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Skip Victor
November 4, 2010
“I have learned in my life as a composer chiefly
through my mistakes and pursuits of false
assumptions, not by my exposure to founts of
wisdom and knowledge.”
Igor Stravinsky
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1956
1974
1978
1981
1983
1984
1990
2005
2006
Born in Detroit, Michigan
Cranbrook High School
Cornell University, A.B. in Economics
Bankers Trust Company
UCLA Anderson, MBA in Strategy & Policy
Drexel Burnham Lambert
Chanin Capital Partners
Balmoral Advisors
Duff & Phelps / Chanin Capital Partners
• Assumptions
• Questions
• Listen
• Synthesize
• Mistakes and Failures and Rejections
• Luck and Serendipity
• Severe Decline in Stock and Bond Markets
• Record Foreclosures
• High and Persistent Unemployment
• (Near) Collapse of the Financial System
• Decline of American Pre-eminence
• Home Ownership
• Low Interest Rates
• Financial Innovation
• Globalization / New Prosperity
• Ratings Agencies
• Optimism
In 2004 the George W. Bush administration urged
Congress to pass the American Dream
Downpayment Act.
Federal Housing Commissioner John Weicher said,
“the White House doesn’t think those who can
afford the monthly payment but have been
unable to save for a down payment should be
deprived from owning a home.” He added, “We
do not anticipate any costs to taxpayers.”
“These two entities Fannie May and Freddie Mac
are not facing any kind of financial crisis. . .”
“I want to roll the dice a little bit more in this
situation towards subsidized housing. . . “
Rep. Barney Frank
House Financial Services Comm.
September 2003
“Improvements in lending practices driven by
information technology have enabled lenders
to reach households with previous
unrecognized borrowing capacities.“
Alan Greenspan
October 2004
“Derivatives have permitted the unbundling of
financial risks.”
Alan Greenspan
May 2005
“Derivatives are financial weapons of mass
destruction.”
Warren Buffett
“As long as the music is playing, you’ve got to
get up and dance.” “We’re still dancing.”
Charles Prince, July 2007
CEO of Citibank
Citigroup’s stock market value dropped from
$244 billion to $6 billion, 75,000 in employee
layoffs, and approximately $45 billion in
TARP/government assistance.
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Policy Confusion about Home Ownership
Home Values Don’t Always Increase
Spending Beyond Your Means Usually Doesn’t Last
Financial Economy vs. Real Economy: Volatility
Global Interdependence
Faulty Assumptions and Reliance on Ratings Agencies
Severe Under-pricing of Risk
Most of the Experts Missed It
Lessons Likely to Be Forgotten
What Economic Crisis Doesn’t Mean
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Never Buy a House
Never Use Leverage
Don’t Buy Derivatives
Restrict Globalization
Prosperity is Over
Will Never Be Another Bubble / Crisis
What Economic Crisis Means For You
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Tough Job Market
Lower Housing Prices
Harder to Obtain Financing
“Less”
Less Optimism, More Pessimism
Less Confidence, More Anxiety
“ . . . Human beings assume that the existing
state of affairs will continue indefinitely,
except in so far as we have specific reasons to
expect change.”
John Maynard Keynes
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9-11
Savings & Loan Crisis
Long Term Capital Management
Internet Bubble
“Flash Crash” – May 6, 2010
Recovery in Financial Markets in 2010
1,100
1,000
Index Average
900
800
700
600
500
Jan-73
Mar-73
May-73
Jul-73
Sep-73
Nov-73
Jan-74
Mar-74
May-74
Jul-74
Sep-74
Nov-74
16,000
14,000
12,000
Index Average
10,000
8,000
6,000
4,000
2,000
-Jan-70
Jan-75
Jan-80
Jan-85
Jan-90
Jan-95
Jan-00
Jan-05
Jan-10
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Pensions – Public and Private
Medical Care
Government Debt
Social Security
Environmental
Political
Terrorism
Costs to Taxpayers
Savings and Loan Crisis
$124.6 Billion
Troubled Asset Relief Program(“TARP”)
$109-127 Billion
Fannie May / Freddie Mac
$389 Billion
Underfunded State Pensions
$3 Trillion
Source: Taxpayers for Wilson
Defined Contribution vs. Defined Benefit
– Difference between setting aside a fixed amount
of money each year and promising to pay a fixed
amount in the future for an unknown amount of
time
– All about risk allocation
Predictions:
– Move to defined contribution and away from
defined benefit
– Some promises will be broken
– Federal and state deficits and debt loads
skyrocketing
– History is littered with ruins of empires and
kingdoms that have taken on debt they couldn’t
repay
“The Federal Reserve can make a difference, but
it doesn’t have a magic bullet. It can’t take a
weak economy facing a lot of major
challenges and rapidly turn it into a strong
economy.”
Donald Kohn
Former Federal Reserve Vice Chairman
“Consumption when brought forward must be
financed, and that financing is a two way bargain
between borrower and creditor.
When debt levels become too high lenders balk
and even lenders of last-resort sovereigns, central
bankers and supernatural agencies – approach
limits beyond which private enterprises
productivity itself is threatened.”
Bill Gross
PIMCO
July 2010
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Good News / Bad News
Humility, Curiosity, Flexibility
Mentor(s)
Think Independently
Read The Fine Print
Move up the Problem Hierarchy:
– Cause
– Identify
– Solve
• Assumptions Drive Behavior