Saturday, April 05, 2008

The Geodyne albatross has finally been vanquished

Back in the 1980's I was gullible enough to let my Paine Webber stock broker talk me into putting money into Geodyne energy income limited partnerships. It was a great idea at the time, getting money off of the production of oil and natural gas, and initially the returns were great, over 16% a year. But the returns were so great that the downstream consumers balked and refused to honor the contracts. Despite lawsuits, the heyday returns vanished, falling down to sometimes below T-bills. A decline in energy prices did not help. I eventually sold the limited partnership units at a modest loss. In fact, it was so bad that Paine Webber and the Geodyne limited partnerships were part of a massive class action lawsuit against Paine Webber, on the order of $1.5 billion, the largest at that time, charging that Paine Webber put investors into "inappropriate investments" and did not adequately inform us of the risks. (Sound familiar?!) I probably broke even with the proceeds of the lawsuit, but of course lost the time value of my money.

Unfortunately, I had also opted to have the income from Geodyne reinvested in the limited partnerships. The way the limited partnerships worked, a new one was created and then closed to investors almost every quarter, so that eight quarters of reinvestment resulted in my having eight fractional units in six distinct limited partnerships, and there was no market for fractional units. Eventually Geodyne did begin repurchasing fractional units, but at a rate of about 23 cents on the dollar. Since I was earning about 5 cents on a dollar in income, that meant my effective rate of return was over 20%, making it beneficial to simply sit on the fractional units. Until last week.

The limited partnerships "expired" years ago, but Geodyne repeatedly exercised their option to renew them every two years for up to five times. Finally last year, Geodyne decided not to renew and proceeded to liquidate the holdings of the limited partnerships (rights to the oil and gas on a number of parcels of land primarily in Texas and Oklahoma.) It took a while, but the final cash distribution from the liquidation occurred last week, on  March 26, 2008.

Finally, on March 28, 2008, UBS (who had purchased Pain Webber years ago) transferred the liquidated limited partnerships out of my account (originally an IRA but converted to a Roth IRA.) Where they transfered them to I do not know, but they are gone as far as I am concerned.

For over 21 years I have had that albatross of a "bad" investment hanging around my neck, but now it is finally gone.

How did I do? Not bad actually, but mostly because of the recent pickup in energy prices.

Those eight fractional units each cost $100 for a total of $800. Over 21 years the total income plus proceeds of liquidation came to $1,893.06. That is roughly a 4.2% simple annual rate of return. Not great by any means, but not bad for a "bad" investment. I did in fact get my full principal back plus all of that income. And I earned interest on the income during that period as well. Overall, I can't complain, especially in the current "crisis" where you have people who were once again put into "inappropriate investments" such as auction rate securities and not given an adequate description of the risks.

Now, what do I do with the proceeds of the liquidation?

I am not going to keep the account at UBS since it is too small to do anything interesting with. Once I get a clean monthly statement I will most likely transfer it into my Roth IRA at Fidelity.

But, I cannot transfer it to my Fidelity Rath immediately because... I screwed up. I did a conversaion of my Fidelity IRA to a Roth account at the beginning of 2007, not realizing that my final level of income for 2007 would not permit such a conversion. I just found that out last week when my accountant was doing my taxes. So, just two days ago I filed the paperwork at Fidelity to "recharacterize" that Roth conversion. I need to wait for all the assets in that Roth account to be transfered back to the non-Roth IRA and then I can do the transfer from UBS. And then the nightmare of the Geodyne albatross investment will finally be over.

-- Jack Krupansky


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