Monday, November 24, 2008

A REAL Rich Man's Opinion

The last time I met with somebody who made Forbes' list of 500 Wealthiest Americans, the individual walked away with my pen. I was somewhat agitated since my pen cost about $6.00 (which I would usually have to disclose to my wife) and he probably has a dozen pens each worth ten-times the value of mine. Granted, this 'perp' was number 200something on the list, you know, not THAT wealthy, only worth a few hundred million--so I should expect him to be fairly thrifty.

Last week I had to meet with another one, this time higher on the list (I didn't bring a pen to the appointment). He handed me his card and I noticed he had one of those nifty nicknames people make up and put on their cards that have nothing to do with their real name. Like Larry "Buck" Smith, or Fernando "Hank" Velazquez. But, in this case, I thought it was deserved since he was probably beat up time and again on the playground because of his first name. Good call.

I won't disclose his name since I didn't inform him that potentially up to TEN people might read about his comments on my blog, so it will have to suffice to say he is the CEO of a publicly traded company. He graduated from Harvard Magna Cum Laude with multiple honors (no "gentleman's" C here), which means he's a legitimate smarty-pants.

Here's what HE thinks (emphasis here on his THOUGHTS not the fact that the individual is a MALE)

Q: Why has your stock price gone from $36/share to $4/share in just a few months?
A: I'm not entirely sure, when we went public I put on the cover of our shareholder report that our daily stock price would not be an accurate reflection on the underlying, long-term economic value of the firm. So we don't manage around our stock price. Also, I don't think the majority of the public understands what we do. Believe me, I watch the stock price but there is little more I can do other than provide some level of comfort to investors.

Q: How do you think the government is handling the current crisis?
A: On the whole, doing a good job. They've obviously made some mistakes. For example they tried too hard to help individual companies without figuring out how to help the broader economy at first. It's like a pack of wolves attacking Caribou and once a Caribou is injured and goes down, the government tries to revive it, while they're doing that, another one goes down and they have to run over and help that one. But what they didn't do, is stop and figure out how to get the wolves from attacking the heard. I think now they're on the right track. But they blew it when they let Lehman go under. In my opinion, Lehman posed a greater risk than AIG. In fact, the organization that stood to lose the most amount of money from Lehman's bankruptcy was the government. Now, AIG's biggest counter-party (in other words, the biggest loser if AIG goes under) is Goldman Sachs. And by the way, Hank Paulson is an ex-Goldman banker and the Treasury is swarming with ex-Goldman employees who still probably own a good chunk of Goldman stock. But, that book hasn't been written. I'm only speculating here.

Q: So you think what they're doing with the TARP, in all it's variety, is the right thing?
A: For the most part. Buying the troubled loans never made any sense to me. Here's why. If you buy something from the Bank for one dollar (as an example), all that bank gets is one dollar. If however, you provide them with one dollar of equity (which is now the goal of the TARP) they can turn around and get 15 dollars of additional capital since banks are leveraged 15:1. This is how credit and lending resumes. Without that outside capital, banks will not be able to lend.

Q: So are you saying we should see liquidity and lending start to come back in the next few months?
A: No. That's what the treasury screwed up. We should have followed Europe. In Europe, when central banks had to step in they provided not only equity but added that the new capital had to be tied to increased levels of lending. We didn't ask for that in the U.S. The treasury should tie the equity infusion to resumption of lending, but either we won't, or have not to this point but may in the future.

Q: What opportunities do you see over the next year?
A: Bonds! Debt! That's where the money will be made. I have no idea why anyone would want to take equity, or stock, in any company when the bonds will get you 20%. From a geographic perspective, we really like China because they have a very robust national balance sheet and there is a lot of organic growth. GDP estimates over the next year put China at 7 or 8%, which is huge given what's going on in the world today.

Q: Where do you see our economy in three years?
A: Dealing with inflation. I think the government will continue to pour billions of dollars in new stimulus packages and will continue to do so until they overshoot. Since there is a lag, it will be impossible for the government to see the benefits of their stimulus packages and that will create inflation which will be exacerbated by high commodity prices, especially oil.

Q: The latest question on everyone's mind is what to do with Detroit. Why are automakers being asked to come back with a plan when the Treasury is giving money away to institutions without any plan?
A: Automakers are further down in the food chain. They benefit from increased credit access. Although it wouldn't be pretty, we could do without automakers, we can't do without banks.

So there you have it. The pride of Harvard. Any thoughts?


Alisa said...

Interesting caribou analogy. I want AIG to do well, but stop this lavish crazy party spending. I think we can't be putting out fires all the time when really everything's ready to ignite.

Jessica said...

Alisa! I didn't know you followed this blog!
How funny.
It is an interesting conversation.
Jenga should publish interviews, eh? He does pretty well, for himself.
(smiles proudly)

Nate said...

How are you interviewing these people?

Jenga said...

Most of them come through on behalf of their companies which either 1) manage some money for us or 2) want to manage some money for us.