Jim Chanos, founder and managing partner of Kynikos, talks with Chrystia Freeland, US Managing Editor, FT.com. Click the image to view this must see interview. Highlights are below:
James Chanos, president of Kynikos Associates, is the biggest short-seller in the world. Chanos, second-generation Greek-American, grew up in Milwaukee, where his family owned a chain of dry-cleaning stores, then attended Yale, where he studied economics, before entering finance. He worked first in Chicago, then moved to New York.
Recently, Chanos told Portfolio.com how Bear Stearn’s Chairman and CEO, Alan Schwartz, called him on the evening preceding the company’s bailout acquisition, to go on CNBC and tell them that everything was hunky-dory at BS.
He is best known for shorting Enron, as well as the work he did in blowing wide open the company’s dirty accounting. He is bearish healthcare, defence and for-profit education companies. Hedge funds will have to get used to the fact there will “lean years,” and of his own fund, he says that cash strapped investors have been using it like some sort of ATM, which has shrunken from $7-billion to $6-billion this year$. (Note: This has been the fate of winning hedge funds, another example of which has been Hugh Hendry’s Eclectica)
Here are some highlights:
How much worse are things going to get?
No one knows for sure.
The last few weeks has seen fear re-enter the banking system, both here and in the UK. The [Bernard] Madoff affair also did a lot of damage to confidence.
Are people right to talk about nationalising the banks?
I don’t know. We almost have it de facto for our largest institutions. The real crux of the problem [is] people still don’t believe the numbers.
What will it take for people to believe the numbers? There is still a bit of Pollyanna in the air. We don’t really know where these banks have marked these assets, because the news is still surprising us on the downside . . . The magnitude of these writedowns is still somewhat staggering.
What do you think of [head of the Federal Deposit Insurance Corporation] Sheila Bair’s idea of creating some sort of aggregator bank?
We continue to violate all of Walter Bagehot’s principles on lenders of last resort . . . As long as we continue to do that we are empowering the worst decisions, we are rewarding the people that got us here.
Are we running out of people able to run these big banks?
I don’t know that we could do a whole lot worse than the people who have been running them lately.
Should the banks be lending more?
Prior to this the banks would lend to anybody with a pulse, and now even JP Morgan himself probably couldn’t get a loan. It is a chicken and egg problem; you have people who are completely creditworthy, who probably don’t want to borrow money now, and the people who do are your lower creditworthy borrowers and the banks are terrified to expand their balance sheets.
Isn’t it prudent for banks to hoard capital now?
They should be coming clean with investors and with the government on their methodology for marking these assets and their loan loss reserves, and giving the Street as much transparency as possible.
Why isn’t it happening?
Because so far the surprises seem to have been on the downside. I think there is still a lot of damage on these balance sheets that has not come out. My guess is the number is going to be over the trillion [dollar] mark when all is said and done.
What effect has [the alleged Madoff fraud] had?
It was a blow to confidence exactly at the wrong moment, when things seemed to be getting better, and injected that nasty concept of fraud into the equation.
Will we see changes in taxation for hedge funds?
We already saw it very quietly. One of the most attractive aspects of hedge fund management was taken away in the Tarp legislation, which was the tax referral for offshore managers. That very quietly went away, and that was a big deal.
Are you worried about a climate of criticism over pay in financial services? [People] should be upset.
Bankers still took home, and my hypothesis is that in fact they never really made the billion dollars.
That’s the problem: we are going to find out when we go through the accounting that in fact these things were never that profitable.
Is America’s financial capital moving from New York to Washington?
Power is beginning to shift, clearly, because of the government investment in these firms.
And anyone who doesn’t see that is kidding themselves.
Have you identified any surprising areas of weakness in the economy?
The three areas we are focusing on would be healthcare, defence and the for-profit education business. All those areas are going to be under a lot of pressure under the new administration.
What is the big thing everyone is missing?
The next battleground is private equity. It is going to be very tough for the industry to look at Washington with a straight face and say “Gee, you’ve got to be hands-off with us”, while they are laying people off who are voting. That is going to be a PR nightmare, and I wish my friends in private equity good luck with that.
This is the week Barack Obama became president. What significance does that have?
I think the world is looking to America for a new beginning; I think a lot of Americans are too, no matter what your politics. The president-elect is hosting a dinner for John McCain, his defeated opponent, which is a very class act.
Long or short? Watch.
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