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Headline: Superstar Investment Strategist Phil Maisano (’69) Offers Wisdom, Tips

On How To Survive In Our Current Economy

Copy: To borrow a famous advertising slogan from a now-defunct Wall Street investment
firm, “When Phil Maisano talks, people listen.”

Indeed, these days, some of America’s most prestigious clients, as well as top financial
news outlets like Bloomberg TV, Barron’s and Investment Age, are listening more
intently than ever to what Maisano ’69 has to say.

And for good reason.

As the Chief Investment Strategist for BNY Mellon Asset Management and Vice
Chairman and Chief Investment Officer of the Dreyfus Corporation, both headquartered
in Manhattan, Maisano oversees investment portfolios that, in the aggregate, total in the
hundreds of billions of dollars. During his more than 30 years in the investment business
in New York, he has also seen some of the worst recessions in American history come
and go. So he has some hard-won wisdom to impart to anyone wise enough to listen.

Recently, Maisano was kind enough to take time out of his jam-packed schedule to share
with fellow Abbey alums and friends of the College some of the same valuable insights
he’s offering to his multi-million dollar clients.

We began Part I of our interview by asking Maisano to help us put the current economic
crisis into some kind of historical perspective:

Have you ever seen anything resembling the current economic conditions, or is this a
whole new ball game?

When I started in the investment management business in 1972 and ’73, things were
certainly bad, and remained so throughout most of the decade of the ‘70s. People forget
that. The ‘70s was a lost decade for securities. Inflation was roaring at double digits.
Now, we don’t have that problem right now. We have the opposite problem – i.e. a
deflation potential. Additionally unemployment was over 10% in the ‘70s. People also
tend to forget that. And so far, we haven’t come close to breaching that number. It’s
possible that at the BOTTOM of this downturn, we’ll get very close to that number, but I
doubt that we will exceed it.

For your readers who are as old as I am, you may remember something called the Misery
Index, which was the aggregation of inflation and unemployment. And at one point
during the late ‘70s the Misery Index was in the mid-20s.

So the answer is that we have seen an economy this bad. In fact, many would assert that
that economy was worse, because we had runaway inflation at the same time. Now, the
runaway inflation was a product of the Vietnam War and massive deficit spending.
So yes, we have indeed seen the economy in this poor a state, but the current crisis does
have the potential to be as difficult – if not more so. The reason we had so much inflation
was we had so much stimulus in the ‘70s because of the war. Sure we have the wars in
Iraq and Afghanistan now, but it’s nothing near the magnitude we had in Vietnam. So we
don’t have inflation per se at this point. Of course, some of the spending ideas in
Congress might get us there before three or four years have gone by.

Some seem bent on drawing parallels to the Great Depression. Are such parallels useful
or accurate in any way, at least in terms of putting things in perspective, or are they
unnecessarily panic-inducing, causing thousands of otherwise smart people to in effect
suffer from self-inflicted financial wounds?

The press has been irresponsible in drawing parallels to the Depression – absolutely,
totally irresponsible. However, they’ve been successful in creating enough panic that
their dire predictions may well come true.

This is as much a crisis of confidence as it is a credit crisis. We do have banks that are in
really difficult condition, and investors are concerned…in fact, for the first time since the
Depression, they’re concerned that their financial institutions – i.e. the banks, the
insurance companies – aren’t solvent. And when they feel that way, they retrench. If
they’re not confident in their financial institutions, it’s very difficult for them to be
confident enough to spend on anything, so they save – i.e. they put their money in their
mattress. And there are various forms of mattresses available, money market funds or
buying treasuries and the like. We have seen a flight to safety unlike anything I’ve seen
in my career.

So yes, we’ve managed to induce a panic. I believe – and I don’t want to get too political
here – that not having an incumbent running in the recent election really added to this
crisis. Because we had BOTH candidates trashing the existing order, and as a
consequence of that, people have less and less confidence, they start withdrawing from
their financial institutions, that causes a runs on banks, and it all becomes a self-fulfilling
prophecy. People start believing the world is going to come to an end. And then on the 6
o’clock news Chicken Little comes on and convinces you that the sky is falling.

So the confidence level is lower than we’ve ever seen, causing consumers to retrench,
when consumers retrench, that means that retailers suffer, if retailers suffer, the
manufacturers ultimately suffer because the retailers aren’t selling the inventory – they
don’t need to restock. It’s the opposite of a virtuous circle; it’s a vicious circle.

Is there a way to follow the whole unfortunate series of events back to one or two major
causes of the meltdown? Or is it all too complex to do that?

Yes. At the genesis of the problem is the irresponsible granting of credit to less than
credit-worthy borrowers. It started with sub-prime mortgages. But it didn’t start in 2007.
You can trace this thing back to the late ‘70s, early ‘80s, when there was a concerted
effort – which, by the way, was a good one from a social standpoint – to get home
ownership up to the 70% level over a period of time. Politicians were frustrated by the
fact that home ownership post-World War II kind of settled into a pattern where 60 % of
families owned their own home, they wanted to increase the percentage of homeowners
to at least 70%. They believed that doing so would certainly enhance the status of people
in the lower middle class by owning their own homes; it would improve the cultivation of
properties, because if you own something, you’re much more likely to take better care of
it, etc.

But in order to get that extra 10% of the family population into homes, you had to change
credit standards some or you had to come up with much more affordable housing. Well,
here’s the rub. If you make it easier to get credit, you put pressure on home prices. So
home prices skyrocket. And people have to borrow more to buy those homes, which
makes the credit quality even lower. So what we had was another unvirtuous cycle where
home values were being pushed up by the artificial demand we created by making credit
too easy. And, by the way, it was all forms of credit.

You have examples of that right there on your own campus. When the freshmen come in,
they’re assaulted by credit card companies who are willing to give them a credit card,
knowing they don’t have a the means to pay off the balances, they are totally dependent
on their parents’ largesse to pay the bills. Oh by the way, after four years – or five or six,
depending on the student – you have a pretty good credit rating because your parents
have paid the bills for all of those years. And they’re apt to increase your credit line
pretty dramatically. And you can see how that cycle can get ahead of you, enabling
irresponsible habits. And what we need, maybe, is a little bit of a reversion to what we
had 35 years ago, if you wanted to buy a house, you had to put 10% down, you had to
have a job, and you had to be able to pay for that house with no more than 25% of your
income. Somehow those common sense rules got suspended.

Look, I think the public purpose here was well taken. It is better to have people in homes
they own. But you can’t let the public purpose override the basic financial facts. And we
did that.

Who were the enablers here? The same people who are now vilifying Wall Street are the
guys who passed the Community Redevelopment Act in the early ‘80s. Then refused to
rein in Freddie Mac and failed? So I think there were a lot of enablers here.

It is not just a Wall Street thing – and I am not trying to be overly defensive about this –
but this is not just a Wall Street thing. Again, we took what could have been a good,
twisted it enough so that it became a rip-off.

It was well intentioned social policy– but lousy economics.


Do you think we’re close to bottoming out yet, or could it get worse for 6-9-12 or more
months before it gets better? What are the brightest signs of hope, in your estimation?
I.e. are there any silver linings to be seen in all of this?

I was asked a similar question by a reporter on Bloomberg TV recently, and here’s the
analogy I used.

If you’ve ever been to a home that has an artificial pond, usually they have some black
plastic at the bottom of the pond to seal it. That makes it very difficult to perceive the
depth of the pond – because of the black bottom.

Assume the same thing, except it’s a pool that is all black at the bottom and the sides. If
you look down from the side of that pool, you have no idea how deep it is. I think we’re
in that situation with the current economy. And a major problem is if people can’t
perceive the depth…that is, if they don’t know where the bottom is, they’re afraid to
jump in the water. They don’t know if it’s 10 feet deep or two feet deep. If it’s two feet
and you dive in, you crack your skull; if it’s 10 and you can’t swim, you could drown. So
you don’t want to take the risk. And I think that’s the situation we’re in right now. It’s
hard to discern the bottom. And it doesn’t look like we have clear signals on what that
bottom might be.

So my answer is: I’m not sure we’re near the bottom. I do think we are beginning to
recognize more and more of the bad loans. I think it may be important for us going
forward to have some place to dispose of those loans – whether it’s a new resolution trust
or whatever they come up with in the TARP program, or it’s simply a clearing house for
these assets…they really don’t know what the value of them is because they won’t
trade…and until they begin to trade and somebody discerns a bottom, we’re going to be
stuck standing beside the pool and looking down, and we won’t be finished with this until
that discernment is clear.

Are there signs of hope? There are always signs of hope. We have the most adaptable
and dynamic economy in the world – in spite of what the Europeans would want to
think about us.

I do think you’ll see some innovation come out of this which will create…some form of
new energy technology – similar to the way broadband did in the late ‘90s, the same way
cellular technology did it in the early ‘90s – if you get some new technology like that – I
think President Obama hopes that it is energy-related – you create new industry, and if
you can do that, you start ramping up new jobs very rapidly. That would be the sign that I
am looking to see. I know there are things in this justifiably-criticized stimulus package
that is coming out of Washington that are related specifically to that area, so it is the one
bright spot that I would hope might come out of this. I don’t think it’s hybrid cars, but
rather an alternative to hybrid cars like hydrogen cars – or some kind of technology that
we can begin to mass produce pretty quickly that will be technology-based. Most major
shifts in the economy are technology-based.
People are working on it, trust me, because there is a whole lot of money to be made, and
if you’re an entrepreneur, you don’t have to worry about the limits on what you can be
paid.

So that’s the silver lining. We are going to drive innovation. And we could come up with
something, and everything could change pretty quickly.

Be sure to look out for the second half of the interview with Phil Maisano ’69.