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Jim Chanos Interview

Jim Chanos Interview

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Published by marketfolly.com
Interview with hedge fund manager and noted short seller Jim Chanos
Interview with hedge fund manager and noted short seller Jim Chanos

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Published by: marketfolly.com on Oct 06, 2009
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12/23/2012

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Rob Johnson Interview with Jim Chanoswww.verbalink.com Page 1 of 12 
 Just a reminder, today’s conference is being recorded.
 
 Erica:
Okay, so who wants to start?
 Rob:
Let me start with a preface. So we’re live on the air now?
 Erica:
Yes.
 Rob:
Okay.
 Erica:
All systems go, Rob.
 Rob:
Okay, all right. Here at New Deal 2.0 today we’re pleased to beable to talk with the guest, Jim Chanos, famous hedge fundmanager and a short-seller, who’s been very involved in marketdevelopments for the better part of three decades and has – howwould you say, played a very interesting role in public policy aswell.The Enron situation which Alex Gibney covered in his film, “TheSmartest Guys in the Room.” Is, I want to say, a portrait of socialdiscovery of financial misdealings. And Jim played a very, verylarge role in the developments that led to the book and the film.He’s been a very successful investor for many years. I’ve knownhim since the days that I worked with George Soros. And in recentdays through a series of press articles in the United Kingdomfollowing a radio interview that he did, we are seeing a very, let’ssay a bit of uproar directed at Gordon Brown, who seeks reelectionthis fall.And it suggests that policy officials, Gordon Brown among them,did have information that our financial system was highly unstableand that Jim Chanos, and other hedge fund managers had given a briefing in Washington in April of 2007 suggesting that theyshould take decisive action.According to the press accounts and the radio interview Jimdescribes that he and others who gave testimony or evidence onthat day were ignored.Jim, thanks for being with us today.
 Jim Chanos:
Thanks, Rob. I’m glad to be here.
 
Rob Johnson Interview with Jim Chanoswww.verbalink.com Page 2 of 12 
 Rob:
Gillian Tett speaks about this episode in her book,
 Fool’s Gold.
And she talks about a whole cadre of high level ministers; the people who were responsible were there. Can you set the stage for us? Can you tell us essentially the context? Why were you invitedto Washington and what was it that you were talking about thatday? Thanks.
 Jim Chanos:
Yes, Gillian did a very good job chronicling this episode in her  book,
 Fool’s Gold.
I was invited along with one other hedge fundmanager as well as hedge fund industry representatives torepresent the industry at the G7 Finance Ministers Conference inWashington which was being held at the World Bank in mid-Aprilof 2007.We were invited to present to the Ministers and Central Bankers onSunday, the last day of the session, basically the hedge fundindustries view point as to why hedge funds would not be, or  perhaps would be, these source of future systemic risk.If you recall at that time, the Europeans, particularly the Germans,were concerned that hedge funds would be the source of futuremarket systematic upheaval if it occurred. And the Germanshappened to be chairing that spring session. So they set theagenda.And the Under Secretary of the Treasury at the time, Bob Steel,invited myself and another manager to basically make presentations as to why we thought that would not be the case.And both the other manager, who has been identified as PaulSinger, that’s public, and myself, took the opportunity to make presentations pointing out something a little bit different from whatthe Germans thought.
 Rob:
So in essence you came in to present a view not only that wasrepresentative of the hedge fund industry, but also a portrait of where the Achilles heel might lie in contemporary financialmarkets and financial structure?
 Jim Chanos:
Right. If you recall, before April of ’07 there were some very,very ominous cracks in the walls of finance that occurred. Youremember that the Bear Stearns hedge fund blow up occurred inJune. So that was still two months away. But we had had in thefall and winter of ’06-’07 the first falterings of some U.S. non- bank financials in the subprime area, New Century and others, thathad begun to stumble with large amounts of default in recent loans.
 
Rob Johnson Interview with Jim Chanoswww.verbalink.com Page 3 of 12 
If you recall the peak in loan issuance, I believe, was late-’05 andearly-’06 for this area. And then you had in February, late-Januaryand February of ’07, HSBC, the big global banking giant, whichhad bought Household International, a U.S. subprime lender, beganto – through experiencing severe deterioration in its U.S. subprime portfolio.So there was not just conjecture at this point. There was some sign posts along the road already. Finally, for anybody who wastracking it, the sort of artificial market indices that were set up totrack these esoteric debt instruments like collateralized debtobligations, CDO’s, and so on and so forth, had begun to crack  pretty hard in February, March from par to somewhere, as I recall, par being 100, down to the high 70’s or low 80’s.So already a market indicator of subprime health had already become to deteriorate rather dramatically by the time this meetingoccurred.
 Rob:
And you also mentioned in other conversations we’ve had aboutthis episode that SEC releases, the 10K reports, were indicatingsome very, very substantial vulnerability among the major financial institutions.
 Jim Chanos:
Well, that’s what got me very concerned. In the two week period between the end of March ’07 and my presentation mid-April, mystaff had begun to review the SEC 10K filings, which are theannual reports that companies file at the SEC.And they usually do in March for the year ending in December;some of the entities were November entities. So they alreadyreported their 10K’s in February.But what was interesting for the 2006 10K’s which were filed inearly ’07 was that for the first time the banks were fessing upunder this new accounting regime to get esoteric FAS 157 whichwas the so-called mark-to-market accounting rules.And for the very first time we were getting a glimpse under thehood like we never had. And which big banks and brokers weretelling us how many of their financial assets that were securitieswere either Level 1, Level 2 or Level 3.Level 1 being something that had a very active market, for example, shares of IBM which trade every day on the New York 

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