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What do you wish you saw earlier than you did as the credit crisis was unfolding?
Arricale: It seems obvious that we were in an asymmetric reward/risk situation in 2006 and early 2007, given the absence of a risk premium in the fixed-income market, the proliferation of esoteric financial instruments, and the poorly underwritten garbage that flooded the system.
Lahr: Seeing how the subprime problem could expand into a global macroeconomic issue.
Ellison: It's happened really quickly, and you don't have time to react--there's no time to be thoughtful about what you're doing.
What is the biggest lesson you've learned from the crisis?
Arricale: Don't assume CEOs and boards are in touch with the realities of the capital markets during times of crisis. They often fail to grasp the urgency of the situation and act decisively.
Lahr: Things can change quickly, but your investment philosophy shouldn't.
Ellison: Managers don't always tell you the truth. But I've been learning that lesson for 25 years, so that's a lesson relearned.
Federal government's handling of the crisis: Thumbs up or thumbs down?
Arricale: Thumbs up. Paulson and Bernanke have demonstrated flexibility, patience, pragmatism, and creativity in handling the crisis.
Lahr: The Fed is dealing with the fallout of prior Fed decisions, so I wouldn't give them a thumbs down. Monetary policy is a very blunt tool, but ultimately the Fed's actions should pay off.
Ellison: I think the jury's out on that still.
Investors don't pay enough attention to which part of the financial system?
Arricale: What the fixed-income markets are telling us and the off-balance-sheet exposures that lurk behind the curtain at financial companies.
Lahr: Its global nature. Opportunities and pitfalls abound everywhere.
Ellison: The liability side or the funding of the assets. The problems we've had have been not necessarily because assets have gone down, but because the funding went away.
What is your current favorite segment of the financials sector?
Arricale: Property and casualty insurance sector, including insurance brokers--cheap stocks, good returns, solid balance sheets, and fundamentals that are quite good relative to the fundamentals at most financial and nonfinancial companies right now.
Lahr: Overcapitalized U.S. thrifts. Despite what you might hear, the mortgage market isn't disappearing and these local players will be capitalizing on the difficulties of larger, weaker lenders.
Ellison: Those that are funded by insured deposits.
In three years, your shareholders will be glad you bought (or added to) .
Arricale: Citigroup convertible bonds, Aon Corp. AOC, Goldman Sachs GS.
Lahr: Lancashire Holdings.
Ellison: What I talked about in number five.
If you could have one do-over this year, what would it be?
Arricale: Investing in several bond insurers; we no longer own them but incurred significant losses.
Lahr: Participating in the AIG AIG capital raising; it was too early.
Ellison: This year.
Where did you open your first savings account?
Arricale: Valley National Bank of Arizona.
Lahr: Guaranty Bank & Trust, Cedar Rapids, Iowa.
Ellison: Middletown (N.Y.) Savings Bank.
What song best captures the past year's pain?
Arricale: "Won't Get Fooled Again"--The Who.
Lahr: "Things Can Only Get Better"--Howard Jones.
Ellison: If you're getting bailed out, it's Carly Simon's "You're So Vain," but if you're like me, it's Warren Zevon's "Lawyers, Guns and Money."
After experiencing the past year, you can now relate to .
Arricale: Herb Kelleher, who said, "Think small and act small, and we'll get bigger. Think big and act big, and we'll get smaller." Balance sheets got way too big over the past five years, and now many of these companies don't exist.
Lahr: Ernest Shackleton.
Ellison: Galileo. It's all about having conviction, doing it the right way, and backing up your facts.
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