Bailout Breakdown With Jim Chanos

Dan Nathan (0:13)

We are back, this is a very special edition of Market Call, that's MRKT Call, I am Dan Nathan. Guy Adami, taking the day off, he did a lot of heavy lifting, I was gone for most of the week, so we really appreciated that. We have a very special group here, you know, our friend Danny Moses, he is our co-host of On The Tape. We also have Jim Chanos, he is the founder president of Chanos and Company. He is at Wall Street Cinec on the Twitter, check him out, you probably already follow Jim. So thank you guys very much for being here today on a Friday afternoon. I gotta tell you, we obviously talk a lot offline here a little bit. We really wanted to get Jim's take on what's going on. This is probably a very busy week for you, Jim. I know that you started the week with a letter to investors in Chanos and Co. talking about just kind of what you're seeing as far as this crisis, how it's unfolding, and how you would compare it to some different periods in the past.

I think you put a fine point on something, you don't think this is systemic.

Love to just give us here your take on what you think is going on here. Forget kind of like, kind of the, you know, we're not going to debate the semantics of a bailout or not.

Where are we right now here? Because it's Friday afternoon, we have the S&P down, we have the NASDAQ up, we have some regional banks sinking, we have some European banks sinking, we have some of the largest kind of custodians in the brokerage business that also have banks trading very poorly on a Friday afternoon.

And it really feels like it harkens back to some prior periods where maybe investors weren't really seeing what's in front of them right here or really taking a look under what lies beneath. Put some context into what's going on in the last two weeks. You've kind of traded through all the major crises the last few decades here.

Jim Chanos (1:59)

Well, hi guys and thanks. And I guess that's a nice way of saying you're old.

But yeah, so we put out a brief memo on Monday night, just trying to organize our thoughts and the way we looked at what happened to Silicon Valley over the weekend and the contagion that occurred on Thursday, Friday of last week and over the weekend into Monday.

And it really kind of struck us on how much it looked like, what happened in late 1994 in the Orange County crisis and again in the late summer of 1998 with the LTCM crisis, where you had, in effect, highly leveraged players who had bought long-duration bonds, because remember that really was the problem in Silicon Valley and to a lesser extent FRC, and I think Republic Bank, and I think that they were caught off sides, right? They had basically lent long and borrowed short. They funded themselves with low-cost or no-cost deposits, and the market finally woke up to what was apparent to a lot of people from last summer of just the mark-to-market losses that were occurring at these institutions that was kind of masked by the use of so-called held-to-maturity accounting, which by the way came in after the global financial crisis as a way to stop the bleeding back then for derivatives securities that the banks didn't want to mark-to-market anymore. And so again, kind of be careful what you wish for, right? And so with the proviso that never underestimate the ability of the government to screw things up, I mean, our view is that this is not a credit transmission device. I think this is really a funding problem at a select number of banks that just simply mismanaged banking 101, which is to try to at least meaningfully match your asset liability durations and not stretch for yield and finance it overnight at 0%. Because at the end of the day, if you remember what sunk the investment banks in 08, and I know Danny does, it's because they ended up with a whole bunch of toxic, hard to market, hard to value securities at the bottom of their balance sheets financed in the basically overnight repo market. And that's just, you can't do that. And we found out that the hard way, again, this go around. So now, having said that, the regional banks are now under scrutiny, have another longer term problem. And that is, as we've discussed sometimes in the past, their reliance on commercial real estate. And the credit event that's in the future is in commercial real estate.