May 26, 2009 

I ran across these notes as I was cleaning my office.  I had them labeled, “HK 9/21/99.”  I couldn’t recall who HK was, until I looked in my calendar, and saw I was at a Prudent Bear conference on that date, and sure enough saw Henry Kaufman as a speaker.  As I re-read the notes, I certainly found them appropriate today.  We have had several market crashes since Henry spoke in September 1999.  These notes were very interesting for me to re-read. 

Henry Kaufman Discussion on September 21, 1999 

Henry Kaufman is an American economist and financial consultant. Currently president of Henry Kaufman & Company Inc., from 1962 to 1988 he worked at Salomon Brothers Inc., where he was Managing Director and member of the Executive Committee. He was also a Vice Chairman of the parent company, Salomon Inc. Before joining Salomon Brothers, Dr. Kaufman served as an economist at the Federal Reserve Bank of New York.  He was on the Board of Directors of Lehman Brothers. If I am not mistaken, he was also listed as a Bernie Madoff victim. 

According to Wikipedia, "He was well-known during the 1970s and early 1980s for the interest rate forecasts he wrote for Salomon, and for their bearish views, generally predicting that bond prices would decrease (interest rate would increase). Thus, he earned the nickname "Dr. Doom." However, Kaufman’s prediction on August 17, 1982 that interest rates would fall sparked a stock market rally that can be dated as the beginning of the 1980’s bull market."

The following are my notes of his discussion:

1.                  No financial technique can predict financial behavior.  This includes both quantitative and qualitative.

2.                  In troubled times, marked to market does not work.  Bid/Ask is different in a non-liquid market.  (side note.  I see this all the time with bond pricing.  We get bond pricing from the B/D, yet it is common to only be able to sell these “priced” bonds at a material discount to what the pricing service is showing.)

3.                  Good times breed a financial liquidity illusion.

4.                  Marketability is not equal to liquidity.

5.                  Marked to Market is imperfect. It can provide false comfort.

6.                  Quantitative models will not work with out liquidity.

7.                  Contagion is a MAJOR concern.

8.                  International diversification will not protect portfolios.

9.                  Leverage hurts mot in turbulent markets.

10.             Investors can’t rely on sell-side analysts.  Nor can investors rely on the Government.  Both groups have too much of a vested interest.

11.              Ratings agencies are not timely.

12.              Off Balance Sheet is important!

13.              Securitization does not eliminate banks in credit risk.

14.              When default looms, emphasis goes from investors to borrowers.

15.              “Bubble is already very big.”  “Unfortunately when you miss the timing, there is always a cost to bear.”