Jim Chanos' Presentation: Ten Lessons From The Financial Crisis ~ market folly

Monday, November 9, 2009

Jim Chanos' Presentation: Ten Lessons From The Financial Crisis

If you're unfamiliar with Jim Chanos then here's what you need to know: He graduated from Yale and is well known for his short selling prowess where he puts a large focus on identifying fundamental flaws in valuation due to underestimated or unearthed problems within a given company. His most notable work in this regard comes from uncovering the issues at Enron. Having previously worked for other firms, he went on to found Kynikos which is Greek for "cynic," a very appropriate name given his strategy and prowess. We also recently covered an in-depth interview he did with the media if you would like to learn more about his thoughts.

Recently, Chanos delivered a presentation entitled "Ten Lessons From The Financial Crisis That Investors Will Soon Forget (If They Haven't Already!)" He delivered this at the second annual Value Investors Conference at the University of Virginia, an event put on by their McIntire School of Commerce and Darden School of Business. In addition to Chanos, numerous 'Tiger Cub' hedge fund managers were present as panel members and contributors. We'll have a post detailing the event tomorrow, but for now we wanted to post up the entirety of Chanos' presentation.

His talking points centered around the following:

- Borrowing short and lending long is still a bad idea
- Accounting matters (a lot)
- Conflicted rating agencies are still not unbiased
- Regulate the activities, not the actors
- Messrs. Glass & Seagall were right
- Too big to fail = too big to exist
- Capitalism on the upside & socialism on the downside = bad policy
- Quantitative easing has its cost
- Insurance without reserves is not insurance
- Shooting the messenger does not change reality

While a couple of his points obviously play to his role as a short seller, he still brings up very valid thoughts. The topic of the ratings agencies is one that has been hotly debated as many have pointed the fault-finger their way for their role in the financial crisis. David Einhorn of hedge fund Greenlight Capital has even shorted the ratings agencies. One of Chanos' points that we think investors actually *won't* forget is that 'helicopter finance' has a cost. Many prominent hedge fund managers (in addition to him) have harped on this point as the consequences of such actions will definitely come to fruition down the line. You have seen more and more people bring this to the front of the discussion and we have a feeling that people have actually started to realize the impact here. Lastly, we absolutely loved this line of his: "Too big to fail = too big to exist." Amen.

Embedded below is Jim Chanos' presentation, Ten Lessons From the Financial Crisis (RSS & Email readers come to the blog to view it:

Alternatively, you can download the .pdf here.

In addition to his solid presentation, we've also learned that Chanos is negative on the municipal bond market, saying that "state and local municipal finance are a mess and going to get worse... (the poor economy) is masking real problems in municipal cost structures." He cites the largest problem as healthcare and retirement benefits given to both local and state workers and as those people start to retire, the problem worsens. He believes that the Fed can (and will) ultimately bail them out if things get that bad. Obviously the muni-market has shown signs of cracking already and he is predicting the situation to deteriorate further so it will be something to keep an eye on.

For more on Chanos, you can check out his recent in-depth interview, as well as another lengthy interview he did in September. It's always good to check in on his thoughts, especially given his short bias and keen eye. While the media prominently focuses on long managers, Chanos is one of the few shorts that they seem to pay attention to.

Lastly, be sure to check out HedgeFundFacts.org. It is a hedge fund advocacy site with a focus on dispelling myths related to hedge funds and short selling created by Chanos. This site is certainly a step in the right direction in terms of removing the 'villainous' title hedge funds are often labeled with.

(Hat tip to My investing notebook for posting the presentation up).

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