Tag Archives: Hedge Funds

Michael Lewis At It Again

In his latest column, his wit shines once more: 

If you haven’t figured it out by now, America has hired the wrong Paulson. There are two of them, Hank and John. Hank turned Goldman Sachs from an investment bank into a busload of tourists going to a casino, with borrowed money.

Goldman might have been the smartest investment bank but you only needed to see Dick Fuld testify before a congressional committee to know how much that means. No pun intended, but Dick didn’t know dick.

Astute observers will note that every time they run across a party of midgets, one is tallest, and his name is usually Goldman. Suffice it to say that while Hank’s shop was creating subprime mortgage-backed bonds, John’s was shorting them. Hank wound up working for the government, John wound up making $3.7 billion. For himself.

Wake up America! The teacher has just asked the class to send one member to the chalk board to figure out a problem. You just reached past the A student in the front row and plucked the guy in the middle who’s working hard for a B-minus. And he’s confused!

Lewis also alerts me to this beauty of a letter written by Andrew Lahde. After running the table this year shorting banks–his hedge fund reports earnings over 800 percent–Lahde decided to retire in his prime. The best excerpt of his resignation letter

 I was in this game for the money. The low hanging fruit, i.e. idiots whose parents paid for prep school, Yale, and then the Harvard MBA, was there for the taking. These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government. All of this behavior supporting the Aristocracy, only ended up making it easier for me to find people stupid enough to take the other side of my trades. God bless America.

Or as Arnold Kling would put it, it sounds like some geeks made some money off the suits.

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Wolfe’s on Greenwich Time

I can’t think of another novelist whose opinion on social matters is sought out like an oracle’s. (Could it be because he’s the last great hope for social realism in literature?) Imagine newspapers calling up Philip Roth and asking him about hedge funds. Would anyone care? Anyhow, here’s the oracle of social realism in today’s Times

The Masters of the Universe are smarter than the people they left behind at the investment banks. Their hedge funds have blown up here and there, but unlike the investment banks, they are still very much in business. They have hurriedly pulled themselves into defensive positions inside their shells, like turtles. Their Armageddon, if any, will not come for two more days, which is to say, Tuesday, Sept. 30.

Most hedge funds open up a crack on Sept. 30, Dec. 31, March 31 and June 30 to give investors the chance to “redeem” their investments, meaning take their money out. These moments are called gates, like a series of gates in a prison. The gate is the limit, the fixed percentage of your money, that the fund will allow you to take out at one time. Even with these strict caps on withdrawals, some funds may end up nothing but shells.

Shed no tears for the Masters of the Universe, however, not that your correspondent actually thought you might. Most of the young Masters already have their own personal nut free and clear. “Nut” is the term for the amount of money you need salted away in weather-proof investments in order to generate enough interest to live comfortably in Greenwich on Round Hill Road, Pecksland Road or Field Point Road in a house built before the First World War in an enchanting European style, preferably made of stone featuring the odd turret, with a minimum of five acres around it and big enough to be called a manor. Every Master of the Universe knows the number.

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Hedge Fund Managers Deserve Their Salaries Because They’re Smarter

The ever insightful Richard Posner writes

I do not think that the government does bear much responsibility for the crisis. I fear that the responsibility falls almost entirely on the private sector. The people running financial institutions, along with financial analysts, academics, and other knowledgeable insiders, believed incorrectly (or accepted the beliefs of others) that by means of highly complex financial instruments they could greatly reduce the risk of borrowing and by doing so increase leverage (the ratio of debt to equity).

Posner fails to consider a host of contributing factors originating from government sources: the moral hazard Freddie and Fannie create, perverse tax incentives (starting in ’97) to overstimulate investment in housing, and the Clinton administration’s policies (again, starting in ’97) to increase home ownership among the poor. Still, the venerable Judge has a point. If all these mortgages were suspect, then why did all those Ivy Leaguers on the trading desks eat them up? Shouldn’t their 150 IQs have included a bullshit detector? Quoth the Seventh Circuit Judge:

It should be noted that because of the enormous rewards available to successful financiers, the financial industry attracted enormously able people. It was not a deficiency in IQ that produced the crisis.

But are they able enough? And were the rewards high enough to attract the most able? The New York Observer has been the first to buttonhole Tom Wolfe and ask him what he thinks of the current crisis. (It’s about time someone got a hold of him, fer Christ sake. Whenever there’s a Wall Street story, a thousand reporters invariably trundle out references to the Bonfire of the Vanities and the Masters of the Universe.) Wolfe has a peculiar theory about the failure of investment banks–it’s brain drain, he says. Instead of turning into cubicle donkeys, the best and the brightest in finance have all found their way to hedge funds, leaving space at the trading desks for all the second-raters out of Harvard. Herr Wolfe:

 there’s nothing as second-rate as investment banks. Every smart and ambitious young man—and forget young women because they don’t play any role in this—wants to be in a hedge fund. And I’d be surprised if the hedge funds implode, they’re just smarter. … What bright guy wants to be an executive for a firm like Lehman Brothers, where you have to hold the hand of disgruntled employees, you hold the hand of disgruntled directors, you’re constantly nice and wearing the right clothes? That’s for real second-raters. … It’s only the bottom of the barrel that’s left in these companies. The new Wall Street is Greenwich, Conn. You don’t need these big glass silos full of people. Look at the number of employees. Lehman? 28,000! And a Greenwich hedge fund can handle the same amount of money with 20 employees. 

And just for kicks, Wolfe adds, “Did I mention to you I’m pimping out my cars?”

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