"That doesn't sound like a very good trade," said the thrift president.

The thrift president had just called up Salomon Brothers. He was desperate to sell Salomon Brothers $100 million worth of bonds.

The Salomon trader knew the president was desperate. So he offered to buy the bonds for only $75 million. The president agreed.

Then, the thrift president turned around and asked to buy $100 million of another nearly identical bond. The Salomon trader offered to sell him the new bonds for 85¢ on the dollar. In other words, the president was going to lose $10 million by exchanging similar bond issues.

He agreed to the trade anyway.

Here's the thing: The thrift manager needed to do the trade for tax reasons. This was 1981, and the government had just introduced a new law designed to bail out the thrift industry from bankruptcy. The law said the thrifts could recoup the taxes they'd paid over the previous 10 years if they simply cleared all the bad loans from their portfolios. For the thrift president, selling these bonds to the Salomon trader and buying some identical bonds to replace them was the only way to stay in business.

In the early 1980s, Salomon Brothers did trades like this with every thrift manager in the country. Thanks to this new tax legislation, every thrift in the country wanted to sell its mortgage bonds. Salomon Brothers was the only firm on Wall Street with a mortgage department. It had the market cornered.

According to Lewie Ranieri, the head of mortgage bond trading at Salomon in the early 1980s, his mortgage department made more money in 1984 than the rest of Wall Street made in all its businesses combined.

Michael Lewis describes the situation in Liar's Poker: "There were a thousand sellers, and no buyers. Correction. One buyer. Lewie Ranieri and his traders. The force of the imbalance between supply and demand was stunning. It was as if a fire hydrant burst directly on a group of thirsty street urchins. One trillion dollars came barreling through the phone lines, and all the traders had to do was open their mouths and swallow as much as they could."

This story is an example of what happens when people get desperate. They sell excellent assets for less than the assets are worth. In this case, the savings-and-loan industry was collapsing, and the thrift presidents needed to sell their mortgage bonds at any price. Salomon Brothers had the cash and knew the real value of the bonds. Salomon Brothers bought as many bonds as it could for 75¢ on the dollar and resold them at 85¢... making billions of dollars in profit.

It's possible to take advantage of desperate sellers today, just like the traders at Salomon Brothers did to the thrifts in the early 1980s. These sellers are giving away valuable assets for as little as 80¢ on the dollar. They're selling cheap because the intense market volatility we see right now is paralyzing investors.

You can find these discounts in the closed-end fund sector. Closed-end funds are collections of assets that trade on the stock market. But the stock market price of the closed-end fund doesn't always match the value of the assets in the fund.

If too many investors want to invest in the fund, then the price of the fund will trade at a premium to the value of the assets in the fund. If the fund is unpopular, the share price will move below the value of its assets. When that happens, you can buy them at a discount.

Right now, many of the closed-end funds I follow are trading at the biggest discounts I've ever seen. It's possible to buy your favorite market sectors, bond funds, or foreign country investments at 10%-20% discounts to the stock market. Here are five deep discount income funds I like:

To browse closed-end funds, go to etfconnect.com. For the biggest savings, sort by "premium/discount."

In the early 1980s, Salomon Brothers made a fortune from desperate thrift presidents when they all sold at the same time. Today we need to take advantage of closed-end fund investors. They're acting the same way as the thrift presidents...

Good investing,

Tom