Transcript: TAMSanity and the Golden Age of Fraud

Featuring: Mike Green, Jim Chanos

Published Date: November 16th, 2020

Length: 01:24:37

Synopsis: Jim Chanos, president of Kynikos Associates, is one of the most legendary

investors of all-time, short seller or otherwise. Even after an incredible bull run that has taken

many short sellers out back behind the woodshed to be put down, he’s still generating

incredible alpha for his investors. In this interview with Mike Green of Logica Capital Advisors,

Chanos explains why we are in a golden age of fraud where the market fails to recognize

frauds until the last minute. He also highlights the dynamic of growth-starved investors willing

to throw money at any company that can demonstrate a large total addressable market (TAM)

even if there is no demonstrable chance of profit. He cites business models like Uber and

Grubhub as examples of the market's TAMSanity. He also touches on two of his highest

conviction shorts, IBM and the commercial real estate sector, with IBM being described as the

ultimate example of a COVID loser and commercial real estate being described as a "slow

motion train wreck." Filmed on November 11, 2020.

Key Learnings: Investors wanting to get short must be cautious and manage risk as the market

is not pricing in fraud until the last minute. As well, IBM should serve as an example of the

types of companies who have failed to innovate and whose death has been accelerated by

COVID. The writing is on the wall for commercial real estate and the debt and leverage in the

industry can help investors determine the timing of its slow death as obligations will eventually

have to be met.

Video Link:

https://www.realvision.com/rv/channel/realvision/videos/e159465ea982425ea16039736aeeb441

The content and use of this transcription is intended for the use of registered users only. The transcription represents the contributor’s personal views and is for general information only. It is not

intended to amount to specific investment advice on which you should rely. We will not be liable to any user for any loss or damage arising under or in connection with the use or reliance of the transcription.

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Mike Green in Conversation: TAMSanity and the Golden Age of Fraud

MIKE GREEN: Mike Green. I am here in Marin County. I am really excited to continue my interview series.

This time, I get to sit down with my friend Jim Chanos. Jim, it is wonderful to welcome you to Real Vision.

JIM CHANOS: I am glad to be here, my friend.

MIKE GREEN: You are in Miami right now. You have been sheltering from the COVID storm. One of the

reasons that you and I know each other is that you annually have hosted an event down in Miami called

Bears in Hibernation. That must have been a challenging experience for the past couple years. Certainly,

this year it was rescheduled and canceled due to the coronavirus dynamics, but you are extraordinarily

well known for your stewardship of a firm name Kynikos and your ability to be short throughout the longest

bull market in history effectively.

Everybody wants to know the secret to how you have done that, but from my experience, what you have

done probably better than anyone else in the bear community is created a community of individuals who

value stock selection, value fundamental research and understanding of companies and experiences of

Bears in Hibernation have always been extraordinary. Just really, really bright people, I have attended,

Josh Wolfe has attended, and incredibly thoughtful people that really understand the individual companies,

and yet we are in this environment where you have described as the golden age of fraud, where nobody

seems to care even though more information is available than ever before.

Can you tell me a little bit about what that means to you when you talk about the golden age of fraud and

how that affects the way that you approach the markets these days?

JIM CHANOS: Yes. What a quaint notion, talking about fundamentals and doing deep dives on

companies. It is a quaint notion, and one day, it might come back into vogue but that does not seem to be

the case these days. Well, just to give you a good example, last year's event, which we moved from Miami

up to Long Island, there was a spirited discussion about a company called Wirecard.

Wirecard, as we know, nine months later, basically completely blew up, but at the time, the stock was

trading in the DAX 30, was trading well over 100 euros per share despite allegations by the Financial Times

and short sellers in February of last year that were quite credible, followed up by a document dumped by 

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the FT Dan McCrum in October, I believe, or September of 2019, and here you had a situation where the

evidence of fraud was piling up in plain sight and all you had to do is a little bit of digging, based on

publicly available reports and documents to realize that something was very, very wrong there. The

company was not what it appeared to be, and yet, and yet, the stock seesawed from basically 80 to 120

euros from the fall into June, when the company finally had to admit itself that it was making up the numbers

and there was a couple billion euros missing from the company accounts. Then the stock went from 100 to

basically, three in a handful of days.

Any credible investor or anyone willing to do any work would have seen immediately that there was a big

problem here. The chairman of the board, of the supervisory board resigned in January. Most amazingly,

the company hired an independent auditor separate from the regulator to investigate the journalists' and

short sellers' claim and in April, that auditor came back and said to the public, the company would not

cooperate with their investigation. Right that in there, you knew you had the smoking gun, as we like to say

in our community, and still, the stock did not go down.

To me, that was the sign that whatever you want to put to market forces, the central bank's fingers on the

scale to use our friend Jim Grant's term or whatever, that until you are actually confronted with the crime

being admitted by the criminal, it is business as usual in Wall Street and in the other financial markets. It is

quite something and we had a wave of fraud right after the dotcom era, but I think this one is going to put

that one to shame.

MIKE GREEN: When you think about that type of dynamic, the Wirecard component, to me, that always

speaks to something I always share with people, which is that it is not opinions that make markets or it is

not the research that people do that makes markets, it is when a transaction actually occurs. When

somebody is forced to decide, I am going to exit my position in Wirecard because the allegations of fraud

have suddenly become very painfully apparent, and I cannot run the risk because it shows up on my

holdings. That could be a fundamental manager that is supported up to that point and there is a tipping

point that that occurs.

One of the things that strikes me in this environment is that many times the holders, you mentioned the

inclusion in the DAX index, in many situations, the holders are doing no research whatsoever because they

are passive indices, they have shown up in that way. When you think about something like Wirecard, how

does that thought process influence what you think is going on?

JIM CHANOS: A couple thoughts on that. Ideally, in our business, you want to be across from the table

from someone who is doing no work or doing poor work. When we have had this wave of passivity in the

equity markets, generally you know that if a stock is in a certain ETF or in a certain index, it is going to be

bought and sold with the vagaries of the market and flows into that factor based algorithm, whatever the

case might be. You have to adjust for that. You have to adjust the way you look to companies and

understand that.

What is even, however, crazier is the fact that we have layered on to that now something that we had not

seen for the first 10 years of this bull market, which we have now layered on starting in the fall of last year, 

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with the advent of zero commissions, and the explosion in activity online in Robinhood and others, we have

added to that interesting mix of the retail investor, who not only is doing no work, but is doing bad work

and are just following trend, following things, speculating massively in options and really is in the market

in a way in which they have not been since 1999, or 2000. You have got both of those to consider.

Now, if you are a skeptic like me, as to just how much these stocks can be held up. In the case of Wirecard

to use your example, you have the index funds that owned the DAX, and then it was one of the few large

cap technology stocks in Europe so there were a number of ETFs and factor based algorithmic funds that

owned it because it was a tech stock denominated in euros, and fine. Then on top of that, you just had

massive speculation by retail investors in the shares, in the options, who were basically betting that the short

sellers were wrong.

That was their case, that in fact, this company was just fine and all of this stuff that the FT and published,

internal documents, all the rest of it, as I said, numerous smoking guns was just an opportunity for long

investors to get leveraged. Because these people have no idea what they are talking about. You couple both

of those, Mike, and it is about as treacherous an environment near term for fundamental short sellers as

you can imagine.

MIKE GREEN: I think that is right, and I would add another layer to that from my perspective, which is

we now inhabit a world in which everybody is perceived as being an expert. Your opinion after 30 years

in the market, I do not want to end by saying there is a little bit more than I know but the underlying dynamic

that prices going up says you are wrong because your opinion carries normal more weight than the guy

on the Our Wall Street Bet Board similar to the 1999 dynamic on Yahoo message boards.

I know, you sent me a really interesting presentation on the TAM phenomenon that I want to go into. You

drew the analogy of the Yahoo message boards from 1999 to the Our Wall Street Bets today. Very much

in that environment, you were perceived as fund managers or skeptics had no idea what they were talking

about. People have heard my story of being called the dumbest man alive in February of 2000 for not

understanding the inevitability of the new economy soaring while the old economy crashed. You have those

same dynamics but ultimately, we have an additional layer to it today, which is if the price is going up, then

the short sellers must be wrong.

JIM CHANOS: It goes back even further. You and I remember 2000, February 2000 very well, but if you

go back to Adam Smith, George Goodman's seminal book the Money Game from 1969, 1968, the go-go

market of the 1960s, and the old timers lamented that you had to have a kid running your portfolio because

only the kids understood that you could buy the electronic stocks and the Bowling Center stocks and the

conglomerates at any price. Whereas the old gray bears were looking at things like dividend yield, cash

flows, things like that. We see this over and over and over again in market cycles, where those with the

least experience because of recency have the best experience.

They only know an up market, and they only know that on top of an up market, you can leverage returns

in an up market by using margin or options. Yes, you are right. Look, your scorecard, you are what your

score says you are. I am realist enough to know that, but I also know that what prices tell us is your level of 

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risk so that if you are wrong, what is your margin of safety, to use an old term? We are at prices now,

where the crowd that is betting on margin and betting through options, weekly options have had better be

right because anything that corrects and reverts to the mean, or to real valuation metrics, is going to destroy

a whole another generation of investors.

MIKE GREEN: You mentioned that destroying another generation of investors, I generally tend to agree

with that. I actually just got off of a call with an individual who has completed a study of Robinhood investor

portfolios, and the conclusion is that 98% of option related trades, despite the zero commission at

Robinhood, are losing money. 98% are losing money. One of the positive conclusions from that that you

can draw is that they will eventually run out of energy. You cannot continue to lose on that. That is one of

the challenges. This is obviously well documented.

One of the challenges of being a professional money manager is that your track record is out there for

everyone to see, you cannot conveniently forget the names that did not work or the trades that did not work

in your favor. It is a little bit easier to do when you are not really auditing your performance. You basically

focus on the wins, not the losses, etc. It feels like there is certainly an element of that and it is beginning to

creep in. If you search the Wall Street bets message boards, you are starting to find the messages similar

to what you saw on Bitcoin in 2018. I have lost everything, I cannot pay my rents, etc. It is really quite

tragic.

This individual was describing what is happening in Robinhood as evil. I do not know that I would describe

it in quite that stark of a term, but the implications of it are ultimately going to be very similar to what we

experienced in 2000, which is a general loss of interest, enthusiasm, etc., for any form of active investing.

It strikes me as quite concerning.

JIM CHANOS: It is, and we can even go beyond that, and that you really are also seeing because of

now the advent of equity issuance again, and some of the vehicles that we are probably going to talk about,

is that you are also seeing, again, a transfer of wealth from people who probably can least afford it, or do

not understand what they are doing to corporate insiders and promoters. This was one of the big lessons

of 1999-2000. I think that it is also one of the reasons why the backlash to fraud is always so great. It feels

like you teach your courses in the history of financial market fraud, and the fraud cycle always follows the

financial cycle and business cycle, but with a lag. The longer the bull market and expansion goes on, the

more people begin to drop their sense of disbelief and begin to believe things that are too good to be true.

The corollary to that is that the greatest defense attorney and the harshest prosecutor for a company is its

stock price. Because as long as stock prices are going up, no one really cares that the company's massaging

its numbers, or playing games with pro forma or outright fraud. The minute people start losing money in a

big way, they begin to basically say, well, it was not my insane levels of leverage or did not understand

what I was doing when I bought Enron, it is actually managements are crooks, and they stole from me, and

you better do something about this.

That is still ahead of us in this cycle, but my point is that people are going to do crazy things, they do not

understand that what they are doing is basically like a casino, and that even if they are not paying 

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commissions, they need to understand things like bid-ask spreads, and that. Of course, they are going to

trade themselves into oblivion. You and I both know that.

MIKE GREEN: That is one of the very clear challenges. That gives us actually a really good opportunity

to cycle back for a second because I know you so well, and I know you are so well known in most venues

that I do not even think about introducing you and giving your background. You brought up this idea of

being skeptical and being thoughtful in understanding all of these frameworks, your career began, give or

take, a decade or so before mine. You started as an analyst in the 1980s, if I remember correctly, and your

rise to fame was on the back of a call on a company, Baldwin-United, that you were an analyst who

basically came up with the sole sell recommendation. Maybe you can actually just give us a little bit of that

background. Then let us talk about the starting at Kynikos. Because it fits with the narrative that I want to

lay out here.

JIM CHANOS: Yes. I started out as an analyst in investment banking, but I was a stock market junkie. I

traded options when I was in college. My dad had taught me about the stock market in the 1960s. I always

was fascinated with it. Every hour at lunch, I would go down the hall at Blake, Eastman, PaineWebber and

spend some time with the manager of the brokerage operation, and we talk stocks, and this was in 1980.

A year or so later, he said, hey, by the way, I closed the door, my partner and I in New York are actually

going to start our own retail brokerage firm. Would you want to join us as an analyst? I loved it because

doing deal books all day long for the investment banking side of the business was just not my idea of a

great time.

I joined him in Chicago, a little firm called Guilford Securities. The first company I was asked to take a look

at was this financial conglomerate called Baldwin-United, the old Baldwin Piano Company. The CEO,

Morley Thompson, had transformed it aggressively into a financial services company. Again, shades of

shades of 20 years later, Fortune hailed it as one of America's most innovative companies. It was beloved

by all the analysts and track record of fantastic earnings growth, all on the back of selling annuities. They

bought the S&H Green Stamp company, for example. None of your viewers going to know what Green

Stamps are but I know you do.

MIKE GREEN: I know what they are.

JIM CHANOS: It was like the points programs of its day, anyway. They bid for MGIC, big mortgage

insurer in Milwaukee, and there was a huge spread in the arbitrage between the takeover bid and the price

of the stock. I was asked to look at it because we had clients that owned MGIC. Baldwin was doing the

highly unorthodox thing of using insurance company proceeds to make deals. This was its secret sauce. As

I started looking at it, I read the 10k three times one weekend and just could not understand what they were

telling me and how they made their money because they were front-ending the annuity profits.

They were basically again, foreshadowing Enron, they were allowed for the accounting conventions when

they sold an annuity to assume the duration of the annuity and a spread and take the entire amount of

income immediately at present value. Of course, they were selling annuities as fast as they could, even

though they could not really make as much as they were paying out on the annuities as much as 14% back 

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then. The more I got into it, I started asking questions. I did not know how to follow an insurance company,

and the statutory financial statements that looked like phone books that listed every security and every line

of insurance and had to become self-educated on that.

I was at my office one night and it was about 5:30, 6 o'clock and my line rang. I picked it up. There was a

voice on the line, said, are you the analyst that is asking questions about Baldwin-United? I said, yes, who

is this? The voice on the other line said, it is not important who this is. Do you know that there are publicly

available files in the State of Arkansas in the insurance department? No, I did not know that. Who is this?

You should get a copy of those files. I think you will find them interesting. Click.

It is like, wow, this is like eight years after Watergate, and I just got a deep throat phone call. I went into

my boss's office next morning to tell him about this phone call. Of course, he immediately said, were you

drinking? I assured him, I think maybe we should just hire an attorney in Little Rock and just go get the files

and see what is in them. We did that. A few days later, we got a FedEx of just all these documents. Sure

enough, the insurance regulators in Arkansas, where Baldwin had most of its insurance subsidiaries, had

realized belatedly that they had basically been hoodwinked by the company, and then let this guy do too

much with the insurance proceeds.

We are screaming for more capital, we are going to have a special examination, they had hired up former

New York state insurance department superintendent, Richard Stewart, to go look at the company. Basically,

you read these documents, and you realize that the company was on fire. Literally, the insurance companies

were insolvent. We put out a research report a few weeks later documenting our findings, the fact that the

company was aggressively accounting for the annuities, that there were regulatory concerns, blah, blah,

blah, blah, blah. I put out a sell saying, sell the stock at 24, and enterprising investors could consider a

short sale. Well, the stock proceeded to double over the next three months.

I put the report out on August 17th

, 1982. If you know your market history, you will know that that was the

absolute bottom of the 16-year bear market from 1966 to 1982. Tells you something about my timing. In

the interim, in October, the Wall Street Journal got a copy of my report and asked about the regulatory

reference and I pointed them to the Arkansas documents. A couple days later, the Journal reports that our

State of Arkansas highly concerned a Baldwin-United insurance unit demanding more capital special

investigation.

Meanwhile, Wall Street was selling these annuities. Merrill Lynch was selling just boatloads of them. I walked

in the office that day, I think the stock had closed at 33 the night before, and chi-ching, it is over. There it

is. Wall Street Journal, page three, the insurance companies may be insolvent, blah, blah, blah, the stock

was up $3 that day. It was an introduction to a young analyst that even if you have smoking guns, ala

Wirecard, the market can make you look wrong for a long time or quite unprofitably. The stock was going

to up on another $20 between then and the first week of December.

Then Forbes came up and published some further really damning stuff, and the stock finally broke. The State

of Arkansas moved in on Christmas eve of 1982 and seized the insurance companies as it had threatened

to do, and Baldwin became the largest bankruptcy in US corporate history at that point a couple months 

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later. Yet, and yet, there it was, all in public, published in The Wall Street Journal, documents available for

anyone to see and the stock basically continued to trade like it was a world beater for better part of six

months.

MIKE GREEN: Just very quickly, when you think about that Baldwin-United dynamics, there is a couple

of things that you hit on there that I think tend to be fairly common. This applies to Wirecard as well. You

often have situations where companies have effectively an embedded finance unit, where pianos were one

of the products that would be a large purchase by a household and so they needed a captive finance

department to initially finance the purchasing of pianos that then grew to dominate the underlying business

and was used, as you are saying, to create a financial services conglomerate effectively with that type of

finance organization.

We saw something very similar with GE. Enron had characteristics around that etc. When you think about

that tension between you make the articulation and you identify the clear fraud, and the market signal, how

do you think about stop losses? How do you think about acknowledging the risk that you could be wrong

in your analysis? Even if it is that clear, you had to have been-- your boss had to at some point, be coming

into your office and saying, hey, Jim, I know that you did the work on this, and I was seeing the documents

myself, but is it possible that you missed something? How do you think about that dynamic?

JIM CHANOS: Well, in that case, I had a boss who ran cover for me because the New York partner

wanted to fire my rear end when the stock hit 50. Because we did have hedge funds, we had New York

hedge funds, well known people who were short the stock and on our recommendation, were getting killed.

My head was going to be on a platter and to his ever credit, my boss in Chicago said, no, I have seen the

work, I have seen the documents. The kid is right.

Now, when you are running money on your own, you do not have anybody there other than your clients,

and your track record and your results. There, it is a different animal. There are really two ways to handle

risk on the short side in an equity portfolio. One is stop losses, and the other is percent of capital allocation,

or some combination of the two. We have always used the latter. Individual ideas are so volatile that almost

any stop you might set to take yourself out of a position is going to get hit. Certainly, I think almost any of

our greatest hits, like Baldwin or Enron, would have probably stopped us out at some point. For me, anyway,

it is very hard to reenter when you have been stopped out.

Now, what we found to be better is a percent of capital, we do not let anyone position ever get to be above

5%. Practically, 3% and 4% is a big position for us in a diversified portfolio. In a case of a company that

we love, where we think we are right, but it goes against us, we will have to trim the position, and to keep

it into our risk parameters, but you have to understand that if you have to trim it on the way up, it is the

same terrible idea. You have to be willing to add as it is working. The big example I can give you on that

in our portfolio recently was a little company called Valeant.

You remember I gave Valeant as one of my ideas in our bears conference in February of 14, and it was

$130 at that point and was [?] $260 a year later. We had to cover stock at $180 and $200 and I think

$210 basically, the position got too big, but we added to it on the way back down, when finally what we

thought would happen happened, and ended up covering position between 10 and 15. Yes, you can be 

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wrong, I would have hated to be completely stopped out at Valeant given the work we had done, and how

well we have documented it, and just what a complete variant view that was with the rest of the hedge fund

community.

It really was one for the ages. I do say, and I do believe, I think Valeant is the largest single stock loss in

hedge fund history at the fund that had about a $90 billion market cap and hedge funds owned about half

of the capitalization.

MIKE GREEN: It is one of the challenges. When you have a management team like you had with Valeant

that is let us put it politely and say that there is a little bit of wink, wink, nod, nod chumminess with an

investor community. Hedge funds are often looking for an element of edge and that tightness can encourage

people to think that they have information that others may not right. That was certainly my perception on

what was playing out in Valeant and the enthusiasm for it in the hedge fund space.

You went from Baldwin-United, and you continued to be an analyst for a couple years, and then you launch

Kynikos, and you did something that was different than anyone else had ever done on the short selling side.

This actually speaks to one of the phenomenon that I often talk about in my interviews with people is it is a

combination of the right place at the right time with the right innovations. A long, short fund, those had

been in existence since the 1940s. A dedicated short seller fund, particularly in the 1980s, I think was really

challenging.

You took advantage of an insight that I think very few people appreciated at that point in time, which is as

I understand what Kynikos did, you x-ed out your short position by buying S&P futures. You effectively gave

a market neutral without having to focus on picking long stocks. Is that a fair analysis?

JIM CHANOS: It is almost fair, and the timing is a little off. We did not get that smart until the mid-90s.

We have the short only business from 1985 and caught a great wave of performance, maybe five to 90,

on the back of Drexel Burnham, land bear commercial real estate. Maybe more on that later and a variety

of just interesting ideas, idiosyncratic ideas. The roof caved in when the market took off in 1991 from 95,

and there was no place to hide on the short side. Everything went up. I think the Russell might have been

up 80% or 90% in 1991, something like that. 

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Anyway, we had a wonderful client that was a big part of our business, and they gave us a big vote of

confidence in 1995-1996, but as part of that, they figured out that we were still generating alpha, it was

close to zero, but it was slightly positive, despite getting our heads handed to us. They said, why do not we

structure something where you basically are long the market and short your stocks, and we will compensate

you that way. That is how they ran the portfolio. We selected the shorts for them. Then we ended up doing

it ourselves directly.

We have really two businesses, Mike. We have the short only business, US and global and that is for people

that already have the longs. Pension funds, family offices that have lots of embedded long exposure. Often,

they will just contribute existing loans as collateral for that account. Then we will just keep score on a relative

basis. Then for people who do not want to do that, we actually could do the hedge for them. Generally, it

is passive. We are just trying to take the systematic risk out of the portfolio and isolate idiosyncratic risk,

because that is how you make your money.

We figured that out, whereas most hedge funds go at it from the other end of the telescope, they buy stocks,

and then they use indices to hedge. We always thought there was a higher alpha generating possibility

based on what we do on the short side, so we are willing to give up the alpha on the long side, and just

hedge the market risk out and try to isolate the short alpha.

MIKE GREEN: One of the ironies, of course, is by buying S&P futures, you have effectively bought into

the greatest alpha creation vehicle on the planet for the past 25 years.

JIM CHANOS: Yes. I am one of the villains in your story. I guess.

MIKE GREEN: That is okay. I find it interesting though, because in part that same time period, 1994-

1995, was broadly when S&P futures began to be adopted by the long only community on the index front

as well, thanks to the 94 derivative report from the Harvey Pitt SEC. Mutual funds, index providers were

actually cleared to begin using the S&P futures to replicate their position so they did not have to buy every

single stock when they came into the market. Regular viewers, and I know you have heard my analysis that

this is really what kicked off the dotcom cycle more than anything else because of the improper index

construction at that time, but I do think that it was a brilliant innovation, effectively saying, look, we can

create alpha without having to constantly be short the market.

I want to emphasize that. I just completed an interview with a young portfolio managers in the process of

building his business, Dan McMurtrie at Tyro Partners, who you know as Super Magotteaux on Twitter. Dan

has come into the industry, and it has taken advantage of some of these innovations to allow him to start

the process of breaking in and building. I would put you in that same group where you effectively said,

look, this is not a sustainable business unless we make these adjustments, and I think there is no question

that that innovation had a huge impact on the success of Kynikos, on the success of yourself.

I just want to emphasize that for people that you need to, as you are thinking about this business, you need

to separate genius in stock picking from genius in business formation or genius in underlying business

approach. I, candidly, will give you props for having a combination of the two. I thought you were even 

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more innovative because you have done it earlier but the observation that you also got that from your client,

to me, speaks to the importance of that relationship that you have with the client that a client would say,

hey, why do not you do this? That emphasizes some of the stuff I have said before.

Now, you mentioned talking about some of the projects that you are working on today. You have sent me

three presentations, and I want to talk about them almost in reverse order. The first one that you introduced

is, or the last one you introduced to me is a deck on IBM. You have some pretty strong views on IBM. It

is interesting because IBM, to me, is one of the classic, it is one of the largest companies in America, and

honestly, I do not think anyone thinks about it other than the Watson commercials that show up on TV but

seem to have no meaningful impact on their business. Maybe you can lay out the thought process on what

you are thinking about as IBM as a challenged company for today's environment.

JIM CHANOS: Yes. I would note by the way that I used to see the Watson ads, and it was all about like

curing cancer and going to Mars and things like that, and now, they basically sponsor the betting shows

on the NFL on Sunday morning, and maybe Watson can help you beat the spread. IBM is fascinating. It is

obviously a company that everybody knows. It has to be one of the least closely followed $150 billion

market cap companies that we know of. The analyst community dutifully writes about it after the earnings

come out every quarter, and that is about it. Everybody knows it is there. It is IBM. It is stodgy, and it pays

a big dividend, and really, nobody cares.

We were short IBM back in 2014-2015 when Ginni Rometty was running the company, and if you recall,

the company was increasingly doing all kinds of wacky financial engineering to bolster their numbers,

which were deteriorating under the surface, because they have posted this aggressive $20 in earnings in

the out year for a handful of years. They were struggling to do it as the core business was deteriorating.

We just suddenly realized that there was such a yawning gap between that $20 and what we thought was

the real learnings, which was like $410, $9 that they had to reset. Sure enough, in a year or so later, the

company had to come clean and reset expectations down, and the stock got killed. It went from 200 to 120,

and we covered our short. It was simply a quality of earnings story on a business that was just flatlining

and slowly declining.

Fast forward to a year ago, and when IBM decided to buy Red Hat for $34 billion in debt to jumpstart their

cloud business, we decided to take another look. Stock was trading around $140-$150 and what we saw

shocked us is last year, went on into this year. What we saw was that the operating morass that we saw 

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back in 2014-2015 had gotten far worse, that now, the revenue declines were solidly mid-single digits

year-over-year. They had cut costs as far as they could cut. The drops in revenues were now dropping to

the operating income line.

Even more so, the company was getting more and more aggressive with how it booked things like tax credits

and one-time items to make up the shortfall. As we did the numbers, we realized, as we looked into 2020,

2021 and 2022, that the company which was supposed to make $11 this year, $12 next year, and $13

in 202, and those $12 and $13 estimates are still out there, really was going to make $6 this year in

economic earnings, $5 and $4. We define economic earnings as basically their operating profit as stated

minus the interest plus royalty income taxed at 21%, the statutory tax, and maybe they could finesse turning

the $11 from $6 this year, and they are doing it through a bunch of charges that they are going to call

extraordinary, but there was no way that they are going to be able to turn $5 into $12 next year, and $4

into $13 in 2022.

That to us said that we have got another reset coming, that they are going to have to basically figure out a

way to bridge the reality of IBM to this inflated set of EPS numbers upon which they are paying a $6

dividend. Well, sure enough, about a month or so ago, they announced another restructuring, and they are

going to spin off part of their business and keep part of the other business and they are going to take a

bunch of charges, and this is going to take 16 months to do-- I have no idea why it is going to take 16

months to do, but it is going to enable them to take a lot more charges next year. That is how they are going

to do it for this year and next year, they are going to basically say, well, we are taking all these transitional

earnings charges, and we are going to reinvest them in the business.

Well, those are not charges. Those are operating costs that you are just trying to reclassify. The problem

still is 2022. How do you turn the $13 expectation from what we think is going to be $4? This is IBM, this

is the problem. It is now a very rapidly melting ice cube, and I think that the stock should be trading about

half of where it is trading today. Clearly, the dividend is holding it up but at some point, the board is not

going to be able to ignore reality and realize that they are paying out more than 100% of their real earnings

and dividends so the company is not reducing debt, it has 50 billion in debt and the business is shrinking.

I like to joke that they call themselves a cloud company, but they are actually, the cloud is their nemesis, not

their business. The cloud is killing them. Because their business is basically a bunch of old legacy things like

the Miami motor vehicle department, or the Florida motor vehicle department, where they run systems and 

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things like this, and inevitably, that stuff is all going to the cloud, is going to different, but IBM is not the

vendor. It is other companies.

MIKE GREEN: That is actually one of the things that I would highlight that I think is so interesting about in

IBM. I was talking with John Burbank last week, and he highlighted coronavirus as the single greatest

technology adoption migration that has ever happened, or impetus to rapid technology migration. If you

are a corporation, and you were ever thinking about when do I make changes? When do I restructure my

operations? When do I switch these things out? This is it. Things cannot be done on mainframes, it can be

done in the modern cloud systems, etc. There is a lot of resistance to pulling that out, but much of that seems

to have evaporated. It strikes me that that ice cube could start to melt very, very quickly.

JIM CHANOS: Look, for the fourth quarter coming up, revenue is going to be down 5% year-over-year,

and it is happening. It is happening in slow motion, but it is happening. It is amazing, the analysts that

follow this thing just beautifully write down the company's projections and guidance and when we point

out, like, look, can you compare the operating income to the bottom line? How is it that in some quarters,

net income is higher than operating income if there is interest expense in taxes? IBM has not paid much in

taxes over the last 10 years, by the way, and so at some point, you have to realize is this company even

really all that profitable?

It is sitting there hiding in plain sight. You saw our deck. We compare the operating earnings to the

economic earnings to the stated earnings, and the gap is just getting wider and wider and wider. As we

said, sometime next year, or in 2022, we are going to see a reset here, and they are going to have to tell

you, we are not really earning this, we are really only earning $4 or $5 a share, not $11 or $12, or $13.

MIKE GREEN: Well, this is another area where your analysis overlaps with mine, as I look through the

holders list on IBM, I need to get to number 49 on the list of holders holding slightly less than 0.35% of the

company before I can actually find a human being who might have looked at something.

JIM CHANOS: That is probably right.

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MIKE GREEN: Everything else is index. It is just incredible.

JIM CHANOS: Yet that has not helped the company for all that has happened and all the buybacks they

did, under Ginni. That has not helped this company has massively underperformed. I think it will continue

to massively-- there is nothing worse than a tech company with shrinking revenues, and just leverage, the

operating leverage is just as extreme. This is a company that markets more than has real technology. All

you need to do is spend an hour with the financials and this one is not rocket science. You will see it right

away.

MIKE GREEN: Well, I tend to agree with that. It immediately reminds me of Kodak or others that have

had a similar long standing legacy. People look at it and say, oh, yes, but the intellectual property that they

have accumulated over the years has to have incredible value. It is very hard to see how I cannot disagree

with you on this at all. Again, it is a really nice overlap with my stuff where I just do not think there is another

human being that is looking at it, it is really absurd.

JIM CHANOS: The other problem the value guys do is they take a look, and they will say, well, wait a

minute, if you look at the free cash flow, if you look at the operating cash flow minus the capex, they are

covering their dividend, they are making enough to pay off. I point out, well, wait a minute, if the revenues

are still shrinking, and they did a $35 billion acquisition last year, and they did a couple of big ones a few

years back. I think your acquisitions are your R&D, and so you basically have to deduct them from your

cash flow if revenues are not growing. If the company is still shrinking, and you are doing all these deals,

then you are buying part of your growth in effect, or your revenues would be shrinking even more. At the

end of the day, there is no free cash flow here and the company obviously has gotten more and more

levered up.

MIKE GREEN: That gives us a great segue into the next idea that I wanted to chat about, which is you

used the phrase TAMSanity which refers to the total addressable market. This is another area where we are

seeing very clear emphasis on growth in an environment and it has created its own narrative that the reason

large cap growth stocks are going up is because investors are desperate to find some element of growth in

the market and as a result, of course, investor communications at large companies have become about

identifying the nearly unlimited growth opportunities that exist.

Forget the fact, for example, that Apple really has not grown revenues at all but the total addressable

market, TAM, mantra has become extraordinary. Maybe you can share some thoughts on how that is used,

how you think about it. We will make sure to include, in the materials, you have a graph that shows the

frequency of the use of the phrase, TAM, in corporate filings. The only thing more vertical is the market

itself.

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JIM CHANOS: Yes, so obviously, this is the size. The market has gone on and on and people have tried

to find more unique ways to justify ever stretched valuations. You get away from earnings and cash flow

pretty quickly and then not even price to revenues might satisfy some of the people. Then it is what is your

total addressable market? What is the whole size of a market? I think, we refer to Uber as one where they

said that the transportation market was their TAM $13 trillion, or something like that.

I actually got into trouble at Jim Grant's conference where I did this talk, and I joked at the end of the talk

that we were going to think about going long the space SPACs, like Virgin Galactic. We are not long Virgin

Galactic, we were never long Virgin Galactic, because I joke that of course, the TAM in space is infinite.

Therefore, your TAM is infinite, your possibility of valuation expands to infinity. Why would we tether

valuations to anything if you are a space company? Virgin Galactic went up like 10% immediately when

some reporter--

MIKE GREEN: Unused to Jim Chanos is long Virgin Galactic, is long the space.

JIM CHANOS: They missed the tongue firmly in cheek. The irony of all this market is that I was ridiculing

it and it drove the stock and people were just whipping me online. Because the stock, of course, collapsed

after we clarified that and people were like, why would you joke about something like that? I am sorry, you

are an idiot. Anyway, what we try to do in trying to separate the wheat from the chaff in this nuttiness is to

basically again, go back to fundamentals and look at the nexus of the economic transaction.

We totally understand that in the digital age, there are a network effect and that we are going to affect

companies to take advantage of a network effect. Obviously, things like Google and Facebook and like

that, that the more users that use it, the more revenues that come in and the more costs are spread out over

a higher user base and you know the drill, but you have to separate that from the charlatans who basically

then convince you that a taxi ride or house flipping, which by their very nature have well established

economics, and house flipping after costs in renovations and brokerage commissions, is almost always a

money loser even in red hot housing market, enables you to do huge revenues that are inherently

unprofitable.

Food delivery. Food delivery has been around for a long, long time. Taxis, ride hailing has been around

for a long, long time. They are body shops, they are subject to labor constraints, because the driver can 

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only make so many dropoffs. We do not have autonomous vehicles yet. We do not have drones deliver you

hamburgers yet. If you are hiring drivers and paying them less than minimum wage to drop off food, or

take you somewhere, you can figure out what those unit economics are. They are generally pretty bad, or

razor thin.

Being big in that area does not necessarily give you scale. You might need to hire more drivers, but the end

of the day, if your labor pool is being paid below the market, you have got a problem because it is going

to be harder and harder to find more and more drivers. Same with food delivery, if you can only deliver

one meal every 25 minutes, which is what it works out to, you can figure out what your revenues are capped

at per driver. You can do the math and realize it is not really a profitable business. Same thing with house

flipping, and we can go on and on and on.

These are places that enable you to grow really fast, because in effect, you were pricing your product below

the market. I could have an enormous TAM handing out $20 bills for $15 on the street corner. I will grow

credibly fast, but the nexus of the transaction is negative. You have to figure out who is selling you a bill of

goods on these TAM stories just to float shares or pump of stock and where there really is a network effect,

and therefore you will have gross margins that are defensible and will grow and have low capital needs.

There is a difference.

I do not get the valuations that people are paying for software as a service stocks, but I understand that if

you have good product, the heavy upfront costs in software as a service can actually pay off quite

dramatically and returns on marginal capital can be great, but that is not happening in food delivery. You

just need more and more bodies to generate what you are doing and the margins in the restaurant business

are tiny to nonexistent. Everybody is, when you deliver from a restaurant, basically, it is not the restaurant

and the consumer anymore, it is two other hands out, it is the driver and the platform company. There is

just not enough money in that transaction to make everybody profitable. This is the inherent insanity of the

TAM type stories because we have gone from network effect to negative transaction economics.

MIKE GREEN: Well, taking that example, part of what I would argue has occurred is it is not a network

effect. When I own a restaurant and I sign up for a delivery service, they are one, subsidizing to attract my

business and be able to show that they are growing their content in the same way that a Facebook or a

Twitter for example, is in many ways, trying to attract people onto their platform to create those network

effects. I am in effect, paying the restaurant. The restaurant responds to it by saying it is fantastic, I have

now got somebody who is willing to deliver my food for free in order to build their business and create the

"value" for their investors and shareholders.

Of course, I am going to sign up, the delivery driver is signing up for a very similar reason. It allows them

to have a job that pays them something close to minimum wage or slightly better with much greater flexibility

around their business model and allows them to utilize a resource at least in the initial stages of the gig

economy, that was something they already had. The 2008-2009 environment, you had high unemployment

and lots of people who had cars, and so they were able to leverage this.

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The irony today is that if we look at who is driving Uber or we look at who is delivering these, we really

have recreated the taxi services, as people who are leasing vehicles, paying the insurance, etc., the old

rates for New York City taxis were $120 for a 12-hour shift, and now, you have people who are leasing

vehicles at $500 a week for access to the vehicle that they can use for Uber. They are functionally identical,

and we have just stripped out in the case of the rideshare component, we have stripped out the million

dollar taxi Medallion, and we have seen those values collapse as a result.

I completely agree with you, I do not think that there is any significant critical thinking that is going behind

this. Again, it is the unique confluence of Silicon Valley and a need to deploy capital. It can take a lot of

capital, it can theoretically create a large total addressable market that could be profitable when the robot

delivery is actually there, when it becomes a truly leverageable dynamic, which it just is not today. It could

be at some point in the future, but it certainly is not today.

JIM CHANOS: There is an added little twist for the ride sharing, however, in food delivery companies

and you are in California, so you probably saw the ads for Prop 22. We make these guys employees or

independent contractors, but the part of the story that they did not tell you, these are the gig economy

companies or the drivers, and a driver here in Miami tipped me off on this last year because I was asking

him, but we got to talk about the economics and I said, well, then, of course, you have got your selfemployment taxes, and you have to pay 15.3%, all of the Medicare and Social Security, you are responsible

for them. He laughed, and he said, I do not pay any taxes. I said, well, look, I do not want to cast aspersions,

but obviously, you are on the hook for that.

He said, look, no one gets reported anything. I said, well, of course you get reported, you get a 1099. The

IRS gets a 1099. He said no, my friend, we do not get 1099s. I said, what are you talking about? He

proceeded to tell me, and he was right, about a loophole in the federal reporting system, that the ride

sharing, and food delivery companies have been categorized by their S as payment platform companies.

Unless the payments from the payment platform companies aggregate over $20,000 a year, there is no

reporting. It is why a lot of drivers work for more than one of the companies.

MIKE GREEN: Of course. Makes perfect sense.

JIM CHANOS: If they earn less than $20,000 from say, Uber and Lyft and DoorDash each, or $60,000

total, nobody knows what they are making. It is not reported to the federal government.

MIKE GREEN: That is fantastic.

JIM CHANOS: When you ask Uber or Lyft about this, they will say, well, what the drivers do is up to their

themselves. I actually tweeted about this a few days ago, you can actually go to the Uber website, and they

explain what 1099K responsibility is. They basically say, if we pay you less than $20,000 a year, we do

not report it. It is a huge loophole and the states do not get this information, the federal government does

not get this information, and so a lot of these drivers are not paying taxes. Again, nobody wants to talk

about it, because it is a loophole that the IRS can close pretty quickly. It is huge. It works out to $3 to $4 an

hour.

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MIKE GREEN: That is absolutely incredible. Let us go on to one more that both you and I are following

fairly closely here, which is the commercial real estate environment and this fits into obviously a COVID

related dynamic where we have seen an extraordinary decline in the demand for office space. Likewise,

many physical retail establishments as that technology push has shifted people towards eating at home,

working from home, taking delivery of food, etc., as compared to what would have happened as recently

as nine months ago. Is this simply a COVID trade or is COVID the catalyst here? Tell us about what you are

thinking.

JIM CHANOS: You referenced earlier the COVID technology acceleration, and we started looking at this

a while ago pre-COVID. If you take a look at the publicly traded real estate companies, most of them saw

peaks in net operating income which is the core metric we use, which is building cash flow. Sorry, they are

basically EBITDA but for corporate overhead. Most of the office and mixed use and retail REITs peaked in

2018. Certainly, retail may have peaked even earlier, 2016-2017. The basic problem is we have a lot of

space in this country and we have been building a lot of it since the GFC.

With lower and lower cap rates, which is really the core of our story, basically, people went on to keep

developing. As we went into COVID, essentially, our presentation, office vacancy rates were already at

levels that we have seen at previous cycle bottoms, they were mid-teens in many markets. I mentioned that

NOIs were beginning to drop, and that is the case. Then COVID hit, and heretofore stable real estate

businesses like hospitality fell off a cliff. Retail, of course, got much, much worse.

In office, that is not the case yet. Because of the nature of office leases, the roll-off is much, much slower.

Typically, an office building has a duration of tenancy by eight or nine years. You are seeing really, in

offices, yes, some tenants are not paying, but for the nation as a whole, 92%, 94% are current on their rents

in offices, and occupancies are slightly north of 90%. That is going to be a slow motion train wreck. I think

work from home is only going to exacerbate the pressure that was already starting to happen. I will give

you a good example of what I mean.

SL Green is the well-known New York office and retail REIT. If you look at their consolidated NOI, and I

think I can get these numbers right, in the third quarter of 2019, their quarterly NOI from their portfolio

properties was $130 million. In the fourth quarter, it was $122 million. In the first quarter, which was still

pre-pandemic, because they got March rents before the lockdown, it dropped to $115 million. In the second

quarter of 2020, it dropped to $106 million and for the quarter they just reported, it was $99 million.

Of course, we are looking at the $99 million versus $130 million a year ago and say, okay, their cash

flows are down 25% or so year-over-year. Think about this, their cash flows dropped from $130 million to

$115 million in the two quarters pre-pandemic. This was in place, and there are other REITs that look exactly

like this was in place before COVID hit. COVID is making it worse. That is number one. What really has us

fascinated, and we were short the commercial real estate cycle in late 1980s, what really has us fascinated

is the function of cap rates in commercial real estate. Because at their peaks in 2018, you were getting cap

rates for offices of 4% and 5%, retail, 5% and 6%. 

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While that sounds attractive, when rates are 1%, you have to realize that is before CapEx. Typically, 3%

for a year, 2% for an office building per year, because public REITs capitalize leasing costs and tenant

improvements. A 4% "cap rate deal" meant you are earning 2% in cash in an office building. That gave

you no margin for error. You could lose by rates going up. You could lose by spreads, credit spreads going

out. You could lose by tax rates going up. You cannot move a building.

What we have noticed now is with the drop in NOIs, something has happened that no one counted on.

Volatility in the cash flow of the asset. Prior to this, it was just you raised your rents a couple percent a year.

It was like clipping coupons. It is not like clipping coupons anymore. There are all kinds of new risks to the

asset.

MIKE GREEN: Well, to your point about the shrinking dynamic that was going on, this is very clearly a

combination of lower revenues per square foot, particularly in the retail side, so that had been delayed for

an extended period of time due to the debt covenants that existed on many of the individual properties.

There has been strong resistance. For someone who has been to New York City pre-COVID, you saw a

remarkable rise in vacancy rates. This is largely tied to the fact that if you lowered your rents, you actually

triggered covenants in your debt contracts on this property. As a result, it was more profitable to sit vacant

and actually pretend that you are going to receive those rents.

That appeared to break somewhere in 2019 and you started to see some of those dynamics begin to flow

through in terms of the deteriorating components. Now, the office space, yes, they are having trouble filling

new office space or filling replacement office space because of the dynamics of the coronavirus and the

pandemic, but as you point out, that does not show up for six to eight years.

JIM CHANOS: It is going to be a slow roll.

MIKE GREEN: It is going to be a slow roll.

JIM CHANOS: Yes, but it is going to happen. Then you hear things like the Raytheon CEO a week ago

telling people, well, no matter what happens with a vaccine, we need 25. We have already done the

numbers for our company, and we have offices and complexes all over the country, our actual square

footage needs for office is going to be down 25%. There you have very typical Fortune 500 companies

saying, whatever happens, if we needed a million square feet to do our job, we need 750,000 square feet

going forward. There are lots of companies that are looking at that and making that same decision as things

go forward.

That is going to weigh on the NOIs of these projects. Let me give the viewer an analogue as a way to think

about commercial real estate right now. If I had a building in San Francisco or Midtown Manhattan or

Chicago loop, and it threw off $100 in NOI two years ago at the peak, offices, ground floor retail, that

typical building today got NOI of $75. Rents have come down, retail has come down, operating costs have

stayed flat. In 2018, I would have had to pay $2,000 for that, 5% cap rate on $100 NOI, and I could

probably get a 50%, maybe 60% first mortgage, and maybe 10% more in mezzanine finance. I would be

putting up anywhere from $600 to $800 in equity and be borrowing the rest to get me to $2,000. 

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That $75 today is in an environment of a 6% cap rate and that cap rates have generally gone up about

100 basis points post COVID. Although the rally this past Monday, Tuesday has brought that back down a

little bit. Say last week, we were looking at 6% cap rates in offices, 7% in retail, that mixed use building

now for purposes of either refinancing or a new buyer, if we multiply $75 times 16.7, we got about $1,250.

You see the problem. What was 60% loan to value project is now 100% loan to value. The equity has been

wiped out or is down 80%, and we are now facing most likely another 20% plus drop in NOI from mid2020 to mid-2021. Our NOI next year is going to be $60 on that building.

This is the inherent problem. It is not so much cap rates, those are bad enough, it is that the cash flows are

now structurally beginning to drop for buildings. It may turn around, but it may not. I would point out to

you, Mike, I paid at 712 Fifth Avenue-- when I signed my first Midtown office lease in 1990, I paid I think

the outrageous price per square foot of about $42 a square foot. There is sublease space now in Midtown

Manhattan in Class A office space available at $30 a square foot and probably asking rents are still around

$70 something, you could probably sign a new lease for probably $55 to $60. I paid $42 in 1990.

For those of you that think this is even a great inflation hedge, you might want to rethink that. That was 30

years ago. I think that commercial real estate as a safe asset class diversifier instead of bonds, I think that

is really the crux of our story, that is going to get a completely new look in terms of some lenders and equity

buyers, and I think that the rate of return needed to compensate for risk is going to have to go up from 5%

and 6% as cash flows are going down, and the impact on equity values is stunning. When the movie runs

in reverse in leverage, you know what happens.

MIKE GREEN: Again, it goes back to one of the initial comments we made. Credit and debt have an

interesting dynamic to them when it comes to equity investing. A lot of people are drawn to the short side

because they say this company is overvalued. Well, overvaluation does not create a catalyst. A debt contract

creates a catalyst. If you cannot refinance, if you cannot fulfill the obligations of your debt contract, then

you are forced into a transaction similar to other stuff or forced into an action similar to other stuff we have

talked about.

You brought up the IBM dividend is providing support, I would highlight on an SL Green, for example. It is

heavily, heavily owned by dividend yielding and real estate funds, etc. If they are forced to cut that dividend,

you actually enter into an environment in which you could see forced liquidation from passive holders. This

is one of those examples, where Vanguard holds 18% of the company. I am sure you have shared your

analysis with the Vanguard analysts that are covering this.

JIM CHANOS: Actually, I have not, but that is okay.

MIKE GREEN: I am going to try to make you feel better about their unwillingness to reach out to you, they

do not have it. This is one of those dynamics where when they are forced to accept this, when they are

forced to change their dividend, when they are forced into a situation they can get kicked out of an index

and create forced selling with no ready buyer to this, this is one of those that is going to be very interesting 

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to watch. My bias would say that this is going to be similar to a Wirecard that it suspends itself, suspends

itself, suspends itself in a magical format, and then just cracks horrifically.

JIM CHANOS: The one difference, Mike, I will tell you, I was out with some investors, some real estate

investors last night here in Miami, and I was walking them through the case and they were stunned that the

public market REITs were still trading at the valuation numbers I told them, because as I put in the deck,

commercial real estate in the US is a monstrously large asset class. It is $17 trillion, and the debt alone on

that is probably about 10 trillion. The debt in the troubled areas, offices, retail, hospitality, urban center

multifamily, are probably $5 trillion to $6 trillion. Now, to put that in perspective, the losses in the

commercial real estate bust of the late 1980s, the S&L bust, totaled about $800 billion, which almost sounds

like a quaint amount in this day and age.

MIKE GREEN: It was big back then, yes.

JIM CHANOS: It was 15% of GDP back then, because our GDP was only about $5.5 trillion. Subprime

mortgage loans and all day and pick a rate loans totaled a little bit under 2 trillion in 2007. Now, not all

of them went bad, as you know. That 2 trillion number was also interestingly about 15% of GDP in 2007,

our GDP was $13.5 trillion then. That $5 trillion and $6 trillion number of debt on troubled commercial real

estate assets, that is pushing 30% of GDP right now.

This is a very big issue. It is not a systemic issue and that our largest banks generally do not have a lot of

this stuff. It is much more diffuse and the regional banks and insurance portfolios, hedge fund portfolios

through CMBS. There is a lot of this paper out there that is radioactive that is hopefully going to get

refinanced. The equity markets can ignore it for a while but if buildings are now trading-- I just saw

refinancing in Manhattan, down in the financial district, that was done at $450 a square foot and the

previous transaction for the building was at $750 a square foot. This is going to be hard to ignore. Then if

you get some marquee bankruptcies, and there are a couple I can think of that are probably looming, it is

going to catch people's attention.

MIKE GREEN: If I look at the debt, for example, on SL Green, and I just pulled it up quickly, most of it is

trading at or above par. Do you think that the debt gets impaired, or do you think this is an equity story? 

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JIM CHANOS: Well, the office REITs are blessed by actually reasonable leverage. This fulcrum is the

equity because they are only about 50% levered. Now, when we take a look at the off-balance sheet stuff,

there is more, but just to give them, as a cynic, just looking at the consolidated stuff, most of the office REITs

have leverage levels that are okay. What they are not going to be able to do is keep paying the dividends,

as you point out, and/or show any earnings or fund FFO for the equity investors. Where people are more

levered, of course, are in the private markets, and in certain selected REITs. We are looking at SL Green via

Vornado and Brookfield Properties because they are big, but there are a number of REITs in specialized

sectors that are quite levered. Those are the ones that are of interest to us. One we are looking at has 45%

of their tenants are movie theaters. There are tenant problems.

MIKE GREEN: Yes, that might create challenges.

JIM CHANOS: Yes. There is one we are looking at in Europe where they are collecting almost none of

their rents, because they are a landlord to small restaurants and cafes in a city center. The good thing is

this is a big asset class, and you can find public securities that just seem wacky.

MIKE GREEN: Let us start to wrap up on that. You have been very generous with your time here, but I

want to get your thoughts on what happens when this cycle breaks, when the golden age of fraud begins

to fall apart. You and I have been doing this long enough to know that that will inevitably happen, it is

going to be different every time it does. We cannot get to pick the way the ending plays out. What are your

thoughts on what happens next?

I am just going to caveat that with a couple of key concerns that I have, which is this has gone on so long

now that I do not know who the next Jim Chanos is, I do not know who comes in to fill your shoes, very

sizable ones, when we come out the other side of this, and it feels to me like we have lost so much in terms

of research capability, thoughtfulness in the market, etc., that I do not entirely know how we recover from

it. I would be interested in your reaction to that. What happens on the other side of this?

JIM CHANOS: Well, for the next cycle, I hope the next one is Jim Chanos, because I am still doing this,

as I love it. I do not know. As you say, every cycle is different. What comes along that changes people's

perception is different each time. I keep pointing out to people that in-- and you remember this-- in March

of 2000, there was no catalyst. The market just stopped going up and started going down. Then of course,

everybody started looking in the rearview mirror. The one thing I can guarantee you will hear, because we

always do is, well, it was so obvious. Look at what was going on. The dotcom, as Drkoop.com and pets.com

and all this crazy stuff, of course, people were going to get killed.

Well, that is not what it felt like while it was going on. You know that and I know that. It is not what it feels

like right now while it is going on. Prices can just go up forever and valuations can go up forever. We will

only look back at hindsight and say, were people smoking? What were they thinking? What gets us to that?

What is the bridge to get to that? I have no idea. Obvious culprits, the central banks get it wrong, or get it

right and actually begin fostering inflation, and rates start going up. I do not think the average investor just 

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realizes to what an extent the financialization of the economy that you have basically referenced has come

on the back of rates going from 14% to zero percent in my career. That hides a lot of problems.

That is something that we have to we have to look at, but it could be political. It could just be the idea that

the central banks using asset inflation or asset price stabilization as a policy part of the tripod is just fostering

more and more outrage in areas of our economy and it would be something like that. Who knows? What

we do know is that valuations are set up to basically have no margin of error and that the losses will be

severe in some areas where the silliness is the worst.

MIKE GREEN: Yes, it is one of the things that I struggle with and communicating a lot of thinking that I

have. What I try to emphasize for people is that what they think of as value, SL Green would qualify, IBM

with a 6% dividend yield would qualify. I think one of the biggest challenges this time around is that the

quality of value has deteriorated so dramatically, there is so much leverage, there is so much room for it to

fall in terms of the actual claims on the corporate structure that it makes me quite concerned, that we are,

as an industry, are going to come out looking quite bad.

The other thing that really concerns me is the younger generation of analysts. I know that you have a number

of analysts at Kynikos and I have worked with several analysts over the years, but there is just not that many

young people coming into the industry that are being given the opportunity to develop their forensic skills

that you and your team have, that will give us the confidence to say the coast is clear coming out of this. I

could be totally wrong on that, but I am quite concerned that we, in an attempt to preserve the old guard,

you and I are both part of that, we have done a terrible job of training the next generation of analysts.

JIM CHANOS: It certainly for the most part has not paid off. People go where the money is. I think that

is an area that is going to be found wanting, I agree with you. It has not mattered now, and I am hopeful

that at some point, it will matter, but events may swamp all of us.

MIKE GREEN: I am hopeful that people watching are starting to understand that they can begin to learn

the right things to do the approaches that you have taken or that I have taken on occasion in my career,

and understand that just because it is not being immediately rewarded. That does not mean that it is the

wrong thing to do. I hope that we are able to develop those skills, but I am concerned, and it is part of the

reason I enjoy doing these conversations.

Jim, this is absolutely fantastic. You have made yourself very accessible to me over your career. You are

incredibly busy. I fully understand that, but if individuals wanted to follow you or get more information

around the types of discussions that we are having here, you are quite active on Twitter, your hashtag is

WallStreetcynic. Is that correct?

JIM CHANOS: Rumorhasit.

MIKE GREEN: Okay, Rumorhasit, and it is @WallStreetcynic. Is there anywhere else that people could

turn if they wanted to gain access to some of your materials or insights?

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JIM CHANOS: Not really, we are still a private money manager so sadly, we are in that little world, but

I get out of my room every once in a while.

MIKE GREEN: I would like to take advantage of that. As always, this is absolutely incredible, sitting down

with the opportunity to talk to you. If I can add you to my stable of regular appearances on Real Vision, I

would really, really enjoy that. Maybe we can connect in another six to 12 months and share with our

viewers how this has worked.

JIM CHANOS: Just how wrong we have been, yes.

MIKE GREEN: Just how wrong we both have been. Exactly correct. That is always the right way to think

about it. Jim, thank you so much. I really, really appreciate you spending the time with us and our viewers.

JIM CHANOS: It was my pleasure, Mike. Have a great Thanksgiving holiday, wherever you are, with

whomever you are having it in this era. I enjoyed it. We will do it again next year.

MIKE GREEN: I look forward to it. The same to you and to your family. Take care.