By Robert H. Halleck
So far I've shared insights on bad loans, bad branches and balance sheet blunders, based on things I learned the hard way in a 35-year financial services career. The picture would definitely not be complete without some thoughts on:
Prudent Investment Portfolio Management
Resist the dealers and investment bankers that encourage you to stretch for yield. Think quality and can I sell it when I need it. Resist complexity and innovative products. If you can't explain it on the back of an envelope, don't buy it. High yields usually mean one of two things: duration risk or poor quality. Let me put it another way. If a product yields significantly more than what you think a normal return would be, then it more than likely has duration risk or odd characteristics.
In the words of Ezra Wheat, my platoon sergeant in the early days of my months as a second lieutenant, "That mistake, lieutenant, means you done bought something you can't eat." This means if loan demand is down, you do not buy CDOs, SIVs, or the flavor of the month.
It most certainly means you do not buy packages of loans you do not underwrite one at a time. It also means, in my opinion, if you can't drive to it in an hour, you do not want it. For the life of me, I have never figured out how people can get 1,000 miles from their home office and think they know more about the market than the local guys who have turned the loan request down. Finally, if it means buying loans you do not ordinarily make, don't do it.
Robert H. Halleck, who retired in 2002 from a 35-year financial services career, remains vicariously involved in the industry through his wife, a credit union CEO.
Read Lesson 5.
