PACIFIC OIL CONFERENCE
GRAND SIERRA RESORT, RENO, NEVADA, SEPTEMBER 16, 2009

Over the past two years, it has become trite to say this the worst financial crisis we've seen since the Great Depression. It is also true.

The risk management function that disappeared and allowed derivatives to go completely unregulated and the complete advocation for oversight really helped to create this bubble. There are people who believed that there was little policymakers could do about the bubble while it was taking place. And so we had the bubble burst, the failure of seven major institutions in the United States, and programs put in place by the Federal Reserve that weren't conceived or thought of in the United States.

Only 6 months after we reached a secular and historic low in the marketplace, the economy seems to be bouncing farther back than anyone anticipated. Airports are busy again. Wall Street is making a lot of money. The markets have come back. The energy markets have come back based on the strength of the Chinese market — they're importing raw materials faster than we would have thought a few years ago. Most financial institutions, policymakers and regulators are much better prepared to deal with fallout in some areas of the economy. I am very much heartened by what I see.

Bailouts are bullish. And that's where we are. We're in the midst of the single greatest bailout in the history of the United States.

The Federal Reserve has one plan and one plan only: revive the economy of the United States. There is no Plan B. There is only Plan A. If Plan A doesn't work, there's just more Plan A.

The fragile nature of this economic recovery has brought home to bear a reality in Washington that may not have been evident a few months ago.

On the regulatory front, we're not sure what's going to happen. What has struck me in recent months is all the folks who were there in the Clinton Administration are back now. In the Clinton Administration they were mad centerists. They were pragmatic. Clinton was quite pragmatic dealing with public policy. I don't get that same feeling this time around. They have staked out positions that are farther to the left.

The folks on Main Street are in a fight with the folks on Wall Street. There is a palpable sense of anger in the industry about what transpired.

The Administration has backed away from pay caps. They have backed away from shareholder votes on compensation and bonuses. After the biggest financial market crash in history, we are looking at the second largest pay packages for financial market professionals. It's better than the alternative which is New York looking like it did in the 1970s.

I think in the area of commodity market activity, there will be a tighter set of market rules regarding financial activity. Some of it has already taken place during the Bush Administration — the swap loophole or Enron loophole has been eliminated.

The popular perception of commodity industries is really skewed by the misperception — primarily, from the mainstream media — that oil prices, alone, are the most manipulated by speculators. It's not the case. If there were some grand conspiracy, a price would be set that would be high enough to make everybody profitable but not high enough to incent alternatives.

For the first time in the history of modern economics, all but two economies in the world were growing simultaneously — Venezuela and Zimbabwe — something we had never seen before. It created a very strong commodities market. It was a bubble. There was no doubt there was a bubble. But it was based on fundamentals.

Any threat to global growth drives down the price of oil.

The CFTC report was set to finger the speculators for the run-up in oil prices. But it ignores the geopolitical risk factor of oil, of supply and demand of oil being tight. Iraq's production has rebounded only modestly. Russia's production is strong but they produce an oil that has very limited use outside of Eastern Europe.

The markets can get bulled on occasion for a short period of time. It's the fact that we've swung between extremes of feast and famine over the years.

On an inflation-adjusted basis, oil and gasoline are still relatively cheap. It's crazy compared to what we're used to seeing. I don't think the speculator has as big as influence as others.

With the price of grains and beans falling back, there's been precious little talk about those sensitive areas being regulated. Oil is a much more political commodity.

We're going into an election year in 2010. Pollsters say the Democrats could lose a substantial number of seats and that would be the end of the Democratic super majority. That threat, combined with the anger coming from the business community, might be enough to turn down the rhetoric in the next few months.

I would suggest if you have a chance to go to the New York Stock Exchange in the next two years that you should do it because it will be gone. We will have converted to an electronic stock exchange and a floor where people pair off will be archaic and won't exist any more.

Deficits under current circumstances have proven not to be as economically dangerous as people anticipated. There is a line miles long of people stepping up to buy treasuries, including Chinese banks, despite complaints about debts. It's in the best interest of the Chinese, the Japanese, the Belgians, the Thai, the Russians, even, to keep our debt in line. As we saw last year with our economy If we sneeze, everyone else gets Swine Flu.

There was an absolute need for the government to step in because there was no private capital available. There was only government capital available. We are forgetting that rather quickly. This is a Keynesian fix — the government steps in when there is no private capital available.

I don't think the deficit is as bad a deal as most people are afraid. You can worry about them one year from now or two years from now. Right now don't worry — it was the only money available and it became available. I would worry about the falling dollar.

We have a dollarized global economy and it's going to stay that way for a long time. We are still the biggest game in town. We are 25% of the global GDP. Nobody has a choice.

I think we have a fairly vibrant debate right now between the right and the left. Unfortunately, the center is becoming silenced. We are past the point where we can have a debate about public policy issues. We are at the point where we can only have invective. The extreme views are prevailing in the media and not allowing us to have a full conversation about what's happening.

What has happened is because commodities became an asset category of choice with exchange traded funds, it created artificial demand for the product. These are highly dangerous and — although I don't usually feel this way — they should be regulated. Exchange-traded funds give consumers access to commodities in ways where they weren't allowed to play earlier.

At the end of the day, these aspects of the marketplace have an effect but they are not what drives the market price overall. I still think it's a fundamental market. When you saw oil go to $34 during a market collapse, that was a fundamental event.

Jobless recoveries are somewhat anomalous. If the economy does take off, we could see a job-full recovery with people being reabsorbed into the economy because they were laid off so quickly.

Remember, it has only been six months since the lull in the stock market. There is a lead time between the markets, the economy and how consumers feel about the economy.

The community banks have done quite well. Your relationships with your community banks are extremely important. Regionals have commercial real estate to worry about. Community banks which are well run now have opportunities and can take market share away from bigger banks that have other issues to deal with.

There's been an overreaction from regulators and, in some cases, they're preventing even high quality loans from being made. The pendulum will swing back. But now is a great time to shop banks. You can get better terms if you're credit-worthy and they're going to get more business. Well-capitalized small banks are having an opportunity to move into new businesses.

Since everything is effectively a security now, I believe there should be more uniform margin requirements. There has to be some standardization of margins. The amount of paper that's driven makes it a security market.