Wall Street winner's tough predictions

Fairfax Financial Holdings Ltd., like Campbell's Soup, has defied the stock market carnage as Wall Street and the global financial system melts down. Fairfax has defied gravity because the property and casualty insurance company, led by its Chair Prem Watsa, realized a few years ago this perfect financial storm was about to hit. So it positioned its gigantic portfolio of premium income and profits to not only withstand the storm, but benefit from it.

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Q. Will Washington's proposed US$700 billion rescue plan work? What should the average person do?

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A. "$700 billion or whatever is not going to stop this. This is going to be long and deep and people want to save money. Be careful about risk. There are unintended consequences in fixing this and all are ahead of us. This will take years to sort out."

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"There will be problems here in Canada too. If the US has a recession we will. For individuals, safety is number one. Buy real estate for your family but not as an investment. Don't borrow for new cars. Keep borrowing at a minimum."

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"Now's the time to protect your money. Keep your life simple. Be mortgage free if you can. People must hunker down."

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Q. Your company is cash-rich so are you going to cherry pick like Warren Buffett? Should other investors be doing that?

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A. "We have C$1.1 billion cash and we are going to keep it because we're scared. Forget about making money. We are also 100% hedged (on equities) and have never been that way before."

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"There are and will be unintended consequences. For instance, September 30 [Tuesday] was the last day for many hedge fund refund redemptions. [Hedge fund unit holders can cash out at the end of the year if they give 90 days' notice, or sometimes 45 days]. Mutual fund holders can redeem at any time. These funds will be selling stock to meet the redemptions and there is no Federal Reserve for a mutual fund."

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"Another unintended consequence was the bailout of Freddie and Fannie which had sold $30-billion of preferred shares at $25 a share. After the bailout these went to $2 a share. Institutional or retail investors bought them thinking they were AAs or triple As, thought the government was behind them and that these preferreds were safe. The effect of what happened? The prefs were wiped out and now nobody can do a preferred issue. The government wanted to save Freddie and Fannie and did not mean to wipe out the preferred market."

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Q. You also have many stocks in your huge portfolio what about losses on equities?

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A. "As of the end of June 2008, we were 70% in cash or government securities with 20% in common stock. [The rest in other investments]. We are fully hedged with our equities. We shorted the TSE 300 and S&P500 because we were worried about the coming storm."

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Q. How long will this financial storm last?

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A. "This is more serious than the financial crises of 1972, 1974 or 1987. We have not seen this happen before, big huge institutions going out of business. The bottom line is this will be long and deep and you have to be very careful. We don't know where the next problem is going to come from. There is good disclosure [of portfolio holdings] in North America, but nowhere else. These liabilities are lurking in places we don't know about."

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