Read An Excerpt

From Chapter 25: Growth

Growing up in Louisiana, I lived in Lake Providence, Tallulah, Delhi, and Oak Grove, and each town had one bank where all the local farmers and townspeople kept their deposit accounts and their savings accounts and got their loans. Except for the bank in Lake Providence, they all failed in the Great Depression, the same way banks all across the United States failed. When these banks went down, they took the money of their individual and merchant clients down with them. That’s why we got the Federal Deposit Insurance Corporation (FDIC), which guarantees that your bank deposits are safe up to $250,000 today (up from the original $10,000 on January 1, 1934, when the FDIC opened). An interesting fact, in light of the current government bank bailouts, is that the FDIC is intelligently funded by premiums paid by the banks it insures, not by taxpayers.

Now we’re in another depression, this one triggered by a “Made in America” run on the global financial network. That network bears little resemblance to your grandfather’s banking system. It’s vast, it’s complex, it’s interconnected. It’s also composed not just of traditional banks in one location but of a shadow banking system that triggered, when things went wrong, a massive, collapsing global domino effect with lenders not knowing and not trusting borrowers and vice versa. All these shadow players bundled and securitized everything from home mortgage and commercial real estate loans to credit card debt to loans to buy-out businesses to auto loans and school loans, whatever, and then resold these opaque bundles to each other over and over again. And when they ran out of real assets, real stocks, and real bonds to securitize, including the junkiest stuff around, they called on teams of very smart, very highly paid young men and women with top echelon university MBA degrees to invent sophisticated creations like credit default swaps and to make up imaginary assets, that, though worthless, could also be bundled and sold. This inflated the money bubble till it burst in 2008 and we got the Great Crash.

What went on was probably not fraud; the sellers didn’t know what was in those bundles either. And neither did the rating agencies. Everything was well lawyerized. I learned long ago that if you can’t explain your business in terms simple enough to fit on the back of an envelope, you probably don’t know what you’re doing. Those who bought securitized debt bundles that they couldn’t understand did just that.

Even before today’s big bailout, the U.S. government has been on a big borrowing spree. With the exception of the great tech-driven economic boom of the late 1990s when our economy actually generated a Federal surplus, with much of the extra tax revenues coming from gains on stocks and stock options, our national debt has been growing in size and as a percent of our country’s GDP. The most alarming and potentially stifling aspect of government debt growth is the growth in “entitlements” to Medicare and Social Security payments for older Americans. And we know that Social Security is “broke!”

There are really only two ways to “fix” Social Security. We can raise taxes or we can cut benefits. Neither of these alternatives is politically popular.

Consistent with my lifelong belief in small government and low taxes, you may have been surprised that in my “Good Earth” chapter, I proposed putting a tax on the carbon content of goods, whether they’re made in America or China or wherever. I called this a Carbon Consumption Tax and Tariff, a “revenue neutral” tax that could “fix” social security. One hundred percent of the revenue would be returned to American taxpayers to reduce or eliminate their social security tax. This Carbon Consumption Tax and Tariff would protect American jobs by assessing a fee on high carbon content imports. It also taxes a “bad” thing—carbon consumption—and reduces taxes on a “good” thing—work, sort of like our “sin” taxes on tobacco and alcohol. There’s a great green bill before Congress right now, competing with the more well-known “cap and trade” idea as the best way to combat climate change.

A Carbon Tax and Tariff would spur investment in renewable energy and create lots of green jobs going forward. It would encourage all forms of energy conservation and motivate investment in clean air through clean energy, both in the United States and around the world. A carbon tax will help us contain our foreign oil imports and make us more secure, more independent. Entrepreneurs would be encouraged to find more American natural gas, such as the gargantuan Haynesville discovery in Louisiana, and to build more wind and more solar.

Eleven years ago we started Green Mountain Energy, setting as our goal, “To change the way power is made.” We were early, but our patience and persistence is now really paying off. Green Mountain has achieved amazing growth despite the recent economic downturn that has hurt so many companies and caused many to fail. In the midst of this great crash and great recession, we have demonstrated strong growth while several of our competitors have disappeared. Green Mountain’s revenues have grown more than 45 percent per year since 2007, and in 2009 will exceed $500 million. Today, Green Mountain serves more than a quarter of a million customers.

Green Mountain had 290 people selling its products in 2006 and now has more than 600 sales reps proudly inviting Americans to “Choose wisely. It’s a small planet.” We were honored with first place in the J.D. Power 2008 Texas Residential Electricity Customer Satisfaction Study. Our customers have stuck with us through good times and hard times because of their commitment to make a difference for the environment, because our prices are competitive, and because Green Mountain is a survivor. Green Mountain is a prime example of playing good offense in a down market. An entrepreneurial company, it is creating more customers every day. That kind of entrepreneurial creativity flourishes even in a depression.

Investment survival in the worst down market since 1929 ain’t easy. Through this late monstrous market turmoil, Maverick, the hedge fund I cofounded with my son Evan and Lee Ainslie in the early 1990s, has played amazing defense. They have done an outstanding job of preserving capital during the most difficult market that today’s generation of investors has ever seen. It’s been a time of extraordinary volatility and dramatic equity deflation made worse by the government changing the rules in the middle of the game, and then, realizing its mistake, flipflopping back after many poor souls were wiped out.

Under Lee Ainslie’s and Steve Galbraith’s leadership, Maverick’s fundamental long/short equity strategy outperformed the S&P 500 in 2007, 2008, and first half 2009 by a total of 40 percent! Yes, Maverick had its first down year in 2008. But in a down market, you win by losing less! This is, after all, the beauty of a low-risk, truly hedged hedge fund that doesn’t chase after the latest fashion in investing or make complicated trades, but, in good times and bad, sticks closely to its charter of fundamental bottom-up analysis of individual companies.

At Princeton, fifty-eight years ago, John Bogle wrote his senior thesis saying that active managers as a group do not beat the market. Student Bogle concluded that the rational investor should not pay a fund manager to try to beat the market.

So is talent worth anything? Well, consider this. In the past fourteen years through March 2009, a dollar invested in the S&P 500 has earned you $1.11. That same dollar invested in Maverick earned you $4.84. If you felt adventurous enough to want to double up with a dollar of borrowed money for every one in Maverick, the Maverick Levered Fund would have gotten you $12.21 for your dollar.

My answer is that talent is worth paying for if it produces better results over a reasonably long period—long enough to know it’s not just a lucky roll of the dice. It’s also vital for the managers to report with consistent accuracy and timeliness, and for their portfolio to be simple enough for them to explain how they manage your money in words your fifteen-year-old daughter can understand. That and good audits allow the investor to sleep soundly, knowing his money is not in the hands of a Bernie Madoff, or alternatively, in the hands of an honest, but mediocre, manager.

Finally, how will Americans respond to the Crash of 2008?

We tough it out.

We become more frugal. “A dollar saved is a dollar earned.” Spending is out. Saving is in. We may need to “downsize,” just as my family did in the 1930s.

Helping our neighbors to help themselves has always been in. Right now, we need that more than ever.

We didn’t dodge the pain in the Great Depression and we can’t dodge it now. Bank losses have to be taken, as we Texans took them in the mid-1980s, or else we’ll spend twelve years in economic misery the way Japan did in the 1990s, when the Japanese, on an island of make-believe, pretended their banks’ rotten assets did not exist. While Japan did it wrong, Sweden did it right, taking their losses even though they had to nationalize a few big banks and later sell them back to private owners after their balance sheets were cleaned up. The sooner we swallow our bitter pills, the sooner the pain will be over. Our house prices will stabilize, generally at levels not much different from today’s. With lower interest rates and lower house prices, once again the average family will be able to afford the average house. As Coach Richards used to say, “We’ll get lean and mean and then come roaring back.”

The Great Crash of 2008 marks the end of an era, but the American people will get through today’s hard times just like we have throughout our history.

With good policy, prudent ways, and some Irish good luck, this latest Depression will soon start to end and the good economic times will begin to come back.

Today, as an investor, I see bargains galore. And I know that the only one too big to fail is America herself.

Read more about Sam Wyly's perspective on enterpreneuring and the current economic crisis in "1,000 Dollars and an Idea." Buy the book.

Copyright © 2009 Sam Wyly