VanderbiltChancellorsLectureMichaelBurry April5,2011 Thankyou,Chancellor. Earlylastyear,Ihadabriefdiscussionwithlongtime60minutesanchorSteve Kroftaboutthestorieshehaddoneoverhiscareer,andwhetherhehadany favoritesinthefieldofmedicine.Aspartofthisdiscussion,Irelatedmy opinionthatalthoughheandIhadmetasaresultofmyactivitiesinfinance,I hadnotmetonepersoninfinancewhocouldcrackthetop50Imetinmedicine. AndIdaresay,withallduerespecttoStanford,45ofthosepeoplearehereat theVanderbiltMedicalCenter,orweretrainedattheVanderbiltSchoolof Medicine.Soyousee,itisaterrifichonorformetoaddressyoutoday.Ihave nothingbutthehighestrespectforVanderbiltandthepeoplehere. AstheChancellorsokindlymentioned,Iwasfortunateenoughtohaveauthor MichaelLewisstumbleuponmystorynearlytwoyearsago.Perhapssomeofyou havereadhisnewbook,TheBigShort.

hort.Today,Iappreciatetheopportunityto addressyoudirectlyregardingwhathappenedtooureconomy,andwherewere headed. Assomeofyouknow,myformaleducationisnotinfinance.Infact,mytimeas anundergraduateatUCLAwasaseeminglyrandomwalkthroughEconomics,English, andBiochemistry,withoutevenonecourseinaccounting. Too,ashasbeenwritten,IhaveAspergersSyndrome,whichplacesmeonthe autismspectrum,andachildhoodcancerleftmewithafakelefteyesinceIwas 2.Bothconditionshaveactuallybeenhugeblessingsinaratherniftydisguise. Perhapsforthesereasonsamongothers,however,inmyidealworld,itwould matternotwhetherIcouldlooksomeoneintheeye,orwhetherIcouldstayawake duringlectures.Performancewouldmatteraboveallelse.Fromanearlyage,the financialmarketsthereforeheldanaturalappeal.Inmyview,menareattheir bestwhenscramblingfromtheabyss,andaretypicallysomethinglessatall othertimes. Still,financeseemedsomethingIcouldalwayspursueontheside.Some volunteeringIhaddonewithchildrenatUCLAledmedownanotherpath anyway.Andso,inthesummerof1993,IchosetoenrollattheVanderbilt SchoolofMedicine.Nevertheless,fromthebeginningIstudiedbusinessalong withmedicine.Forinstance,aftermyfirstyearatVanderbilt,asastudent summerexternattheRehabilitationInstituteofChicago,Icametostudywhyit wasthatrehabilitationmedicinewasdoingsowellevenasothersstruggled. Iwroteupmyconclusions,andlookingbackatthatpaper,writtenin1994,the yearofForrestGump,Iseethesametypeofresearchthatledmetoconcludein 2005thattheUSEconomywouldstarttocollapsein2007.Withinvariousbitsof legislation,fromthecreationofMedicarein68totheTaxEqualizationand FiscalResponsibilityActof82,andtheSocialSecurityAmendmentsof83,I foundthecatalystsforprivatemarkettrendsthathavecometodominatehealth carefordecades.Fromthatsummeron,myfocuswasontheinterplaybetweenthe actionsofourgovernment,andtheoverreactionsoftheprivatemarket.The mostimportantconsequences,itseemed,werealmostalwaysunforeseen.

 Afewyearslaterin98,IwasaresidentphysicianatStanford,butasRussia defaulted,andLongTermCapitalbuckled,andtheFederalReservepanicked,Iwas payingcloseattention.Infact,IcametoseetheFedsactionslatein98as asignificantcontributortotheensuingblowofftopofthedotcomandtelecom bubblein99andearly2000. IputmythoughtsaboutstocksandmarketsuponawebsiteIwasrunningduring thelatterhalfofthe90s.AndwhatIwroteseemedtoattractattention.WhenI criticizedtheprospectsforindexfundsandhyperlinkedtoVanguard,Vanguards attorneyskindlytoldmetoceaseanddesist.IwasanearlyAmazonAssociate, butitreallyseemedtopayoffwhenIgotagigwritingforMSNMoneyata dollarperword.ThatwasespeciallygreatformesinceImwordy(asyoull see). Acoupleyearslater,asIlaunchedmyinvestmentpartnershipScionCapital, VanguardChairmanJohnC.BoglewouldridiculemeasacharlataninaForbes magazinecoverstory.Itwasaportentofthingstocome.WhateversuccessIwas boundtoachieve,Iwouldrepeatedlyfaceseveredoubtfromthewellcredentialed wholookeddownonmylackofcredentials.This,itseems,isanessential featureofmanyAmericansuccessstories.So,toBoglespoint,Imjusta doctor,whatwouldIknowaboutmarkets? Well,ScionCapitalstartedoutokanyway.Ihadleftmedicinewith$145,000in debtandnoassetsundermanagement,soofcourseitgotbetterfromthere.It wasawildridefromthegetgo,asIdivedintobankruptcies,telecomblowups, asbestosissues,toxicstubsandothernastyplaceswhereIthoughtprofitsmight behiding.Myfundwasstructuredwithalotofflexibility,butInevergavemy investorsmuchtransparencyintowhatIwasdoing.Quitehonestly,Isuspected fromtheverybeginningthatitwouldperhapsfrightenthemunnecessarily. Soon,however,myattentionwascaughtbythegrowingimportanceofthehousing sector.Theamountandtypeofleverage,thegenerationsoldassumptionthat pricesalwayswentup(ifyouwaited3yearsanyway)andtheverybroadsocietal participationcalledouttome.Thiswasnotjustacaseofafewearlyadopters orventurecapitalistsactingbadly.Theentireeconomydependedonhomeprice appreciationconsumerspending,jobs,securitiesmarkets,allofit.Soon,I wouldseefinancialArmageddonlooming,withhousingasthetriggerpoint. Inpredictingwhenandhowthecollapsewouldoccur,myfocuswasagainonthe actionsofourgovernmentandtheresponseoftheprivatesector.Thiswasmuch inkeepingwithmystudiesinChicagoadecadeearlier. Soletsconsiderthehistory.TheideaofanAmericanDreaminvolving homeownershiphasbeenaroundfornearlyacentury.Nearlyeverymodern presidentpromoteditinonewayoranother.ThegovernmenthelpedreturningGIs buyhomesafterWorldWarII,andthegovernmentsecuritizedthefirstmortgage portfoliobackintheearly1970s.Privatesecuritizedmortgagesfollowed shortlythereafter.

PresidentReaganwouldsigntheSecondaryMortgageMarketEnhancementAct,which amongotherthingsallowedpensionsandinsurancecompaniestoinvestin securitizedmortgages,andashorttimelaterhemadethesesecuritiesalotmore taxefficient.Tobeclear,securitizationofmortgagesmeanttherewasnearlyno limitontheamountofmortgagesoriginatedbylendinginstitutions.All considereditharmless,agoodthingfortheAmericanDream.Butallthisdesire tosatisfytheDreamneededatool,somethingthatwouldmakehomeloans themselvesmuchmoreaffordableforthosewithouttheincome,credit,orassets toaffordone. Steppingbackto82,theDepositoryInstitutionsActlegalizedtheAdjustable RateMortgageintheUnitedStates.Theseadjustableratemortgages,orteaser ratemortgages,would,invariousforms,betheprimarymortgageproductatthe heartofhousingsimplosiontwoandahalfdecadeslater.ButAdjustableRate Mortgagesdidnottakeoffasamortgageproductuntiladditionalregulatoryand legislativechangesinthe90sandearly2000sjumpstartedthemarketfor affordabilityproductsinthemortgagespace. Specifically,duringthe90s,theCommunityReinvestmentActof77was reinterpretedbyTreasurySecretaryRobertRubinandPresidentBillClinton.The generalpointwastoincreasepressureonbankstomakemoreloanstoless creditworthycustomers.Andtheydid.Subprimemortgagesexperiencedaminiboom inthe90sissuanceroseroughlyfivefoldduringthedecadebeforeamini collapse.BillClintonhadanameforthisdrive:TheNationalHomeownership Strategy. Thenin1999theGrammLeachBlileyActrepealedtheGlassSteagalActof1933, andofficiallyremovedtheincreasinglyleakyseparationbetweentheactivities ofWallStreetfirmsanddepositorybanks.Thisfreedbankstoexperimentandto expandintonewlinesofbusiness,nonemorefatefulthanexperimentswith derivativesandassetbackedsecuritization.Theprivatemarkettherefore gainedthecapabilitytomountamassiveresponsetoallthegovernmentsefforts tostimulatehousing. Weallremember99well,butinfactourglobalvillageunderestimatedmany, manyrisksthroughoutthe90s.Andsowehadtodealwiththestockmarket crash,Enron,9/11,Worldcom,andeventuallyWar. TheFederalReservesteppedin,cuttingthediscountrateitchargesbanksfrom 6%toroughly1%inordertostaveoffrecession.Otherkeyshorttermrates followed.Notatallcoincidentally,from2001to2003wesawAmericanhome prices,whichhadmovedlargelyinlinewithchangesinhouseholdincomeoverthe decades,suddenlyaccelerateupandawayfromthehouseholdincometrendline. Homepriceshadgoodreasonforsuchdeviation.From2001through2003,rapidly decliningshorttermratestolowsnotseensincetheaftermathoftheGreat Depressioninducedaboominadjustableratemortgages.Ahomeownersdollar wentalotfartherduringtheteaserrateperiod,andsohomepricesrose unnaturally.Riskwouldbelowaslongashomepriceappreciationwasstrong, thankstorefinancingoptions.Itwasapositivefeedbackloop,withfull blessingsoftheUSgovernment.

Infact,amidstearlyfearsthatthehousingmarketwasgettingaheadofitself in2003,FedChairmanAlanGreenspanassuredeveryonethatnationalbubblesin realestatesimplydonothappen.AsIsurveyedthenationaltrendsinhousing, Iwonderedwhethercommonsenseoughtruleagainsttheapplicationofprecedent totheunprecedented. Mr.GreenspanwentontoadviseAmericansin2004thattheywereunderutilizing thenewtypesofadjustableratemortgages.Andin2005,helaudedthe technologiesenablingsubprimeborrowerstoacquirehomes.Tragicallyforallof us,theFedhadtheauthoritytoblockanylendingpracticesitdeemeddeserving ofsuchtreatment,butithadabsolutelynowilltodoso. Inanyevent,by2003,mortgageratesstabilizedat40yearlows.And, importantly,plainvanillaAdjustableRateMortgageshadalreadycomeinto widespreaduse. Thiswasabigproblemforlenderswithagrowthmandate.Theyneededto stimulatemoreloanvolumedespitestablemortgageratesandinadequateincome growth.Atthispoint,ifhomepricesweretorisesignificantly,theywould havetofloatalmostentirelyonthebackofthetypeandqualityofmortgage creditprovidedtothebuyer.Critically,Interestratesalonewouldnolonger determineaffordability.Inmyletterstoinvestors,Itermedthiscredit extensionbyinstrument,andittookourhousingmarketintoanewparadigm.It wastheprivatemarketstimetooverreact. Theinstrumentchosenforsubprimeborrowersbylendersin2003wasarelicfrom the1920stheinterestonlypaymentoption,appliedtoanadjustablerate mortgage.Lenders,byimplementingamortgagefeaturetheyhadlongavoided, showed,foralltosee,theywereinterestedingrowthmorethantheywere interestedinmaintainingcreditstandards. Byfallof2004,InotedformyinvestorsthatCountrywideFinancial,avery largemortgagelender,reportedSubprimemortgageoriginationsup158%yearover yeardespitea24%declineinoveralloriginations.Evidencewasmanifest bankswerechasingbadcredits,inclusiveofhousingspeculators.Theonly questionwashowfartheycouldgo.Fraudjumped. Thepointatwhichtheprovisionofcreditwasmostlaxwouldmarkthepointof maximalpriceintheasset. Iimaginedthetopinthehousingmarketwouldbemarkedbyamortgageinwhich homebuyersofsubprimequalitywereenticedtobuywithteaserratemonthly paymentsnearzero.Iwasveryawarelenderswouldtakethistothenth degree.Thankstosecuritization,anyloansthebanksdidnotwanttokeep,they couldalwayssellonthroughWallStreettoaworldofinvestorssimplyravenous foryield. Importantly,becausesubprimemortgageswerebeingturnedintosecurities,there weremandatoryregulatoryfilings,andthisishowIeducatedmyself.

Bysummerof2005,thesedocumentsrevealedthatinterestonlymortgageshad takenasubstantialshareinthesubprimemarket,oftenmorethan40%ofsubprime mortgagepoolsthatwerepassingthroughWallStreetontheirwaytoinvestors. Thiswasupfromjust10%ayearearlier.Simultaneoussecondlienmortgages rampedup,andthestatedincomeoptioninspiredanewvernacularliar loans.Insomemortgagepools,40%ofsubprimeloanswereforsecondorvacation homes.Yetasoflate2005,MoodysandS&P,socrucialtothesecuritization process,werenotreactingatall. Thetopwouldsoonbefastuponus.AsthesubprimeInterestOnlyAdjustableRate Mortgagestartedtotouchmaximumsaleschannelpenetration,wesawthe introductiononawidescaleofyetanother,moreextremeteaserratemortgage calledthepayoptionARM.Inthisnewtypeofmortgage,neverbeforeseenina widelystandardizedformat,theborrowercouldpaynexttonothingeachmonth, andtheunpaidinterestwouldsimplynegativelyamortizeintothegrowing mortgagebalance.Rampantcashoutrefinancinghadalreadymadethehomea magicalATMandnowhousinghaditsmagicalcreditcard. Yet,itwasblessedbybothlendersandinvestors.ThiswaswhatIhadbeen waitingfor:peakcredit.Suchamortgageproductwouldonlyexistaslongas homepriceappreciationwasthecentralassumption.AndHomePriceAppreciation wasnotlongforthisworldpreciselybecausethesemortgageproductsexisted. Someofthesesortsofmortgagesstartedmakingtheirwayintosubprimechannels too.Iknewthisbecauseby2005Icouldseethesemortgagesbeingpackagedinto AltAmortgagesecuritizations.Butnotalloftheseweresoldthroughtothe Street. Incredibly,WashingtonMutualandCountrywide,twoverynationalgiantsinhome loans,begantoloadtheirownbalancesheetswiththesepayoptionARMs.Facing anotherslowdowninloanvolumes,thesecompaniessawthenegativeamortization featureasawaytoshowloangrowthinaslowingmarket.Yet,thesecompanies, indoingso,alsoexpressedconfidenceinhomepricestabilityintheeventofa slowdowninloanorigination.Ofcourse,thisiswhattheratingsagencies,the FederalReserve,Congress,thePresidentandallthePresidentsmenbelievedtoo. Idisagreed.Isawabsolutelynochanceofhomepricesgoingsideways,or stabilizingforanysignificantlengthoftime.Oncehomepriceappreciationwas nolongeragiven,thesenewtypesofmortgageswouldsimplydisappear.Home prices,starvedofpeakcredit,wouldnecessarilyfall,andfallsteeplyas mortgageoptionscrumbledaway. Thecrisis,inmyview,wouldstartnolaterthan2007,bywhichtimeteaserrate periodsonthevastmajorityofthesenewtypesofmortgageswouldexpire,or reset,forapopulationofhomebuyerstrappedinamortgagetheycouldnolonger afford.Andonthewaydown,housingwouldtakeconsumerspendingandjobswith it,settingupapositivefeedbackloopofaverydamagingvariety. So,Idecidedtoshortthemortgagemarketandprofitfromthecollapse.Iset outtobuycreditdefaultswapsonsubordinatedtranchesofsubprimeRMBS.In doingso,IgainedanewlevelofinsightintohowWallStreetreallyworks.

IcalleddifferentWallStreetbankstotrytoconvincethemtotradeinthis marketwithme.Initially,Ifoundnotakers.Thiswholeeffortwascomplicated becauseitwasimportanttomethatthissecuritywouldbestandardized,such thatifIboughtacreditdefaultswapfromonedealercounterparty,Icould easilytradethecreditdefaultswaptoanotherdealercounterparty.Bespokeone offswerefullofcontractandcounterpartyriskandwerenotmything. Nevertheless,byMayof2005,weagreedtoourfirsttradesshortingthesubprime mortgagemarketwithDeutscheBank.Weworkedonthesoontobestandardized contractlanguageabit,andinthefirstdaysofJune05,thefirsttradeswere finallyexecuted.Wewouldultimatelyuseninedifferentdealercounterparties, thoughIavoidedLehmanandBear.GoldmanSachswouldfeatureprominently.Tobe clear,thesecreditdefaultswapswouldriseinvalueasmortgagessuffer losses. Now,Iwantedtoshorttensofbillionsofthesemortgages.Thiswasanepic investmentopportunityandIshamelesslyinvokedSorosinmylettersto investors.Ievenattemptedtosetupaseparatevehiclejustforthispurpose, whichIcalled,andthisisfortheEnglishmajors,MiltonsOpus,inthesummer of2005.TheeffortshowedIcannotsellANYTHING.Itmetwithincredible skepticismfrommyinvestors,andwhenIreachedouttooutsideinstitutionswith theidea,theysimplywentofftodoitthemselves.MiltonsOpusnevergotoff theground.MiltonsOpus,ofcourse,wasParadiseLost,andIhadnodoubtthat waswherewewereheaded. Bylate2005,Iwasstillaloneasadirectionalshortonthismarket.Goldman andDBinparticularseemedveryinterestedinwhatIwasdoing.Infact,Iwould shortabout$1.8billionnotionalinRMBS,andabout$6.6billionnotionalin corporatecredits,includingAIG,Countrywide,WashingtonMutual,FannieMae,and FreddieMac. AIGwasparticularinterestingbecauseIknewthatAIGneednotpostcollateral foritsderivativestradesaslongasithadaAAorbetterrating.This informationcametomeduringournegotiationsoncreditagreementswithGoldman SachsandBankofAmerica.SoItheorizedinemailstomystaffasfarbackas Aprilof2005thatarunonAIGwouldmanifestitselfincollateralcallsasa resultofaratingsdowngrade.Thatnooneelsetheorizedthiswouldleadtothe unnecessarynationalizationofAIGjustafewyearslater,andwouldcost taxpayerssome$180billion. ByFebruaryof2006,wewereessentiallydonebuyingCDSonmortgages,asthe ratingsagenciesfinallyrespondedbyrequiringmorecollateralincertain subprimemortgagepools.Infact,bythattime,themedianpriceofnewandused homeshadfallenfromAugust2005,accordingtotheNationalAssociationof Realtors.Earlymortgagedefaultsonthesummer2005vintagewereatrecord levels,aswastheglutofnewhomeinventory.Somepanicwasevidentinvarious articlesatthetime.ItwastimefortheworldtoseewhatIsaw.Yetmortgage spreadscontinuedtofalltheimpliedriskinmortgageswasdecreasingas2006 progressed.

Manyhavewonderedwhythemarketsdidnotsendanappropriatewarningsignal. Theansweristhatinlate2005,technicalfactorscameintoplaythatkeptthe creditderivativemarketsfromsendinganywarningsignal. Tothispoint,SyntheticCollateralizedDebtObligations(CDOs)relyingonCredit DefaultSwapsonsubprimeRMBSwererampinginabigwayascorrelationtraders suckedupthemostsubordinate,hardesttoselltranches,andtradableABX IndicestrackingthemarketforcreditdefaultswapsonRMBSemerged.These Indicescateredtothoseneedinganeasywaytotakeonalotofyieldwithouta lotofanalysis,suchasinvestorsandcorrelationtraders. TogetherSyntheticCDOsandtheABXIndiceshelpeddistributeriskfarandwide, andinexponentialfashionrelativetotheunderlyingrealworldmortgages.This wouldnotbeagoodthing,nomatterwhattheStreetsriskmodelsaid.Andto beclear,therewasonlyoneriskmodelthattheyallused. 2006wouldinfactbetheyearsystemicriskwassupersized.Itwastheyear,for example,whenMerrillLynchtookitssubprimeexposurefromafewbilliontomore than50billion.Ultimately,Merillwouldhavetowriteoffover40billionin mortgageassetsvirtuallynoneofwhichwasonitsbookspriorto2006.This wastheyearthatreallygotWallStreet. AsIwrotetoinvestorsas2006gotunderway,Itissimplyatragedyoffate thateverlowerreturnsencourageeverincreasingleverage,withonlyone possibleultimateoutcome.Itisatragedyofourtimesthatourregulatorswill donothingaboutit.Asanaside,thisisagaintruetoday. Iwarnedinvestorsthat2006wouldbedifficultforus.Itturnedoutmore difficultthanIhadimagined.Ourcounterpartydealerspriced,ormarked,our bookofCDS,andourongoingfightwiththesedealerssuchasGoldmanSachsand MorganStanleyoverthevalidityofthesemarkshitabsurdlevels.Wewereforced tosidepocketourRMBSCDStrade. Facingaveryangrycrowdofinvestors,manyofwhomweredemandingtheirmoney back,IclosedourHongKongOffice,cutsalaries,andlaidoffstaff.Wewere threatenedwithlawsuits,andIhadtoconsiderliquidationofthefundat December2006,attheworstpossibletime.Iinsteadliquidatedbillionsofour corporatecreditdefaultswapshortpositionsinsomethingofafiresale.As ourdistresswasreportedinthepressandbackthentheonlypressIgotwas badpressdealerslookedtotakeadvantage.Wewouldreceivelessthan1/10thof 1pennyonthedollarformanyofthem,hurtingourperformancemore so.Ultimately,ourmassivesalesshavedbillionsinputativegainsfromour portfolio. ButIknewmyanalysiswascorrect,andnotoneofthedetractorsseemedtobe abletogetanyofthedetailsright.Weretainedthepositionswecould.This begantopayoffin2007.

Notthateven2007waseasy.Recently,USSenatorCarlLevinprovidedspecific evidenceforsomethingthatwealreadyknew.Thatis,ourWallStreetbank counterpartiesall9ofthemweretryingtoscrewusrightuptotheend.The gamesthesecounterpartiesplayedwithmarksorpricingonourpositionsI couldtalkaboutthoseforhours. ButSenatorLevinwasinvestigatingGoldmaninparticular,andhedisclosed tellingemailsthatshowedGoldmanadoptedashortsqueezetodrivedownthe priceofcreditdefaultswapssuchasthoseheldbymyfunds.AsMr.Swenson,a seniorexecutiveatGoldman,saidinanemail,Weshouldstartkillingthe shortsinthestreetThiswillhavepeopletotallydemoralized.Inananother emailhesaidhewantedustofeelquote,maximumpain.Whathadhappened fromourpointofviewatthetimewasthatGoldmanhadbeenmovingtoourside ofthetradeasearlyasDecember2006,andwasworkingtogetintoourtrade evenbiggerthemselvesinSpringof2007,soalowerpricefortheBigShort benefittedGoldmanSachsandthatishowWallStreetworks. InlateJuneof2007,creditspreadsstartedmarchinghigher,andthentheyjust tookoffforgoodonceGoldmanandotherswereinonthesamesideasmy trade.ThenitwasAIGsturntocomplainaboutGoldmansmarks. Incredibly,itwouldlaterbereported,thatmorethan$60trillionincredit derivativesexistedatthepeak.Andthehyperbolewouldbethatisgreaterthan thevalueofallgoodsandservicescreatedonplanetearth.Butitsroughly equal,andwhoreallyknowswhatthegrossproductofEarthisanyway?Still, $60trillion,how?Creditderivativesonanunderlyingassetcouldbeworth multipleordersofmagnitudemorethantheassetbecauseallassetbacked derivativessettledincash.ThatwasthesecretsauceoftheDoomsdayMachine. Andsothecrisisunfolded,withthemarketprovidingasignalfartoo late.Evenso,FedChairmanBenBernankeandTreasurySecretaryHankPaulson continuedtounderestimatethesituation.Iwasapoplectic. SecretaryPaulsonnowclaimsthatevenifheknewwhatwasgoingtohappen,he couldnothavedoneanythingaboutit.Butletsbeclear.HankPaulsonwasUS TreasurySecretaryfreshfromtheapocryphaltopjobatTHEGoldmanSachsinthat summerof06,andheorchestratedtheonceunthinkablegovernmenttakeoversof AIG,FannieMae,FreddieMac,andthebailoutsofWallStreet.Hewasanything butanimpotenttool,andhehadarunningstartunlikeanyother.Butifhe trulyfeltthatway,thisisanabsolutelydevastatingcommentaryonhow governmentworks. Infact,asbooksandarticlesonthecrisisproliferate,itbecomesclearthat atnearlyeveryfailedorseverelytroubledmajorinstitutionandwithinevery relevantdepartmentoftheUSgovernment,therewassomeonewhoseinsightwas everybitasfarsightedasmine,andinsomecasesevenmoreso.However,NONE ZEROwereinthetopjob.ThatourCEOs,ourGovernors,ourPresidents,our Chairmen,didnotseethiscoming,anddidnotadequatelypreparetheir constituencies,isanindictmentofthemannerbywhichwechooseandenableour leaders.

Butsuchwouldnotbetheconclusionsmadein2008.Bythesecondhalfofthe year,withthegovernmenttargetingcommodityhedgefundmanagerswithpunitive subpoenas,theglobalattackonsocalledspeculatorsand,again,hedgefunds, thenationalizationsofFannie,Freddie,andAIGandtheirliabilities,the FederalReserveswideopenmonetarypolicy,andTARP,Iworriedaboutthefuture ofanationthatwouldrefusetoacknowledgethetruecausesofthecrisis.In myview,anhistoricopportunitywaslost.Americahadinsteadchosenitspoison asthecure,andthesecondgreatestgenerationwouldneverbeborn. Today,IexpecttheUSgovernmenttoattempttocontinueeasymoneypoliciesinto thenextpresidentialterm,pastthemeatoftheforeclosurecrisisandthe corporateandpublicrefinancinghumps.Withjunkbondsincrediblyatall timehighs,yes,quantitativeeasingseemstobeworking,fornow.Butthisisan invalidvalidationofwhatAmericaisdoing. ThisisinfactaPyrrhicgamble,aswecontinuetodebaseourcurrency.Bernanke saysheisnotprintingmoney.Again,Idisagree.Asitstands,Igetanemail fromtheFederalReserveeverysingledaysayingtheyremonetizing7or8 billiondollarsorsoofTreasurieseachandeverydaythankstoQEII.Infact, QEIInotQueenElizabethbutquantitativeeasingQEIIssizeandbreadth raisestheseverequestionoftheTreaurysneeds. Thegovernment'sborrowingofmoneyforthepurposeofinjectingcashinto society,bailingoutbanks,brokers,andconsumers,isashortsighted,easy decisionforapopulationthathasnotyetlearnedthatshortsightedandeasy strategiesaretheroutetolongtermruin. Weneverquiteachievedthenecessarycatharsistostokeadeepreevaluationof ourwants,needs,andfears.Importantly,thetoxictwinsofafiatcurrencyand anactivistFedremainfirmlyentrenched,evenmoresowiththefinancialreforms enactedlastyear. Infact,theFederalReserve,despitehavingnewlyacquiredbroadpowersof regulation,hasinsistedthatnothinginfieldofeconomicsandfinancewasof helpinpredictingthecrisis.Suchaconclusionisworthless.Itguaranteeswe willmakethesamemistakesagain. SoIhaveaproblemwithourleadersIshouldnotethatIvebeenverymuch overwhelmedonseveraloccasionswhenconsideringthecolossalmistakesofour leaders.Weneedbetterleaders,butveryfrankly,thisneedisunlikelytobe met.Aproblemcannotbesolvedifitcanneverbeacknowledged.Taxesneedto beraised,loopholesneedtobeshut,spendingneedstobecutifwearetohave anyhopeofreturningtoastablebase.Certainlyhomeownershipshouldnotbea policyoftheUSgovernment,andthebankingsystemneedssubstantialreformand evenbankbreakups.GlassSteagalneedsasecondruninastrongform.Andthose 22.5millionpublicworkershavenobusinessunionizingagainstthetaxpayer.The listofthingsthatlikelywonthappenbutshouldhappengoesonandon. AscitizensoftheseUnitedStates,weshouldcarefullyconsiderwhatone trillionmeans.Allpersonalincometaxescollectedinayeardonotsomuchas addupto$1trilliondollars,andyetby2020interestexpenseonournational debtalonecouldexceed$1trillion.Whenyouconsiderour$1.7trillionannual

deficit,alsoconsiderthattheTreasurytakesinjustover2trilliondollarsa year.2Trillionalsohappenstoberoughlytheamountofbankandgovernment debtheldnowatthetremendouslybloatedFederalReserve.Thinkaboutit,two trillionsecondsis64,000years.Ourcountrysmathisscarybig,butwhats evenmorescaryisthatitsimplydoesnotwork. Argumentsonbloomingprosperityandeconomicrecoverymustbeconsidered alongsidethefactthatallthedebtandallthemoneybeingprintedisverymuch arealbill,arealtaxthathasnotyetcomedue,exceptwithrespecttosavers andthoseonfixedincome. Assuch,soberanalysisonthepartoftheindividualisparamount.Wemust rememberthatentiresocietiescanandoftendofollowthewrongpathforavery longtime,andthatthereisnothingwrongwithbreakingfromthesocialnormto ensuregoodoutcomes.Legaciesareaterribleandsometimesfatalburdenina rapidlychangingworld,andcommonsensemustrulewhenitcomestocareerpaths andlifechoices.Thoughthesituationseemstocallforit,itisnotatime fortheresponsibleindividualtotolerateanylevelofblindfaithdirected towardanymanorwoman.Itisabsolutelynotatimetofollow. Allthatsaid,ImightsuggestopeningaretailbankingaccountinCanada. Again,thankyouforyourattention.Iamhappytoanswerquestions.