Keith Gessen and Diary of a Very Bad Year
August 3, 2010 | by Sofia Groopman
Keith Gessen's Diary of a Very Bad Year: Confessions of an Anonymous Hedge Fund Manager is a compilation of one-on-one interviews with a New York City hedge fund manager (HFM) that took place as the financial crisis unfolded, from September 2007 to August 2009. HFM guides Gessen, co-editor-in-chief of n+1, through the inner-workings of the market and the hedge fund world, as the system collapses around them. Recently, Gessen took the time to answer my questions about the book.
As the editor of n+1, why a book about the financial crisis?
For me personally, I had a close friend whose mortgage was underwater and I wanted to get an expert opinion. On another level, I was interested in how a person with a real mastery of a field thinks about it, talks about it—what that sounds like. I always find that interesting, when people talk about their work, and HFM was able to talk about his in a uniquely thoughtful way. But for n+1 as a magazine, we’re increasingly turning into a group of autodidact economists, so I think this book makes sense.
I’ve been told that the Anonymous Hedge Fund Manager has appeared publicly at readings, which is not so anonymous.
He’s still anonymous, in terms of his name not being out in public, which was and is the hope. Initially we thought we’d do the readings with him in some kind of disguise, but when the time came it felt silly and we went ahead without it. In the end, you know, HFM was a partner at a very large fund, but it’s not like he’s been on CNBC or had his picture in the paper, so we figured no one would jump up in the middle of Greenlight Books in Brooklyn and call out his name, and they didn’t. If someone with a pretty good knowledge of the hedge fund world read this book, I think they’d be able to identify him. He was able to talk more freely, less self-consciously, because his name wasn’t on there—and so far it still isn’t.
What was the most shocking thing you learned?
Gosh, a lot of things. But if you mean about the financial system, I guess I hadn’t really realized what the “financialization” of our economy meant: What it meant is that we took some of our brightest young people and sat them down on Wall Street and asked them to come up with ways to trick people out of their money, and it didn’t really matter who those people were. Some of them were from other countries, and some of them were from this country. And we did this under the banner of “the market.” We blame it on the Bush Administration—always a good bet—but in large part this was also Clinton’s doing. I knew all this in a vague way before. Now, I really know it; we all do.
Was there anything HFM ever said that made you angry?
I unfortunately find it hard to be angry at someone who’s sitting right in front of me, but there were definitely some moments where HFM was very callous toward, for example, people who were losing their homes, and I kept those in the book. (And HFM, to his credit, didn’t say, when he saw the text, “Hey, that makes me look bad, take that out.”) HFM is a very charming, very intelligent person who bought into the general ideological defense of capitalism and high finance—that it makes markets more efficient, that while it causes a lot of visible damage and in the short term increases inequality, it also in the long run increases overall wealth and spreads it around. And that kind of belief occasionally caused him to be very unfeeling.
There’s a defense of the book that can be mounted from a left perspective as “Talks with Hitler” or whatever—a portrait of the mind of the enemy. But if I’m honest, that’s not what interests me. I don’t think reading this is really like reading Donald Rumsfeld’s thoughts on the Iraq War and thinking “You arrogant fool! You criminal!” For me the interest was much more in his thinking, his humor—and also in the fact that, to my surprise, he underwent a kind of spiritual journey over the course of the crisis. And, I mean, this is the great thing about literature: For HFM to go through that journey, his fund had to lose many hundreds of millions of dollars. Whereas readers can experience it for just $14.95.
Did you speak to other hedge fund managers? Is HFM a typical hedge fund manager?
That’s an interesting question. I didn’t actually speak to other HFMs, so I don’t know. It’s certainly the case that before hedge funds became a big industry, which only happened really in the last ten to fifteen years, a fair number of hedge fund people came from non-financial backgrounds—A. W. Jones, who invented the hedge fund business model in the 1940s, had a Ph.D. in sociology. George Soros is another example—he does in fact have a finance background, but he always had other interests, too. So it’s a pretty heterodox world, or anyway it used to be.
That said, there’s an obvious problem to all the talk about how smart hedge fund people are, or finance people in general. And of course I am as guilty of this as anyone because I think HFM is so smart. But the point to keep in mind is that, well, we’d feel silly talking about how smart poker players are. If we turned on ESPN and were like, “Look at those smart guys playing poker, they’re so smart.” I mean you would never do that, because those guys are just sitting there playing cards. But now what if you turned on ESPN and they were sitting there playing cards as usual but the guys were wearing jerseys, national jerseys—Italy, Greece, Germany, Russia, USA, China, Brazil—and then, whoever lost, the working people of that country would then have to undergo “austerity” for the next decade. That’s what high finance is.
In my economics class at college, I was taught that one of the first assumptions that you have to make is that people act rationally. Did my professor lie to me?
I also took that class. And the short answer is yes, our professor lied to us. The theory of “rational markets” ceased to be orthodox in academia several decades ago. That it continues to get taught in introductory econ classes is kind of amazing because when you get further into your training as an economist, you (usually) learn all the ways in which it’s false. It’s sort of how one learns American history—the first time through, in elementary school, you’re taught that the Civil War was over slavery. Then, in high school you're taught that the Civil War was about “the economy,” and also Thomas Jefferson owned slaves. By the time you’re in college, you know that America is basically a proto-fascist state and it’s amazing we’re not all being rounded up in the middle of the night and shot. Only in old age, or alternately in graduate school, do you return to the verities of your youth, because in fact, the Civil War really was about slavery, deep down. With the introductory econ class, it's like you're taught the elementary school stuff about rational markets and the supply and demand curve but you never go on to get the more skeptical high-school point of view. You can graduate from college convinced that from an economic perspective that the minimum wage is a bad idea.
What kind of literature do you think will be born of the financial crisis?
I don’t know. Working on this book has caused me to read a lot of the books on the crisis, something I probably wouldn’t have done otherwise, and it’s been very interesting. Generically speaking they tend to alternate between descriptions of complex financial instruments and then various financial people swearing. So it’s like:
A credit default swap is an insurance policy taken out on a form of debt, whether a bond or other obligation to pay. “Fuckety fuck your mother fuck fuck fuck!” said the hedge fund manager, throwing a shoe through his Bloomberg screen. “Fuck!!!” He had $2 billion under management, half of it from the Yale Endowment. The pressure was getting to him.
That’s been pretty fun. And I’ve learned a lot1. One of the shocking things, when you look at all the books that have come out (and there have been a lot) is how many of them are about New York financiers and how few of them are about the people on the other side—the people who are going to lose their homes, or have already lost them, or their jobs. There are a lot of reasons for this—one is that people have been losing their jobs and their homes forever, though possibly not to this extent, whereas the particular mind-set of the people who perpetrated the subprime credit fraud is new, or somewhat new—but it’s still a little disturbing. And obviously our own book is a prime example of this. We're starting a project right now to gather material from American cities affected by the crisis, which I hope will even the balance at least as far as n+1 is concerned. In the meantime I think it's okay to think about who did this, why they did it, and why we let them.
- There’s a history of hedge funds that was published recently that goes through the story and investment strategy of the ten most famous hedge fund guys from the past fifty years, and what's interesting is that it's really a story of getting further and further from what's known as fundamental analysis, where you look at whether a company is a good company or not. Because the trouble with that is being really smart could actually hurt you when you're doing fundamental analysis, because your super-true insights might not be shared by the market, which is dumb, and by the time the market catches up with you, you'll have lost all your money. This was particularly true during the dot-com bubble, where it was perfectly clear to intelligent people that it was a bubble, but if you tried to stay out of it, as some of the better hedge funds did, you lost money. Anyway, so the book shows how as time goes on hedge funds get further and further away from fundamental analysis, and the hero of the book, the greatest hedge fund manager of all time, is James Simon, the mathemetician founder of Renaissance, because he's built these computer models that just look at stock market patterns and not at all on the companies underneath those patterns—he’s eliminated the companies entirely, and this turns out to be the highest achievement of hedge fund civilization.