Friday, December 04, 2009

3 folds Increase in 3 years: What Comes Next

Prem Watsa is one of the few investors in the world who saw last year's meltdown coming and placed his investment bets accordingly. Consequently, he made billions for the shareholders of Fairfax Financial Holdings Ltd. In 2006, Fairfax's shareholders' equity was US$2-billion and by 2009 it was US$6.5-billion. He sat down for an interview recently with the Financial Post's editor-at-large Diane Francis to discuss ways in which the world can "reset risk management" in order to avert future catastrophes.


Q Are we at the bottom?

A It is difficult to say but the economy is still in a great deal of trouble. Do you think anybody is going to speculate in houses for the foreseeable future? People may do something else irrational, but not houses; a housing bubble is no longer in the cards. This goes to your point about international regulation: You don't have to worry about new rules and regulations, the free market is sorting itself out.

Q What role did monetary policy, easy credit, play in all of this?

A The Greenspan policy was part of the problem. If Paul Volcker had been chairman of the U.S. Federal Reserve would this have happened? Not likely. He would have put interest rates up in 1996 when Greenspan warned about "irrational exuberance" and the tech bubble. Mr. Volcker would have let Long Term Capital Management go bust, raised interest rates and we never would have been in this current situation.

The financial collapse happened because we had 20 years of boom time, and bubbles, without any significant recession.

Q What stock market rules contributed to the meltdown?

A Eliminating the uptick rule [can only short on upticks in stock prices] was a mistake and so is short selling without borrowing the stock first. The ban on shorting financial institutions is lifted again and the SEC is debating whether to bring back the uptick rule again. What we need more of is transparency in all markets, including with respect to shorting and derivatives.

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