Interview With Prem Watsa

Excellent interview.

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Prem Watsa's Lecture: Feb 16, 2011

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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.

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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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Prem Watsa: THE RELUCTANT CEO OF THE YEAR

He is a little bit greyer than he was before the beginning of his biblical seven lean years, and a little bit balder, and slightly more wrinkled, but wiser, too. He has learned. He has discarded one of his own personal commandments, a rule he rarely breached in 20 years: Thou Shalt Not Give Interviews to the Press. He has opened his mind and his mouth to journalists, analysts, skeptics and enemies. He has a PR agent now. He does conference calls and takes questions. He has done all this because he had to--because his life's work was attacked, and because it became clear to him that the world had changed, and it wasn't good enough any longer to stay cloistered in his comfortable circle of friends and admirers and confidants and fellow travellers.

But that doesn't mean he likes it. And it doesn't mean he wants the attention any more than he did a decade ago, before all the trouble started, when he was still labelled a "recluse" and Bay Street loved him and his peculiar creation, insurance and investment company Fairfax Financial Holdings Ltd. Over the decades, The Globe and Mail has named dozens of CEOs of the Year. Prem Watsa is the first, as far as anyone can recall, who tried to reject the honour. Vehemently.

It's Fairfax policy to reject all awards to individuals. In 1999, Watsa even turned down a business leader award from his alma mater, the Richard Ivey School of Business; other Fairfax executives have rejected similar nominations. Watsa would not pose for photographs or grant an interview for this story (though he has given several interviews to The Globe this year, most recently in early October, when he spoke at length about the financial crisis and predicted a long, deep and painful recession). Through the company's chief legal officer, Paul Rivett, Watsa asked us to rename the title "Company of the Year" and grant it to Fairfax instead of him. He even offered to try to find us a more willing candidate. These efforts were not an act of false modesty. In Rivett's Toronto office, there is a limestone plaque that reads: "There's no limit to what a man can do or where he can go if he doesn't mind who gets the credit" --a quotation often attributed to Ronald Reagan. Watsa gave one to all senior Fairfax executives.

Well, tough luck, fella. Sometimes you have to suck it up and accept the credit. And this year--the most extraordinary year in financial markets since the Depression--is unquestionably Prem Watsa's time. His critics, the so-called cadre of hedge funds and their hired hatchet men whom Watsa alleges tried to destroy Fairfax in 2005 and 2006, are in retreat. The very practice of short-selling, while hardly discredited, is under scrutiny now, as are the practices of the brokers and traders who serve short-sellers. An analyst who helped touch off panic selling in Fairfax shares--by writing a report that essentially claimed the company was on the road to bankruptcy because it had failed to set aside a necessary $5 billion (all currency in U.S. dollars) for insurance claims--has been fired for leaking that document to some clients before its release. Fairfax seems financially healthy for the first time since Monica Lewinsky was on everyone's lips. In the summer, Moody's Investors Service raised Fairfax's credit rating, which it hadn't done since 1998; DBRS Ltd. moved the company's bonds to investment grade, where they hadn't been since 2002.

But these are mere details. The real reason Watsa is the (reluctant) recipient of the title is that, in three words, he called it. He didn't know that the greatest financial disaster in decades would unfold in the autumn of 2008, of course, and he didn't predict that it would sink such leviathans as Lehman Brothers and American International Group, his biggest rival in insurance. But he did spot the source of the trouble long before most everyone else. And he has $2 billion to prove it.

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Prem Watsa: Fairfax Financial beats bad markets

Q: Everybody else is running for the exits and melting down and Fairfax just had its credit rating upgraded so how did you pull this off?

A: “Very simply it goes back to this 100-year storm concern of ours. We took action that reflected our belief that everything was headed downward. Predicting rain doesn’t count, but building an ark does. And that’s what we did. We built an ark and we had a little bit of good fortune. This is why our rating went up.”

“Our focus has had a tremendous effect on our results. Last year we made in excess of US$1.1 billion and in the first quarter of 2008, US$631 million. Our capital, shareholders equity in 2006, was US$2.9 billion and it grew by 50%.”

Q: What was your thinking that led to these results?

A: “We have always taken a long term view and in 2003 we started worrying. We were concerned about asset-backed paper. We saw the moral hazard in all this credit that we saw was being blended and blown out. This was because interest rates were dropped to 1% to bail out the technology companies after the bubble burst in 1999 and we saw that this would lead to the real estate and auto loans and credit card problem. We saw that half of consumer spending was from home equity loans. So we protected ourselves. Credit default swaps are why our ratings went up.”

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Prem Watsa: Bear Bonanza

Earlier this year Prem Watsa, the gunslinging chief of Fairfax Financial, had $341 million riding on a hunch that dozens of brokers, banks and insurers could struggle paying their debts. Watsa has a history of making a killing on bearish bets. He sold half the company's stock holdings before the 1987 crash and bought puts against the S&P 500 before the index fell in 2000. But as summer began, his latest wager had produced nothing but losses.

Then the credit markets seized up, and investors began clamoring for the Toronto insurer's collection of credit default swaps, basically insurance against bond defaults. Prices climbed. By the end of July Fairfax's swaps were worth $537 million, up 170% in a month.

The winners and losers from the credit crunch are still being tallied, but one thing is clear: Some smart investors won big, and suddenly.

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Ben Graham Centre for Value Investing May 25, 2007

The Ben Graham Centre for Value Investing released videos of May 25th, 2007 Conference on Intelligent Investing.

The conference featured Mr. Prem Watsa, Dr. George Athanassakos, Dr. John Bart, Mr. Howard Atkinson and Mr. Rob Arnott.

Full videos

Source: BRKNews