Prem Watsa looks back at the meltdown
This is part 1 of a 2 part interview with Prem Watsa (who needs no introduction)…
Click Here To Read: Prem Watsa looks back at the meltdown
(H/T Corner Of Berkshire & FairFax)
Introduction (Via Financial Post)
Prem Watsa is one of the few investors in the world who saw last year’s meltdown coming and placed his investment bets accordingly. Consequently, he made billions for the shareholders of Fairfax Financial Holdings. In 2006, Fairfax’s shareholders’ equity was US$2-billion and by 2009 it was US$6.5-billion. He sat down for an interview recently with the Financial Post’s Editor-at-Large Diane Francis to discuss ways in which the world can “reset risk management” in order to avert future catastrophes. This is the first of a two-part interview. The second part will appear on Dec. 1.
Excerpts (Via Financial Post)
Q What caused the failure of risk-management systems?
A It is tied in some ways to ratings. The blind reliance on ratings without thorough self-analysis helped create the asset bubble. Ratings are so pervasive in our financial system and in many cases investors take ratings at face value and do not challenge them. How else can you explain why there are only a handful of AAA corporate credits but there are literally thousands of structured products that were rated AAA but did not have any track record and no management?
In Canada, however, like Britain, regulators like our Office of the Superintendent of Financial Institutions (OSFI) have the Prudent Person Rule. This means you must judge financial prudence or risk in terms of what a prudent person would do and not simply rely on ratings. This is a principles-based approach, as opposed to a rules-based one that is antiquated days after it is enacted and relies exclusively on ratings, which is prevalent in the U.S.
It is prudent throughout all aspects of investment management for credit decisions to be made, or at least understood, by those who actually make the investment decision and not solely rely on the generic methodologies of any third-party. We should go back to, or forward to in some cases, the Prudent Person Rule.”
Q Is this how you have guided your investment strategies?
A We don’t rely simply on ratings. We have our own guidelines. We apply our own analysis and rigour to every investment we make. The worst thing that happened in financial circles was the movement to put aside personal and professional responsibility and analysis and rely exclusively on ratings.
