vanderbilt chancellor talk april 5 2011 burry

8/13/2019 Vanderbilt Chancellor Talk April 5 2011 Burry

1/10

VanderbiltChancellorsLectureMichaelBurry April5,2011Thankyou,Chancellor.

Earlylastyear,Ihadabriefdiscussionwithlongtime60minutesanchorSteveKroftaboutthestorieshehaddoneoverhiscareer,andwhetherhehadany

favoritesinthe

field

ofmedicine.

Aspart

ofthis

discussion,

Irelated

myopinionthatalthoughheandIhadmetasaresultofmyactivitiesinfinance,I

hadnotmetonepersoninfinancewhocouldcrackthetop50Imetinmedicine.AndIdaresay,withallduerespecttoStanford,45ofthosepeoplearehereattheVanderbiltMedicalCenter,orweretrainedattheVanderbiltSchoolofMedicine.Soyousee,itisaterrifichonorformetoaddressyoutoday.IhavenothingbutthehighestrespectforVanderbiltandthepeoplehere.

AstheChancellorsokindlymentioned,IwasfortunateenoughtohaveauthorMichaelLewisstumbleuponmystorynearlytwoyearsago.Perhapssomeofyouhavereadhisnewbook,TheBigShort. Today,Iappreciatetheopportunitytoaddressyoudirectlyregardingwhathappenedtooureconomy,andwherewereheaded.

Assomeofyouknow,myformaleducationisnotinfinance.Infact,mytimeasanundergraduateatUCLAwasaseeminglyrandomwalkthroughEconomics,English,andBiochemistry,withoutevenonecourseinaccounting.

Too,ashasbeenwritten,IhaveAspergersSyndrome,whichplacesmeontheautismspectrum,andachildhoodcancerleftmewithafakelefteyesinceIwas2.Bothconditionshaveactuallybeenhugeblessingsinaratherniftydisguise.

Perhapsforthesereasonsamongothers,however,inmyidealworld,itwouldmatternotwhetherIcouldlooksomeoneintheeye,orwhetherIcouldstayawakeduringlectures.Performancewouldmatteraboveallelse.Fromanearlyage,the

financialmarkets

therefore

held

anatural

appeal.

Inmyview,

men

are

attheir

bestwhenscramblingfromtheabyss,andaretypicallysomethinglessatallothertimes.

Still,financeseemedsomethingIcouldalwayspursueontheside. SomevolunteeringIhaddonewithchildrenatUCLAledmedownanotherpathanyway. Andso,inthesummerof1993,IchosetoenrollattheVanderbiltSchoolofMedicine.Nevertheless,fromthebeginningIstudiedbusinessalongwithmedicine. Forinstance,aftermyfirstyearatVanderbilt,asastudentsummerexternattheRehabilitationInstituteofChicago,Icametostudywhyitwasthatrehabilitationmedicinewasdoingsowellevenasothersstruggled.

I

wrote

up

my

conclusions,

and

looking

back

at

that

paper,

written

in

1994,

the

yearofForrestGump,Iseethesametypeofresearchthatledmetoconcludein2005thattheUSEconomywouldstarttocollapsein2007. Withinvariousbitsoflegislation,fromthecreationofMedicarein68totheTaxEqualizationandFiscalResponsibilityActof82,andtheSocialSecurityAmendmentsof83,Ifoundthecatalystsforprivatemarkettrendsthathavecometodominatehealthcarefordecades. Fromthatsummeron,myfocuswasontheinterplaybetweentheactionsofourgovernment,andtheoverreactionsoftheprivatemarket. Themostimportantconsequences,itseemed,werealmostalwaysunforeseen.


2/10

Afewyearslaterin98,IwasaresidentphysicianatStanford,butasRussiadefaulted,andLongTermCapitalbuckled,andtheFederalReservepanicked,Iwaspayingcloseattention. Infact,IcametoseetheFedsactionslatein98asasignificantcontributortotheensuingblowofftopofthedotcomandtelecombubblein99andearly2000.

IputmythoughtsaboutstocksandmarketsuponawebsiteIwasrunningduringthelatterhalfofthe90s. AndwhatIwroteseemedtoattractattention.WhenIcriticizedtheprospectsforindexfundsandhyperlinkedtoVanguard,Vanguardsattorneyskindlytoldmetoceaseanddesist. IwasanearlyAmazonAssociate,butitreallyseemedtopayoffwhenIgotagigwritingforMSNMoneyatadollarperword.ThatwasespeciallygreatformesinceImwordy(asyoullsee).

Acoupleyearslater,asIlaunchedmyinvestmentpartnershipScionCapital,VanguardChairmanJohnC.BoglewouldridiculemeasacharlataninaForbesmagazinecoverstory. Itwasaportentofthingstocome.WhateversuccessIwasboundtoachieve,Iwouldrepeatedlyfaceseveredoubtfromthewellcredentialedwholookeddownonmylackofcredentials.This,itseems,isanessentialfeatureofmanyAmericansuccessstories. So,toBoglespoint,Imjustadoctor,whatwouldIknowaboutmarkets?

Well,ScionCapitalstartedoutokanyway.Ihadleftmedicinewith$145,000indebtandnoassetsundermanagement,soofcourseitgotbetterfromthere. Itwasawildridefromthegetgo,asIdivedintobankruptcies,telecomblowups,asbestosissues,toxicstubsandothernastyplaceswhereIthoughtprofitsmightbehiding.Myfundwasstructuredwithalotofflexibility,butInevergavemyinvestorsmuchtransparencyintowhatIwasdoing. Quitehonestly,Isuspectedfromtheverybeginningthatitwouldperhapsfrightenthemunnecessarily.

Soon,however,

myattention

was

caught

bythe

growing

importance

ofthe

housing

sector.Theamountandtypeofleverage,thegenerationsoldassumptionthatpricesalwayswentup(ifyouwaited3yearsanyway)andtheverybroadsocietalparticipationcalledouttome. Thiswasnotjustacaseofafewearlyadoptersorventurecapitalistsactingbadly. Theentireeconomydependedonhomepriceappreciationconsumerspending,jobs,securitiesmarkets,allofit. Soon,IwouldseefinancialArmageddonlooming,withhousingasthetriggerpoint.

Inpredictingwhenandhowthecollapsewouldoccur,myfocuswasagainontheactionsofourgovernmentandtheresponseoftheprivatesector.ThiswasmuchinkeepingwithmystudiesinChicagoadecadeearlier.

So

lets

consider

the

history.

The

idea

of

an

American

Dream

involving

homeownershiphasbeenaroundfornearlyacentury. Nearlyeverymodernpresidentpromoteditinonewayoranother. ThegovernmenthelpedreturningGIsbuyhomesafterWorldWarII,andthegovernmentsecuritizedthefirstmortgageportfoliobackintheearly1970s. Privatesecuritizedmortgagesfollowedshortlythereafter.


3/10

PresidentReaganwouldsigntheSecondaryMortgageMarketEnhancementAct,whichamongotherthingsallowedpensionsandinsurancecompaniestoinvestinsecuritizedmortgages,andashorttimelaterhemadethesesecuritiesalotmoretaxefficient.Tobeclear,securitizationofmortgagesmeanttherewasnearlynolimitontheamountofmortgagesoriginatedbylendinginstitutions. Allconsidereditharmless,agoodthingfortheAmericanDream.Butallthisdesire

tosatisfy

the

Dream

needed

atool,

something

that

would

make

home

loans

themselvesmuchmoreaffordableforthosewithouttheincome,credit,orassetstoaffordone.

Steppingbackto82,theDepositoryInstitutionsActlegalizedtheAdjustableRateMortgageintheUnitedStates.Theseadjustableratemortgages,orteaserratemortgages,would,invariousforms,betheprimarymortgageproductattheheartofhousingsimplosiontwoandahalfdecadeslater.ButAdjustableRateMortgagesdidnottakeoffasamortgageproductuntiladditionalregulatoryandlegislativechangesinthe90sandearly2000sjumpstartedthemarketforaffordabilityproductsinthemortgagespace.

Specifically,duringthe90s,theCommunityReinvestmentActof77wasreinterpretedbyTreasurySecretaryRobertRubinandPresidentBillClinton.Thegeneralpointwastoincreasepressureonbankstomakemoreloanstolesscreditworthycustomers. Andtheydid.Subprimemortgagesexperiencedaminiboominthe90sissuanceroseroughlyfivefoldduringthedecadebeforeaminicollapse. BillClintonhadanameforthisdrive: TheNationalHomeownershipStrategy.

Thenin1999theGrammLeachBlileyActrepealedtheGlassSteagalActof1933,andofficiallyremovedtheincreasinglyleakyseparationbetweentheactivitiesofWallStreetfirmsanddepositorybanks.Thisfreedbankstoexperimentandtoexpandintonewlinesofbusiness,nonemorefatefulthanexperimentswithderivativesandassetbackedsecuritization. Theprivatemarkettherefore

gainedthe

capability

tomount

amassive

response

toall

the

governments

efforts

tostimulatehousing.

Weallremember99well,butinfactourglobalvillageunderestimatedmany,manyrisksthroughoutthe90s. Andsowehadtodealwiththestockmarketcrash,Enron,9/11,Worldcom,andeventuallyWar.

TheFederalReservesteppedin,cuttingthediscountrateitchargesbanksfrom6%toroughly1%inordertostaveoffrecession.Otherkeyshorttermratesfollowed.Notatallcoincidentally,from2001to2003wesawAmericanhomeprices,whichhadmovedlargelyinlinewithchangesinhouseholdincomeoverthedecades,suddenlyaccelerateupandawayfromthehouseholdincometrendline.

Homepriceshadgoodreasonforsuchdeviation. From2001through2003,rapidlydecliningshorttermrates tolowsnotseensincetheaftermathoftheGreatDepression inducedaboominadjustableratemortgages.Ahomeownersdollarwentalotfartherduringtheteaserrateperiod,andsohomepricesroseunnaturally. Riskwouldbelowaslongashomepriceappreciationwasstrong,thankstorefinancingoptions. Itwasapositivefeedbackloop,withfullblessingsoftheUSgovernment.


4/10

Infact,amidstearlyfearsthatthehousingmarketwasgettingaheadofitselfin2003,FedChairmanAlanGreenspanassuredeveryonethatnationalbubblesinrealestatesimplydonothappen. AsIsurveyedthenationaltrendsinhousing,Iwonderedwhethercommonsenseoughtruleagainsttheapplicationofprecedenttotheunprecedented.

Mr.Greenspan

went

ontoadvise

Americans

in2004

that

they

were

underutilizing

thenewtypesofadjustableratemortgages.Andin2005,helaudedthetechnologiesenablingsubprimeborrowerstoacquirehomes.Tragicallyforallofus,theFedhadtheauthoritytoblockanylendingpracticesitdeemeddeservingofsuchtreatment,butithadabsolutelynowilltodoso.Inanyevent,by2003,mortgageratesstabilizedat40yearlows.And,importantly,plainvanillaAdjustableRateMortgageshadalreadycomeintowidespreaduse.

Thiswasabigproblemforlenderswithagrowthmandate. Theyneededtostimulatemoreloanvolumedespitestablemortgageratesandinadequateincomegrowth. Atthispoint,ifhomepricesweretorisesignificantly,theywouldhavetofloatalmostentirelyonthebackofthetypeandqualityofmortgagecreditprovidedtothebuyer.Critically,Interestratesalonewouldnolongerdetermineaffordability.Inmyletterstoinvestors,Itermedthiscreditextensionbyinstrument,andittookourhousingmarketintoanewparadigm. Itwastheprivatemarketstimetooverreact.

Theinstrumentchosenforsubprimeborrowersbylendersin2003wasarelicfromthe1920stheinterestonlypaymentoption,appliedtoanadjustableratemortgage. Lenders,byimplementingamortgagefeaturetheyhadlongavoided,showed,foralltosee,theywereinterestedingrowthmorethantheywereinterestedinmaintainingcreditstandards.

Byfallof2004,InotedformyinvestorsthatCountrywideFinancial,avery

largemortgage

lender,

reported

Subprime

mortgage

originations

up158%

year

over

yeardespitea24%declineinoveralloriginations. Evidencewasmanifestbankswerechasingbadcredits,inclusiveofhousingspeculators.Theonlyquestionwashowfartheycouldgo. Fraudjumped.

Thepointatwhichtheprovisionofcreditwasmostlaxwouldmarkthepointofmaximalpriceintheasset.

Iimaginedthetopinthehousingmarketwouldbemarkedbyamortgageinwhichhomebuyersofsubprimequalitywereenticedtobuywithteaserratemonthlypaymentsnearzero. Iwasveryawarelenderswouldtakethistothenthdegree. Thankstosecuritization,anyloansthebanksdidnotwanttokeep,they

could

always

sell

on

through

Wall

Street

to

a

world

of

investors

simply

ravenous

foryield.

Importantly,becausesubprimemortgageswerebeingturnedintosecurities,thereweremandatoryregulatoryfilings,andthisishowIeducatedmyself.


5/10

Bysummerof2005,thesedocumentsrevealedthatinterestonlymortgageshadtakenasubstantialshareinthesubprimemarket,oftenmorethan40%ofsubprimemortgagepoolsthatwerepassingthroughWallStreetontheirwaytoinvestors.Thiswasupfromjust10%ayearearlier.Simultaneoussecondlienmortgagesrampedup,andthestatedincomeoptioninspiredanewvernacularliarloans. Insomemortgagepools,40%ofsubprimeloanswereforsecondorvacation

homes.Yet

asoflate

2005,

Moodys

and

S&P,

so

crucial

tothe

securitization

process,werenotreactingatall.

Thetopwouldsoonbefastuponus.AsthesubprimeInterestOnlyAdjustableRateMortgagestartedtotouchmaximumsaleschannelpenetration,wesawtheintroductiononawidescaleofyetanother,moreextremeteaserratemortgagecalledthepayoptionARM. Inthisnewtypeofmortgage,neverbeforeseeninawidelystandardizedformat,theborrowercouldpaynexttonothingeachmonth,andtheunpaidinterestwouldsimplynegativelyamortizeintothegrowingmortgagebalance. RampantcashoutrefinancinghadalreadymadethehomeamagicalATMandnowhousinghaditsmagicalcreditcard.

Yet,itwasblessedbybothlendersandinvestors. ThiswaswhatIhadbeenwaitingfor: peakcredit.Suchamortgageproductwouldonlyexistaslongashomepriceappreciationwasthecentralassumption. AndHomePriceAppreciationwasnotlongforthisworldpreciselybecausethesemortgageproductsexisted.

Someofthesesortsofmortgagesstartedmakingtheirwayintosubprimechannelstoo.Iknewthisbecauseby2005IcouldseethesemortgagesbeingpackagedintoAltAmortgagesecuritizations. ButnotalloftheseweresoldthroughtotheStreet.

Incredibly,WashingtonMutualandCountrywide,twoverynationalgiantsinhomeloans,begantoloadtheirownbalancesheetswiththesepayoptionARMs. Facinganotherslowdowninloanvolumes,thesecompaniessawthenegativeamortization

featureasaway

toshow

loan

growth

inaslowing

market.

Yet,

these

companies,

indoingso,alsoexpressedconfidenceinhomepricestabilityintheeventofaslowdowninloanorigination. Ofcourse,thisiswhattheratingsagencies,theFederalReserve,Congress,thePresidentandallthePresidentsmenbelievedtoo.

Idisagreed.Isawabsolutelynochanceofhomepricesgoingsideways,orstabilizingforanysignificantlengthoftime.Oncehomepriceappreciationwasnolongeragiven,thesenewtypesofmortgageswouldsimplydisappear.Homeprices,starvedofpeakcredit,wouldnecessarilyfall,andfallsteeplyasmortgageoptionscrumbledaway.

Thecrisis,inmyview,wouldstartnolaterthan2007,bywhichtimeteaserrate

periods

on

the

vast

majority

of

these

new

types

of

mortgages

would

expire,

or

reset,forapopulationofhomebuyerstrappedinamortgagetheycouldnolongerafford.Andonthewaydown,housingwouldtakeconsumerspendingandjobswithit,settingupapositivefeedbackloopofaverydamagingvariety.

So,Idecidedtoshortthemortgagemarket andprofitfromthecollapse. IsetouttobuycreditdefaultswapsonsubordinatedtranchesofsubprimeRMBS.Indoingso,IgainedanewlevelofinsightintohowWallStreetreallyworks.


6/10

IcalleddifferentWallStreetbankstotrytoconvincethemtotradeinthismarketwithme. Initially,Ifoundnotakers. Thiswholeeffortwascomplicatedbecauseitwasimportanttomethatthissecuritywouldbestandardized,suchthatifIboughtacreditdefaultswapfromonedealercounterparty,Icouldeasilytradethecreditdefaultswaptoanotherdealercounterparty. Bespokeoneoffswerefullofcontractandcounterpartyriskandwerenotmything.

Nevertheless,byMayof2005,weagreedtoourfirsttradesshortingthesubprimemortgagemarketwithDeutscheBank. Weworkedonthesoontobestandardizedcontractlanguageabit,andinthefirstdaysofJune05,thefirsttradeswerefinallyexecuted.Wewouldultimatelyuseninedifferentdealercounterparties,thoughIavoidedLehmanandBear. GoldmanSachswouldfeatureprominently.Tobeclear,thesecreditdefaultswapswouldriseinvalueasmortgagessufferlosses.

Now,Iwantedtoshorttensofbillionsofthesemortgages. ThiswasanepicinvestmentopportunityandIshamelesslyinvokedSorosinmyletterstoinvestors. Ievenattemptedtosetupaseparatevehiclejustforthispurpose,whichIcalled,andthisisfortheEnglishmajors,MiltonsOpus,inthesummerof2005. TheeffortshowedIcannotsellANYTHING.Itmetwithincredibleskepticismfrommyinvestors,andwhenIreachedouttooutsideinstitutionswiththeidea,theysimplywentofftodoitthemselves. MiltonsOpusnevergotofftheground. MiltonsOpus,ofcourse,wasParadiseLost,andIhadnodoubtthatwaswherewewereheaded.

Bylate2005,Iwasstillaloneasadirectionalshortonthismarket. GoldmanandDBinparticularseemedveryinterestedinwhatIwasdoing.Infact,Iwouldshortabout$1.8billionnotionalinRMBS,andabout$6.6billionnotionalincorporatecredits,includingAIG,Countrywide,WashingtonMutual,FannieMae,andFreddieMac.

AIGwas

particular

interesting

because

Iknew

that

AIG

need

not

post

collateral

foritsderivativestradesaslongasithadaAAorbetterrating.ThisinformationcametomeduringournegotiationsoncreditagreementswithGoldmanSachsandBankofAmerica.SoItheorizedinemailstomystaffasfarbackasAprilof2005thatarunonAIGwouldmanifestitselfincollateralcallsasaresultofaratingsdowngrade.ThatnooneelsetheorizedthiswouldleadtotheunnecessarynationalizationofAIGjustafewyearslater,andwouldcosttaxpayerssome$180billion.

ByFebruaryof2006,wewereessentiallydonebuyingCDSonmortgages,astheratingsagenciesfinallyrespondedbyrequiringmorecollateralincertainsubprimemortgagepools.Infact,bythattime,themedianpriceofnewandused

homes

had

fallen

from

August

2005,

according

to

the

National

Association

of

Realtors.Earlymortgagedefaultsonthesummer2005vintagewereatrecordlevels,aswastheglutofnewhomeinventory.Somepanicwasevidentinvariousarticlesatthetime. ItwastimefortheworldtoseewhatIsaw.Yetmortgagespreadscontinuedtofalltheimpliedriskinmortgageswasdecreasingas2006progressed.


7/10

Manyhavewonderedwhythemarketsdidnotsendanappropriatewarningsignal.Theansweristhatinlate2005,technicalfactorscameintoplaythatkeptthecreditderivativemarketsfromsendinganywarningsignal.

Tothispoint,SyntheticCollateralizedDebtObligations(CDOs)relyingonCreditDefaultSwapsonsubprimeRMBSwererampinginabigwayascorrelationtraders

suckedupthe

most

subordinate,

hardest

tosell

tranches,

and

tradable

ABX

IndicestrackingthemarketforcreditdefaultswapsonRMBSemerged. TheseIndicescateredtothoseneedinganeasywaytotakeonalotofyieldwithoutalotofanalysis,suchasinvestorsandcorrelationtraders.

TogetherSyntheticCDOsandtheABXIndiceshelpeddistributeriskfarandwide,andinexponentialfashionrelativetotheunderlyingrealworldmortgages.Thiswouldnotbeagoodthing,nomatterwhattheStreetsriskmodelsaid. Andtobeclear,therewasonlyoneriskmodelthattheyallused.

2006wouldinfactbetheyearsystemicriskwassupersized.Itwastheyear,forexample,whenMerrillLynchtookitssubprimeexposurefromafewbilliontomorethan50billion. Ultimately,Merillwouldhavetowriteoffover40billioninmortgageassetsvirtuallynoneofwhichwasonitsbookspriorto2006. ThiswastheyearthatreallygotWallStreet.

AsIwrotetoinvestorsas2006gotunderway,Itissimplyatragedyoffatethateverlowerreturnsencourageeverincreasingleverage,withonlyonepossibleultimateoutcome.Itisatragedyofourtimesthatourregulatorswilldonothingaboutit.Asanaside,thisisagaintruetoday.

Iwarnedinvestorsthat2006wouldbedifficultforus.ItturnedoutmoredifficultthanIhadimagined.Ourcounterpartydealerspriced,ormarked,ourbookofCDS,andourongoingfightwiththesedealerssuchasGoldmanSachsandMorganStanleyoverthevalidityofthesemarkshitabsurdlevels.Wewereforced

toside

pocket

our

RMBS

CDS

trade.

Facingaveryangrycrowdofinvestors,manyofwhomweredemandingtheirmoneyback,IclosedourHongKongOffice,cutsalaries,andlaidoffstaff. Wewerethreatenedwithlawsuits,andIhadtoconsiderliquidationofthefundatDecember2006,attheworstpossibletime. Iinsteadliquidatedbillionsofourcorporatecreditdefaultswapshortpositionsinsomethingofafiresale. Asourdistresswasreportedinthepress andbackthentheonlypressIgotwasbadpress dealerslookedtotakeadvantage.Wewouldreceivelessthan1/10thof1pennyonthedollarformanyofthem,hurtingourperformancemoreso. Ultimately,ourmassivesalesshavedbillionsinputativegainsfromourportfolio.

ButIknewmyanalysiswascorrect,andnotoneofthedetractorsseemedtobeabletogetanyofthedetailsright. Weretainedthepositionswecould.Thisbegantopayoffin2007.


8/10

Notthateven2007waseasy.Recently,USSenatorCarlLevinprovidedspecificevidenceforsomethingthatwealreadyknew. Thatis,ourWallStreetbankcounterpartiesall9ofthem weretryingtoscrewusrightuptotheend. Thegamesthesecounterpartiesplayedwithmarksorpricing onourpositions Icouldtalkaboutthoseforhours.

ButSenator

Levin

was

investigating

Goldman

inparticular,

and

hedisclosed

tellingemailsthatshowedGoldmanadoptedashortsqueezetodrivedownthepriceofcreditdefaultswapssuchasthoseheldbymyfunds. AsMr.Swenson,aseniorexecutiveatGoldman,saidinanemail,WeshouldstartkillingtheshortsinthestreetThiswillhavepeopletotallydemoralized.Inananotheremailhesaidhewantedustofeelquote,maximumpain. WhathadhappenedfromourpointofviewatthetimewasthatGoldmanhadbeenmovingtooursideofthetradeasearlyasDecember2006,andwasworkingtogetintoourtradeevenbiggerthemselvesinSpringof2007,soalowerpricefortheBigShortbenefittedGoldmanSachs andthatishowWallStreetworks.

InlateJuneof2007,creditspreadsstartedmarchinghigher,andthentheyjusttookoffforgoodonceGoldmanandotherswereinonthesamesideasmytrade. ThenitwasAIGsturntocomplainaboutGoldmansmarks.

Incredibly,itwouldlaterbereported,thatmorethan$60trillionincreditderivativesexistedatthepeak.Andthehyperbolewouldbethatisgreaterthanthevalueofallgoodsandservicescreatedonplanetearth.Butitsroughlyequal,andwhoreallyknowswhatthegrossproductofEarthisanyway? Still,$60trillion,how?Creditderivativesonanunderlyingassetcouldbeworthmultipleordersofmagnitudemorethantheassetbecauseallassetbackedderivativessettledincash.ThatwasthesecretsauceoftheDoomsdayMachine.

Andsothecrisisunfolded,withthemarketprovidingasignalfartoolate. Evenso,FedChairmanBenBernankeandTreasurySecretaryHankPaulson

continuedtounderestimate

the

situation.

Iwas

apoplectic.

SecretaryPaulsonnowclaimsthatevenifheknewwhatwasgoingtohappen,hecouldnothavedoneanythingaboutit. Butletsbeclear.HankPaulsonwasUSTreasurySecretaryfreshfromtheapocryphaltopjobatTHEGoldmanSachsinthatsummerof06,andheorchestratedtheonceunthinkablegovernmenttakeoversofAIG,FannieMae,FreddieMac,andthebailoutsofWallStreet.Hewasanythingbutanimpotenttool,andhehadarunningstartunlikeanyother. Butifhetrulyfeltthatway,thisisanabsolutelydevastatingcommentaryonhowgovernmentworks.

Infact,asbooksandarticlesonthecrisisproliferate,itbecomesclearthat

at

nearly

every

failed

or

severely

troubled

major

institution

and

within

every

relevantdepartmentoftheUSgovernment,therewassomeonewhoseinsightwaseverybitasfarsightedasmine,andinsomecasesevenmoreso. However,NONEZERO wereinthetopjob.ThatourCEOs,ourGovernors,ourPresidents,ourChairmen,didnotseethiscoming,anddidnotadequatelypreparetheirconstituencies,isanindictmentofthemannerbywhichwechooseandenableourleaders.


9/10

Butsuchwouldnotbetheconclusionsmadein2008. Bythesecondhalfoftheyear,withthegovernmenttargetingcommodityhedgefundmanagerswithpunitivesubpoenas,theglobalattackonsocalledspeculatorsand,again,hedgefunds,thenationalizationsofFannie,Freddie,andAIGandtheirliabilities,theFederalReserveswideopenmonetarypolicy,andTARP,Iworriedaboutthefutureofanationthatwouldrefusetoacknowledgethetruecausesofthecrisis. In

myview,

anhistoric

opportunity

was

lost.

America

had

instead

chosen

its

poison

asthecure,andthesecondgreatestgenerationwouldneverbeborn.

Today,IexpecttheUSgovernmenttoattempttocontinueeasymoneypoliciesintothenextpresidentialterm,pastthemeatoftheforeclosurecrisisandthecorporateandpublicrefinancinghumps. Withjunkbondsincredibly atalltimehighs,yes,quantitativeeasingseemstobeworking,fornow.ButthisisaninvalidvalidationofwhatAmericaisdoing.

ThisisinfactaPyrrhicgamble,aswecontinuetodebaseourcurrency.Bernankesaysheisnotprintingmoney.Again,Idisagree. Asitstands,IgetanemailfromtheFederalReserveeverysingledaysayingtheyremonetizing7or8billiondollarsorsoofTreasurieseachandeverydaythankstoQEII. Infact,QEIInotQueenElizabethbutquantitativeeasingQEIIssizeandbreadthraisestheseverequestionoftheTreaurysneeds.

Thegovernment'sborrowingofmoneyforthepurposeofinjectingcashintosociety,bailingoutbanks,brokers,andconsumers,isashortsighted,easydecisionforapopulationthathasnotyetlearnedthatshortsightedandeasystrategiesaretheroutetolongtermruin.

Weneverquiteachievedthenecessarycatharsistostokeadeepreevaluationofourwants,needs,andfears.Importantly,thetoxictwinsofafiatcurrencyandanactivistFedremainfirmlyentrenched,evenmoresowiththefinancialreformsenactedlastyear.

Infact,theFederalReserve,despitehavingnewlyacquiredbroadpowersofregulation,hasinsistedthatnothinginfieldofeconomicsandfinancewasofhelpinpredictingthecrisis.Suchaconclusionisworthless.Itguaranteeswewillmakethesamemistakesagain.

SoIhaveaproblemwithourleadersIshouldnotethatIvebeenverymuchoverwhelmedonseveraloccasionswhenconsideringthecolossalmistakesofourleaders.Weneedbetterleaders,butveryfrankly,thisneedisunlikelytobemet. Aproblemcannotbesolvedifitcanneverbeacknowledged. Taxesneedtoberaised,loopholesneedtobeshut,spendingneedstobecutifwearetohaveanyhopeofreturningtoastablebase.Certainlyhomeownershipshouldnotbea

policy

of

the

US

government,

and

the

banking

system

needs

substantial

reform

and

evenbankbreakups. GlassSteagalneedsasecondruninastrongform.Andthose22.5millionpublicworkershavenobusinessunionizingagainstthetaxpayer.Thelistofthingsthatlikelywonthappenbutshouldhappengoesonandon.

AscitizensoftheseUnitedStates,weshouldcarefullyconsiderwhatonetrillionmeans. Allpersonalincometaxescollectedinayeardonotsomuchasaddupto$1trilliondollars,andyetby2020interestexpenseonournationaldebtalonecouldexceed$1trillion. Whenyouconsiderour$1.7trillionannual


10/10

deficit,alsoconsiderthattheTreasurytakesinjustover2trilliondollarsayear. 2TrillionalsohappenstoberoughlytheamountofbankandgovernmentdebtheldnowatthetremendouslybloatedFederalReserve.Thinkaboutit,twotrillionsecondsis64,000years. Ourcountrysmathisscarybig,butwhatsevenmorescaryisthatitsimplydoesnotwork.

Argumentsonblooming

prosperity

and

economic

recovery

must

beconsidered

alongsidethefactthatallthedebtandallthemoneybeingprintedisverymucharealbill,arealtaxthathasnotyetcomedue,exceptwithrespecttosaversandthoseonfixedincome.

Assuch,soberanalysisonthepartoftheindividualisparamount.Wemustrememberthatentiresocietiescanandoftendofollowthewrongpathforaverylongtime,andthatthereisnothingwrongwithbreakingfromthesocialnormtoensuregoodoutcomes.Legaciesareaterribleandsometimesfatalburdeninarapidlychangingworld,andcommonsensemustrulewhenitcomestocareerpathsandlifechoices. Thoughthesituationseemstocallforit,itisnotatimefortheresponsibleindividualtotolerateanylevelofblindfaithdirectedtowardanymanorwoman. Itisabsolutelynotatimetofollow.

Allthatsaid,ImightsuggestopeningaretailbankingaccountinCanada.

Again,thankyouforyourattention.Iamhappytoanswerquestions.

vanderbilt chancellor talk april 5 2011 burry

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