Roubini Ritholtz Conference Call

Nouriel Roubini
is the NYU economics professor known lovingly around Wall Street as
“Dr. Doom” for his foresight in predicting the end of the financial
system as we know it. Blogger/strategist Barry Ritholtz
of The Big Picture and Fusion IQ, who hasn’t been much more optimistic,
is joining him this afternoon for a conference call to discuss the
credit crunch. Should be fun! And by “fun,” we mean “a reminder to
stuff our money in our mattress.”

5:08: Roubini starts out saying there are six things to think about. The first question has about 10 parts. Could be a long call.

Nouriel Roubini

5:11: The U.S. economy risks a negative feedback loop: Economic woes hurt creditworthiness, hurting banks, hurting credit, hurting the economy. Wash, rinse, repeat, lose your house.

5:14: The Fed’s next move is likely a rate cut.

5:14: Everything that’s going on in markets now? You know, stocks and credit being lousy? Expect more of that.

5:16: “The events of the last few weeks say we’re one accident away from a systemic financial meltdown,”
says Roubini. He points to previous accidents that nearly caused a
universe-eating financial black hole: Bear Stearns in March, Fannie and
Freddie in July and Lehman and AIG a couple of weeks ago. “We’re seeing
the beginning of a silent run on the shadow and traditional banking
system,” he says. “There’s a generalized panic” in the financial
markets.

5:20: And that’s not the scariest part, he says!
The scariest part is that, every time the government steps up its
response, the market reaction gets weaker and weaker.

5:22: “We are literally one step away from collapse of entire financial system and even the corporate system.”

5:24: This bailout package isn’t going to do the trick.
That’s why the market isn’t cheering it any more: Nobody trusts anybody
any more. “We’ve reached the point where $700 billion doesn’t make any
difference given reaction of market.”

5:26: The economy was already in “freefall” before September. We’re in for a severe recession, according to a litany of data.

5:28: Treasury should have done more — you can’t
just buy and park bad assets. You have to triage, shutting down weak
banks and deciding who to save. You have to recapitalize the banking
system so they’ll extend credit. You have to reduce debt. Earlier, he
said you have to guarantee all deposits, regardless of amount. “This plan in Congress is just a sham.”

Barry Ritholtz

5:29: Roubini ends with the words “Great
Depression.” Ritholtz asks, “That’s how you’re introducing me?” He says
he’s relieved to be the less-bearish guy on the call.

5:30: Ritholtz says we won’t have a “Great Depression,” but a “Fair Depression — not nearly as bad as 1930!” What a relief.

5:31: He takes time to poke the permabulls. Everybody take a drink.

5:33: We won’t see a one-day loss like in 1987, but all told, the market is already doing worse than it did in 1987. “You would have been better off investing in 1982 and investing for six years than investing in 2002 and investing for six years.”

5:35: There’s a smallish chance of another 20% stock-market downside from here.

5:37: Given his forecast for earnings next year, the S&P should be about 975
(it’s at 1114 now) assuming a P/E multiple of 15. If you use a much
lower multiple, then, well, you get the picture. “Crazy numbers.”

5:39: Oil could fall to $50.

5:39: The bailout plan doesn’t really go to the
problem, which is that banks have a shortfall of capital. “This solves
issues on the balance sheet, not the higher issue of capital.”

5:40: On the bright side, we’re seeing some signs
of market panic. But there’s still buying on dips — people haven’t been
“punished enough” to stop having that reaction.

5:42: This is shaping up to be a “generational bear market,”
not a typical bear market. We have a severe recession, with a credit
crunch. We’re just starting to see the effects of credit on the real
economy.

5:44: The thing to remember about every bailout is
they all have unintended consequences — every bailout has begotten the
next bailout. Look at LTCM, considered a good bailout: No tax money, no
Fed money. LTCM was an undercapitalized hedge fund that used a lot of
leverage to trade hard-to-value thinly traded paper. We bailed them
out, and, lo and behold, nobody got hurt from it. So it’s no surprise
that a few years later, here we are with the same situation. “My concern is what disaster are we gonna be dealing with 3, 4, 5 years from now that will be the consequences of giving Wall Street’s most reckless players a pass?”

5:45: Zach Gast at RiskMetrics is speaking now,
offering the “bottom-up perspective” on the banking sector. He starts
off with that baseball metaphor, asking what inning it is. On the
teevee, it’s the 9th inning in Tampa Bay, and the Rays are up 6-4 with
one out.

5:48: The Tampa game is now over (the Rays won),
but Gast is suggesting that we are still in the mid-to-early innings
for the banking sector. We’re starting to see problems in commercial
loans and other previously healthy credit areas.

5:52: There are loans still sitting, overpriced, on
bank books. When you move away from fair-value accounting, people lose
confidence in your numbers and it gets harder to get capital. Moving away from mark-to-market accounting, as the banking sector seems anxious to do, will be a net negative for banks.

5:54: “Many institutions would be insolvent if we fully fair-valued their assets,” says Gast.

5:56: Deposit insurance up to $250,000 won’t make much of a difference — the deposits we’re worried about are much larger.

5:57: Removing the bad assets from a bank and
adding an equity warrant is an improvement over the original plan — it
will build the equity base. But it’s not enough; there needs to be more.

5:58: This bailout is probably best for the money
center banks. They’re the ones holding trading securities. They’ve
already taken the hits to earnings. This hurts the regional banks and
others still holding assets at cost basis. Setting a lower market price
will hurt their capital adequacy in “a big way.”

The Not-So-Fair Depression

6:00: We will probably need to explore injecting
capital into the banks. There will be significant resistance to
creating winners and losers this way. But there are ways to have the
market do this, using private-equity investors and matching their
offers with government money.

6:02: Now it’s Q&A time. The first question is
why this bailout plan is so awful. Roubini suggests it was a rush job
by Messrs. Paulson and Bernanke and that Congress is just in a hurry to
get on the campaign trail.

6:05: Ritholtz suggests Paulson is running Treasury
the way he ran Goldman, “with an iron fist,” without a lot of
consultation. The Bush administration has operated in a similar
fashion, he says. “It’s a mediocre plan, poorly sold and poorly managed. I don’t think this is a slam-dunk tomorrow. I expect it to pass, but it wouldn’t surprise me if it loses by a vote or two.”

6:06: The big, scary question: What if we pass the
bill and it doesn’t help? What might happen, says Ritholtz, is that
either one or both of the presidential candidates calls for emergency
panel to figure out a better solution. They’ll probably end up deciding to recapitalize the banks after all.

6:09: Roubini says recession is marching around the
globe. It doesn’t help that the world’s biggest consumer, the USA, is
in bad shape, and the world’s biggest producer, China, is slowing down,
too.

6:11: Ritholtz suggests being in cash. Roubini makes fun of him for being “only 55%” in cash. “Cash is safe today as long as it’s not in a bank or a money-market fund,” says Roubini, getting another laugh. Financial apocalypse humor is somehow less funny than other kinds of humor.

6:13: “Gold is not a bad place to hide,” says Ritholtz, maybe 5% or 10% of your portfolio.

6:15: Gast says the short-selling ban hasn’t saved
any financial firms, but has increased the cost of trading, which hurts
mutual funds. Ritholtz says it’s counterproductive because there aren’t
any shorts to cover — the “natural floor in a crash.”
Now there’s no parachute. Roubini says would-be shorts are now in the
CDS market, pushing spreads really wide, which creates a mess for
financials anyway. In short, nobody likes what the SEC has done.

6:19: The dollar will be in a narrow range for the
next 6-12 months, but things get scarier later because of rising fiscal
deficits, says Roubini.

6:23: They’re talking about their favorite sectors. “I would buy stock in antidepressant firms,” says Roubini, getting another laugh.

6:27: Roubini points out that this is the end of
the deregulation era — we’ve gone from an extreme of laissez-faire to
the greatest government intervention since the Great Depression. We
need more pragmatism, less ideology. Ritholtz points out that even Russia allows short-selling. “But they closed the stock market,” says Roubini.

On that happy note, the call ends. Vice Presidential debate, anyone?