July 19 (Bloomberg) -- One Sunday afternoon in September 2007, Keith Gessen says, he sat down outside a Brooklyn coffee shop with a hedge-fund manager, the friend of a friend.
They talked for two hours, he says, about things Gessen, a novelist and founding editor of literary magazine n+1, had never heard of: quantitative trading, financial paradigm shifts and 10-sigma events. Eventually, n+1’s website featured an interview with an erudite anonymous investor identified as HFM. At least one reader suspected a hoax.
“When we put the first interview up online,” Gessen says, “a financial blogger said, ‘No, this is made up. There’s no way a hedge-fund manager would know all these literary references and use ‘solipsistic’ properly in a sentence.’”
HFM interviews appeared on the site throughout the financial maelstrom and have now been turned into a book, “Diary of a Very Bad Year.” In a phone conversation, Gessen discussed literary frauds, HFM’s biggest scare and how JPMorgan Chase & Co. “harvested the organs” of Bear Stearns Cos.
Pressley: Did these interviews really take place?
Gessen: Yes, they did. I wish I had such knowledge of the financial markets that I could interview myself in this way.
Pressley: Hedge-fund managers are more sophisticated than many people think. Did that surprise you?
Gessen: It did. I went to school with a fair number of people who eventually went into finance. They were great guys, but they weren’t scholars.
Pressley: In one interview, there’s an awkward silence when HFM mentions the famous short story “The Lottery.”
Gessen: I had not read it.
Pressley: How can that be?
Gessen: They skipped it at my school.
Pressley: After JPMorgan took over Bear Stearns, HFM commented that Bear was still alive -- because JPMorgan was waiting to “harvest the organs.”
Gessen: His speech was rich with metaphors. The markets are sometimes so abstract that somebody who’s good with them, a good investor, develops vivid ways of describing them.
Pressley: HFM made the wrong call on Lehman and moral hazard.
Gessen: One of the nice things about the book is that his thoughts are all preserved. So we see him thinking, at first, that you can’t bail out the banks. We also see him saying, in the first days after Lehman collapsed, that things were going along pretty smoothly.
Pressley: He felt differently by October 2008.
Gessen: Yes, I think the line was, “opening my eyes every day and expecting to be hit in the face with a brick.”
‘Pure Blind Fear’
Pressley: Around that time, he ran into a colleague who had just withdrawn his deposits from Citibank.
Gessen: This was, for HFM, one of the scariest moments. His colleague had withdrawn all his deposits from Citi even though they were under the federally insured level. This was pure blind fear.
In the book, he becomes increasingly despairing. At the end, he quits.
Pressley: HFM invested in emerging markets.
Gessen: His knowledge of international affairs is amazing. It made me think that the way to get Americans to learn about other countries is to make sure that they own chunks of them.
Pressley: During the crisis, borrowers took advantage of the chaos to avoid paying debts. How did HFM respond?
Gessen: He brought extrajudicial pressures to bear. He ratted them out to the press and other potential customers. This was the most frustrating thing: It was taking more time to recover the money than money was worth. He declares “time bankruptcy.”
Pressley: HFM says his fund later gave too much credence to its own CDO expert.
Gessen: They had a CDO expert who had been making money trading subprime. In 2006, HFM travels to Florida. He sees a forest of cranes. He wonders who’s going to live in all these buildings. He thinks, “This is crazy.”
Pressley: So they talked about shorting the market.
Gessen: But then they didn’t do it! I asked HFM if he’d read Michael Lewis’s “The Big Short.” He said, “No, it’s too painful. This was the opportunity of a lifetime, and we blew it.”
For me, the interviews were interesting on three levels. One was just that I didn’t understand this stuff, and he explained it. Two, he was interesting as a character and thinker. And three was that HFM, to my surprise and delight, changed as we did these interviews. It’s like when you’re making a documentary film and things start happening.
Pressley: HFM retired to Austin, Texas. Do you think he’ll be able to stay away from hedge funds?
Gessen: I suspect not.
One of my conclusions from these talks was that you can come up with all the world’s best regulations, and you should, but the only way to dis-incentivize smart people from figuring out ways to get around the rules is to tax the hell out of them.
Gessen: For someone like HFM, it’s an intellectual challenge. So you pay him $100,000 a year. If he’s the best investor, he gets a blue ribbon; we list him as the top investor on some website. He just does it for the glory.
“Diary of a Very Bad Year: Confessions of an Anonymous Hedge Fund Manager” is published by Harper Perennial (260 pages, $14.99 paperback). To buy this book in North America, click here.
(James Pressley writes for Muse, the arts and leisure section of Bloomberg News. The opinions expressed are his own.)
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