Jim Chanos: What We've Learned from the Crisis

Host: Jim Chanos is a legendary short seller on Wall Street. Using this trading strategy he profits when stock prices fall. That made him one of the few winners during last year's stock market meltdown. He was also one of the first to recognize that the financial system was headed for trouble. You were among the first people to really talk about this meltdown that was looming, I believe at the G7 in 2007. Mr. Chanos: Uh-huh.

Host: What did you see at that time? Mr. Chanos: Well, at that time we'd already started to see the cracks in the credit facade. Some sub-prime companies had gone bankrupt in the late part of 2006. And HSBC the big global lender which had bought Household International in the U.S. warned about its sub-prime exposure in February of '07. In addition there were some securities that were tracking the sub-prime market that you could follow, and the pricing on those securities had begun to drop in the spring of '07. And then finally the last straw for us that broke the camels back is we saw some new SEC disclosure in the documents of the big banks and brokers outlining their exposure in hard-to-value securities. And to everybody's horror those numbers were far greater than anyone thought. And we pointed this out, myself and another hedge fund managers, to the finance ministers and central bankers in Washington in mid April of '07. And we were listened to politely and then dismissed.

Host: So two years later you're proven correct. What's changed? Where do we go from here? Mr. Chanos: I don't know that a lot's changed. That's the sort of scary thing for me. We put together an unprecedented rescue package in the fall and spring of '08 and '09 but there's some troubling signs that we're already backsliding. For example, the banking industry has asked for a liberalization of the accounting policies and more opacity as opposed to transparency in financial statements. That's going to make it tougher for people like me and your viewers to value financial stocks. For one. Number two, I mean I think there was a strong sense that anything went in the fall of '08. So we had the bans on short selling which were unprecedented and completely arbitrary which threw a monkey wrench into all kinds of things. And, furthermore, a general sense of: Trust us we know what's best for the system. And as I like to say we had a -- it just validated my view that we have capitalism on the way up and socialism on the way down. And that's a very cynical system in my view that creates a lot of suspicion by the ordinary investor.

Host: Well, as we talk about maybe the government response -- Mr. Chanos: Uh-huh.

Host: You were at the meeting this past week where President Obama delivered this at Federal Hall. Mr. Chanos: Yep.

Host: How has he done? Mr. Chanos: I think he came in with an awful bad financial hand being dealt. I mean let's face it. This was not on his watch. This was all in the making in the past administration. So I think that he and his team have done as good a job as they can inheriting the mess. But I think it also behooves, as he said on Monday, to get government intervention out of the markets as soon as possible because I think that the government intervention right now in the financial markets is skewing all kinds of things. And people can get credit if there's a government guarantee behind it, but if you don't have a government guarantee, it's not quite clear you can get a credit. So we're still getting distorted market signals due to the government's rescue program.

Host: How do you think that regulatory reform should be approached at this point a year after the collapse of Lehman Brothers? What needs to happen on a regulatory level to right some of the wrongs of the past? Mr. Chanos: Well, I mean I think that we need smart regulation not more regulation. And I know that seems like an easy bromide to say but it's true. I mean every time there's a knew financial innovation like credit default swaps or structured finance the ability of the marketplace to move faster than the regulators' abilities to understand what's going on completely befuddles the process. And I think that that's the real problem here is that we have a regulatory system that is run primarily by academics and attorneys. And you have very very few people who regulate the biggest financial institutions who sat on a trading desk, run a fund, cold called clients. I mean they really don't know how the business operates and they operate from a checklist and that's troublesome.

Host: Well, with all those guys out of work maybe that's a good place for them to go. That could be possible. Mr. Chanos: They may have no choice.

Host: Exactly. Well, let me ask you this, shifting gears a bit, you obviously had a knock-your-socks-off 2008 for your fund, but a lot of people don't have enough money to get into a big hedge fund and get access to Jim. What do you tell individual investors who are out there looking at the landscape ahead how to manage their own money? How to take care of their families? And how to look for opportunities? Mr. Chanos: Well, I mean it's tremendously boring advice I give investors when they come to me. I tell them first of all save as much as you can. That's obvious. B, because people don't and because they don't they then feel they need to go into higher risk investments to offset the lower amount of money they're setting aside. And I think that that's gotten an awful lot of ordinary investors in trouble down through the years. If they'd simply saved more they could have much more conservative portfolios to get them where they need to go. Having said that it's awfully tough to beat the market. I'm in here every day trying to do it and it's tough. And I've got some of the best analysts in the world and a great trading operation and it's still -- the market befuddles us you know 4 1/2 days out of 10. And so I think that it's awfully tough for the individual investor to routinely say, I'm going to knock the cover off the ball investing. And so what I advocate is often just simple passive investing through index or ETFs with asset allocation being kind of the most crucial aspect for the small investor. Early on in life one can take more risk later on in life one should take fewer risks. It's awfully boring advice but it tends to beat most money manager's hands down over and over and over again. Remember 80 to 90 percent of all money managers do not beat the market.

Host: And yet they get paid all that money. Mr. Chanos: And they get paid. It's one of the great conundrums in finance.

Host: Well, it's fantastic that you've taken the time to sit with us. Great advice for our users and great advice for any investor. Keep it simple. Save a lot of money. And thanks again for joining us Jim. Mr. Chanos: My pleasure.

==== Transcribed by Automatic Sync Technologies ====