Subprime Surprise

Always read the fine print.




You can get a pretty good debate going about whether homebuyers who took out subprime mortgages or the brokers and lenders who set up and sold the mortgages are responsible for what everyone agrees is the current mess.

But one other group is getting off easy. And, sad to say, I am part of it. That's the investors who bought high-yield securities backed in part by subprime mortgages.

There is no way of knowing exactly how many Memphians are in that group. But a reasonable guess would be hundreds — if not thousands — because Memphis-based Regions Morgan Keegan started and sold seven such investments between 2000 and 2006. In all, more than 115 million shares were sold. Morgan Keegan and James Kelsoe Jr., the "fund whiz" who managed the closed-end and open-end funds that included subprimes, were featured last October in a front-page story in The Wall Street Journal.

"Little good has come to any party that touched the loan," said the story that traced an $88,000 mortgage loan to a 61-year-old Colorado truck driver through a finance company, a foreign bank, and eventually into my mutual fund.

I blame only myself. I have been investing in stocks for 30 years and writing about it on and off for 15 years for this magazine. To put it bluntly, I should have read the fine print more closely, but even if I had, I probably would have made the same mistakes.

So how did I buy my little piece of subprime misery and lose, on paper, more than half of my investment in less than two years?

I'm a yield-seeking investor. I am custodian of a trust fund for my 86-year-old stepmother and I control my daughter's college fund. With the help of a professional stockbroker, I buy a variety of dividend-paying investments for both of those accounts.

In 2006, I bought $20,000 of the initial public offering of the RMK Multi-sector Hi Income Fund, stock symbol RHY. The price was around $15 a share. And at that price, the dividend was over 9 percent. A safe, conservative investment? Not really. At the time, government bonds were paying less than 5 percent.

But the stock market had returned about 20 percent the year before. So mentally, I was splitting the difference. I was buying yield. And I was buying the good name of Regions Morgan Keegan. When I looked at the fine print in public filings, what I saw was a blue-chip board of directors chosen for "familiarity with the funds as a result of their current service as directors and their knowledge of the investment company industry." The directors range in age from 49 to 66 – no young cowboys here. They included Morgan Keegan cofounder Allen Morgan Jr. and Mary Stone, a CPA and holder of the Hugh Culverhouse Endowed Chair of Accounting at the University of Alabama.

Directors get $4,000 a year for each fund and $1,000 for each meeting, which translated to $30,000-$34,000 apiece in 2006, according to the proxy statement.

For that kind of money and that kind of experience, I expected due diligence and dividends. What I, along with other investors, got instead was a year's worth of nice dividends and a fairly steady stock price followed by eight months of bad news. In August, there was this troubling disclosure: "An independent valuation consultant has been retained" because the value of the securities in my fund "may be difficult to determine and thus judgment plays a greater role in this valuation process."

In December, news broke that Wall Street firms are being ordered to justify their due diligence regarding the mortgages they packaged and sold. Better late than never.

Maybe what the fine print should have said is something like this: "WARNING: The investment you are considering depends on the ability of an unhealthy truck driver in Colorado to make his mortgage payments on time even if his interest rate goes sky high."

The stock I bought for $15 in 2006 was worth $6 in early December 2007. The dividend, which is nearly 30 percent at that price, is secure for another month, but after that, who knows?

So my 2008 New Year's resolution is to not do this again until I do this again.

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