And so it can be very much in the interest of bank A to sell-short bank B shares, or buy CDSes on bank B, because they have exposure to bank B. It's the responsible thing to do as a fiduciary, and yet if everyone does it at the same time, it's destabilizing because everyone is selling.
James ChanosDerivatives in and of themselves are not evil. There's nothing evil about how they're traded, how they're accounted for, and how they're financed, like any other financial instrument, if done properly.
James ChanosIn China, remember, the the banks are arms of state policy. They loan because the local party official or regional party official tells them we need a new stadium. They are instruments of state policy.
James ChanosWhat we define as a bubble is any kind of debt-fueled asset inflation where the cash flow generated by the asset itself - a rental property, office building, condo - does not cover the debt incurred to buy the asset. So you depend on a greater fool, if you will, to come in and buy at a higher price.
James ChanosWhat people don't realize is that China papered over its last two credit bubbles, those in 1999 and 2004. The banks were never bailed out - they just exchanged their bad loans for questionable bonds from quasi-state organizations.
James ChanosI used to think that good short-sellers could be trained like long-focused value investors because it should be the same skill set; youโre tearing into the numbers, youโre valuing the businesses, youโre assigning a consolidated value, and hopefully youโre seeing something the market doesnโt see.But now Iโve learned that thereโs a big difference between a long-focused value investor and a good short-seller. That difference is psychological and I think it falls into the realm of behavioral finance.
James Chanos