Chanos Presentation

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James ChanosKynikos Associates

Virginia Value Investing ConferenceUniversity of VirginiaMcIntire School of Commerce/Darden School of Business

October 22, 2009

Ten Lessons From The Financial Crisis That

Investors Will Soon Forget (If They Haven't Already!)


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Ten Lessons From The Financial Crisis ThatInvestors Will Soon Forget (If They Havent Already!)

1. Borrowing Short and Lending Long is Still a Bad Idea

2. Accounting MattersA Lot!

3. Conflicted Rating Agencies: Still Not Unbiased

Observers

4. Regulate the Activities Not the Actors

5. Value at Risk May Put Your Firm at Risk


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Ten Lessons From The Financial Crisis ThatInvestors Will Soon Forget (If They Havent Already!)

6. Messrs. Glass and Steagall Were Right After All

7. Too Big to Fail = Too Big to Exist

8. Capitalism on the Upside and Socialism on theDownside is Bad Policy

9. Quantitative Easing (Helicopter Finance) Has a Cost

10.Insurance Without Reserves is Not Insurance

11.Shooting the Messenger Does Not Change Reality


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Borrowing Short And Lending Long Is Still A Bad Idea

Large Duration GapsCreate a MismatchedBook

Extra Spread Not

Worth Refinancing Risk

Short-Term FundingCan Always Be Rolled

Except in a CreditCrisis!


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Accounting MattersA Lot!

Mark to Market AccountingWas Not the Cause of the

Credit Crisis

Level II and Level III Assets:Mark to Model Fantasy

Off Balance Sheet RisksAre Still Real Risks:

Remember Enron?

Equity Capital is Not Simplyto Balance the Books


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Conflicted Rating Agencies: Still Not UnbiasedObservers

Issuer CompensationCreates Inherent Conflict

of Interests

Rating Agencies Aided inStructuring AAA Financial

Products

Rating Agencies AreAlways One Step BEHIND

Wall Street

CDS Market Offers RealTime Evaluation of Credit


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Regulate The Activities Not The Actors

National Financial SecurityCouncil Needed - Regulatory

Fiefdoms Mean No One HasUltimate Responsibility

Regulatory Capture is a Real

Issue

The Level of Risk is NotDetermined by Firm Type

Demonizing Hedge FundsCaused Regulators to Missthe Last Crisis


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Value At Risk May Put Your Firm At Risk

Black Swans Do Exist

Six Sigma EventsSeem to Be HappeningMore Often

VaR Models Work WellIn Theory: Reality is

Often Quite Different


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Messrs. Glass And Steagall Were Right After All

Depositors Are OnceAgain Financing the

Whims of Wall Street

Wall Street Prefers theExcitement of Fee-Based

Transactions: TraditionalLender/BorrowerRelationship is Boring

Shareholders and BankersReap the Rewards WhileDepositors Bear the Risks


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Too Big To Fail = Too Big To Exist

Systemic Risk: Too BigIf it Cannot Be Allowed

to Fail

State Sponsored EntitiesGiven Unfair Advantage

Implied GovernmentBackstop EncouragesExcessive Risk Taking

Taxpayers Bear theUltimate Risk!


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Capitalism On The Upside And Socialism On TheDownside Is Bad Policy

Hands-Off Regulationof MarketsUntil Wall

Street Needs a Hand!

Crony Capitalism: AllBailouts Are Not

Created Equal

Wall Street vs. MainStreet: Populist Anger

Could Interfere withBusiness As Usual onWall Street


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Quantitative Easing (Helicopter Finance) Has A Cost

Printing Money is Not aReal Solution: Zimbabwe

Should Not Be the GoldStandard!

Zombie Banks Financed

with Cheap Money OnlyProlongs the Problem: DidWe Not Learn Anything

from Japan?

Potentially Creates the NextFinancial Bubble: Kick the

Can Down the Road


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Insurance Without Reserves Is Not Insurance

Owning Hedges Does NotGuarantee You Are Hedged:

Counterparty Risks OftenIgnored

False Sense of Security

Leads to Excessive RiskTaking

Financial History Has a Wayof Repeating Itself:

Some Other Firm WillBe the AIG of the NextCrisis!


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FinallyShooting The Messenger Does Not ChangeReality

Short Sellers Play a VitalRole in Exposing

Excessive Risk within theFinancial System in RealTime

Wall Street Always AttacksNaysayers During theBoom: Problems Do NotGo Away by SilencingCritics

Cosmetic Changes inAccounting Policies WillNot Change Reality


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Thank You University of Virginia,The McIntire School of Commerce, &

The Darden School of Business

Chanos Presentation

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