Nice chart.

Nice article and summary of current issues in regards to the credit crisis. The worst is definitely not over in my opinion. Nothing is certain — and during these times, the uncertainty is extremely high for the future of the capital markets in the near-term (1-2 years). One action should be exercised– do further research on the S&L crisis in the 1980s and see the potential relationships between now and then.

Also… long commodities.

———————————–

Pen-and-paper tellers to a global catastrophe: Tracing the rise and (almost) fall of US banks

• Stevenson Jacobs and Erin Mcclam, Associated Press Writers
• Saturday February 7, 2009, 11:28 am EST

These days, you can roll up to an ATM at the grocery, the pharmacy, the gas station, the hardware store, the office, even the ballpark. You can check your Bank of America balance on your iPhone. You can text Chase, and Chase will text you back.

That’s banking today: It has grown from an almost quaint relationship between teller and customer into a massive, dizzyingly interconnected network that touches almost every adult in this country.

And right now, the federal government — working without a road map, and without a net — is putting together a plan to keep U.S. banks from collapsing.

Not just to get the banks lending again. To keep them alive.

The government is expected to announce Monday a plan that analysts expect will include lifting soured mortgage assets off selected banks’ books, possibly along with guarantees against other losses and maybe more direct injections of cash.

Financial industry experts say it is a matter of choosing the best of several options, none of them very palatable.

And no one knows for sure what will work because nothing like this has happened in living memory.

Getting it wrong could trigger a replay of what happened after Lehman Brothers collapsed last fall — the stock market in free fall, seizure of the credit markets, ripples of layoffs. Perhaps even a run on other banks — so many customers rushing to pull out their cash that it would make the bank run in “It’s a Wonderful Life” look like, well, a feel-good holiday movie.

“The banks are at a terrible junction,” says Robert Reich, a labor secretary under President Bill Clinton. “The bottom is falling out. Almost every area of the credit markets, we’re finding people unable to repay their loans. That means many banks are basically insolvent.”

“If one big bank implodes,” he says, “the reverberations could be endless.”

So how did we get into this mess?

And how do we get out?

Washington and Wall Street are still playing the blame game. But most financial experts agree that a cocktail of bad economic policies and lax government oversight led lenders, borrowers and investors to take huge risks.

Greed and recklessness trumped fear and reason, and they led banks to the brink.

To understand how the things went awry this time, go back a couple of decades, to a time when you could walk into your hometown bank branch and speak to a teller who knew your name and kept a pen-and-paper record of your mortgage.

Banking was a simpler affair, and a no-nonsense one: If you didn’t make enough money to qualify for a loan, you didn’t get one.

But in the 1980s, falling interest rates and loose lending standards opened banking to the masses.

Credit was cheaper, and the government pushed to make more Americans homeowners. The housing boom was on.

Banks and savings and loan associations, or S&Ls, spread across the country offering cheap, 30-year mortgages. By 1980, banks had $1.5 trillion in outstanding mortgage loans, more than double the amount from 1976.

It was, says Eugene White, an economics professor at Rutgers University and an expert on the Great Depression, all about the government’s postwar policy of selling a “piece of the American dream.”

“But by doing that, we forgot about the risks,” he says.

Then came the bust. Unable to pay their mortgages, homeowners and businesses began defaulting in droves. Deliquencies soared, triggering the savings and loan crisis, battering the stock market and prompting a huge, taxpayer-financed bailout.

Sound familiar?

Fast forward to today. Not exactly an example of lessons learned.

Some ingredients of the S&L mess, such as cheap credit, loose lending standards and weak oversight, also are part of the current debacle. But two new trends — the rise of the global banking behemoth and the packaging of debt into securities that investors could buy and sell — made this meltdown unique.

And much worse.

In the span of a decade, Citigroup, Bank of America and JPMorgan Chase, once bread-and-butter providers of free checking accounts, grew into international banking conglomerates that buy and sell stocks and manage assets for fees.

The “universal bank” model, which took hold in the late 1990s, changed the face of global finance. And it linked Main Street with Wall Street in a way never seen before.

Banks themselves became ubiquitous in American life. From 1995 to 2008, the number of bank branches grew from 81,000 to 99,000. Over the past decade, the number of ATMs swelled from 187,000 to 406,000.

These banks lured first-time homeowners, many of whom believed housing prices would go up forever, with attractive lending rates and lax requirements. Bad credit, no credit — it seemed almost anyone could get a mortgage loan.

But instead of holding on to the loans themselves, a modern version of the old pen-and-paper model, the banks bundled them into securities and sold them to investors across the globe.

In a flash, a mortgage for a home in California or Florida could be sold to a hedge fund in London or Singapore — a huge shift.

In the old days, credit had been based on the borrower’s ability to pay back the loan.

“But now it was based on the lenders’ ability to securitize the loan and sell it,” says Barry Ritholz, a financial analyst and author of “Bailout Nation: How Corrupt Money Shook Wall Street.” “That is absolutely unique in the history of finance.”

Sure, the risks were big. But so were the rewards.

Using vast sums of borrowed money, Goldman Sachs, Morgan Stanley and other investment banks bought and sold mortgage-backed securities and other complex financial products, reaping astronomical profits that helped pay for outsized bonuses for executives.

In 2006, Goldman Sachs turned a $9.4 billion profit, the highest in Wall Street history. The bonanza netted chief executive Lloyd Blankfein a bonus of $53.4 million, more than any other Wall Street CEO for that year.

That was followed by the $41.4 million pay package received by Morgan Stanley CEO John Mack, who led his firm to a profit of more than $7 billion of profit in 2006.

But the good times didn’t last long.

When the housing market began to decline in 2006, subprime loans — those made to people with the worst credit — were the first to self-destruct. That caused massive financial losses at the big banks and claimed the first casualties of the financial crisis.

Then, early last year, Bear Stearns, a venerable 85-year-old investment bank, began to teeter.

The bank suffered huge losses tied to subprime securities. Its stock plunged, and investors raced to pull their money. Bear Stearns was bought by JPMorgan for a meager $10 a share in a government-brokered fire sale.

Six months later, the crisis spread to Lehman Brothers, a 158-year-old investment bank that helped finance America’s railroads. And, this time, the government decided not to step in.

Lehman collapsed in the biggest bankruptcy in U.S. history. Immediately, banks around the world, seized by fear, stopped trusting almost anyone, and lending, the lifeblood of the economy, dried up.

Seemingly overnight, two of the biggest names in global finance were gone.

To the even greater alarm of most Americans, the stock market went haywire. The Dow Jones industrials, in what amounted to a slow-motion crash, plunged 2,400 points over eight straight trading days in October. By late November, retirement accounts were cut almost in half.

To many observers, the big banks broke one of Wall Street’s cardinal rules: Be greedy, but be greedy over the long term.

“They forgot their instinct for self-preservation,” says Lisa Endlich, author of “Goldman Sachs: The Culture of Success.”

This January, the government took over six failed banks, including three on a single day. Last year, it took over a total of 25.

When it happens, the government swoops in and try to minimize disruption. Recently, it has tended to close banks on a Friday and achieve something close to business as usual by Monday morning, arranging for other banks to take on the assets. ATMs have kept working, and people have had access to their cash.

So far, most of the failed banks have been relatively small, many with assets only in the hundreds of millions of dollars. But what would happen if one of the nation’s big banks, the kind that manage hundreds of billions in assets, went down?

“That would probably cause a complete meltdown of the American financial system,” says Andreas Hauskrecht, an associate professor of money, banking and finance at Indiana University.

After the financial crisis accelerated last fall, the government increased the limit for the amount of bank deposits it will insure for individual depositors, from $100,000 to $250,000, effective through the end of this year.

And while few Americans have to worry about keeping anything bigger than that in the bank, the government could eliminate the limit altogether and insure all deposits regardless of size if a huge bank, such as Citigroup or Bank of America, were to fail, says Jim Wilcox, a professor of financial institutions at the University of California at Berkeley.

No one has ever lost money in an account insured by the Federal Deposit Insurance Corp. But no one has ever seen a bank that size go under, and news of a giant bank’s downfall would probably touch off a panic in which even depositors with money in safe banks rush to get it out.

But there’s a bigger economic problem: Other lenders, which hardly trust everybody these days anyway, would stop trusting anybody. Businesses, unable to borrow money day to day, would fail, with worldwide consequences.

It doesn’t take an economics degree to realize that would be nothing short of catastrophic for the economy.

“Not to say there’s not good aspects of letting someone fail,” says Robert G. Hansen, senior associate dean at Dartmouth College’s Tuck School of Business. “But the short-term costs of inflicting that punishment to everybody are really high, and I don’t think the Obama administration has the stomach for it.”

Already, the new administration is treating the Lehman failure as a lesson. Treasury Secretary Timothy Geithner suggested at his confirmation hearing before Congress that the feds would not let another big bank go down.

“Lehman’s failure was enormously complicated, an enormously complicated set of events,” he said. “It didn’t cause this financial crisis, but it absolutely made things worse.”

So what now?

Financial experts don’t expect the United States to go the way of Iceland, where a collapse of the banking system last month threw the tiny country into turmoil and toppled the goverment.

What keeps them up at night is a scenario closer to that of Japan, which bungled its own bank bailout in the 1990s and limped along during a “lost decade” of anemic economic growth and high unemployment.

To prevent that, the Obama administration must choose the best of several difficult options, or a combination. The emergency medicine prescribed by the last administration — flooding the financial system with billions of federal bailout dollars — hasn’t worked. If anything, banks are sicker.

One idea under consideration is the creation of a government-run aggregator bank, or a “bad bank,” that would buy up hundreds of billions of dollars in banks’ toxic assets. The government also may decide to pump more money into banks and offer billions in dollars in guarantees against future losses.

But no single fix is seen as a magic bullet, and financial experts say the government is quickly running out of lifelines.

“The longer they wait, the more damage there is to the economy and the more it will cost taxpayers,” says Frederic Mishkin, an economics professor at Columbia Business School and a former member of the Federal Reserve Board.

In theory, the government-run bad bank would buy soured debt that’s gumming up the banks’ books and clogging the flow of credit. That could shore up banks’ base of capital, soothe investors and get banks lending again.

But in practice, it’s far from simple.

For starters, no one — including the banks themselves — knows how much these assets are worth. The complex nature of mortgage-backed securities, credit default swaps and other contaminated products has made investors too afraid to touch them.

Pricing them is tricky, to say the least.

If it pays too little, the government risks forcing banks to record huge losses on their books, potentially putting them out of business and wiping out shareholders. If it pays too much, it risks shortchanging taxpayers by hundreds of billions of dollars.

“It’s a can of worms,” says Sung Won Sohn, an economics professor at California State University, Channel Islands.

The forensic nightmare of appraising these bad assets forced the Bush administration to abandon the idea in the early days of the bailout. With the markets spiraling lower, there simply wasn’t enough time.

And even if the government figures out how much to pay for the assets this time, the question is how much to buy.

Goldman Sachs estimates the government would need to shell out $4 trillion or more to absorb all the banks’ troubled mortgage and consumer debt.

How big is $4 trillion? It’s more than one-third of the economic output of the United States in a year. It’s more than twice as big as the first federal bailout and the coming economic stimulus combined. Just look at all those zeroes: $4,000,000,000,000.

Another vexing issue: Who would be in charge of poring over the banks’ books and valuing the assets? Experts say the people best qualified to do that are the same ones who created the faulty products — Wall Street bankers and other investment professionals.

That prospect makes some financial observers queasy.

“We’re asking the same people who got us into this mess to get us out. These are the guys who buy airplanes and decorate their offices for a million bucks,” says Bill Seidman, a former chairman of the FDIC who ran the government bailout during the savings and loan crisis.

Seidman and others are calling for an alternative rescue plan that they say would avoid the pitfalls of past efforts: a short-term nationalization of the banks.

To many people, that very thought is an affront to the free-market system, more Argentina than America. But that’s exactly what the U.S. government did in the S&L debacle of the 1980s.

With Seidman at the helm, the government-run Resolution Trust Corp. took over failed S&Ls and sold off their depressed assets — repossessed homes, offices, cars, planes and even artwork. Any institution needing help had its management fired and its shareholders wiped out.

During the next six years, the RTC sold nearly $400 billion in assets on the books of more than 700 failed thrifts. Then it sold the cleaned-up S&Ls back into the private sector.

The cost to taxpayers? About $125 billion to $150 billion by the time the bailout was completed in 1995, which was about 2 percent of one year’s gross domestic product at the time.

Seidman believes a similar plan has the best chance of success. And he claims it would cost taxpayers far less because the government wouldn’t have to buy bad assets or inject more money into troubled banks.

Instead, the government’s expenses would be largely limited to the cost of cleaning up the seized banks and selling them back into the private sector, Seidman says.

“If we don’t do it, we risk staying right where we are — pumping more money into insolvent banks and keeping them alive at the expense of healthy ones,” he says.

That’s what happened to Japan, which injected billions of taxpayer dollars into the banking system and spawned a legion of “zombie banks” — financial institutions that take government money but don’t lend it out.

Nationalization isn’t a sure thing either.

In the S&L days, the government recouped some taxpayer money by selling the physical assets of the banks, things like real estate and cars — not the hard-to-value paper assets held by banks today.

That wrinkle makes it much harder for the government to follow the RTC strategy, says Jonathan Macey, deputy dean at Yale Law School and the author of a book about a government bailout of Sweden in the 1990s.

“We’re not talking about valuing buildings and dirt,” Macey says. “This is quite a bit different.”

In other words, it’s uncharted territory once again.

AP Business Writer Madlen Read contributed to this story.

Holy crap this is an amazing video! Wow.

Bill Gross, manager of the $132 billion Total Return Fund, increased holdings of U.S. government bonds for the first time in a year after missing most of the biggest Treasury market rally in 13 years. Treasuries gained 14 percent last year, outperforming all other asset classes, according to Merrill Lynch & Co. indexes.

As he added to the government debt holdings last month, Gross sold mortgage-backed bonds, sending the fund’s holdings of the securities down to 62 percent from 81 percent a month earlier, data on the Web site show.

Municipal and Inflation-Protected Debt

The last time Gross bought U.S. government securities was December 2007. In the first 11 months of 2008, Gross’ fund held negative positions in Treasuries and debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Bank system.

Gross has been urging investors to anticipate which assets will benefit as the government struggles to boost the economy. Last week he recommended municipal bonds, inflation-protected Treasuries and debt the U.S. government plans to buy. In the past six months, Gross bought senior bank debt, agency mortgage securities and preferred shares in financial companies, all before the government did the same.

The fund is still “underweight” U.S. government debt compared with its benchmark index, the Barclays Capital U.S. Aggregate Index, which holds 38 percent.

Summarized Bloomberg Article –> Pimco’s Gross Buys U.S. Debt for First Time in Year (Update2)

Two leading technical analysts, Ralph Acampora and John Murphy, believe that a decline in the US stock indexes below the 2008 lows from November may trigger averages to levels not seen since the mid-1990s.

Ralph Acampora, retired technical analyst from Knight Capital Group Inc. in October 2007 after four decades on Wall Street, warns if the DJIA falls below 7,552.29 (reached on Nov 20), it might slide to 6,000. That’s a level last reached in October 1996 and 27 below Friday’s close of 8,212.49.

John Murphy, chief technical analyst at StockCharts.com and author of three TA books, says the lows in November are a “very, very significant area” because they are roughly where the last bear market ended in 2003. “If that’s broken, it becomes very negative.”

Both analysts spoke as part of a panel discussion about technical analysis, which involves making predictions based on historical trading patterns, at Bloomberg LP’s New York office.

How fast and how far

The S&P 500 and the DJIA have both posted their biggest annual declines since the Great Depression in 2008. The S&P 500 reached an 11-year low of 752.44 and the Dow sliding to its worst level since 2003 on Nov. 20. Stocks tumbled as more than $1 trillion in bank losses froze lending and spurred a global recession. The S&P 500 sank 38 percent last year and the Dow fell 34 percent amid the worst financial crisis since the Great Depression and the first simultaneous recessions in the U.S., Japan and Europe since World War II.

Murphy said the November lows are likely to be broken, in part because the dollar’s recent strength against the euro signals lower share prices globally, as foreign equity markets are correlated to local currencies. “There’s another down leg coming,” Murphy said. “Normally the market comes down in five legs. We’ve come down in two. I think we’re going to test those lows at the very least, and eventually probably take them out.”

Acampora said that while the past two weeks are “very disturbing,” he’s still “willing to give it the benefit of the doubt.” Even if the 2008 lows are not revisited, the market is probably in a trading range comparable to the ones that followed the 1929 crash and the bull market of the 1960s, Acampora said. The Dow average is unlikely to exceed its October 2007 peak of 14,164.53 for at least four years, he said.

Trading Range

After the 1929 crash, the Dow fluctuated between about 100 and 200 until 1950 when it began a sustained move higher. From 1966 to 1982, the average traded between about 600 and 1,000.

Summarized from Bloomberg Article –> Dow May Fall to 6,000 Should Low Break, Acampora Says (Update1)

Word on the Street

President-elect Barack Obama is going to back a bank-rescue.  This rescue includes fresh capital injections with steps to deal with toxic assets on lenders’ balance sheets. Along with this, we mustn’t forget Obama’s proposed $825 billion economic stimulus plan.

His economic team will use a portion of the $350 billion remaining from TARP to help homeowners avoid foreclosure. The money may also go to help cities and states with “credit issues” … pun intended.

Rescue Program

When will the Treasury Secretary-designate Timothy Geithner and Obama’s economics chief Lawrence Summers unveil a comprehensive rescue program? Thus far, Summers has told Congress Obama’s Treasury would use between $50 billion and $100 billion for a mortgage modification program, a good chunk of the rest of the funds could be used to buy the illiquid assets from banks. The FDIC, which has authority to take “any action” with insured deposit-taking firms deemed necessary to counter “adverse effects on economic conditions or financial stability,” could also play a role in this program, says Summers.

“We think by leveraging TARP funds in this way, you could have a significant capacity to acquire troubled assets,” FDIC Chairman Sheila Bair said. Officials could “require those institutions selling assets into this facility to contribute some capital cushion themselves.”

Create a Toxic Bank

As Geithner and Summers develop their plan to save the economy, US regulators are advocating a government-backed “bad” or “aggregator” bank to acquire hundreds of billions of dollars of troubled securities now held by lenders. Treasury Secretary Henry Paulson and Sheila Bair praised such an approach yesterday, backing up comments earlier in the week by Federal Reserve Chairman Ben Bernanke.

“Credit won’t flow in material ways until bank portfolios are cleansed and collateral values are re- established,” says Brian Olasov, a managing director at the McKenna Long & Aldridge law firm in Atlanta.

While the initial proposal for approving the TARP was to use the rescue funds to purchase illiquid assets, Paulson instead bought stakes in banks. After the Senate approved the release of the second half of TARP on Jan. 15, Obama’s administration can act soon without as many barriers as before.

You Can Do it, Paulson!

A Bernanke-led oversight panel issued a report yesterday calling for Treasury to “continue to take actions under the TARP to stabilize financial markets, help strengthen financial institutions, improve the functioning of credit markets and address systemic risks, given the disproportionate consequences that instability of the nation’s financial institutions and markets may have for the broader economy.”

Summarized with Commentary from Bloomberg Article –> Obama Financial Rescue May Revive Effort to Resolve Bad Assets

Background: According to the ancient Chinese scholars, the Chinese Royal Family was obsessed with longevity and health. This led to years of studies by the scholars and wise men in the field of medical science and health.

2200 – 0100 = Sleep
*  Body is producing highest level of growth and regenerative hormones
*  Better sleep quality

0500 – 0700 = Wake Up
*  Body is in the process of cleaning up the digestive system, eliminating toxic and waste products from our system
*  Drink a light and healthy drink during this period to help the digestive process

0700 – 0900 = Breakfast
*  Increases energy and ability to learn
*  Stops you from overeating later in the day

1100 – 1300 = Nap
*  Ideally around 20 to 30 minutes, even 10 minutes is good
*  Helps brain reorganize its data
*  Helps repair body from tiredness and stress

1200 – 1400 = Lunch
*  Food consumed during this period will last you long enough until the evening
*  Body is able to make use of energy of the food better

1500 – 1700 = Learning
*  Optimal memory and learning capabilities
*  Typically optimal level of operation 8 hours after waking up

2100 – 2300 = Copulation
*  Scientific studies –> Highest conception rate

I’m going to attempt to follow this schedule from now on. However, I do not feel “ready” to practice the the optimal copulation time.

Source: http://pokechild.com/lifestyle/time-sleepeat-learn-fk/

Summarized with commentary from BB News Article: “Dubai Speculators Quit as Lending Drought Bursts Desert Bubble”

The classified ads in Dubai read like an obituary for a real-estate market that was booming for years. The property bubble in the deser emirate, home to the world’s tallest building, most expensive hotel suite and largest manmade islands, is bursting as scarce credit and slumping oil prices have international investors scurrying to dump assets.

On November 11, 2008, Marc Faber said in a Bloomberg Television interview, “Dubai Properties … this is the next disaster to hit the world.”

Christopher Davidson, a professor of Middle Eastern affairs at Durham University in the UK, says, “If the property industry collapses in Dubai, it will be finished. Dubai’s relative autonomy will come to an abrupt end.”

Mohammed Ali Alabbar, chairman of Emaar Properties PJSC and head of a committee studying the effects the global credit crisis on Dubai’s economy, said the real estate sector in Dubai is going through a “healthy correction” and that Dubai will be able to meet its debt obligations.

Over the past 5 years, real-estate values have more than fourfold. Many of the borrowers have mortgages for as much as 90% of the property’s value to buy homes. If it was build on the premise of “build it and they will come” then that will now turn out to be a mistake. Now, many real-estate properties have seen a third of their value diminished in months.

Tight credit in the landscape. Amlak Finance PJSC, one of U.A.E’s biggest mortgage lenders, said Nov 19th that it had suspended new home loans.

With less interest in buying third or forth homes in Dubai, the worst may be yet to come as a new wave of properties arrive on the market. About 70,000 units are scheduled to be finished in 2009, more than half which were originally planned for this year and last.

“The speculative buyers were more than 50 percent of the market,” said Eckart Woertz, chief economist at the Dubai-based Gulf Research Centre. “They have disappeared.”

An excellent interview with Marc Faber and Charlie Maxwell on Nov 11th, 2008.

JAM PACKED WITH LOADS OF INFORMATION!

Wire: BLOOMBERG News (BN) Date: 2008-11-11 16:17:14
Faber Says Corporate Bonds `More Attractive’ (Transcript)
     Nov. 11 (Bloomberg) — Marc Faber, managing director of
Marc Faber Ltd. and publisher of the “Gloom, Boom & Doom
Report,” and Charles Maxwell, an analyst for Weeden & Co.,
talked yesterday with Bloomberg’s Pimm Fox in New York about
the outlook for the U.S. economy and stock market, Federal
Reserve monetary policy and commodity prices. (Source:
Bloomberg)

     (This is not a legal transcript. Bloomberg LP cannot
guarantee its accuracy.)

     PIMM FOX, BLOOMBERG NEWS: Who better to help us
understand all this but Marc Faber, the editor and the
publisher of the “Gloom, Boom & Doom Report.” Marc, you’re
always a bit of a contrarian. And first of all, welcome.
Glad you could join us.

     MARC FABER, MANAGING DIRECTOR, MARC FABER LTD.: Thank
you, very kind of you.

     FOX: You’re a bit of a contrarian, and in reading some
of the latest things that you’ve written, you actually talk
about a stock market rally. You say that there’s going to be
some rebound in stock prices. First of all, is that true?
And then, why is that?

     FABER: Well, we’re basically statistically extremely
oversold. And originally I had thought that we would be in a
bear market like ‘73-’74 where you would drift and then
rally and drift and rally. And we’ve come essentially in one
year down as much as in two years in ‘73-’74. So I think
some kind of a rally is possible here. Also, it is
conceivable that having had so many bad news and considering
also the various bailouts and the money printing we have,
and the expansion of the Fed’s balance sheet, that some kind
of a rally could occur. But I wouldn’t bet too heavily on
it. I think the economic news will continue to be very, very
bad.

     FOX: Well, you’re smiling when you say that, so I guess
there’s a bit of an irony in there because if you’re talking
about what has already happened, are you really just basing
your future outlook on a kind of a statistical model that
says you have so many bad coin tosses, eventually something
is going to come up, yes?

     FABER: Well, I think that if you look, say, at long-
>>term trend lines like the 200-day moving average of the
>>market, then obviously we’re very, very oversold. If you
>>look at the list of 12-month new lows, it had a very high
>>reading on October 10th. And since then the list of new lows
>>has diminished somewhat. So statistically it is possible
>>that we have some kind of a rally here. But equally I don’t
>>think that stocks are all that inexpensive because usually
>>people look at earnings. I think the earnings will be very
>>bad over the next 12 months. And equally people look and
>>compare the earnings yield to say the Treasury bond yield.

>>    But, I think in this environment you ought to compare
>>the earnings yield of the S&P 500 to essentially junk bonds,
>>because its junk bonds that is behind the S&P 500, the very
>>few AAAs left. And the corporate bond market has tanked,
>>whereas the Treasury market has rallied. So you can buy,
>>today, say you could buy a stock, or you could buy the bonds
>>of that company at the yield of maybe 13 to 15 percent. So I
>>think maybe the bonds market is more attractive than the
>>stock market.
    

     FOX: Well, indeed -
    
     FABER: The corporate bond market.
    
     FOX: The corporate bond market. Well, indeed I believe
- and today you talk about the bond market. Fitch came out
and offered a prognosis for the high-yield debt market,
saying that the downturn, the default wave, may be the most
severe on record for the high-yield market, increasing
corporate defaults. Do you see that happening as well?

>>     FABER: It could be, could be. But if that happens, when
>>the corporate bond market defaults, then the underlying
>>stock is worth zero. It’s like GM basically. If they default
>>on their debt, the equities were zero. And it should be
>>worth zero.
    

     FOX: Do you think that that’s - GM specifically?
    

>>     FABER: Well, not only GM. Actually what is amazing is
>>how many companies are now reporting dramatically lower
>>earnings or even losses, and gradually the skeletons are
>>coming out of the cupboard, showing that actually a lot of
>>companies were speculating on all kinds of financial
>>products, including companies in Asia. So I think that
>>because of the lack of transparency, which we’ve seen in
>>particular with AIG and with the banks, there could be a lot
>>of further negative surprises.

     
     FOX: All right. I’m going to ask you more about the AIG
and the banks. I specifically want to find out what you
think about all the government money that has been thrown at
this problem, and whether that’s going to have an
inflationary effect. I know you’ve been writing about some
of the consequences of that, compared to what’s been going
on historically. You’ve been looking at Weimar, Germany. Is
that correct?
    
     FABER: Yes, correct.
    
     FOX: It looks as though the TARP is something that they
want to spread, perhaps, even further, not just with
financial companies, but we talked about GM. Let me ask you
to kind of just step back, because you’ve said that if you
compare what’s going on now to what happened in ‘71-’74,
let’s say, or even ‘82-’83, there are some fundamental
differences that are worth paying attention to.

>>     FABER: Yes, I’d like to mention - this is an unusual
>>recession and slump, because if you take, say ‘73-’74, the
>>bear market, stocks went down, but gold rallied, coopper
>>rallied, corn rallied. And also home prices continued to go
>>up. Also in ‘81-’82, home prices didn’t go down. And bonds
>>rallied very strongly because the bond market bottomed out
>>in September, on September 21, 1981. And so until ‘82, we’d
>>have a huge rally. And the rally continued throughout the
>>’80s and ’90s.
    
>>     So there are fundamental differences that this time
>>around, whatever you touched 12 months ago and 6 months ago
>>has gone down, except U.S. Treasury bonds. So if you were in
>>commodities, you lost 50 percent of your money. If you were
>>in emerging markets, you lost more like 60 to 70 percent of
>>your money. If you were in real estate, you lost money, and
>>much more to come in commercial and globally, because we
>>have the global boom, and a global real estate bubble and
>>construction boom, and that is going down.
    
>>     If you were in shipping, the Baltic Dry Index is down
>>more than 90 percent. And interestingly enough today, on the
>>stimulus package China announced, the Baltic Dry Index went
>>down, it didn’t go up, which is a clear signal that the
>>stimulus package of China won’t help very much.
    
>>     And so whatever you touch went down. Global stock
>>markets have lost something like $30 trillion market cap,
>>from $60 trillion to $30 trillion. Bond markets have
>>collapsed, commodities and so forth. So the government
>>bailouts are tiny in comparison to the asset deflation we
>>have. Tiny.
    
>>     And I would say actually concerning the bailout of say,
>>now GM, they already obtained $25 billion in August. Now
>>they’re coming for more. I don’t know whether it’s an
>>additional $50 billion or whatever it is. It would be much
>>cheaper for the U.S. government to give a present to Toyota.
>>$50 billion, please take GM off our hands. And to go to
>>Honda and say, here, $20 billion, take Ford off our hands
>>and you run it. Because GM and Ford have proven over the
>>last 25 years they don’t know how to run a business.
    

     FOX: So there are endemic issues to those two - that
specific -
    
     FABER: They make - I admire Jimmy Rogers. He told me
already a few years ago, you can sell short General Motors
at any price, and he’s right. The company is badly managed.
    
     FOX: All right. Now if the company is badly managed,
let me get your perspective on the economy right now, and
whether that is being managed correctly. As you know, we’re
talking about all this money that has been coming in. What
are some of the likely effects?

     
     FABER: Well, I don’t think that initially there will be
>>an inflationary impact, because the asset deflation is so
>>massive that all the government bailouts and liquidity
>>injections will have no impact.
    
>>     But what will have an impact is that say you’re a ship
>>owner, and your stock is down 90 percent. Say dry ships or
>>so. You don’t get new loans. You cannot finance. You’re
>>going to go bust. In the mining industry, you don’t get any
>>new loans. Same for the oil industry. As prices collapse,
>>you don’t get the financing for exploration.
    
>>     So whenever the `L’ recession finishes, and that can be
>>in three years, it could be in five or in 10 years, who
>>knows, and the recovery comes, vital expansion projects,
>>whether it’s in the oil industry or in other industrial
>>commodities, will not have been completed. And then prices
>>will go up dramatically.

     
     FOX: You’ve also written about infrastructure as being
perhaps a victim of what is going on. Because we often hear
about how infrastructure build-outs will continue unabated,
whether it is in emerging markets or in various markets of
Asia. What have you discovered about that?
    

>>     FABER: Well, I would say the following. The present
>>crisis usually ascribed to a financial crisis. I think the
>>financial crisis was the catalyst, but the cause of the
>>crisis was overly expansionary monetary policies that led to
>>anyone borrowing money. The consumer to consume, via the
>>refinancing of his home and the extraction of money from
>>their homes. And what it also led to a huge increase in
>>supplies. In other words, in most industries, whether it’s
>>autos or ships or infrastructure, we have now oversupplies.
    
>>     And you can print as much money as you like. The
>>oversupply will stay there. And in action to fact, if you
>>look at the intervention of Mr. Bernanke, after Sept. 18,
>>2007, he slashed the fed fund rate from 5.25 percent now
>>down to 1 percent. So what happened is the Baltic Dry Index
>>had another huge move upwards, and commodities also, until
>>July 2008. And the Baltic Dry Index until May 2008, which
>>encouraged ship owners to order even more ships.
    
>>     So actually the monetary policy in the last 12 months
>>has actually probably increased supplies even more than
>>would have been necessary. And in the crisis such as we have
>>now, the most important is to get the supplies down as fast
>>as possible through bankruptcies or through huge price
>>declines that discourage new expansion of capacity.

     
     FOX: And we’re joined now by Charlie Maxwell, senior oil
analyst with Weeden & Co. And Charlie, you’ve been following
the oil markets for about, well, 50 years. Have you ever
seen such a huge price destruction in such a small amount of
time?

     CHARLES MAXWELL, ANALYST, WEEDEN & CO.: Yes, this is
the small amount of time that’s the surprise. We’ve seen the
price destruction, but never so much so fast.

     FOX: All right, so so much so fast. What does that
indicate to you about the prospects for making money in the
oil patch? Is there money to be made?

     MAXWELL: Well, I think there is. But I think we’re
going to have to wait a little bit longer. I think we have
to find some kind of a bottom to this market before - and
the market for oil, in particular, remembering that oil
stocks and oil-service stocks are particularly correlating
with the price of the commodity. And therefore until the
commodity finds a home at some kind of a bottom, I think
that it’s premature to go in and speculate.

     FOX: Let me come to you, Marc and connect that to maybe
your macroeconomic thoughts. When you travel around and you
see consumption patterns, what are you seeing? Are you
seeing people actually using the gasoline that’s produced
from the oil?

>>     FABER: Yes. Of course with prices having gone up, there
>>has been a slowdown in demand. And I’d also like to mention
>>that the demand for commodities was driven by kind of a
>>double whammy on the upside.

>>     First of all, because of the over-consumption in the
>>U.S., you had very strong production increases in China.
>>Industrial production went up a lot to meet the exports of
>>the U.S. And because the exports went up strongly,
>>industrial production went up, and capital spending went up.

>>     So when you build new factories, then you also use
>>energy and copper and all the industrial commodities to
>>build those factories. Now demand from the U.S. is down, and
>>the exports are down. And so you immediately cancel some of
>>these capacity expansion plans. And so the demand for
>>commodities was hit very hard. And I agree with Charlie
>>entirely, who is, by the way, a walking encyclopedia for
>>oil, and knows everything and is a genius, that it will take
>>time.

>>     But equally as commodity prices came down, a lot of
>>exploration will stop, because it’s not profitable. You look
>>at, say Petrobras, at this level maybe the deep-sea drilling
>>will not take place because it costs roughly $100 billion.

>>    And so there will be again tightness in the market at
>>some point in the future when the global economy recovers.
>>And hopefully it will recover during our lifetime.

     FOX: Well, let me come to you, Charlie. Is it going to
recover in, let’s say the foreseeable future. I don’t want
to put you on the spot. But is there sort of a basic
fundamental - when we look at 86, 82 million barrels of oil,
what kind of demand and supply numbers should people be
watching right now?

     MAXWELL: Well, I think Marc is again exactly right when
he says that this is going to cause a shortfall in new
supply. It just takes a little while, though, to unwind the
existing plans and go forward on a much more reduced level.
And even then, you’re producing only now last year’s - what
you put on the stream last year. And you’re actually
producing what you found maybe six or eight years ago. So
there’s a long time lag in there.

     So I think that this time when we find a bottom, we’re
going to have to find a bottom based on the factors of
depletion, where each year the world is depleting about 8
percent per year, coming down on its own naturally. And then
we have to replace that with new supplies. And I think that
will help in the next year.

     And I think also capital expenditure will be cut. But
remember not cut immediately and not cut for everybody. So I
think something like 16 to 25 months, 24 months.

     FOX: Perhaps another two years?

     MAXWELL: Another two years will be before we begin to
see the effects of this work through the system.

     FOX: Two years, that’s in our lifetime, Marc. Do you
think that that’s a reasonable outlook? You can’t predict
these things, but clearly -

     FABER: It could last longer. But in the meantime, I can
tell you some people are going to be hurt very badly, i.e.,
Dubai Properties. This is the next disaster to hit the
world.

     The Middle East, I was recently at the real estate
exhibition there. Everybody’s planning a new island. They
have plenty of sand, but they have to build more sand
islands. And a lot of these projects will simply not be
profitable. I think they will have a lot of problems. And
the sovereign funds will have to bailout their own projects
before they go and bailout companies in the Western world.

     FOX: Charlie, we’ve got about 30 seconds. I know you’re
coming back. What do you make of - where are they going to
get the money for all these bailouts if the price of oil is
at $50 or $55 a barrel?

     MAXWELL: I don’t think they will. I think that they
will bailout a few of the big ones, as Marc says, that are
close to the rulers, or close to the important sheiks, but I
think that the majority of them will be let go, that there
will be no choice.

     FOX: Thank you very much, Charlie Maxwell coming in from
Weeden & Co.

     ***END OF TRANSCRIPT***

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Taken from Motley Fool:

———-

Michael Lewis on Wall Street’s Future

By Mac Greer
November 26, 2008

What’s behind the financial crisis and collapse of companies like AIG (NYSE: AIG), Fannie Mae (NYSE: FNM), Freddie Mac (NYSE: FRE), and Merrill Lynch (NYSE: MER)? How did hedge fund manager Steve Eisman manage to make huge money off the subprime train wreck? What will Wall Street look like in five years? And is the stock market still the place to be for long-term investors or is Berkshire Hathaway (NYSE: BRK-B) Chairman Warren Buffett’s optimism misplaced? In this 30-minute audio interview, I put those questions to best-selling Liar’s Poker author Michael Lewis, editor of the new anthology Panic: The Story of Modern Financial Insanity. For the text version of this interview, click here. (Please note: This interview is not downloadable.)

———-

Archived Audio –> Click Here

Incomprehensive Transcript at the very bottom (after my notes).

———-

My notes on the interview:

[00:00]

Where go wrong?
- Short answer: Ability of Wallstreet to repackage subprime into investment grade security… which created a multi-trillion dollar casino that bet against subprime mortgages going bad
- This casino = many trillions more than original market
- Because most subprime mortgages turned bad –> then these investment grade securities suddenly turn worthless — losing trillions of dollars

[01:20]

Underpricing of Risk
- Risk premia for options work well under normal environments
- When volatility increases, risk pricing falls apart — today is another example of that
- There is logic to why subprime mortgages were reclassified as investment-grade securities –> diversiphilia… this grows out of academic research
- The assumption is that they are not correlated with each other. If this is so, then maybe the owners who get first payments Do have an investment-grade security
- Unfortunately, financial markets growing increasingly correlated over last 20 years
- Also, subprime mortgages are all correlated quite well with one another
- Thus, the problem stems from the systematically misclassified nature of the risk of subprime

[03:27]

How to Prevent?
- A lot of things could have prevented it .. almost takes a conspiracy to cause this.
- From the top… if financial regulatory systems controlled leverage — would reduce risk.
- If rating agencies had allow themselves to be gamed from wall street by putting “investment grade stickers” onto the subprime mortgages, the entire problem would have been avoided
- Moody’s made a bunch of money from stamping these CDOs with investment grade status
- Above are “top tier” problems .. moving to more micro problems…
- If wall street firms were partnerships (instead of corps)
- If people would be more long-term minded instead
- If American culture was not as leverage-loving
- … things would change.
- If Lehman Brothers and other investment banks had stayed private, things would have changed.
- By being private, the gains and losses are absorbed by the partners of the company and the company would take much less risk
- By being public, employees keep large chunk of the upside of any risky bet and none of the downside
- Minds of Wall Street people -> how the normal level of salaries changed
- A few millions bucks pay back then was great. Now? It’s chump change. People were making 10, 20, 30, … 80 million dollars inside these firms. How add so much value? Well they probably can’t unless they take huge risks and the risks pay off.

[08:49]

Women on Wall Street
- Academic research: A single woman > married woman > married man > single man — for the performance in the stock market — Presence of women is a good thing for an investment portfolio

[11:50]

Warren Buffett’s Call
- His call that US stks = good place to be in next 10 yrs
- Dumb to take on Warren Buffett
- Michael Lewis has started to buy S&P Index Funds (started last week)
- How bad the markets get is — in a large part — dependent on investor psychology… and that is essentially unpredictable

[13:38]

Steve Eisman - makes a boat load of money off this
- Runs a fund inside a group of funds call FrontPoint Partners — focuses on investing in Financial stocks
- Got into around 2003/2004 and his job was to put money to work in the stock market investing in financial stocks — had been financial stock analyst at Oppenheimer — had also trained Meredith Whitney, the person who was right about the bust
- He started digging deeper into the current state in financial system and slowly concluded madness in subprime mortgage lending business
- Absence of credit analysis before handing people money
- He wasn’t familiar with the market and learned everything.
- Stock market’s a zit compared to the bond market.
- He was convinced that this was all going to go bad… He called S&P rating agency, asked what happens if real estate prices go down? Answer: Our model doesn’t allow negative numbers — can’t put a falling housing price
- He asks a lot of questions to understand –> “Could you say that again?” “Could you explain that again in english?” during meetings
- You find out that a lot of these Wall Street ppl dont know what they’re talking about — they’re just repeating what they’ve been told
- So once convinced, he identified pools of subprime mortgages that were particularly terrible
- For example… those locations with no documentations, floating rate mortgages, no money down, etc.
- After identifying, calls Deutche Bank and GS to strike some deals .. essentially shorting ssubprime mortgage market
- This CDS market was bigger than original market
- Then you see the Fed throwing money at insurance companies like AIG … and you ask why?
- Well because, GS took the short, and GS passed it to AIG to foolishly insure it
- So when the gov’t pays AIG.. really, AIG pays GS to pay the person who shorted it in the first place
- Wall Street doesn’t really care what it sold.

[21:27]

Eisman’s Favourite Line (that Eisman thinks he’s ever written)
- From one of his reports as an analyst… “The Lomis Financial Corporation is a perfectly hedged financial institution. It loses money in every conceivable interest rate environment.”
- Great line.

[21:50]

Michael Lewis Best Line — Selected by Mac Greer (the interviewer)
- Mac Greer: Line to sum up Liar’s Poker — Maybe it would discourage some people from going to Wall Street and making a boat load of money … and instead follow their passion and do all sorts of goods things
- “The rebellion by American youth against the money culture never happened. Why bother to overturn your parents’ world when you can buy it, slice it up into tranches, and sell off the pieces.”

[23:00]

Michael Lewis’ Essay in the New Book: What Wall Street CEO’s Don’t Know Can Kill You
- CEO’s don’t know that their company’s collapsing
- “A CEO is a hostage of their cleverest employee”
- Explain by Example: People in Wall Street firms who started the CDO subprime mortgage business and encouraged it for years were making more money for the firm than anybody else in the firm. And they were the engine of profit for the firm. The greatest fear in that period of a CEO was that those people would leave.
- And you ask, “Why didn’t the CEOs back away from it and say that one day subprime will all go down the drains?”
- Answer: It was because the markets did not allow him to.
- If the CEO’s firm didn’t have those profits and underformed his peers, he would lose his job.
- He’s like an NBA head coach who’s at the mercy of his stars.. where his stars have the sort of guarantee contracts
- In every firm, or at least in several firms, there were arguments between reasonable people who said, “We really shouldn’t be doing this” and the people who encouraged the subprime business. The people who tried to resist the business ended up being demoted, shoved aside, or ended up losing their jobs altogether.
- In addition, one must be very very smart to understand half the risks that any major investment bankw as taking .. before they ceased to be investment banks.
- THere was just so much risk-taking inside these businesses…
- These CEOs have a lot of other responsibilities.
- GS CEO and CFO caught it at the last minute and offset the risk. They did the better job, relatively. But the best thing was to not get into it in the first place.
- Taking social responsibility and telling other people they shouldn’t be doing this stuff.

[25:37]

Solution?
- Let more institutions fail.
- No solution that’s not a painful solution.
- Handing over taxpayer dollars to failed banks — hoping they’ll become successful banks — is futile.
- Gov’t should target homeowners in their homes and use the subsidy to subsidize those people so they stay in their homes.
- And then renew their mortgages so they’ll have lower principal balances and so forth.
- You start at the level of the crisis which is the level of the individual home owner.

[26:23]

What to do with Automakers?
- Bankruptcy.
- They need to be reorganized in bankruptcy.
- The unintended consequence of handing huge sums of money to failed enterprises are seldom appreciated.
- Michael Lewis hopes the Treasury and Congress have learned that the money handing out money to banks wasn’t a smart thing to do

[27:30]

Has the Game Changes? Are these effects lasting?
- Yes, the game has changed.
- Short answer: The structure of the financial system is going to change as a result of this — the compensation in the financial system is going to change.
- 5 years from now –> Fewer fancy seats… fancy seats remain in hedge funds
- Job at Goldman Sachs would be just about as glamourous as a job at Chase Bank in 1985. … Just not what smart people want to do
- Neatest jobs are the ones in finance are venture capital and private equity — but smaller niche jobs
- Financial sector shrinks quite a bit.
- Fewer people taking financial risk

————–

Transcript:

[00:00]

Mac Greer: Michael Lewis, it is ugly out there. Where did it all go wrong?

Michael Lewis: There is a short answer and a long answer. I will give you the short answer first. The very short answer was the ability of Wall Street to repackage subprime mortgages as an investment-grade security. That is the heart of the immediate problem.

Then, having done that, [Wall Street] created alongside this market, which grew to a couple of trillion dollars, a casino in side bets where smart people could bet against the subprime mortgages going bad — which smart people did do — this market in side bets, with many trillions more than the original market. So you have got — because the subprime mortgages have all turned out to be, or mostly turned out to be kind of rotten — you have got many trillions of dollars of supposedly investment-grade securities that are suddenly worthless. That is a traumatizing event for the global economy, but that is the very short answer.

[01:20]

Greer: And Michael, you say that the common thread in all financial panics, or at least recent financial panics, is the underpricing of risk.

Lewis: Yes, I think it is true that the models that have been used on Wall Street since the early 1980s to price financial risk — to essentially price financial insurance, which takes different forms, but the most common form is an option — work reasonably well in normal financial environments, when things aren’t too volatile. When there are really extreme moves, they fall apart. And over and over in the past 25 years, we have seen really extreme moves in which they fall apart. This is another example of that.

There is a logic to, for example, why subprime mortgages were reclassified as investment-grade securities. It is the diversiphilia that has swept the ratings agencies in the last 20 years, and it grows out of academic research. And if you make assumptions about these different subprime mortgages that are — and the assumption is that they are not correlated with each other — well, then when you throw them all together in a single package, well, maybe the people who get the first payments out of that package do have an investment-grade security.

But the fact is, the financial markets have been growing increasingly correlated over the last 20 years, and subprime mortgages in particular are all correlated perfectly with one another. So it is as if Wall Street has been writing catastrophe insurance — say, insurance against houses on Miami Beach being destroyed by hurricanes — as if it was auto insurance. They have sort of systematically misclassified the nature of the risk that they are dealing with.

Greer: So along those lines, Michael, how could this crisis have been prevented?

Lewis: Well, that is a really great question, because a lot of things could have happened to prevent it. It took a conspiracy of many forces for it to be as bad as it is, but why don’t we start from the top down? If the financial regulatory system had controlled the leverage that investment banks were able to run, that would have dramatically reduced the amount of risk in the system. But they didn’t, not properly. If the ratings agencies had done their job properly and not caved to pressure from Wall Street to … not allow themselves to essentially be gamed by Wall Street into putting investment-grade stickers on things that were essentially crap, then all of it would have been avoided.

Greer: Michael, you are telling me Moody’s (NYSE: MCO) was asleep at the switch? I think of Moody’s as this like sleepy old company, not taking many risks.

Lewis: Isn’t it sleepy old companies that fall asleep at the switch?

Greer: I guess that works both ways.

Lewis: Moody’s had an incredible run there, where their profits were incredible. In fact, the whole of the financial system was running on the profits from the American mortgage securitization industry. It was a vast industry, and Moody’s was making huge sums of money rubberstamping these CDOs [collateralized debt obligations] — Moody’s that is 20% owned by Warren Buffett. And so if they had done their job, if they had behaved with real total integrity or not been stupid — who knows exactly what they were thinking? — then the problem would have been prevented.

However, those are just the top-tier culprits. If the Wall Street firms had been partnerships instead of corporations, if the people in them had had total long-term engagement with the risks they were taking, they never would have done what they did. If American culture had not evolved to inure people to the risks of leverage, then I don’t think nearly so many people would have borrowed money they couldn’t repay. So this is just the beginning, off the top of my head.

[05:45]

Mac Greer: Michael, I know your employer at one point, Salomon Brothers, was the first Wall Street firm to go public. And when Salomon Brothers goes public and other big Wall Street firms go public, the game changes?

Michael Lewis: Dramatically, because all of a sudden what happens is the employees keep a large chunk of the upside of any risky bets and none of the downside. Before they had the downside and the upside and the firms, as partnerships, took much less risk and never would take risks, single risks that would sink the whole firm because essentially all the partners’ wealth was tied up in these places. Once the firms are corporations, well then the game becomes shoot the moon and just disguise the fact that you are shooting the moon because if you are right; let’s say you are faced with a bet that has got a 60% chance of working out and a 40% chance of failing. A pretty good bet, right?

Greer: I like it, yeah.

Lewis: You like that bet and if they let you bet as much as you want on it and you get to keep the winnings, you would probably just bet as much as you could on it.

Greer: Sure.

Lewis: But there is still a 40% chance that it is going to fail and if it fails, the firm goes down. This was starting when I was at Salomon Brothers. John Meriwether’s traders, who went on to become Long Term Capital Management and so on, were increasingly allowed to make bets, that if they had gone wrong, could have sunk the firm and they were smarter than everybody else and for a long time, they did really, really well, but it was still risky. There were still catastrophic risks being run and these firms; what happened in the minds of Wall Street people is really interesting, I think, because I think part of this story is how the normal levels of pay changed so that when I got to Wall Street, if you made a million bucks in a year, you were really happy. You were big time. Million, two million, that was pretty great.

That became chump change. The levels of compensation became just extraordinary where people were making $10, $20, $30, $40, $50, $60, $70, $80 million inside these firms. If you back away from it and ask, “How do you make that kind of money as a financial person?” Well, it is very unlikely you are making it by adding that kind of value, by you actually being that valuable. You make it by taking huge risks and the risks paying off. I think people thinking that it was normal to get paid that much helps them get their minds around taking that much risk.

[08:49]

Greer: In terms of taking that sort of risk, is that unique to the male persuasion? Would this whole thing have unfolded differently if women were calling the shots on Wall Street?

Lewis: Yeah, that is a really good question. It was some academic research that … was trying to analyze performance in the stock market, according to sex, and found that the most success. If you took a single woman, did better than a married woman and a married woman did better than a married man and a single man did worst of all. The presence of women was a good thing for an investment portfolio.

I don’t think men are worse than women, but they are different and they are; I do think that if you waved a wand over Wall Street and it put women in the seats of genuine power through all of this, you never would have had the risk-taking.

Greer: And it sounds like ideally we want Henry Paulson to be a single woman.

Lewis: (Laughing.) Maybe he is … wearing an incredible wig.

Greer: (Laughing.) That is your next book. I want to talk a little more about your experience at Salomon Brothers. I believe you wrote Liar’s Poker back in 1989 and reflecting back on that experience at Salomon Brothers, you had this to say. You said, “To this day, the willingness of a Wall Street investment bank to pay me hundreds of thousands of dollars to dispense investment advice to grown-ups remains a mystery to me. I was 24 years old with no experience of or particular interest in guessing which stocks and bonds would rise and which would fall. The essential function of Wall Street is to allocate capital to decide who should get it and who should not. Believe me when I tell you that I hadn’t the first clue.”

Now are you being a bit tough on yourself and to what extent can we basically just say that about everyone on Wall Street now?

Lewis: Well I am being completely honest. I think I described myself as an intelligent observer would have described me. The piece you are referring to is the piece that is in the current issue of Portfolio magazine, where I basically, as the author if Liar’s Poker, wander back on to the Street and figure out what the hell happened here. I think that there are really smart people on Wall Street, and there are people who are suited to the job. Warren Buffett is suited to the job. But there are a lot more people doing finance than should be doing finance. The system has evolved to reward all kinds of quixotic personalities and talents that have nothing to do with actually making shrewd decisions about capital allocation.

[11:50]

Greer: Any thoughts on Warren Buffett’s recent call that U.S. stocks are a good place to be for the next 10 years?

Lewis: Well, you really don’t, and I have done it before, want to take on Warren Buffett. It is sort of a game that doesn’t pay. Let me tell you what I have done. I have actually just started buying S&P index funds, just now, just in the last week or so. I had been on the sidelines for a long time, so I got a huge amount of cash and those. And I am going to average down if I have to average down, so I guess I agree with him, but I don’t really know. I wouldn’t want anybody to take my advice and he doesn’t know, he just thinks. He doesn’t know how bad it could get because how bad it gets depends in large part on investor psychology, and that is essentially unpredictable.

I think that in the long run; the problem with Warren Buffett is that in the short run he is dead. In the long run, we are all dead. If you are an older person, if you are talking to a 75-year-old person saying, “Should you get in the stock market with your retirement funds right now?” I would say it is insane. You don’t know what it is going to do. God, it could go to 4,000; it could go anywhere. We are in the middle of a panic, but if you are a middle-aged person or a young person, it makes complete sense. I don’t feel at all uncomfortable having my children’s college funds in the stock market because they are 9 and 6 and 2 years old.

[13:38] TRANSCRIPT ENDS—Moves onto Steve Eisman—NO TRANSCRIPT—

[27:37] TRANSCRIPT CONTINUES—Solutions to the Current Mess—

Greer: And along those lines, what is the solution to the current mess?

Lewis: I think you let more institutions fail. I think there is no solution that is not a painful solution. I think that this top-down approach of trying to sort of hand over taxpayer dollars to failed banks, hoping that they will become successful banks, is a mug’s game …  what they should do is target homeowners in their homes, and use that subsidy to subsidize those people so they stay in their homes, and re-jig the mortgages so they lower principal balances, and so and so … you start with the level of the crisis, which is the level of the individual homeowner. And if, above that, and while you are doing that, some of these institutions fail, then they fail.

Mac Greer: And Michael, what are you going to do about the automakers [General Motors (NYSE: GM), Ford (NYSE: F), Chrysler]?

Michael Lewis: Bankruptcy is the best option, I think. I think if you give them money, you are going to make it harder for them to change what they need to change. They need to be reorganized in bankruptcy. The unintended consequences of handing huge sums of money to failed enterprise are seldom appreciated. I hope that the Treasury and the Congress has already learned something from the money they have handed out to the banks. It wasn’t a smart thing to do.

[27:05] TRANSCRIPT ENDS—Moves onto “Unreported Story of this Mess” then moves to “Has the game changed?”—NO TRANSCRIPT—