Finance Forum - Edward Misrahi 29 October 2008
Speaker key
CH Chairman
EM Edward Misrahi
UF Unidentified female
UM Unidentified male
[inaudible discussion]
CH Good evening everyone. Welcome to our humble abode, the Centre for Jewish Life. Again, for those of you who are not familiar, as you see from our strapline, we facilitate Jews connecting, because when we believe that great things happen when Jews come together. , our belief is that great things happen. I’d like to begin, Bbefore I introduce Edward, our speaker Edward Mizrahi here tonight, I’d like to say that these days, certainly in times of uncertainty, and I would could say a bit of confusion, all the great, wise men are not looking so great and wise. But tThere are still are a few places to look.. We look to the most ancient source of wisdom in the Torah , and in this week’s Parashav [?] we read of two very magnificent episodes, events. At the beginning of the Parashav, we read of the deluge of flood, the Mabul, thatwhich destroyed the world. At the end of the Parashav, we ready of the famous story whenre all the people in the world came together to build the Tower of Babel, and eventually God dispersed them. The question the commentaries ask is, why in the first instance did did God destroy the world in the first instance did but only disperse them in the second, and in the second instance, did God just disperse them, and the answer is given by the majority of the commentaries is that in the first case of the Mabul, the flood, man turned against man, and when man turns against man, ultimately they destroy themselves. In the second case, although they did turn, we are taught against God, they worked together, and because they worked together, they continued prospered and God did not destroy them., so tThe evidence from the Torah thencertainly is that any sort of remedy, salvation can only come when people work together., and certainly in the world we live in today.
I’m a Rrabbi and , I know nothing about finance. I can tell you that from the start. But I can say that probably never before in history has it been , but certainly we are living in a world where probably in history it has never been felt so strongly that any component, any part, be it individual, community, society or, country can impacts the entire world, and therefore any solution must be a collective one. .
I want to introduce you to Mr. Edward Misrahi. For those of you who don’t know, Edward originally comes from Spain. He’s a Real Madrid supporter, so I’ll let you know that at the start, and he went to America to study. He studied atin Princeton, eventually going to he worked at Goldman Sachs, and with a friend, Mr. Eric Eric MindichMindidge [?], they founded a hedge fund called EasEtontern Park, and the rest is history, and he’ll tell you more about that. But, the reason why we have Edward here tonight is because our philosophy, certainly as Jewish people, s is that whenever there is a difficult moment, we tend to look and focus and discover what must necessarily exist deep down and sometimes deeper down, and that is a positive that will to overcome a negative experience, as a result of that negative, and even more so, by meeting the challenge we achieve something greater than before. to the degree there is a negative, there is a challenge, we believe that there is and there will be a greater positive coming out from a difficult situation. So, if you’re looking around and you’re trying to understand and discover what’s going on in the big world out there, and everyone is trying to outdo another with giving it names, a tsunami, a melt down, and have run out of words, but we, as Jews, let us as Jewish people look constantly to discover somethinga positive that exists there . Edward, amongst all his other talents, I’m not sure of his position in the markets over the last year, but he is a positive guy, and that’s why we have him here tonight, to give you a very uplifting, inspiring and , realistic message.
[laughter and applause]
EM Thank you very much, and thank you, Yosef and let me assure the audience and if there’s one thing I know, it’s that although he is he’s a Rrabbi, he definitely knows about finance. If you don’t believe menot, let me tell you, have hime will call you and you will see for youselfknow. And so, thank you, I’m very excited to be here. Yosef wants me to be very upbeat but . I appreciate. I think if I’m going to be upbeat, I’ll have to end my speech now that given that you want me to be very upbeat, I’m going to be brief. [Thank you very muchaudience laughter].
I agreed to give a talk at the Financial Forum of the Centre for Jewish Life because I’m a very big supporter of what Rabbis Yosef and Mendy Vogel are trying to do here. Anyway look, I must tell you though that when I agreed four or five months ago to give the talk, I said to Yoseminde [?] about four or five months ago that I would be happy to talk at the Financial Forum, because I’m a very big supporter of what they’re trying to do in the centre, I must add at the time I thought it would probably be a little boring talk discussionon I would have about whatever was going on at the time whenon at the time, in five or six months ago , when things were already bad but still more in control than today. I even thought , and we could talk about certain things and I I hopefully would be able to talk a little bit about Real Madrid. , Bbut I must say that a lot of things have changed since then.. So much so that when I was planning my speech for today thinking about what to speak about today, I decided I had to wait until yesterday to finalize it, just in case . If I prepared it on Monday, it would have become irrelevant and outdated by today, and so hopefully you will find this, as things are developing so quickly..
Again, I appreciate that Tthings in the last four months have been a big roller coaster for everybodyanybody that’s been involved in the financial sector., and uUnfortunately, the roller coaster , I think, is moving through the rest of the economyies too.,
What happened? and though Tthere are’s so many parts to the storythat you could talk about, including , about what’s happened. rReal estate, structured credit, , rating agencies and , most people don’t really understand when they speak about economic crisis, that I realise that there are so many of them, I’m really not that qualified to speak about them all. most of theSo m, but I will I thought that it would be better if I keept my remarksa little bit more general and some of the remarks, try to put some a little bit of context to what ’s happened. I’ll also talk about what is going to change.
, what I think the situation is in the context of things, what are some alterations and what are the implications of what is happening now, in terms of what it’s going to mean, and hopefully by that we will motivate some Q&A from everybody.
I am not going to be predicting what will ’s going to happen into the markets. I’m hoping someone else will do that for me I’m hoping someone here is going to tell me during in the Q&A.
, so in the context of that, hopefully I’ll be able to address this. And, the other thing I would say is that I haveam a fairly upbeat person by personality but , but I would say that my partners and I eat o and a lot of my partners in our firm have had a been very negative outlook about things for a while. , and therefore sometimesWe thought things would take a turn for the worse …except we didn’t at any time anticipate what’s going to happen, and the scale of the downturnof what happened. , but we thought things. We used to talk internally that we felt it was a little like the Titanic. , I hope most of you have seen the movie Titanic? You know, it was a little bit like that, we felt like the Titanic, which is Tthe world had already hit the iceberg and, so most people were sitting in first class and not realising what was going on. , Wand we could see that the water was flowing in all over the place, and people were still playing the violin and dancing in the ballroom, and so what’s happened is the thingthe catastrophe looks very sudden. Everything looks like it’s just happened, like you hit the iceberg yesterday, but the truth of the matter is this has been happening over a long period of time in the last few years, and that also points to explains a little bit the severity of what is going to followgo.
So, I’ve decided I was going to talk about three different topics. Firstly, I’m going to give a little one the first context to , a little bit of what’s going on, the crisis and whatthat we’re dealing with today. Secondly, I will try to explain where I think we are up to in the stageseps of the crisis, and how close we are to be able to eventually get out ofemerging from it, and then finally, I will was going to talk a little bit about some of the of the implications of the crisis, what it means for the future. You know, I work in a hedge fund, which I think gets blamed for most things in the world, including the weather, I heard, so I’ll also and I’m going to touch on talk a little about what really the hedge funds are really are all about and what role they have played in thise context. So, let me just start with that.
What you are seeing today is simplyjust the implosion of a massive bubble. It just is, and Tthat ’s is really what is happening. It’s very unpleasant, but it’s not more complicated than that. People are going to give you 500 0 excuses and explanations ofor what’s happened, but what really happened is the world witnessed, over the last five or six years, one very large credit bubble, literally everywhere in the world.
, andT just to give you somethe context of how much these things happen, I’m going to use some statistics fromin the US, but the UK hasave had a similar dynamic. Over the past last ten years, the two sectors in the world that have taken on gotthe mostre debt t and and continued to have increase increased their own leverage, arhase been consumers and the financial sector. That’s really been the two parts of the world that really have increased the leverage. Over the pastlast 15-20 years , the financial sector in, for example, leverage in the financial sector went up six times, from where it was in the early 90s, the mid to late 90s to where it is right now. For the consumer, or the household as that people like to refer to it, in the last 15, 20 years, we’ve seen leverage doubled in the past 15-20 years,.
So, Wwhat happens is this: oover a long period of time the magnitude of leverage grows. , and Eevery time you increase it you feel justified in doing so because well it’s onlyjust a little bit more. But , the magnitude of growth of the leverage and how people arebecome increasingly comfortable with new levels ofthe leverage and , mmany of us don’t realizeknow thatwhat is happening. I’ve been in business since 1991, and many of us have already lived through a period of only increasing leverage, but it doesn’t take away from the magnitude of itsthe size. People go numb at the numbers. For example, the notional value, i.e. the reference value, of something that you may have seen in the press, and you talk about what we call, Oover Tthe Ccounter derivatives, which are and tradable financial instrumentsthings that that are traded which are related to another security, grew over the pastlast ten years from 100 trillion to 500 trillion dollars. I don’t even know how to conceive of such a large number. But this of that size, but it number was created there and it was created and it was operatanded on trading on the market. The balance sheets of all the investment banks and hedge funds in the world - , that’s and many of us, there are 2,000 other firms like ours plus aand all the big investment banks -in the world became equal to 50% of the size of all the commercial banks, i.e. the size of the growth of the financial industry wand the sector was reallyas tremendous. The leverage, which means how much debt you take for the amount of equity that you have in the investment banks, went up from 15 times, they were already used to be highly leveraged in the 90s, to close to 40-, 45 times and in some places even 60 times duringover the paslast year.
What I’m trying to saying is that you have to wonder when in the context of it, where people say, oh my God, what a crisis!. As You’ve got to realise, Jews always like to say ‘you need to know where you’re coming from if you want , to know where you’re going., you need to know where you’re coming from’ and it’s very important to realise that, Yyes, we have an implosion, but the credit crisis, we have been creating athe massive credit bubble that in the Western part of the world we had created for over the pastlast literally 15-, 20 years. , has been massive in the Western part of the world, and that’s the thing it is. So, you have implosion of a bubble. Bubble implosions are never good but , and this one was particularly big, so that’s part of the reason why weyou have shockthat. But, I think that it’s also important to realise understand how these things work and not to over dramatise it tha. Et even though it ithis is a big bubble that is bursting and it’s serious, it’s not the first time this has happened. This has happened plenty of times, unfortunately, and part of it has to do with human behaviour and, with human greed but , the sequences are the same. You’re going to see a lot of people talk about different bubbles at different moments of time. In the UK, in the 1700s there was a big bubble, called the South Sea Bubble, where speculators were purchasing a lot of joint stock companies., Among the many companies to go public in 1720 was one that advertised itself as a company ‘for carrying-out an undertaking of great advantage, but nobody knows what it is.’ and there was one description that Oone of the people who that works with me made this discovery foundand I think it’s a proper description for what has happened today. that I thought was proper, which said that one of the companies who sold them managed to sell stock in the market was the company that said, a company for carrying and undertaking of great advantage, but nobody knows what it is, and I think that’s obvious. If you talk about a many lot of the things people bought over the pastlast five years, I must say , I think a lot of people didn’t know exactly what they were buyingit was, except for the fact that they thought it was going to go up., Eand effectively that’s what happened in today’sthe context, but it also happened in the 1720s.