BRIEFING BOOK

Data Information Knowledge WISDOM

BARRY RITHOLTZ is chief executive and director of equity research at FusionIQ, an online quantitative research firm. Ritholtz also writes at The Big Picture--one of the Web's most popular financial blogs.

Location: Forbes, New York, New York

About Barry Ritholtz....………………………………………...... 2

Debriefing Ritholtz...... 3

Forbes on Ritholtz “Are Stocks Finally Cheap?” 02/27/09...... 7 “The Market Turns to Plasma,” 10/20/08...... 12 “Where’s The Ref,” 09/12/08...... 17

The Ritholtz Interview…………………………………………………. 19

ABOUT BARRY RITHOLTZ Intelligent Investing with Steve Forbes

Barry L. Ritholtz is chief executive and director of equity research at FusionIQ, an online quantitative research firm. Ritholtz also writes at "The Big Picture"--one of the Web's most popular financial blogs. The Big Picture has amassed over 39 million page views from more than 29 million visitors.

Additionally, Ritholtz authors the "Apprenticed Investor" columns at TheStreet.com. He is also a member of the Forbes.com Investor Team.

Ritholtz is a regular guest on CNBC, Bloomberg, Fox and PBS. His market perspectives are quoted regularly in The New York Times, The Wall Street Journal, Barron's and other print media. His research and market commentaries have been published in Barron's, Forbes, TheStreet.com, WSJ.com and elsewhere.

He is the author of the forthcoming book Bailout Nation: How Easy Money Corrupted Wall Street and Shook the World Economy. The book will be published by Wiley. McGraw-Hill, the original publisher, declined to publish it because Ritholtz criticized ratings agency Standard & Poor's, a McGraw-Hill property.

Ritholtz earned his undergraduate degree at Stony Brook University, where he was vice president of the student body and a member of the Stony Brook Equestrian Team. His graduate degree is from Yeshiva University's Benjamin N. Cardozo School of Law in New York, where he focused on economics, anti-trust and corporate law. Ritholtz graduated cum laude and was a member of the law review.

Ritholtz is an avid New York Knicks fan and a vintage sports car enthusiast. He and his wife, Wendy, an artist and teacher, live with their dogs, Max and Jackson, on the North Shore of Long Island, New York.

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DEBRIEFING RITHOLTZ Intelligent Investing with Steve Forbes

Every good financial decision I've made comes from: "Wait a second monkey boy, step back, don't do that." -Barry Ritholtz

Interviewed by David Serchuk, March 5, 2009

Forbes: What is one misplaced assumption in the business world?

Ritholtz: The single biggest misplaced assumption is how fast earnings have been falling. The analyst community had been forecasting $105 per share for the S&P 500 in 2008, and slowly ratcheted it down. For the year, we ended up in the low $50s and low $60s. Now, for '09, everyone is optimistic again, but we will probably end up in the $30 to $32 earnings range.

If someone says the S&P will go to 300 because of earnings, I would say it's a tough number. There's not a high probability, but it's not an impossibility. The whole analyst community is slowly coming to grips with these horrific numbers. The fourth quarter of '08 was the first time with zero earning. That's a pretty bad number. It's shocking.

Who is the greatest business mind today?

I'm thinking. If it's a pure investor, I will have to say Jim Simons. If it's a businessperson, I just love what John Chambers has done, positioning Cisco to be 21st-century equivalent of AT&T when it was the only game in town. [Cisco] will be the largest provider of Internet plumbing there is. They had become so overvalued during the boom, the stock's not a screaming buy. But they are positioned to have a dominant position across this whole run of stuff.

I love Google, but it's theoretically easy for Google to slip from its pinnacle. It's based on one basic model; if some bright kid figured it out, what happens to Google is what happened to Microsoft--they are not as significant as they were. Cisco could dominate that space for a long, long time. I think it's the next company to find its way into the Dow.

I don't think [Chambers] gets enough credit. Also look at the acquisitions by Larry Ellison. The lesson he is teaching is forget these mega mergers. Instead let's make bite-sized acquisitions. Eat and digest and flesh out your product line. I wouldn't be surprised to see Cisco to continue to develop the way they have into cable and wireless. I don't own Cisco. Putting the stock aside, looking at the

- 3 - moves Chambers made, the guy's on a fantastic streak and Larry Ellison isn't too far behind him.

It's not about the technology. We're talking specifically about how they've acquired companies. It's the opposite of what Microsoft did trying to swallow Yahoo!, or the Countrywide [and] Merrill acquisitions by Bank of America. Small acquisitions are a smart strategy, and nobody does that better than Cisco.

What is your bold prediction for the future?

What I say, because I had been so bearish in '08 people are surprised when I say "this too shall pass," although this happens to be a worse recession than most. There are secular elements happening. I don't believe in betting against America, but we have to think about America being downsized. Retail chains are going belly-up. The existing surviving companies are cutting out non-profitable spaces. What are we up [to], 1,200 of 25,000 Starbucks [locations] cut back? We will be left with a physically smaller retail footprint.

R&D at Pfizer has been cut back. Endowments at universities are down 30% to 40%. This has a huge impact on the future of research and scholarships. We're being downsized. I don't think it's the end of the world. Having 70% of our GDP being consumer-driven is a misunderstanding of how America grows.

We will go back to 65% to 67%. Sport shopping will not hold the same place in the American heart it used to. Non-stop consumerism taking a backseat to something a little leaner and greener. It will be a different environment. People won't have the cash or the credit. You can grow or earn you way to prosperity; you can't borrow your way to prosperity.

What is the greatest financial lesson you've ever learned?

You're a monkey. It all comes down to that. You are a slightly clever, pants- wearing primate. If you forget that you're nothing more than a monkey who has been fashioned by eons on the plains, being chased by tigers, you shouldn't invest. You have to be aware of how your own psychology effects what you do. This is why we as investors sell at the bottom, get panicked. All the other lessons I've learned have come out of that. As has the field of behavioral economics.

Wall Street clichés, like "cut your losses and let your winners run" come back to prevent the monkey part of your brain from doing what it does. There's a banana- -I want it. That's how chimps behave. Us humans react to greed and fear in predictable ways. We are predictably irrational. If you understand that you can take steps to prevent that--we don't own anything in the office that doesn't have a stop-loss on it. In 2008, we watched the market go down 40%. We figured out we're chimps, and don't let the chimp inside us make those chimp-like decisions.

- 4 - Every good financial decision I've made comes from, "Wait a second, monkey boy, step back, don't do that." Once you realize how your own brain chemistry works against you, it gives you a chance to not panic at the bottom.

Your blog is called The Big Picture. What about the macro side of things do you think most people are missing about the current meltdown?

A couple. First, these bailouts are horrifically misguided. AIG is two companies. One was a rock solid insurance company. It made money the old fashioned way. It had terrific management. Steady, quality insurance. Its tables were not fraudulent. It was insured by the states, heavily regulated. This forced them to be above board. When we talk about deregulation, we are talking about regulating the monkeys. I don't want to regulate markets, [but] the idiots pushing the buttons, we have to regulate them.

AIG [is] a perfect example. It had a regular earnings stream. It made money over centuries! Not a lot of companies around like that. Now they took this triple-A- rated company and said, "Let's throw this giant hedge fund under this area. Under the umbrella of AIG, if it works out, we'll all make billions of dollars."

[The people who] set up this hedge fund had no expertise in writing insurance on structured finance projects, because no one did. This stuff was brand new. They rolled the dice on the whole company. I don't think the American public understands that. What they should've done is pull the clean company out. Then you, the hedge fund, are not the American public's responsibility.

Wind down the whole thing. There is no reason for you and I as taxpayers to pay $200 billion for that. Nowhere does the Constitution guarantee the trades of hedge funds. This is the frustration with Citigoup and Bank of America. If you can't make good, you will be in receivership. Bondholders will get a 50% haircut. You were dumb enough to lend money to bad management. That's free-market capitalism.

You see how quickly these guys waving the free-market flag on television become 10-year-old schoolgirls during a crisis: "Rescue me!" I don't think the public really understands how badly they're being screwed. There is no reason why these banks don't go through a pre-packaged bankruptcy and come out clean. It would be the best thing for GM too. Get rid of the horrific health care plan and start over.

This disaster is an opportunity to throw out a lot of really bad management. It's time for a giant mulligan. I love that phrase. This whole past 10 to 20 years has been a debacle. Let's start over. People haven't figured it out. The public says $1 trillion is a lot of money. How about $14 trillion?

- 5 - 100 years ago, people would be horrified about the government rescuing the companies.

You have said the latest craze is blue-chip penny stocks. Do any of these actually entice you?

None whatsoever. I always look at "How much can I lose?" And it can be 100%. They should be nationalized. I look at GE. This is the answer to what don't people know. For the past three years, I've [been] lambasting the financial sector. Not only do I not know what's on their books, they don't know. They will deny [that]. About a year ago, on some show with a famous banking analyst, after being negative he flipped positive. He said these are generational buys. Yeah, it will take a generation to break even. Not only do investors not know what they have, these guys have no idea how damaging the toxic assets are that they hold.

GE has a hedge fund in the middle of their donut. You don't know the extent of the potential damage of GE Capital Corp. The CFO can tell us everything is great; I don't think this guy has a clue. If he did, this stock wouldn't be $6. I don't think anyone in top management at GE can tell me the value of the toxic paper they hold. The fact they can't answer that question is astonishing.

Another thing people do not know--I don't think most people realize the vast majority of the financial sector invested heavily in Star Wars collectibles. You can buy stocks, which is a $50 trillion market. Bonds, an even bigger market. Trillions of trades. You can go into currency, the value of which is in the trillions per hour. Instead of taking these broad, deep markets, they said, "We will take this new paper. It's hard to value and has no real market, but I think we'll find out an exit strategy down the road. We'll stay away from well-established markets, and go with the Beanie Babies. Because I'm sure I can sell these CDOs [collateralized debt obligations] on eBay. How hard can it be?"

It's not just that the housing market is falling apart. If you can do two plus two, you can figure this out. I just don't know how people managed to miss that. Any of these blue-chip penny stocks are penny stocks for a reason. You're better off buying the Mega Millions ticket for the lotto. Your odds are just about even.

You can see I have a hard time coming out of my shell.

- 6 - FORBES ON RITHOLTZ Intelligent Investing with Steve Forbes

Intelligent Investing Panel Are Stocks Finally Cheap? David Serchuk 02.27.09, 4:00 PM ET

In February, we gathered members of the Forbes.com Investor Team for a wide- ranging discussion about financial planning and the economy. We'll be publishing transcripts from that discussion each afternoon this week.

Our panelists are: Barry Ritholtz, Carol Pepper, Marc Lowlicht and Stephen Roseman.

Forbes: We're going to move on to the next question ... "Is the market cheap vs. gross domestic product?" I know, Barry, you've spoken about this. There's very few ways to measure objectively whether the market's affordable or not. It seems like right now the market, speaking about the S&P 500, is about 70% to 75% of the value of the GDP as I understand it. And you had written on your blog, you said, "How's that working out for you, for the people who've jumped in already?" So I open this up to the table. How's that working out?

Barry Ritholtz: By the way, that's Warren Buffett's favorite measure. I'll start with that. The market is cheaper than it's been for some time. But speaking objectively, it is not, across the whole market, absolutely cheap. We know that, if we look at the forward earnings, they're about 15 to 16, which is about the mean historically if you go back 100 years. You can actually go back further. Some people have argued that if you go back 200 years it's really 13. But just using last century as a frame of reference--

Forbes : That's a long time horizon.

Ritholtz: That's right. Last century gives you a 15 to 16 price-to-earnings ratio, which suggests the market is at fair value. That doesn't mean it's cheap. And then, when we turn around and look at what is the directional action of earnings, earnings have been going down. I would be surprised, by the time this S&P 500 earnings quarter is over, we see zero earnings for the quarter, or a negative number, which means it's going to be pretty hard to get back to $50 to $60, where, coming into 2008, the analyst community was looking for $100, $105 on the S&P 500 earnings. And the way they got there was a 20% jump in Q3 and a 50% jump in Q4. Clearly that didn't happen.

We're probably looking at somewhere between $40 and $60. And if I had to hone it in, it would be more of the downside than the upside. If you're generous and put a 15 multiple on a $50, you're at 750, which, best case scenario, means we're

- 7 - fairly valued. From a purely earnings perspective, it's very easy to see earnings slide to $40.

It's very easy to see a 10 multiple on a $50 number. So 500, you know, if I saw the S&P 500 at 500, I would be finding this guy to get in and buy it hand over fist. I'd be buying small-caps, I'd be buying really cheap names. Back in 2002, we saw a number of small-cap companies trading--profitable, debt-fee companies trading--not only for less than book value, less than cash on hand.

So the market was saying a dollar was only worth 75 cents. Now all that said, there's no guarantee. We're at a critical level today. We're watching. If you go back to the 2002, 2003 lows, you'll see we bounced off this level three times and then took off. Now we hit this level in October-November and here we are, four months later, and we're back at this level. If it holds, it's probably real. And I hate this sort of analysis. I cringe every time I hear it.

If it holds, there's plenty of upside. We were 70% cash. We're now 50% cash. The caveat is if this level that's been so substantial going back to 2002 fails, then, you know, next stop is going to be pretty close to 500. And we tend to be trigger- fingered when it comes to the key technical levels like this. We would very much be sellers. If the recent lows, which are the same lows as [we] saw in 2002, 2003--if they give way, there's no guessing where this stops, other than staying at S&P 500, 500, we would be aggressive buyers.

Forbes: Wow. Gary Shilling said the S&P would hit 600 at the start of the year, and a lot of people thought he was nuts. So far he hasn't been nuts a whole lot. Okay, so I'm going to open this up to the table. Comments.

Carol Pepper: Well, I think the thing that's interesting is that was a very valid, probably a more valid, measure, let's say, 20 or 30 years ago, because the markets were more domestically focused. I'm not sure if U.S. GDP vs. the market is really what you ought to be looking at. What about--and I haven't done the research yet--but what about looking at a broader world, MSCI type of an index?

Because the problem is, for the S&P 500 companies now, a lot of them are no longer domestic companies. More than half, three quarters of their earnings might be coming from overseas. So where that measure probably worked well for Warren in the '70s or the '80s, it's not working as well for him now. And I think that's part of the reason why it's not working as a signal.

Because we're in a market now where everything is much more globally linked. So I think we, in addition to paying attention to what's going on with all our bank bailout and our stimulus package, we need to be paying attention to what the G7 is doing and what's happening in Dubai right now, and what's happening in Asia. Because all of the markets are very inextricably linked, if there's sort of a global meltdown.

- 8 -

Forbes: And we've seen that so far.

Pepper: I mean, there was this talk when markets were really up and frothy that there was a decoupling, that Asia didn't need us, that the Middle East didn't need us anymore, that everybody was sort of free now of the U.S. And the minute the U.S. started to tank, everybody else fell apart. So I think it's very interesting. We are the leader in terms of, when our recovery starts, it gives the rest of the world ... confidence.

And they really still follow us. So, as much as they would like to think they've decoupled from us, it's not true. So there's a bigger risk in that, if our market continues to go into a death spiral, the rest of the world goes into a death spiral. So it's in nobody's interest to let that happen. So my hope is that it won't happen. I mean I don't see it happening, necessarily.

Ritholtz: What do you mean by "let that happen?" That's a great turn of a phrase.

Pepper: Well, to me, it really is coordinated bank interventions around the world. It's coordinated stability and stimulus packages globally. It can't just be the U.S. It's keeping the wars under control. You know, it's keeping, it's really the whole global community getting together and saying, "It's in nobody's interest." And look at China is seeing huge job losses, and they don't know what they do.

They are talking in Davos. We were hearing about civil unrest in other parts of the world. We've seen a rise in crime in the States, which is unfortunate. So there's literally no--what I mean is this is no time for free markets, in my opinion. This is no time for free markets. Policy makers around the world, governments-- and using monetary policy, using fiscal policy, using tax policy--have to do everything they can do to reassure the planet that we're not going to hell in a hand basket, and that we're going to get everything back on track, and that, you know, things are going to, quote unquote, "return to normal." Because it's--

Stephen Roseman: Carol, how do you manage the law of unintended consequences when you expose the markets and the global economies to that?

Pepper: It will happen. There will be unintended consequences. Look what happened with ethanol. We started to have food riots because we thought it was great to suddenly grow soybeans for gas. That was an example of a great unintended consequence.

There will be unintended consequences. However, I think the alternative is more what you're talking about, and it's too dire. Nobody's going to let that happen. I don't believe that human beings, in general, just throw up their hands and do nothing.

- 9 -

Roseman: Well, no, they're given to action. People are given to action.

Pepper: We talk, we figure it out, and we go to work. Especially you guys--guys love to have a problem and work on it. So I really believe that, you know, the people are going to get together and figure something out.

Ritholtz: A lot of the headaches we're dealing with now, both in terms of leverage and de-leveraging, in terms of the global slowdown, was people in 2001, 2002, saying, "Hey, we have to do something." So Greenspan took rates down to levels that were simply unprecedented, below 2% for 33 months, and over at 1% for over a year, and that huge spiral in inflation, and oil, and in commodities, in the huge reevaluation of anything that was priced in dollars, or that had to use credit to borrow--everything went vertical because money was free. It's why the hell would you sit in cash? Just buy everything.

So I think you're ultimately right, you have to do something now. But we have to be cognizant of the reason we have this disaster now is because someone said the same thing seven years ago.

Pepper: I would disagree with that a bit.

Marc Lowlicht : You have to be able to unwind it when it's no longer needed.

Pepper: Right.

Ritholtz: And that never took place.

Lowlicht: Free markets work when things return to--

Pepper: No, but they didn't.

Lowlicht: --realistic expectations.

Pepper: Wait a minute, guys. Remember what happened about all the ... Look, I worked on Wall Street. I started there in 1984. One of the biggest things that got us into this trouble was lack of regulation and understanding of the derivatives markets. Okay? Which caused the creation of securities that nobody could price and the trading and paper profits of things that didn't exist.

Because everybody said, because the Street said, and I remember when Dennis Weatherstone was saying this to the Fed: "We can regulate ourselves. We don't need any oversight on derivatives." That is one of the major things that got us into this trouble.

Lowlicht : Well, yeah.

- 10 -

Pepper: It wasn't the people borrowing mortgages.

Lowlicht: But the point…

Pepper: It was the 500 to 1 leverage on one mortgage.

Lowlicht: The point I'm trying to make it that there shouldn't be free-for-all markets where it's just anything goes. But there has to be a balance between regulation and free markets.

Ritholtz: We had radical de-regulation.

Pepper: That's the problem.

Lowlicht: So what's going to happen is, is it's going to all go full swing to too much regulation. And the question is:w When we get to that point, how do we unwind it so there's a balance between the two, without disrupting money being put to work efficiently and where it goes to work most efficiently?

Forbes: Well, that's the question. And I don't think we'll come to an answer right now. But I leave with two thoughts. One, how [come] unintended consequences are never good? Something (LAUGHTER) that something happens? Secondly, I believe we're going to end it on Carol's thought. This is no time for free markets: an amazing thing to hear at a meeting of the Forbes.com Investor team.

See More Intelligent Investing Features.

- 11 - The Markets Turn To Plasma Michael Maiello 10.20.08, 6:00 AM ET

Coverage of the financial crisis hasn't just overwhelmed investors with too much information--it's overwhelmed them with too much wrong information. On Friday, Lawrence Goldstein of the Energy Policy Research Foundation was quoted as saying that the recent drop in oil prices amounts to $275 billion in financial stimulus.

It sounds good, but it isn't really true.

Forbes.com Investor Team member Vincent Farrell Jr., points out that while oil peaked at over $140, it didn't linger there very long. Farrell wrote to clients: "Oil averaged $72 in 2007. If oil had been $140 for a full year and then fell for a full year to the current price, the $275 billion would be true. You need to compare year over year and not peak to trough to see the true impact. The U.S consumer is better off today regards to the price of oil at $140, but today's price is little changed from a year ago and that is the comparison."

None of this is meant to criticize Goldstein, who made a natural attempt to quantify the effects of oil prices falling 50% from the peak. As Farrell says, it is good news and it is stimulus.

The larger point that emerged from our most recent gathering of the Forbes.com Investor Team is that we don't know quite what rules apply to the markets anymore (at least in the near term).

Barry Ritholtz of FusionIQ joined the discussion for the first time. The well-known bear now sees some opportunity in what might be an oversold market likens the current environment to, "The plasma state of matter. It's not liquid, not solid, not gas; it's plasma and all the traditional rules go away and it's quantum mechanics. As long as we're in the plasma state of matter, all bets are off."

Sacha Millstone, a financial adviser with Raymond James in Colorado, reports that her clients have panicked in the face of this. She had seven who demanded that all of their investments be liquidated. "They wouldn't even wait for a rally to sell into," she says.

Nick Raich of National City's private client group in Cleveland says that he's seen companies around him prosper as manufacturing exporters. Still, he says, the traditional defensive plays no longer work. Maybe a pure utility like Con Edison is doing better than most, but other utilities like Energen, he warns, have hidden interests in commodities-based energy markets and are tanking along with the rest of the market as a result.

- 12 - All of our panelists agree that the long-term outlook favors buying stocks. They also all agree that the next year will see a weakening global economy. The question is whether the market has priced that in already or has overcompensated.

Stay in and hold on.

That '70s Show?

Ritholtz: I've been horrifically bearish, but for the last week, week and a half, I think we've reached some extreme levels of bearish sentiment, and that's made us start putting some cash back to work on the long side.

The University of Michigan sentiment readings are the worst since the late '70s. You just don't see those extreme degrees of pessimism unless you're at an entry point.

We don't have the same inflation we had then. The economy may eventually hit as bad a stretch as we saw in the '70s, but right now we're enjoying a mild recession that's threatening to turn into a more significant recession. We're not looking at double digit inflation or a 2% to 3% contraction in the economy.

So far, it's just prelude. It hasn't been awful. But the risk is that it could get worse. There are more downside risks for the economy than for the stock market. There's this belief on Wall Street that the market predicts the future. Well, Bear Stearns funds blew up in June 2007, the credit crisis hit in August and the stock market said we'll go to all time highs in October of that year. Three months after the fact! Some leading indicator.

Raich: Now the market is pricing in a deep recession or even a depression. If we only have a recession at this point, stock prices move higher.

Inflation it not a problem, deflation could be. Companies are losing pricing power.

Right now the bottoms-up earnings consensus (for the S&P 500) is $95. That makes a P/E nine to 10 times earnings. Nobody believes that. A multiple of 15 implies buy side anticipating earnings to drop to the mid 60s. Everybody expects earnings forecasts to get cut. Will they be cut to mid 60s?

With freeze of credit hard, it's hard to determine company spending. You're going to hear the word lack of visibility. People are having a hard time assessing risk.

A Recession Might Not Be So Bad

- 13 - Millstone: I tend to agree with a lot of what Barry was saying about sentiment indicators. I think about other times that we saw this very extreme pessimism, to me this is similar to 9/11, to 1987.

Everybody is expecting the absolute worst, and what actually unfolds is likely to be better than the absolute most terrible scenarios that people spin out in crisis moments. Talking about consumer sentiment--it's strange how much fear has been put into the average person's mind into the whole notion of a recession.

There's great media hype about, "Are we in a recession?" People are scared out of their minds. They've totally stopped spending.

Whatever we're already in and what we're going to go into, as unpleasant as a slow economy is, we're not falling off a cliff.

Ritholtz: The mainstream press has been far, far behind the public in declaring a recession. Speak to the public, look at the various sentiment surveys, right track, wrong track, the public has been saying for a couple of quarters already. Everyone else is dragging their feet. The way we report economic data puts lipstick on a pig. We're in a bifurcated economy where the people on this call and our peers have been doing pretty well, but the rest of the country has been struggling a bit.

Raich: Barry, do you think it's a tale of where you live and what industry you work with? Profits outside of financials and homeowners have been holding up great.

Ritholtz: There was a great Bloomberg story recently that said if you back out the big three oil companies in terms of profits that you're down 30% year over year. Exports because of a week dollar are such a small portion of the economy. Twenty years ago it was the meat, now its 15%.

Raich: There are companies thriving in Cleveland that were exporting to China up until July.

Ritholtz: Sure. Deere, Caterpillar. Tech companies like Apple with manufacturing in China. The earnings in this market are lumpy, just not evenly distributed.

Raich: Geographic.

Ritholtz: I agree. What's been dragging down the stock market over the past year is the fear that problems in the credit and mortgage markets would spread and the whole decoupling idea that the U.S. could sneeze and the world wouldn't catch a cold. It held true for a long time. Then it didn't, and we found out contagion did occur. Banks would not lend to anybody. There was the fear that we were going to head to a depression.

- 14 -

Millstone: It's very interesting to discuss what earnings are going to be like, but I think what's equally as important is the amazing amount of stimulus that is going to be hitting the economy. There's a lot of stimulus that's been announced, and the programs haven't been started yet.

Everybody around the world is going to be doing various things. We even got some cooperation globally, which is amazing. I didn't think we would have governments cooperating until we had an environmental problem threatening people with death, but here we have a monetary crisis, and now governments and central banks are working together.

The impacts ultimately for the world are very positive, not only in the short run-- we're breaking new ground of international cooperation, we're strengthening relationships, and that's bound to have some long-term impact that's positive.

At the same time, balances of power are going to shift and I don't think the U.S. is going to be the big winner ultimately. Maybe we've been arrogant, maybe a lot of this is our fault and maybe we should be cooperating with other countries. There's talk of a second Breton Woods. Obviously, our financial system globally needs to come into the modern world.

New Rules For An Old Game

Ritholtz: I've written a book called Bailout Nation. Half of it is the study of unintentional consequences. Look at LTCM [Long-Term Capital Management] rescue. The power of the Fed bringing all these bankers into the room and knocking heads together--that's long been considered the good bailout. But look at consequences, you had a hedge fund under-capitalized, over-leveraged and trading hard-to-sell paper. It went under. Does that sound familiar? If we had taken the hit and let everybody take their portion of the hit then maybe things would have played differently later on. The thing that cracks me up is how completely and totally parallel this is. LTCM take II.

Millstone: On steroids!

Ritholtz: It's never different, but you have to look at the rules because some no longer apply. Somebody said you can't "Fight the Fed" and the Fed started cutting last year, had you fought the Fed you would have done well. This was also true between 2001 and 2003--the Fed started cutting in 2001, had you moved out of equities, you would have saved yourself a lot of heartache. Everything we believe to be true, you have to double check.

Raich: No sector's working perfectly. There's nowhere to hide. The playbook buys--consumer staples and health care--have worked better than most.

- 15 - Ritholtz: You'd think utilities would be a safe harbor.

Raich: It hasn't. There's a lot of hidden energy plays there.

Ritholtz: Wall Street is kind of like crappy poker player. They win a hand with trip threes, and now every time they get two threes they say, "Oh, I have a winning hand." It's far more complex. Sacha, as someone dealing with a lot of retail clients, are you getting the panicked phone calls?

Millstone: I've been doing this since 1986, and I'll tell you this was the worst experience. We had seven clients insist on selling everything and, of course, they wouldn't even wait for a rally. I think I do have this perspective because I see what people do to themselves when they get afraid. They don't even have the consequence to even hang tough for a little while, to let the emotion dissipate.

Ritholtz: This is like the plasma state of matter, it's not liquid, not solid, not gas; it's plasma, and all the traditional rules go away and it's quantum mechanics. As long as we're in the plasma state of matter, all bets are off.

- 16 - Commentary Where's The Ref? Barry Ritholtz 09.12.08, 4:45 PM ET

The credit crunch. Bear Stearns. The housing crisis. Fannie Mae and Freddie Mac. And as of today, Lehman Brothers, Wachovia and possibly even such august firms like AIG and Merrill Lynch.

These are the bailouts of the past 12 months and the potential bailouts of the next 12 months. The U.S. is experiencing a set of financial crises unlike anything since the Great Depression. It has forced long-held ideologies to be closely re- examined, destroyed enormous amounts of wealth, quashed hundreds of thousands of jobs and ruined the reputations of corporate titans and former Fed chairs alike.

Wall Street is now scrambling, anticipating a sale of Lehman Brothers this weekend. It behooves the reader to consider how we got ourselves into this mess, what possible solutions there are to the current problems, and most important, how we can avoid finding ourselves in a similar situation in the future.

The current headache begins and ends with ideology, namely that of former Fed Chairman Alan Greenspan--an acolyte of Ayn Rand, a free-market absolutist, a true believer in the evils of regulation. Many of the present headaches point directly back to the decisions made by the Greenspan Fed. Sure, there is plenty of other blame to go around: an unengaged president, a clueless Congress, a hapless FDIC, a compromised OFHEO, and Phil Gramm--but the biggest and most accusatory finger points directly at Easy Al.

A brief bit of history puts this into some context: In the 1960s and '70s, the U.S. had developed a serious regulation problem. Oversight by the government had become excessively time-consuming to comply with, terribly complex and quite costly. When Ronald Reagan became president in 1981, he started a process of eliminating red tape and excess regulation. For the most part, this was a good thing. It made the cost of doing business cheaper and allowed new start-ups to flourish and businesses to grow.

But there are some rules and regulations that serve a valid purpose. These went out along with onerous costly ones. It only took a few generations--or about 75 years--to forget the lessons of the Great Depression. The Glass-Steagall Act was repealed, allowing brokerage firms and banks to once again merge. Free-market deregulation became a misguided rallying cry of ivory-tower neo-con ideologues.

The U.S. had moved from a state of excess regulation to one of excess de- regulation.

- 17 - Somewhere along the line, too many people forgot that an ounce of prevention is worth a pound of cure. Reasonable capital requirements? Who needs 'em! Leverage limitations? Forget it! Enforcement of lending standards? Not here in America! And all these misguided attempts at allowing the markets to police themselves have come home to roost. The clean-up for this is going to be expensive. We still have no idea how many trillions--yes, that's trillions with a "T"- -this is going to cost.

When confronted with a great evil in World War II, the U.S. put ideology aside and pragmatically set about saving the world. We need to revisit that attitude and start focusing on real solutions to complex problems--and not academic theory or zealous beliefs. They have had their run, and it's over.

Now comes, we hope, a more intelligent and pragmatic form of supervision and regulation. We don't allow the Super Bowl to be played without referees on the field. We know that players would give in to their worst impulses: Roughing the quarterback, steroid use, face-mask pulling, abuse of amphetamines. We should treat our financial system with the same measure of common-sense rules and oversight as we do our sports--or prepare to be on the hook for even more multi- billion dollar bailouts.

The choice is ours.

Barry Ritholtz is CEO of Fusion IQ, a quantitative research firm, and author of the forthcoming book Bailout Nation, to be published by McGraw Hill in fall 2008. He writes the daily Big Picture blog.

- 18 - THE RITHOLTZ TRANSCRIPT Intelligent Investing with Steve Forbes

[00:08] Steve: Take Charge, Obama Hello, I’m Steve Forbes. It's a privilege and a pleasure to introduce you to my featured guest, Barry Ritholtz. Barry is the head of research firm FusionIQ, and one of the most outspoken and insightful minds on Wall Street today. We ask Barry how the markets got to their perilous state and whether or not we're near the bottom.

My conversation with Barry Ritholtz follows but first --

The nation elected Barack Obama president last fall, but you wouldn't know it to look at his stimulus plan. It has the fingerprints of all too many other voices, not his own. Financial markets have shown their displeasure with this weakness.

America needs a serious discussion about how any relief bill should work. But what it needs more is for Obama to seize the reins. Instead he let his so-called allies in congress weigh down this bill with every piece of pork imaginable. This isn't the kind of stimulus America needs. If Obama were serious about this, he would write his next bill himself.

History tells us that mark to market accounting is key. We had a banking crisis in the early 90s. If banks were forced then to mark unsold assets down it would have destroyed all the biggest names. It would have been a depression. But it wasn't.

Today when banks make a loan, especially a large loan, they know they will have to take a write-down. Even if the loan is current on payments of principles and interest. This is destructive to capital. Compound this with a vast democratic spending binge and the economy will surely suffer. President Obama you must take control, now.

In a moment, my conversation with Barry Ritholtz.

[01:46] Barry The Bear

STEVE FORBES: Well Barry, it's good to have you with us.

BARRY RITHOLTZ: Thanks for having me.

STEVE FORBES: Well, thank you for joining us. You have a new book coming out?

BARRY RITHOLTZ: Yes.

- 19 -

STEVE FORBES: What's the title?

BARRY RITHOLTZ: Bailout Nation , on your grocer's shelves on May 12th is the publication date.

STEVE FORBES: Well, finish the title because it gets even better.

BARRY RITHOLTZ: Oh. How Greed and Easy Money Corrupted Wall Street and Shook the World's Economy .

STEVE FORBES: Now, this means you've been a bear for awhile. When did you turn bearish and why?

BARRY RITHOLTZ: Well, we have two degrees of bearishness. Bearishness number one, is how do you really feel about where things are going? And bearish posture number two, is how are you invested? And fortunately, I work with partners that are smart enough to let me be as bearish as I want when it comes to the first one.

But we run a quantitative model. And sometimes we're long, even though we hate it. In fact, in the summer of '07, I was saying I was miserable. I couldn't wait to climb into the bear cave with just some gold bars and nothing else. But at that point, we were still actually net long and stayed that way until pretty much the end of '07. And then it was pretty clear it was all over but the crying. As to why I became bearish, you know, I'm a big believer that things run in regular cycles.

I don't mean you could predict where the market's going to be 43 years from now from the cycle. But you know after a recession ends, the Fed will do what the Fed always does. They've cut rates. And you know how business will respond and how employment and income will go up and all the usual good things that take place when the economy starts to expand on its own with a little push from the Fed.

We started looking at the post-2001 recession recovery as, by the data, as surprisingly weak. When you looked at the historical measures of how long it took to get back to the pre-recession employment levels, this was the worst employment recovery since the end of World War II. It was very surprising. And then on top of it, you had what was very obviously ultra-low rates. The former Fed chief didn't just cut rates but took them down to levels not seen in generations.

You know, if you go back to the recessions of the '50s and '60s-- '54, '58, '61-- rates would dip below two percent for a couple of weeks, a month or two, and then come back above. We were aware of the fact there was no free lunch. And

- 20 - if you took rates down too long, you have recession and inflation and other problems.

But this time around, we had rates below two percent for 36 months, and at one percent for over a year. That was just unprecedented. So, it was clear that anything that was denominated in dollars was going to have a nice boom. And anything that was credit dependent was going to have a big boom. But it eventually became just an outsized portion of the economy. And I don't believe you can borrow and spend your way to prosperity. You have to earn your way to prosperity. If you create jobs and have increased income, people could go out and actually spend money they make, as opposed to spending money they're borrowing. And it was pretty apparent by '05, '06, that we were going down a wrong path. We were just borrowing and spending.

[05:07] No Greenspan Fan

STEVE FORBES: Is that when you decided to do your book?

BARRY RITHOLTZ: No. The book actually came about. I was working on a different book, which is a couple years away. But this book came about because I had been writing about the Fed. And I'm not a fan of Greenspan. I don't think he's the greatest Fed chief ever. And I think he was just too easy with money.

So, there were a number of articles, a number of research pieces I had written. And when Bear Stearns hit, I had begun to go back in history and say, "How do we get to the point where the fed is targeting asset prices instead of targeting either inflation or job creation?" If you look at the ECB, they have an easier job.

They have to just worry about price stability. Job creation, economic expansion, that sort of stuff, they don't care about. So, it was kind of interesting that our Fed, our central bank, not only is charged with maintaining price stability and making sure the economy reaches its potential, but we've seen a number of examples where the fed became interested in market psychology.

You know, what is the psychology going on? What's happening out there? And that eventually leads to targeting asset prices. So, the book I started writing in the spring of '08 right after the Bear Stearns collapse, thinking that I would really be looking at the big arc of history from Bear Stearns backwards. And then, by the time we got to August, if you're working in the market long enough, you could just smell it coming. The book was actually due August 15th. And I said to the publisher, "You know, I've been doing this long enough. Something wicked this way comes. I can't tell you what it is. But let's just give it another month or two."

And the first week in September, all hell broke loose. We were concerned that I would never be able to finish the book. It would just basically be a weekly serial, because every weekend, you know, if it's Sunday, it's got to be a new bailout.

- 21 - So, each week I would have to, this is a true story, the last chapter of the book since August was called, Who's Next ? And any name I put down in the "who's next," it was the kiss of death. They were the next bailout. So, AIG is a possible, boom. AIG goes down. And then Lehman.

STEVE FORBES: So, who are you putting in now?

BARRY RITHOLTZ: Well, now, we're going beyond who's going to be bailed out, and looking at who's going to be nationalized and who are the shareholders going to be wiped out? And when I think of nationalization, I think of really, an FDIC-mandated prepackaged bankruptcy. You know, we've bailed out dozens of banks over the past year. People don't realize. Now just Bear Stearns, but if you look at, on Friday, Washington Mutual was an independent company. And on Monday, they were owned by JP Morgan. Same thing with Wachovia and Wells Fargo. In fact, it was so transparent.

[07:57] Banks Will Fail

STEVE FORBES: So, let us know. Are there life insurance? How many more major financial institutions do you think are going to really hit the skids?

BARRY RITHOLTZ: Well, the good news is, about 65 percent of the banks in the U.S. are triple-A rated. They're mostly small, commercial and regional banks. They're well run. They're profitable. The joke is they make money the old- fashioned way. They earn it. They're not just gamblers and speculators. The problem is, about two-thirds in the assets in the country are held by the four or five largest banks.

So, you have this huge swath of banks that are doing things right. But they don't have all the assets. So, the next couple of banks that we're going to see, the question is, is it going to be one of the smaller banks that go under? Or are things going to get so bad at Citigroup or Bank America or, let's say, AIG, that there's no alternative but to force them into that FDIC receivership and wipe them out?

STEVE FORBES: Well, what's going to happen to the life insurance companies? They've been hammered in the stock market.

BARRY RITHOLTZ: You know, I think they're being painted with too broad a brush based on AIG. We keep no learning that AIG, this triple-A, very closely regulated insurance company, also had under its roof this unregulated, unsupervised shadow hedge fund that was doing all this structured-finance stuff. You know, you look at the insurance side. There's literally centuries of actuarial data that you can look at and say, "Well, we know if we insure this many people's life insurance," or you could look at any historical phenomena, even hurricanes and things like that.

- 22 -

We know approximately the range there is. But once you start making bets, once you start speculating as to which bank is going to go belly-up when, well, you're no longer doing insurance. You're just gambling. You're just speculating. And they thought they were smart enough to know how to handle the risks and manage it.

But it was clear based on the amount of money we as taxpayers have poured in, they had no idea what they were doing. What is it now, $175 billion and counting? AIG is potentially a half-a-trillion-dollar bailout before everything is said and done. And that's just a horrifying number.

STEVE FORBES: Now, you once said it was two companies. Why didn't they let the hedgie go and preserve the life insurance company?

BARRY RITHOLTZ: I would love to know that.

STEVE FORBES: And it turns out, do you think it turns out that the two are so intermingled that it was impossible to break them apart?

BARRY RITHOLTZ: There's two possible explanations. To me, the simple solution would've been to say triple-A insurance company, pull them out. Because you know, we have to as a society, we want to make sure that when we go, our loved ones, if we have insurance, are taken care of. And if that were to break down, well then Barton Biggs is right-- start storing bottled water and ammo. But besides that, when you look at why did we have to save this hedge fund, why as a taxpayer am I making good on hedge fund bets that are counterparties, and that's part of the explanation. I don't agree with it. But the fact that the counterparties that are out there are Deutsche Bank and Merrill Lynch and most of all, Goldman Sachs.

There was a Bloomberg article some time ago. I think the number was $25 billion that went straight from the AIG bailout to Goldman Sachs. It's good to have friends in Washington that way. And then you look at what people are now talking about, the securitization of some of these structured finance.

I don't know if that's just a theory that's out there. I haven't seen any hard data that says that's it. To me, the right thing to do would've been to say, "Sorry everybody who invested in a really bad company. This is how the free market works. You lose. The insurance company is now essentially owned by its creditors, i.e. the bond holders."

We spin that out separately. And, you know, the way we wound down Lehman matched all the CDS's that you could. The stuff that you couldn't match, just everybody ended up taking a haircut to some degree. And you wind that all

- 23 - down. And all these other debts go away. Quite frankly, if we did that with Citigroup and Bank America, everyone would be better off.

I'm not talking about a continental Illinois, nationalize them in '84 and in '91; send them out public again to be bought, by the way, most ironically, by Bank of America. You didn't think just Countrywide and Merrill were bad acquisitions of theirs. That goes back decades. They have a terrible, terrible track record. So, the sooner we get this toxic stuff off the books of the banks, and let banks do what they're supposed to do, which is lend money to individuals--

[12:24] Buying Stocks Again

STEVE FORBES: Now, given the hammering the market's taken in the post-war period, it hasn't gone down in nominal terms this much. You indicated that you seem to be buying things again. You're looking at things again.

BARRY RITHOLTZ: Yeah. You know, we see stuff that is attractive price-wise, value-wise. We see things that have come back to levels that technically

STEVE FORBES: Now, you're once recorded as saying buying Citigroup? Is that true?

BARRY RITHOLTZ: Yeah. We didn't buy it. We said Citi at around ten. And I said assuming there's no more revelations, under $4, $5, Citi could be an interesting thing. So, we watched it and we just didn't have the nerve to pull the trigger. And now, Citibank is on the dollar menu.

STEVE FORBES: You've also been quoted as saying, though, in this kind of environment as you get back in, do ETFs, exchange traded funds? Why?

BARRY RITHOLTZ: Absolutely. Well, because Citigroup is a perfect example. If you like a given sector, stunningly, the home builders are actually doing pretty well now. And if you look at a handful of internet stocks, are actually doing pretty well, instead of having the single-stock risk of XYZ going to a buck from $50 or $20, you're buying the whole group.

And as long as the group is doing well, you're going to do well. The issue now is when do earnings turn around? And how long are we going to be in this period of just, you know, quarter after quarter of declining earnings? It turns out, if you look at the history, the ideal time to get back into the market is not when the earnings become really good. By then, it's kind of late in the cycle.

[13:59] Ignore P/Es

STEVE FORBES: Well, one of the things you like to say is P/E ratios tell you nothing.

- 24 -

BARRY RITHOLTZ: That's exactly right. It looked as a group. We rarely pay attention to PE ratios. I'll give you a few years why. If you go back to 2005, the P/E of Google and Apple and RIM were all high double digits. And they proceeded to double and double again. The next year, the home builders were single-digit P/Es.

And they looked attractive. And then they dropped 80 percent. The year after that, the banks were single-digit P/Es, nice dividends. And then they dropped 80 percent. And the year after that, the investment bank single-digit P/Es, and now they've dropped 70, 80 percent. So, PE doesn't really tell you anything by itself.

STEVE FORBES: So, on earnings, you're saying what's the signal it's safe to get in?

BARRY RITHOLTZ: Now this is an interesting, somewhat counterintuitive thing. You're familiar with the business of news. And you know how media tends to lag a little bit--

STEVE FORBES: Except Forbes .

BARRY RITHOLTZ: Well, I'm talking about other media. So when the earnings go from really God-awful which is what they'd been for the past few quarters to, you know, mediocre, to right now, we're looking at down 25 or down 35 percent, one of the quarters in the near future, they'll be down ten or down eight percent.

And that's telling you that things are starting to get better. But you're not going to be reading that in the headlines of the major papers. Because all the news is still relentlessly bad. But suddenly, earnings are, you know, this free-fall. It's like a parachute is opening. And it's starting to slow down. And the next step is restarting those engines.

So, when you start to see the earnings, it's just going to improve a little bit. But it's a negative enough that most people look at it and say, "Well, earnings is still negative." Yeah, but they're not negative 30 percent. It's negative four percent. That's an ideal entry point historically.

STEVE FORBES: So, are you doing nibbling now with ETFs and other things?

BARRY RITHOLTZ: We have a toe in the water. We're probably 65 percent cash.

STEVE FORBES: And you were high as 70.

BARRY RITHOLTZ: We were high as 70. We were, at one point earlier this year and late last year, down to about 45 percent cash, which sounds ridiculous

- 25 - to say, "I was all the way down to 45 percent cash." Usually, it's three, four, five percent cash. But we had that really nice year-end rally which saw the Dow run from about 7,900 to the mid-9,000s. And here we are, you know, down another 30 percent from that level. Not only was last year down 40 percent, we're barely into the third month of the year. And we're down another 20-plus percent. It's truly, truly astonishing things to observe firsthand.

STEVE FORBES: So, we know the first quarter is shot.

BARRY RITHOLTZ: Pretty much, yeah.

STEVE FORBES: Even with the layoffs.

BARRY RITHOLTZ: Unless there's a spectacular end-of-March rally.

[16:41] The Data Stinks

STEVE FORBES: But in terms of earnings, what do you think in second and third quarter? You think you're going to start to see the eight-to-ten percent decline?

BARRY RITHOLTZ: Second quarter will probably, the first quarter earnings, which we're not going to see until April, are probably going to be worse than the fourth-quarter earnings. So, you just saw January, things really, really were pretty horrific. At that point, it became inescapable. You still had a lot of people sort of dancing around and saying, "Well, it's not a terrible recession."

And there were a lot of naysayers. And, you know, eventually, the bus just went right off the cliff. And, you know, there was no longer that, "I think we can make it to the other side." There's that moment when the coyote steps off the cliff and he's just hanging there. So, that's what the fourth quarter was like. And come January, sort of look down and noticed there was no terra firma beneath him, and then he plummeted.

So, we're sort of working our way through that. I keep saying that I'm amazed who is surprised by this economic data. Every time we get this horrific number, there's always some headline, you know, "Market sells off on downside surprise on non-front payroll." Hey, we're a year and change into this.

The data stinks. It's going to stink. It almost doesn't even matter at this point. You know, today's unemployment number was actually, if you add in the revisions and the birth/death adjustments and some of the other decreases, today, you could easily say today was a loss of a million jobs for the February report.

But this is a horrific recession. That shouldn't be a surprise. And at 6,500, you have to think that most of that, if not all of that, is in the stock market already. At

- 26 - 12,000, people are saying, "Well, we pull back 15 percent. We could buy here." The soft landing is reflected. At 6,500, hey, I don't know if we go to 6,000 or 5,700. But the bulk of the bad recession, it has to be mostly in the stock market at this point.

[18:36] We're Just Monkeys

STEVE FORBES: One of your devices is stop/loss orders. Explain.

BARRY RITHOLTZ: Well, I know that I'm an irresponsible, emotional human being.

STEVE FORBES: You once compared us all, we're just sophisticated, or at least clothed, monkeys.

BARRY RITHOLTZ: Right. Slightly clever, pants-wearing primates, exactly. And because I know I'm a monkey, I know that when I find the stock that I like and I do the research and you become a little bit of a cheerleader, and you start rooting for the stock, and you wrap up some of your ego in that stock. And you don't want to admit you're wrong.

And you don't want to say, "Gee, all this research and affiliation is for naught." So, you start hoping. And, you know, the slope of hope is the bad, bad way to invest money. So, rather than make an emotional decision and, "Let me just give it a couple more days," I can't tell you how many times I've heard that from asset managers and retail brokers, "I'm just going to give it another week." And then, "Oh, it's down 20 percent. It's too late to sell." I've heard that God knows how many times. So, rather than go through that whole emotional debate, before we

STEVE FORBES: Just have it automatic.

BARRY RITHOLTZ: Yeah, before we get into any position, ETF, short, long, at what point do we say enough's enough?

And it's so nice to do it beforehand, because you're objective and you're neutral. And there's no emotion tied up. And we all get that little pang of queasiness when oops, got stopped out of that stock. And then you, "Oh, you know, I really like the company. And I like their little widget. And I wish I still owned that."

And then you look at it a month later and it's down another 30 percent. Hey, you know, if you really like the widget, give it a little more time. Maybe you'll get it for half off. But it's the way to preserve capital and avoid the sort of horrific returns we saw in recent years.

[20:22] Ratings Agencies

- 27 - STEVE FORBES: Is it true on your book that recently, McGraw-Hill was going to publish it?

BARRY RITHOLTZ: Yes.

STEVE FORBES: And then you said credit rating agencies were not so good?

BARRY RITHOLTZ: Oh, it was impossible to write a book about bailouts and avoid the credit agencies. And I disclosed upfront. I gave them a table of contents and who's to blame, it's a laundry list. You know, a lot of people want to blame him or this guy or that. There's a long laundry list of a lot of different parties that are involved in this. Not you, but a lot of people were involved in this. And you couldn't avoid the rating agencies who essentially slapped a triple-A rating on stuff that turned out to be junk.

If it wasn't for that, Nobel laureate Joseph Stiglitz called them the prime credit crisis enablers. If it wasn't for that triple-A rating, all of these various central banks and hedge funds and mutual funds and places like Iceland wouldn't have been able to buy this stuff. And they're now all in deep trouble.

STEVE FORBES: So, what's the reform?

BARRY RITHOLTZ: The reform for rating agencies, I'm not sure. You know, they've had this special status for years. And I'm wondering if opening up rating agencies to competition in the free market might be a little better.

STEVE FORBES: Shouldn't the users pay for it instead of the insurers?

BARRY RITHOLTZ: The banks? Well, that's how it was for a long time. It used to be the bond buyers would pay a certain fee in order to get these ratings. And the whole world of structured finance and residential mortgaged-backed securities were kind of unique in that it was the I-Banks that were paying for it.

My former publisher was unhappy when I called it “payola” and "pay for play." Here, play this song on the radio. Keep it fair, keep it fair, a little. That's what it essentially was. And they basically were, you know, the old joke is he who pays the piper gets to call the tune.

STEVE FORBES: And now we're on enablers?

BARRY RITHOLTZ: Yeah.

[22:17] Geithner a Bad Choice?

STEVE FORBES: What do you think of the job Geithner has been doing?

- 28 - BARRY RITHOLTZ: I'm not a fan of carrying on the New York Fed attitude to treasury. You know, when you look at the New York Fed, and most people don't realize this, the New York Fed is essentially a private corporation owned by the primary dealers. They're a Delaware corporation. And the various banks own them.

So, if you're the president of the New York Fed, you essentially work for the banks. As Treasury Secretary, you're supposed to work for the American taxpayer. Your boss is the president. But really, you're working for the American taxpayer. And the thought process should really be more along the lines of, "What can we do to save the financial sector as opposed to saving the banks?" There should be no sacred cows. And I think Citibank and Bank of America have become sacred cows.

By the way, if you take all the junk paper and the toxic assets off of their books, they're fantastic companies with great assets. Look at Bank America. That's a great core bank. Pull out Merrill Lynch. Pull out Countrywide, everyone forgets Countrywide is still the biggest mortgage servicer, the biggest mortgage underwriter you can basically take. And they own another dozen other companies.

STEVE FORBES: So, treat them as you would a patient with a tumor? And cut the tumor out?

BARRY RITHOLTZ: Exactly, that's exactly right. And harvest all the organs, because essentially they're all viable but for the cancer that's eating away at them.

[23:39] Risk Is Healthy

STEVE FORBES: So, what has this market taught us about risk? What has it taught you?

BARRY RITHOLTZ: Well, it's taught us a couple of things. Hyman Minsky was right, that risk is ever present. And the more stability we have, the greater the risk is. So, stability is sort of this false panacea. He's really the anti-Greenspan. He's the guy who said, "You have to leave rates a little higher just so people realize that there's risk."

And if you backstop the speculators too much, if you make traders too comfortable, well then this all eventually spins out of control. And pretty much, that's happened. That's number one. Number two, there's no such thing as a free lunch. I mean, that is truly the first rule in economics. And yet, everybody seems to forget it.

- 29 - STEVE FORBES: And so, what do you think is still the misplaced assumption out there today after all of this?

BARRY RITHOLTZ: There's a couple of misplaced assumptions. I keep coming back to this. I don't think people realize, certainly I don't think the taxpayer realize, there's a general degree of anger at the bailouts, because they're costing just obscene amounts of money. But I don't think the public realizes how totally unnecessary they are.

And what I mean by that is, when a company runs off the road because their own mismanagement and lack of capital preservation techniques and lack of having an ability to control all their moving parts, you basically as a government entity supervisor, regulator, whatever role it is, but usually it's the FDIC, instead of trying to save this wounded thing, you're better off going in and saying, "You're insolvent. You haven't earned the right for the taxpayers to give you billions and billions and billions of dollars. So, what we're going to do is essentially put you into receivership. The good pieces will spin out separately. The bad pieces, that's really a shame. But, you know, that's what happens." If you look at the Dow Industrials today, you know, there's three or four names in it that were there 100 years ago. And you go back to 100 years or 75 years, most of those names have gone. They've all disappeared. You know, Acme Leather, there's not really much of a need for it.

STEVE FORBES: So, what's the best financial lesson you've ever learned?

BARRY RITHOLTZ: The best financial lesson I've ever learned? It really all comes back to the fact that we're monkeys. I'm a monkey. And left to my own devices, my instincts say run away from the tiger, because there's a saber-tooth tiger. Get up that tree. And in the capital markets, that really isn't a helpful strategy. In fact, most people learn the hard way that your instincts and your intuition usually take you 180 degrees.

STEVE FORBES: So, your emotions are your enemy?

BARRY RITHOLTZ: Absolutely. If you can either figure out a way to control your emotions or at least bypass them, I could kick and scream when, you know, a stock drops past where our stop/loss is. But it's out of my hands. Our trader has the sell order before we ever do the buy order. And there are a couple of times when I've looked at it and, you know, this is the one we shouldn't sell.

And I'll walk into the trading room. And too late, dude. He gives me the ticket. You're out. We're done. Don't even ask. I mean, everybody's well trained. So, you have to go out of your way to protect yourself from your own wet wear. Our wiring isn't designed for, "Let me think about calculating what sort of risk/reward ratio we have here relative to the potential." You just aren't built for that.

- 30 - STEVE FORBES: So, we're monkeys that need to learn new tricks?

BARRY RITHOLTZ: And, you know, as soon as you realize that you're a monkey, it really becomes helpful to avoid the thrown bananas, so to speak.

[27:18] This Shall Pass

STEVE FORBES: And finally, what's your bold prediction for the future after seeing all of this and having anticipated some of it?

BARRY RITHOLTZ: I'll tell you the one thing that people seem to forget. And it goes back to Solomon, you know, this too shall pass. Whether this is a cyclical recession or a secular downturn where things are changing going forward, it's not the end of the world. We'll actually get through this. I think we're going to see a couple of significant changes.

The concept of American as the world's ultimate consumer, I think the number was 71 percent not too long ago for percentage of GDP that consumer spending was. Go back a few decades, and that was 66, 65 percent. We're probably going to move back in that direction. We've seen a number of huge retailers go out of business, everyone from Sharper Image, Circuit City, Linens 'n Things, Home Depot Expo, not only that the existing retailers, their footprints are getting smaller, also. They're closing stores. So, I think we'll end up with a smaller retail environment. That sort of relentless consumerism is going to be throttled back a little bit, a little leaner and meaner. But, you know, I think we'll eventually come out of this hopefully a little smarter. My favorite quote from Winston Churchill has always been, you know, "Leave it to the Americans. They'll do the right thing after they've exhausted all other possibilities." And I think that we're on the path towards that.

STEVE FORBES: Good. Well, hopefully sooner rather than later.

BARRY RITHOLTZ: Yes.

STEVE FORBES: Barry, thank you very much.

BARRY RITHOLTZ: Thank you very much.

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