chanos presentation
TRANSCRIPT
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James ChanosKynikos Associates
Virginia Value Investing ConferenceUniversity of VirginiaMcIntire School of Commerce/Darden School of Business
October 22, 2009
Ten Lessons From The Financial Crisis That
Investors Will Soon Forget (If They Haven't Already!)
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Ten Lessons From The Financial Crisis ThatInvestors Will Soon Forget (If They Havent Already!)
1. Borrowing Short and Lending Long is Still a Bad Idea
2. Accounting MattersA Lot!
3. Conflicted Rating Agencies: Still Not Unbiased
Observers
4. Regulate the Activities Not the Actors
5. Value at Risk May Put Your Firm at Risk
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Ten Lessons From The Financial Crisis ThatInvestors Will Soon Forget (If They Havent Already!)
6. Messrs. Glass and Steagall Were Right After All
7. Too Big to Fail = Too Big to Exist
8. Capitalism on the Upside and Socialism on theDownside is Bad Policy
9. Quantitative Easing (Helicopter Finance) Has a Cost
10.Insurance Without Reserves is Not Insurance
11.Shooting the Messenger Does Not Change Reality
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Borrowing Short And Lending Long Is Still A Bad Idea
Large Duration GapsCreate a MismatchedBook
Extra Spread Not
Worth Refinancing Risk
Short-Term FundingCan Always Be Rolled
Except in a CreditCrisis!
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Accounting MattersA Lot!
Mark to Market AccountingWas Not the Cause of the
Credit Crisis
Level II and Level III Assets:Mark to Model Fantasy
Off Balance Sheet RisksAre Still Real Risks:
Remember Enron?
Equity Capital is Not Simplyto Balance the Books
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Conflicted Rating Agencies: Still Not UnbiasedObservers
Issuer CompensationCreates Inherent Conflict
of Interests
Rating Agencies Aided inStructuring AAA Financial
Products
Rating Agencies AreAlways One Step BEHIND
Wall Street
CDS Market Offers RealTime Evaluation of Credit
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Regulate The Activities Not The Actors
National Financial SecurityCouncil Needed - Regulatory
Fiefdoms Mean No One HasUltimate Responsibility
Regulatory Capture is a Real
Issue
The Level of Risk is NotDetermined by Firm Type
Demonizing Hedge FundsCaused Regulators to Missthe Last Crisis
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Value At Risk May Put Your Firm At Risk
Black Swans Do Exist
Six Sigma EventsSeem to Be HappeningMore Often
VaR Models Work WellIn Theory: Reality is
Often Quite Different
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Messrs. Glass And Steagall Were Right After All
Depositors Are OnceAgain Financing the
Whims of Wall Street
Wall Street Prefers theExcitement of Fee-Based
Transactions: TraditionalLender/BorrowerRelationship is Boring
Shareholders and BankersReap the Rewards WhileDepositors Bear the Risks
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Too Big To Fail = Too Big To Exist
Systemic Risk: Too BigIf it Cannot Be Allowed
to Fail
State Sponsored EntitiesGiven Unfair Advantage
Implied GovernmentBackstop EncouragesExcessive Risk Taking
Taxpayers Bear theUltimate Risk!
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Capitalism On The Upside And Socialism On TheDownside Is Bad Policy
Hands-Off Regulationof MarketsUntil Wall
Street Needs a Hand!
Crony Capitalism: AllBailouts Are Not
Created Equal
Wall Street vs. MainStreet: Populist Anger
Could Interfere withBusiness As Usual onWall Street
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Quantitative Easing (Helicopter Finance) Has A Cost
Printing Money is Not aReal Solution: Zimbabwe
Should Not Be the GoldStandard!
Zombie Banks Financed
with Cheap Money OnlyProlongs the Problem: DidWe Not Learn Anything
from Japan?
Potentially Creates the NextFinancial Bubble: Kick the
Can Down the Road
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Insurance Without Reserves Is Not Insurance
Owning Hedges Does NotGuarantee You Are Hedged:
Counterparty Risks OftenIgnored
False Sense of Security
Leads to Excessive RiskTaking
Financial History Has a Wayof Repeating Itself:
Some Other Firm WillBe the AIG of the NextCrisis!
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FinallyShooting The Messenger Does Not ChangeReality
Short Sellers Play a VitalRole in Exposing
Excessive Risk within theFinancial System in RealTime
Wall Street Always AttacksNaysayers During theBoom: Problems Do NotGo Away by SilencingCritics
Cosmetic Changes inAccounting Policies WillNot Change Reality
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Thank You University of Virginia,The McIntire School of Commerce, &
The Darden School of Business