The End-Times Investor

chanos1 The End Times InvestorThere are lots of people who search for signs of the end of the world. The homeless guy on the corner. Glenn Beck. The most highly paid one we know of is Kynikos Associates founder Jim Chanos, whose batting average as an investing Cassandra is pretty high (and with the exception of a few disgruntled CEOs of the companies he’s targeted, no one’s ever called him a crazy). He was among the first to call out Enron, WorldCom and the housing/credit bubble that nearly brought the world to its knees. Fellow hedge fund manager Bill Ackman recently said that if he were Treasury secretary, he’d hold a weekly meeting with Mr. Chanos to hear what could go wrong in the markets. No need.

The Observer
: Did anything surprise you about the Lehman Brothers report? Or did it just validate everything you thought?

Mr. Chanos: Except for the shameful New York Fed/Lehman “stress test” disclosures, nothing in it surprised me. We had concerns about Lehman well before 2008. People thought they were tough, no-nonsense guys. But we were saying, actually, they’re incredibly aggressive risk takers with a wide berth for what they consider the truth. We’ve known for a while that the hole in their balance sheet was around $150 billion. To put that in perspective, the hole in Enron’s balance sheet was roughly $65 billion. We can quibble on a billion here, a billion there, but $150 billion? I have to think that fraud was involved. It wasn’t just bad business judgment.

So do you think there will be any perp walks? And why haven’t there been any yet?
I would be stunned if there weren’t at least indictments at Lehman and some of the other large institutions that have failed. I don’t know why there haven’t been any yet, but it’s amazing that it’s taken them this long. We’ve known about Lehman’s books since late 2008, but we just needed it confirmed by someone who wasn’t a short seller, since we’re not to be trusted. [laughs] We’ve known something was wrong with their books since the collapse.

Fuld apparently loved the report and has been telling people it vindicated him. He can sleep easy now, which must be nice.
I’d say that reaction is not inconsistent with the way he ran his firm.

You were very supportive of Obama during the election, and showed that support in the best possible way, i.e., through cash. How do you think the administration has been doing?
You know, I agree with the White House that they were dealt an awfully bad hand and number one, we have to understand that. Number two, the economy does appear to be getting better and the markets certainly have righted themselves. I do not agree with some of the financial rescue decisions that the administration made, which were simply follows-on of the previous administration. And I think that’s still politically hurting this White House. The real problem isn’t the White House; it’s Congress. It’s just completely broken down. On the financial regulatory front we still need to see what happens in the near future. We’ve got the House bill, we’ve got the Senate bill, and I think there’s some good steps in both, and some steps that need to be changed. However, it still amazes me that the banking industry continues to have the clout in Congress that it does, after all that’s happened. I’m stunned by the amount of power they still wield down in Washington.

What do you think the passing of the health care bill will mean for the economy?

I don’t think health care is out of the woods yet long term, because it’s still increasing as a percent of the economy, and that’s the real problem. In fact, if you look at the two areas of our economy where the government has very large and growing exposure, it’s residential real estate and health care. And both at the end of the day are fairly nonproductive, long term, for our economy. Putting more and more money into housing and keeping us healthy in our golden years doesn’t necessarily make us a more productive society. We should be devoting more of that money to technology and education.

Let’s talk about hate, and that of Goldman Sachs. The other day an ad on Craigslist offered payouts to anyone who would tape him or herself spitting on the Goldman building, peeing on the building, spitting on an employee or peeing on an employee, if the footage was uploaded to YouTube. While it must chafe that you didn’t come up with the idea yourself, you were actually first on the Hate Goldman Trade. [Mr. Chanos had a high-profile public feud in the summer of 2007 with former Goldman Sachs managing director Marc Spilker, Mr. Chanos’ neighbor in the Hamptons, who decided in order to “maximize” his beach enjoyment, he needed to cut down Mr. Chanos’ hedges, without asking permission.] Is that a source of pride?
[laughs] I wasn’t the first on the “Hate Goldman Trade,” I was the first to point out that certain Goldman bankers acted as if the rules of society didn’t apply to them. It led me to vent at the time that it seemed that Goldman was not putting clients’ interests ahead of its own. And I think we’ll leave it at that.