2009 1st Quarter Letter {Part II}

What Went Wrong?

Last fall we said, “The current environment owes itself to four intertwined events: (1) the unwinding of credit excesses in housing, (2) the unprecedented manner which the world financial community levered itself to such, (3) decelerating world economic conditions and (4) the extraordinary de-leveraging that has occurred especially in the hedge fund community.”

The apex of the crisis occurred in an election year when neither political party had any real incentive to come up with solutions. Anyone spending time watching the failed economic summit in Washington, the inability to stave off bankruptcy at Lehman Brothers, the numerous testimonies before Congress or the debate regarding Treasury’s TARP program would have been shocked by how little our elected officials understand about how the economy actually works. Our problems also festered during the interregnum period that occurs when administrations change in this country. Thus bandages were applied to a patient that likely needed major surgery in order to survive. Stocks lost over 30% between 9.19.08 and 10.10.08. Managing a portfolio during market declines is like sailing a boat on rough seas. There are systems in place such as pumps and water tight doors to keep out or remove as much water as possible. Unfortunately no system exists to keep a boat afloat when storms dash it upon the rocks and rip the guts out of its bottom. Late 2008 was one of those times.