Highlights From the Barron’s Interview with Jeremy Grantham

I don’t know if you’re familiar with Jeremy Grantham or not, but I like him. Barron’s published an interview with Grantham ($) in this week’s issue. Of course the topic was the credit crisis and market turmoil. Here’s just a couple of highlights from the interview.

This first one would be funny if it weren’t so true:

Barron’s: Do you think we will learn anything from all of this turmoil?

Grantham: We will learn an enormous amount in a very short time, quite a bit in the medium term and absolutely nothing in the long term. That would be the historical precedent.

I thought this one was also interesting:

Barron’s: Do you have any closing thoughts about how we got into this financial state?

Grantham: I ask myself, “Why is it that several dozen people saw this crisis coming for years?” I described it as being like watching a train wreck in very slow motion. It seemed so inevitable and so merciless, and yet the bosses of Merrill Lynch and Citi and even [U.S. Treasury Secretary] Hank Paulson and [Fed Chairman Ben] Bernanke — none of them seemed to see it coming.

I have a theory that people who find themselves running major-league companies are real organization-management types who focus on what they are doing this quarter or this annual budget. They are somewhat impatient, and focused on the present. Seeing these things requires more people with a historical perspective who are more thoughtful and more right-brained — but we end up with an army of left-brained immediate doers.

So it’s more or less guaranteed that every time we get an outlying, obscure event that has never happened before in history, they are always going to miss it. And the three or four-dozen-odd characters screaming about it are always going to be ignored.

If you look at the people who have been screaming about impending doom, and you added all of those several dozen people together, I don’t suppose that collectively they could run a single firm without dragging it into bankruptcy in two weeks. They are just a different kind of person.

So we kept putting organization people — people who can influence and persuade and cajole — into top jobs that once-in-a-blue-moon take great creativity and historical insight. But they don’t have those skills.

He may be right on that one but I also think a lot of it had to do with a sort of “to-hell-with-it” attitude that went on in the financial industry. The industry was primarily concerned with making money NOW—to hell with the consequences. I remember reading that mortgage brokers supposedly wrote bad business because they knew that if they declined, the borrower would just go down the street and get the loan from a competitor. It seems sound principles flew out the window.

Nearly 1 in 10 Stocks Trade Below Their Per-Share Holdings of Cash

This little tidbit comes from this must-read article ($) by Jason Zweig that was in today’s Wall Street Journal:

Out of 9,194 stocks tracked by Standard & Poor’s Compustat research service, 3,518 are now trading at less than eight times their earnings over the past year — or at levels less than half the long-term average valuation of the stock market as a whole. Nearly one in 10, or 876 stocks, trade below the value of their per-share holdings of cash — an even greater proportion than Graham found in 1932. Charles Schwab Corp., to name one example, holds $27.8 billion in cash and has a total stock-market value of $21 billion.

Bargains? Probably. But, that doesn’t mean that the market won’t drop further before it stabilizes. The article mentions that we could—though unlikely—see the market drop another thirty to fifty percent.

It’s amazing at just how crazy things can get—both on the upside and the downside. It kind of blows holes in the whole efficient market theory. You can’t tell me that the markets aren’t overreacting.

Should CEOs Give Back When Their Companies Fail?

Reading assignment: ‘Your company is bankrupt, you keep $480m. Is that fair?’

In that article, Henry Waxman asked Richard Fuld, CEO of now defunct Lehman Brothers, the following question:

“Your company is now bankrupt and our country is in a state of crisis,” said Waxman, a liberal from California. “You get to keep $480m. I have a very basic question: Is that fair?”

There’s that stinkin’ word again: FAIR!

Life’s not fair, Mr. Waxman. You know that.

That said, as much as I dislike Henry Waxman, he does have a point. A CEO who was in command as his company disentigrated into nothingness doesn’t deserve to keep his compensation. That’s my opinion and I’m sure it’s harsh but that’s the way I feel.

It’s no consolation to shareholders and those employees who lost their jobs and their retirement plans to hear their former CEO say, “If I had it do over again…” DUH! Who wouldn’t do things differently? We can’t do that so that’s why it’s important to make good decisions in the first place. What CEO, if they had thought this thing through, would have still made the same decision to get involved in these toxic mortgages and their related products?

We’ve discussed this subject before but I’m interested in hearing what you think of Fuld’s comments in the article. Should compensation be more rigorously tied to performance so that CEOs reap the benefits of sound decisions and consequences (real consequences) of poor decisions?

Dave Ramsey’s Plan to Fix the Credit Crisis

Jesse over at You Need a Budget sent me an email this evening asking my opinion of Dave Ramsey’s 3-step plan for fixing the credit crisis. Here’s the plan (which you can also download as a PDF here):

Years of bad decisions and stupid mistakes have created an economic nightmare in this country, but $700 billion in new debt is not the answer. As a tax-paying American citizen, I will not support any congressperson who votes to implement such a policy. Instead, I submit the following three steps:

Common Sense Plan.


A. Insure the subprime bonds/mortgages with an underlying FHA-type insurance. Government-insured and backed loans would have an instant market all over the world, creating immediate and needed liquidity.

B. In order for a company to accept the government-backed insurance, they must do two things:

1. Rewrite any mortgage that is more than three months delinquent to a 6% fixed-rate mortgage.

a. Roll all back payments with no late fees or legal costs into the balance. This brings homeowners current and allows them a chance to keep their homes.

b. Cancel all prepayment penalties to encourage refinancing or the sale of the property to pay off the bad loan. In the event of foreclosure or short sale, the borrower will not be held liable for any deficit balance. FHA does this now, and that encourages mortgage companies to go the extra mile while working with the borrower—again limiting foreclosures and ruined lives.

2. Cancel ALL golden parachutes of EXISTING and FUTURE CEOs and executive team members as long as the company holds these government-insured bonds/mortgages. This keeps underperforming executives from being paid when they don’t do their jobs.

C. This backstop will cost less than $50 billion—a small fraction of the current proposal.


A. Remove mark to market accounting rules for two years on only subprime Tier III bonds/mortgages. This keeps companies from being forced to artificially mark down bonds/mortgages below the value of the underlying mortgages and real estate.

B. This move creates patience in the market and has an immediate stabilizing effect on failing and ailing banks—and it costs the taxpayer nothing.


A. Remove the capital gains tax completely. Investors will flood the real estate and stock market in search of tax-free profits, creating tremendous—and immediate—liquidity in the markets. Again, this costs the taxpayer nothing.

B. This move will be seen as a lightning rod politically because many will say it is helping the rich. The truth is the rich will benefit, but it will be their money that stimulates the economy. This will enable all Americans to have more stable jobs and retirement investments that go up instead of down. This is not a time for envy, and it’s not a time for politics. It’s time for all of us, as Americans, to
stand up, speak out, and fix this mess.

I think think this plan makes sense. Still, even under this plan we’re still going to see a lot of foreclosures. Those who purchased homes using interest-only mortgages and then only paid the interest-portion of the payment will never be able to afford a regular mortgage payment.

Dave’s also not quite clear on how we pay for the insurance program. Is this something paid for with tax dollars or is it something charged to the homeowner? I’m assuming it is taxpayer-funded. Regardless, I think this is a lot more tolerable than the massive $700 billion bailout that’s being discussed. What do you think?

If you like Dave’s plan, go check out his website to learn how you can help spread the word.

Stephen Schwarzman on How We Got Where We Are

I saw this in Thursday’s Wall Street Journal and thought it worth sharing. It’s Stephen Schwarzman, chairman of Blackstone Group, talking about how we got into this credit crisis ($):

“It’s a perfect storm. It started with Congress encouraging lending to lower-income people. You went from subprime loans being 2% of total loans in 2002 to 30% of total loans in 2006. That kind of enormous increase swept into the net people who shouldn’t have been borrowing.

Those loans were packaged into CDOs rated AAA, which led the investment-banking firms [buying them] to do little to no due diligence, and the securities were distributed throughout the world, where they started defaulting.

When they started defaulting, out of bad luck or bad judgment, we implemented fair-value accounting….You had wildly different marks for this kind of security, which led to massive write-offs by the commercial-banking and investment-banking system.

In the face of those losses…you needed to raise new equity…which came from sovereign-wealth funds, in part, which then caused political resistance to sovereign-wealth funds, who predictably have withdrawn from putting money into the system….It seemed pretty obvious that would happen. We now find ourselves with a liquidity crisis where fundamentally the cost of money for financial intermediaries [such as investment banks] is significantly in excess of their cost of lending it. So several institutions found themselves in a structurally impossible position. …Goldman reverted to a banking charter for a lower cost of funds, which today is still not low enough for the business.”

That pretty much sums it up. It’s just ironic to me how Wall Street has always talked down to average Americans and now they (Wall Street) are reeling from some very poor decision making. What the hell were they thinking?

Hillary: Let’s Keep People in Their Homes

This comes to us from Hillary Clinton’s editorial, Let’s Keep People in Their Homes, that was in today’s Wall Street Journal:

…we must address the skyrocketing rates of mortgage defaults and foreclosures that have buffeted the economy and ignited the credit crisis. Two million homeowners carry mortgages worth more than their homes. They hold $3 trillion in mortgage debt. Nearly three million adjustable-rate mortgages are scheduled for a rate increase in the next two years. Another wave of foreclosures looms.

I’ve proposed a new Home Owners’ Loan Corporation (HOLC), to launch a national effort to help homeowners refinance their mortgages. The original HOLC, launched in 1933, bought mortgages from failed banks and modified the terms so families could make affordable payments while keeping their homes. The original HOLC returned a profit to the Treasury and saved one million homes. We can save roughly three times that many today. We should also put in place a temporary moratorium on foreclosures and freeze rate hikes in adjustable-rate mortgages. We’ve got to stem the tide of failing mortgages and give the markets time to recover.

This is why the bailout for the banks, brokerages, and mortgage firms bugs me so much: it fuels the argument that we need to help people afford the unaffordable since we helped Wall Street. I am against a bailout of any kind—damn the consequences. There is no reason to believe that these companies will change their ways just as there is no reason to believe that these homeowners (a really bad term since they don’t really own anything) won’t again run into trouble. What then? Do we come to the rescue with another dose of help?

The solution to all this is really simple: we need to return to responsibilty and standards for both companies and citizens.