Jim Chanos: FT.com Interview

Wednesday, February 4th, 2009

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.

Source: FT.com

Tags: Alan Schwartz, Array, Bailout, Banking System, Bear Stearn, Bernard Madoff, Cnbc, Crux, Dry Cleaning Stores, Eclectica, Education Companies, Executive Compensation, Financial Services, Freeland, Greek American, Hedge Funds, Hugh Hendry, James Chanos, Jim Chanos, Kynikos Associates, Managing Editor, Pollyanna, Profit Education
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The Man Who Made Too Much: The Other Paulson

Sunday, January 11th, 2009

Portfolio.com’s February 2009 issue profiles John Paulson, the now legendary hedge fund manager whose record payday in 2007-’08 came as a result of doing what can only be described in its entirety as “shorting Subprime.” What’s remarkable about his feat is that there was no simple way to do so at the time 2 years ago. No subprime instruments existed that one could short, and no representative futures or other derivatives were available to make this a strategy that others, no less, Paulson, could employ in order to facilitate his gigantic bet against subprime mortgages and housing.

This is this weeks must-read piece. Here are a few excerpts to whet your appetite:

Hedge fund manager John Paulson has profited more than anyone else from the financial crisis. His $3.7 billion payday in 2007 broke every record, and he made it all by betting against homeowners, shareholders, and the rest of us. Now he’s paying the price.

By scoring returns of this magnitude, Paulson has dwarfed the success of George Soros, whose currency trades in the 1990s made him so much money that he has spent much of the rest of his career atoning for them.

Paulson makes no apologies. During our conversation in his conference room, he describes in detail how he pulled off the greatest financial coup in recent history—a two-year bet that the calamity we are now experiencing would take place. It was a megatrade involving dozens of financial instruments, along with prescient wagers that banks like Lehman Brothers would eventually go under.

The article also features an eye-opening conversation between Jim Chanos and Bear Stearns’ Alan Schwartz:

Chanos, for one, is tired of the blame-the-shorts litany, and he recalls a conversation with Bear Stearns’ Schwartz to make his point.

The day before the Fed’s rescue of Bear Stearns, Chanos says he was walking to the Post House restaurant in New York City, when, at 6:15 p.m., his cell phone rang. He saw the Bear Stearns exchange come up on his caller I.D. and took the call.

“Jim, hi, it’s Alan Schwartz.”

“Hi, Alan.”

“Well, Jim, we really appreciate your business and your staying with us. I’d like you to think about going on CNBC tomorrow morning, on Squawk Box, and telling everybody you still are a client, you have money on deposit, and everything’s fine.”

“Alan, how do I know everything’s fine? Is everything fine?”

“Jim, we’re going to report record earnings on Monday morning.”

“Alan, you just made me an insider. I didn’t ask for that information, and I don’t think that’s going to be relevant anyway. Based on what I understand, people are reducing their margin balances with you, and that’s resulting in a funding squeeze.”

“Well, yes, to some extent, but we should be fine.”

“This is now 6:15 on Thursday night, the night before the collapse,” Chanos says. “It was after a meeting with Molinaro”—Bear Stearns C.F.O. Sam Molinaro—“who basically told him at that meeting, ‘We’re done. We’re gone. We need money overnight we don’t have.’ So here he is, calling one of his biggest clients to go on CNBC the next morning to say everything’s fine when clearly it’s not. And he knew it wasn’t.”

Chanos refused to go on CNBC. By 6:30 the next morning, word was out that the Fed was engineering the rescue of Bear Stearns. Chanos realized that he could have been on CNBC while that was ­announced. “I thought, That f*cker was going to throw me under the bus no matter what.”

Then, Paulson’s outlook:

Paulson is astounded that some optimists continue to expect that somehow the formerly unsinkable economy will remain afloat, at least long enough for the government’s rescue boats to arrive. “Now that we’re in a recession, they’re probably admitting, ‘Okay, we’re in a recession, but it will probably last just two to three quarters.’ So they’re always underestimating the severity of the magnitude,” he says.

Paulson’s own view of the current situation is much darker. He predicts that the recession will last well into 2010 and that unemployment will reach 9 percent, a sharp increase from its current perch just below 7 percent. “We have a long way to go before we reach the bottom,” he says.

About his recent presentation:

Slides in Paulson’s presentation declared that the U.S. had slipped into its deepest recession since World War II. His charts displayed the usual parade of bad tidings: a steep decline in home prices, soaring mortgage delinquencies, credit contracting, and hemorrhaging in the financial sector. The 14th chart showed his strategy. It read, “How do we benefit near-term?”

Paulson’s answer came in four bullet points: Cut leverage and build cash, eliminate exposure to the equity markets, maintain only short-term securities, and prepare for bargains in debt securities of distressed companies—a “$10 trillion opportunity,” another chart pointed out

/Read on

Tags: Alan Schwartz, Bear Stearns, Bet, Calamity, Coversation, Derivatives, Financial Crisis, Financial Instruments, George Soros, Hedge Fund Manager, Issue Profiles, Jim Chanos, Lehman Brothers, Litany, Megatrade, No Apologies, Paulson, Recent History, Subprime Mortgages, Time 2, Wagers
Posted in Credit Markets, Economy, Markets, Outlook | No Comments »