into a cash cow.

To be sure, there is no guarantee that this pool of assets will eventually remain profitable. But, at least on paper, these guys are in pretty good shape.

As usual, the devil is in the details. And the details are a bit on the sobering side. For one thing, the bankers can’t sell any of their shares in this fund for five years. On the flip side, though, the fund is doing well enough for them to get some income, which is not a bad deal, at least as long as it lasts. So what’s in this fund? According to The Journal: “The pool is largely made up of commercial mortgage-backed securities and leveraged-loan products Credit Suisse sought to offload in late 2008 as it scaled back its own risk-taking. The fund assets originally included debt of a Japanese shopping center, a mining company and a U.S. supermarket chain.”

But here’s what makes this interesting. As The Journal points out “When the fund was unveiled in January, 2009 Credit Suisse bankers groused about the plan, fearing the securities would register few gains. Some bankers argued that they hadn’t contributed to Credit Suisse’s 2008 net loss. A number of them had hoped for cash bonuses instead.” Yet, things have turned out fairly well for these guys as “Credit Suisse’s timing now appears impeccable. The fund’s 72% increase for 2009 compares with a 23.5% rise in the Standard & Poor’s 500-stock index and an 18.8% gain in the Dow Jones Industrial Average. Credit Suisse shares rose 60% over 2009.”

And perhaps, this is the take home message. Credit Suisse didn’t take any government bailout money. Instead they raised money privately and put this pool of assets together for its bankers. Then, they have obviously managed it well enough to make it a moneymaker.

In other words, a major financial institution took its chances and seems to have had enough confidence and smarts to actually turn a very nasty situation and make it profitable.

This, of course, is a story that was somewhere in the bowels of the Journal, not in the front page. That’s where all the stories about rising unemployment, government deficits, and bad real estate are.

If there isn’t any fine print in this story, especially stuff that will pop up in a few years, it looks as if Credit Suisse actually made money the old fashioned way, not by stealing it, but by taking prudent chances, managing risk, and standing on their own two feet.

That’s kind of novel and refreshing in this day and age where government bailouts after bad decisions by executives, greedy consumers with unrealistic expectations, dim witted politicians and so called Wall Street smart guys have led to a near calamity to the global economy.

The lesson here is that investment is all about market timing and appropriate risk taking. Sometimes you get it right, and sometimes you don’t. Credit Suisse got it right, at least so far.

The long term for this bank is much more promising than for many of its international cohorts, who after creating wacky derivatives, didn’t know what to do with them when things went wrong, and went running to government piggy banks for salvation.

By the same token, fame and fortune can be fleeting. But at least Credit Suisse can bask in a little bit of sunshine for now and investors should consider studying this example and learning from it. In money management, a little bit of sunshine can go a long way.

For more insight and commentary from Dr. Joe Duarte (http://www.joe-duarte.com/), can be found by visiting Dr. Joe Duarte’s “Market I.Q.’ (at http://www.joe-duarte.com/free/order_choices.asp), Duarte’s “Intelligent Forecasts” (at http://www.intelligentforecasts.com), as well as by reading Duarte’s books (available via http://www.amazon.com/), which include “Market Timing For Dummies”, Successful Energy Sector Investing,” “Successful Biotech Investing”, “Successful Energy Sector Investing” and “After-Hours Trading Made Easy” (co-authored by Duarte).

Dr. Joe Duarte, In addition to regularly contributing to Investrend Weblogs (http://www.investrendweblogs.net/jduarte/), has logged many appearances on CNBC and is a frequent radio guest.  One of CNBC’s original Market Mavens, Dr. Duarte has been writing about the financial markets since 1990.  He is a featured columnist on Stockwatch.com. His articles and commentary have been featured on Marketwatch.com, Barron’s, Smart Money, Medical Economics, and in Technical Analysis of Stocks and Commodities magazines.  In 2003, Doctor Duarte received second place, in the professional section, of the Medical Economics Investment Challenge with a 12-month return of 42%.

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