In a speech at Whitney Tilson's Value Investing Conference on Monday, hedge-fund icon David Einhorn of Greenlight Capital, perhaps best known for his massive bet against Lehman Bros., offered some wisdom on the economic outlook and how investors can protect themselves.
Einhorn pulled no punches. "Ben Bernanke and Tim Geithner have become the quintessential short-term decision makers," he said. "They explicitly do whatever it takes to solve one problem at a time and deal with the unintended consequences later. It is too soon for history to evaluate their work, because there hasn't been time for the unintended consequences of the 'do whatever it takes' decision-making to materialize."
He also had harsh words for the banking industry and its influence on Washington. "Bankers advance ideas like, 'Without banks, we would have no economy.' Of course there was a public interest in protecting the guts of the system, but the ATMs could have continued working, even with forced debt-to-equity conversions that would not have required any public funds. Instead, our leaders responded by handing over hundreds of billions of taxpayer dollars to protect the speculative investments of bank shareholders and creditors."
Referring to President Obama's rhetoric on ending too-big-to-fail and making bankers accountable for their decisions, Einhorn said, "These are good points that he should run by his policy team, because Secretary Geithner's reform proposal does exactly the opposite. . . . The financial reform on the table is analogous to our response to airline terrorism by frisking Grandma and taking away everyone's shampoo, in that it gives the appearance of officially doing something and adds to our bureaucracy without really making anything safer."
Einhorn also echoed recent comments by FDIC Chief Sheila Bair, warning that government subsidies for certain banks have created an elite clique of too-big-to-fail banks with huge competitive advantages over smaller, unsubsidized institutions. In the end, the losers are the consumers: "Even as the government spends trillions to subsidize mortgage rates, the resulting discount is not being passed to homeowners but is being kept by mortgage originators who are earning record profits per mortgage originated. Recently, Goldman [Sachs Group (GS)] upgraded Wells Fargo partly based on its ability to earn longterm oligopolistic mortgage origination spreads."
How can regulators prevent future catastrophes? Get rid of credit-default swaps, Einhorn says, calling them "highly antisocial."
So what's an investor to do with all this information? Toward the end of the speech, Einhorn talks his book, an early glimpse into regulatory incompetence: Fooling Some of the People All of the Time: A Long Short Story. "When I watch Chairman Bernanke, Secretary Geithner and Mr. Summers on TV read speeches written by the Fed Governors, observe the stimulus black hole, and think about our short-termism and lack of fiscal discipline and political will, my instinct is to want to short the dollar. But then I look at the other major currencies. The euro, the yen, and the British pound might be worse. So I conclude that picking one these currencies is like choosing my favorite dental procedure. And I decide holding gold is better than holding cash, especially now, where both earn no yield."
It's a fascinating speech -- one of the most trenchant economic analyses we've seen recently, intuitive and jargon-free -- and it should be required reading for every investor and every voter.
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