The Smartest Guy in the Room

by Corey Robin on March 10, 2013

The current issue of Vanity Fair has a profile of William Ackman, the billionaire hedge fund manager who’s trying to bring down Herbalife. Ackman’s friends and enemies call him Bill; I know him as Billy.

You see, Billy Ackman and I grew up together in Chappaqua, New York. He was a year ahead of me in school. Our families went to the same synagogue. I knew his parents, and his older sister and my sister were in the same class. We weren’t friends, and he never made much of an impression on me. He was smart, but in the way many kids in Chappaqua were smart: he got good grades, obsessed about college, went to Harvard.

What I didn’t know was this:

In 1984, when he was a junior at Horace Greeley High School, in affluent Chappaqua, New York, he wagered his father $2,000 that he would score a perfect 800 on the verbal section of the S.A.T. The gamble was everything Ackman had saved up from his Bar Mitzvah gift money and his allowance for doing household chores. “I was a little bit of a cocky kid,” he admits, with uncharacteristic understatement.

Tall, athletic, handsome with cerulean eyes, he was the kind of hyper-ambitious kid other kids loved to hate and just the type to make a big wager with no margin for error. But on the night before the S.A.T., his father took pity on him and canceled the bet. “I would’ve lost it,” Ackman concedes. He got a 780 on the verbal and a 750 on the math. “One wrong on the verbal, three wrong on the math,” he muses. “I’m still convinced some of the questions were wrong.”

Ackman has made billions of dollars since 1984. According to Vanity Fair, he owns a $22 million mansion in the Hamptons, an estate in upstate New York, a co-op in a “historic” building on Central Park West, and a private Gulfstream 550 jet. He started his own hedge fund with a quarter-million dollars from Marty Peretz, who was his professor at Harvard (the only reason I could possibly imagine for taking a course with Peretz is that you think he might some day help you in just this way). He goes bone-fishing (whatever that is) in Argentina. He likes to say things like “Tennis, I practice. Presentations, I don’t.”— which I gather is hedge fund for “shaken, not stirred”—and “You know what? It’s time for me to do something for cancer.”

But with all that, he still remembers his SAT scores—and the number of questions he got wrong—as if he took them yesterday.

You see, Ackman is one of those guys for whom phrases like “smartest guy in the room” mean something. That’s a phrase I’ve been thinking about of late. I know smart people, but their minds are so various and incommensurate, it’d be impossible to rank them according to intelligence. They’re all smart, but in different ways: one sees deeply, one sees quickly, one sees things no one else sees.

But Ackman operates in a world—and it’s not just Wall Street; you can also find it in DC, the media, the law, and some parts of academia—where rankings of this sort mean something. They have to: no matter what the endeavor, someone always has to come out on top or in first. Whether it’s the most money, the biggest house, or the fastest cyclist.

It happened last summer when Ackman decided to join a group of a half-dozen dedicated cyclists, including [billionaire hedge-fund dude Daniel] Loeb, who take long bike rides together in the Hamptons. The plan was for Loeb, who is extremely serious about fitness and has done sprint triathlons, a half-Ironman, and a New York City Marathon, to pick up Ackman…The two would cycle the 20 or so miles to Montauk, where they would meet up with the rest of the group and ride out the additional 6 miles to the lighthouse, at the tip of the island. “I had done no biking all summer,” Ackman now admits. Still, he went out at a very fast clip, his hypercompetitive instincts kicking in. As he and Loeb approached Montauk, Loeb texted his friends, who rode out to meet them from the opposite direction. The etiquette would have been for Ackman and Loeb to slow down and greet the other riders, but Ackman just blew by at top speed. The others fell in behind, at first struggling to keep up with the alpha leader. But soon enough Ackman faltered—at Mile 32, Ackman recalls—and fell way behind the others. He was clearly “bonking,” as they say in the cycling world, which is what happens when a rider is dehydrated and his energy stores are depleted.

While everyone else rode back to Loeb’s East Hampton mansion, one of Loeb’s friends, David “Tiger” Williams, a respected cyclist and trader, painstakingly guided Ackman, who by then could barely pedal and was letting out primal screams of pain from the cramps in his legs, back to Bridgehampton. “I was in unbelievable pain,” Ackman recalls. As the other riders noted, it was really rather ridiculous for him to have gone out so fast, trying to lead the pack, considering his lack of training. Why not acknowledge your limits and set a pace you could maintain? As one rider notes, “I’ve never had an experience where someone has gone from being so aggressive on a bike to being so hopelessly unable to even turn the pedals…. His mind wrote a check that his body couldn’t cash.”

Apparently this story “is so widely known in the hedge-fund eco-system that it has practically achieved urban-legend status.” You might think people who make and break economies over breakfast would have something else to talk about. But when every last activity in life is a race, and someone must always win or lose, a weekend ride becomes just as much a revelation of the whole as a morning trade.

What’s odd in Ackman’s case is how loathed he is by his colleagues. So much so that they’ve banded together to take him down in this Herbalife deal.

Ackman says he suspected, when he “shorted” (i.e., bet against) Herbalife, that other hedge-fund investors would likely see the move as an opportunity to make money by taking the other side of his bet. What he hadn’t counted on, though, was that there would be a personal tinge to it. It was as if his colleagues had finally found a way to express publicly how irritating they have found Ackman all these years. Here finally was a chance to get back at him and make some money at the same time. The perfect trade. These days the Schadenfreude in the rarefied hedge-fund world in Midtown Manhattan is so thick it’s intoxicating.

So why is Ackman the object of such hate?

 

It’s Ackman’s perceived arrogance that gets to his critics. “The story I hear from everybody is that one can’t help but be intrigued by the guy, just because he’s somewhat larger than life, but then one realizes he’s just pompous and arrogant and seems to have been born without the gene that perceives and measures risk,” says [Robert] Chapman. “He seems to look at other members of society, even legends such as Carl Icahn, as some kind of sub-species. The disgusted, annoyed look on his face when confronted by the masses beneath him is like one you’d expect to see [from someone] confronted by a homeless person who hadn’t showered in weeks. You can almost see him puckering his nostrils so he doesn’t have to smell these inferior creatures.

Notice what Chapman says: Ackman treats his colleagues as if they were the homeless. In other words, it’s fine, even expected, to treat the homeless—and all the other little people—that way. As Ludwig von Mises wrote to Ayn Rand: “You have the courage to tell the masses what no politician told them: you are inferior and all the improvements in your conditions which you simply take for granted you owe to the effort of men who are better than you.” What’s not fine is to treat the big people that way.

Ackman’s mistake is that he takes the “smartest guy in the room” business too seriously. He really thinks he’s that dude. So much so that he’s willing to treat the other guys in the room as if they weren’t. That’s a no-no, and now they’re going to take him down for it.

Nietzsche understood this dynamic all too well. In an essay from 1872, “Homer’s Contest,” he remarked upon the centrality of competition to the Greek state. Not economic competition but other forms of contest: military, athletic, aesthetic, and so on. The idea was that “every talent must develop through a struggle” with one’s peers, but the point of that struggle was to serve the good of the state.

From childhood, every Greek felt the burning desire within him to be an instrument of bringing salvation to his city in the contest between cities: in this, his selfishness was lit, as well as curbed and restricted.

But when a competitor’s ambition is so unhinged, when he not only tries but actually manages to make his way to the top, and stay there, he must be removed. For the good of the state. That, says, Nietzsche, is the origins of the practice of ostracism. And if his competitors can’t do it, the gods will: they step in and take him out.

 

Why should nobody be the best? Because with that, the contest would dry up and the permanent basis of life in the Hellenic state would be endangered….the preeminent individual is removed so that a new contest of powers can be awakened: a thought which is hostile to the “exclusivity” of genius in the modern sense, but which assumes that there are always several geniuses to incite each other to action, just as they keep each other within certain limits, too.

Back to Wall Street: If the “smartest guy in the room” is going to serve the purpose for which it was coined—to spur little Billy Ackman’s to work hard, get into Harvard, and make lots of money—it has to remain an elusive prize. Something to strive for, never to be claimed.

No one, it turns out, can ever really be the smartest guy in the room. For two reasons. First, to make sure that everyone keeps fighting to get in, and stay in. Second, to make sure that everyone who doesn’t get in is kept out.

{ 147 comments }

1

Sebastian H 03.10.13 at 5:48 am

The bike story provides a lesson. Is there any chance he learned it?

2

Hidari 03.10.13 at 6:14 am

When I hear the words `hedge fund` I release the safety catch from my Browning.

That`s it. That`s all I have to contribute to this thread.

3

robotslave 03.10.13 at 6:37 am

When I hear the words “safety catch,” I release the browning from my Hedge Fund.

That’s it. That’s all I have to contribute to this thread.

4

Brett 03.10.13 at 6:44 am

Small world, huh? And I thought it was that way because my mom was friends with Clayton Christensen in high school.

5

Jack 03.10.13 at 8:16 am

Corey’s aversion to displays of status, dominance, and hierarchy are particularly transparent in this piece. The egalitarian brain just can’t handle it — the competition inherent in evolution short-circuits its equalist deontology. Surely such barbaric, nay animalistic, instincts are non-existent in our advanced, humane civilization!

6

between4walls 03.10.13 at 8:31 am

Ackman’s case against Herbalife is detailed on this website.

7

Alex 03.10.13 at 8:39 am

Yeah, Ackman might be a giant dick (hint: everyone in IB is a giant dick), but he’s on the right side of this trade. Herbalife is a parasite.

8

Chris Bertram 03.10.13 at 9:07 am

Christopher Boehm’s recent Moral Origins (like his earlier Hierarchy in the Forest) argues that the desire to take-down would be dominators (“assholes” in the vernacular) is very deeply embedded in our human nature. In a Late Pleistocene hunter-gatherer band, Ackman would have been quietly dealt with on a hunting trip after some preparatory gossip among his peers (probably killed by a close family member). It is good to see that these egalitarian anti-dominator instincts remain alive and well even among those who remain assholes wrt the rest of us.

9

Gaspard 03.10.13 at 9:10 am

Articles and blog posts like this always remind me of the experiment where male rhesus macaques sacrificed fluid to view the faces of high-status monkeys.
If we can’t maintain that behind every fortune is a great crime, we can comfort ourselves that behind every fortune is a great asshole, whereas the sad truth is they are just like everyone else.

10

Mao Cheng Ji 03.10.13 at 9:54 am

“For the good of the state.”

For the good of the state?

I read a story once, about Sultan Baybars, a sultan of Egypt in the 13th century. Fictional narrative, author’s interpretation. Baybars’ story, the known details: his rise to power, his military victories, his death – it’s truly extraordinary, unbelievable. He was, for sure, the smartest and the most ruthless (you need that too) of them all. And he did good for the state.

So, in the book, he always has a circle of nine, nine of of his closest, most loyal comrades. Among the Nine, there’s always One who is the closest, his right-hand man; the best friend, most talented, most ambitious. He dominates and controls the other Eight, who are all equal.

That’s the easy part. The trick is to catch the moment when your right-hand man, your best friend, decides that time has come for him to kill you and become the boss. You need to be able to see it in his eyes, that he’s made this decision (he will become reluctant to meet your eyes), and to kill him before he gets a chance to act. You kill him, replace him with the most eager one from the Eight, and bring one more from the outside. For as long as you can keep doing it, you’ll be fine.

Not sure why I’m typing all this, but somehow this post reminded me of that story.

11

Tim Worstall 03.10.13 at 10:45 am

There would be a certain joy in replacing the hedge fund competitions with properly Homeric ones. Here’s your sword, shield and greaves and let the arrogants have at each other. Best man win and all that.

The problem with it is that this always leads to everyone else having to line up and die in the phalanxes. Perhaps letting the alphas play around with the money is less dangerous in the end?

12

UserGoogol 03.10.13 at 1:01 pm

I don’t think the quote about homeless people is really saying that it’s right to act that way in response to homeless people (except in the fairly banal sense that if people smell bad it’s natural to be put off) it’s just making a descriptive analysis that this is something that people (including non-rich people) often do.

13

P O'Neill 03.10.13 at 1:11 pm

Given the context, the tale of Prince Alwaleed bin Talal and the Forbes world’s richest people ranking is worth a read.

14

Sam Dodsworth 03.10.13 at 1:15 pm

Tim@8 Homeric competition was sports, not duelling. Although I gather the wrestling could get pretty brutal. (And Homeric warriors didn’t fight in phalanx.) This is relevant to Nietzsche’s point.

15

rmgosselin 03.10.13 at 1:45 pm

Nietzsche’s take on ostracism reminds me of Coriolanus. He, of course, was the smartest guy in the room, and look what happened to him!

The Conspirators draw, and kill CORIOLANUS: AUFIDIUS stands on his body.

There’s a new film version in here, somewhere.

16

LFC 03.10.13 at 2:12 pm

Two short comments, neither of which, admittedly, has anything much to do with the post’s main point:

(1) with all that, he still remembers his SAT scores…as if he took them yesterday.
I graduated from high school in 1975 and there were roughly 700 people in my class. I would guess that at least half of them, probably more like three-quarters of them, remember their SAT scores, I mean their *exact* scores.

(2) Since the author of this post has degrees from Princeton and Yale, I’m not sure he should make *quite* so much of the fact that Ackman went to Harvard. (I’m sure one could find arrogant, extremely unpleasant billionaires among the graduates of Corey Robin’s alma maters.)

17

Mitchell Freedman 03.10.13 at 2:18 pm

Great post. Love the von Mises quote as it gets us back to that id that drives the right wing, which is they really do despise the mass of humanity. In all of his public writings, did he once say it that way? I wonder…

18

nickt 03.10.13 at 2:49 pm

LFC, Ackman’s Harvard pedigree is mentioned twice. The first time is in passing, as biographical data. The second time matters more , because it was Ackman’s acquaintance with Peretz – AT HARVARD – that got him his seedcorn. This is pretty clearly germane to the tale of how Ackman got where he is today. FWIW, I knew Corey slightly at Yale (mostly in his GESO capacity, ) and also have a degree from Harvard. I defend neither school in terms of its educational competence. I just wonder why you should be so tender towards Mother Harvard, the dear old Kremlin on the Charles.

19

a lurker 03.10.13 at 2:52 pm

greetings, i post here just to inform you that the twitter feed of this blog seems to be a little late on the articles.

20

LFC 03.10.13 at 2:55 pm

I just wonder why you should be so tender towards Mother Harvard, the dear old Kremlin on the Charles.

I’m not.

21

LFC 03.10.13 at 3:00 pm

P.s. And there may indeed be a higher proportion of Ackman-types among Harvard alums. I don’t know. (Btw, Harvard is mentioned again at the very end of the post.)

22

pedant 03.10.13 at 3:11 pm

The bike ride becomes legend because everyone involved is making a kind of compounded, generalized form of the Fundamental Attribution Error: if this guy loses at anything, anywhere, then he must have the personality type of Loser. (It’s worse than “if he tells the truth on this occasion, then he must be an honest person;” it extrapolates from one behavioral domain to another. “If he can’t bike, he must be crap at chess.”) They believe it, despite the availability of more plausible situational explanations (e.g. lack of training). And Ackman believes it, too.

They think that there are fundamental personality types, Loser, and Winner, and that events merely reveal these facts about you. Imagine people capable of such a pathetic misunderstanding of human psychology. What losers.

But Corey, I missed in your final discussions of Nietzsche any clear statement about how the hedge-fund guys differ from Achilles, Themistocles, and Aristides. Those guys were trained to compete in activities such that, if a lot of them were really good at it, and no one got too big for their britches, the city really would flourish (at least militarily). This has never been true with the managers of hedge funds. They don’t need to become excessively hubristic in order to be deleterious to society. They are parasites no matter how big they are. A stable eco-system of hedge-fund managers with no dominant one would still be destroying the society it fed on, without producing anything of worth.

That’s not the kind of case that Nietzsche was imagining. And that means that Nietzsche’s tone of celebration and approval–i.e. his view that Homeric competition really is capable of bringing out something glorious in human beings–will not apply to hedge fund managers. He is not going to say that they are “several geniuses” who provide “salvation to their city” or provide the “permanent basis for life” in their states. They are just grifters.

23

Tzimiskes 03.10.13 at 3:33 pm

This sounds like the kind of culture that I don’t want handling my money. This kind of hyper-competitiveness has to be correlated with outsize risk taking and lower returns in the very long run (though survivorship bias would definitely mask this). Thinking yourself the smartest person in the room would just make everything so much worse; thousands of people (if not 10s of thousands) have received higher SAT scores than this guy (including myself and at least one other person at the small mid-western high school I went to); and if he’s remarkably smarter than most of the folks in this business it’s just more evidence these folks aren’t as smart as they think they are.

There has to be room for a segment of the financial industry that has a different culture than this. Though it seems like our institutions have to be set up in a way to prevent this because everything I read about the industry seems to indicate they are selecting for this arrogant hubris even though the bulk of the job they should be doing is reducing risk. But having interviewed with some financial firms recently it seems this attitude is endemic at all levels, it’s all about maximizing sales and revenue and even bring up the notion that you understand risk or want to make sure you are making a good sale, rather than any sale, and they’re pushing you out the door. It’s not about being the best, it’s about setting up easy to measure metrics for the contest that tends to favor those that are most aggressive and reckless.

24

Tzimiskes 03.10.13 at 3:34 pm

Dang it, need practice with html tags. Only meant to italicize “should.”

25

Main Street Muse 03.10.13 at 3:35 pm

“His mind wrote a check that his body couldn’t cash.”

Sounds just like a banker… and just like a banker, he had someone to guide him back to safety.

I think we have to ask ourselves why our culture values above all other values this predatory, rapacious desire to be “the smartest guy in the room.” Because this focus on being that “smartest” entity – especially within the excessively well-paid financial sector – has been exceptionally costly to our economy. Witness Enron (subject of book and documentary called “Smartest guys in the room.”) Witness Lehman Brothers. Witness AIG. And witness the IPOs, where by the product of value in the IPO is undervalued by the bankers doing the deal: http://nyti.ms/Zv9IKT.

[I remember my SAT scores – and it was a very far cry from yesterday. Is this unusual? I thought those numbers became seared on the brain.]

26

Sebastian H 03.10.13 at 3:52 pm

The problem that they don’t seem to understand is: even if you were the smartest guy in the room, you are still going to be wrong. Often.

27

Omega Centauri 03.10.13 at 3:54 pm

Well at least for the moment, I am the smartest guy in the room. Helps to be the only one in the house…..

I think that tale about the cycling thing, was more about absolute freaking competitive drive. For these sorts of predatory business types, I think its the attribute most prized. I suppose thats why golf is such a big deal, reveals something about the personality.

28

Cranky Observer 03.10.13 at 4:02 pm

= = = I think that tale about the cycling thing, was more about absolute freaking competitive drive. For these sorts of predatory business types, I think its the attribute most prized. = = =

Of course, after his absolute freaking competitive drive induced him to turn a fun/learning ride into a competitive race (a race that started on unfair terms as well), that very same Type A, “competitive drive” also induced him to lose the race he initiated, injure himself, and potentially do severe long-term damage to his own muscle structure. That’s pretty typical of “high-energy”, “freaking drive” people in my experience – except that I have watched them destroy entire organizations and thousands of lives in that manner.

Cranky

29

LFC 03.10.13 at 4:39 pm

From Vanity Fair as quoted in the OP:
Tall, athletic, handsome with cerulean eyes, he was the kind of hyper-ambitious kid other kids loved to hate

I didn’t remember what “cerulean” meant and had to look it up. (I want my tuition back from the Kremlin on the Charles — in inflation-adjusted dollars, of course.)

30

casino implosion 03.10.13 at 4:44 pm

On the other hand, he’s trying to take down a pyramid marketing scheme, so cudos to him for that.

31

Vance Maverick 03.10.13 at 4:46 pm

I think this story sheds an interesting light on Corey. I approve wholeheartedly of his profession, and I generally agree with the tendency of his thinking, but there’s something von oben herab about his writing style, which now I’m inclined to see as an echo, not so much of the Ivies (for if so, I’d be implicated too), as of Chappaqua, or the streak of Chappaqua that runs through all of America, and makes hypercompetitors of so many of us.

32

rf 03.10.13 at 5:03 pm

What does von oben herab mean out of curiosity..google translate says ‘snooty’…..?

33

pedant 03.10.13 at 5:18 pm

Vance @26–

Yeah, you are getting to what bothered me about Corey’s treatment of the Nietzsche quote. It’s really not clear that he condemns Ackman’s outlook. He might; but he might also, compatibly with what he says in the OP, just want to see Ackman taken down so that he, Corey Robin, can be the smartest guy in the room.

There’s one way of applying Nietzsche to these cases that shows how utterly banal these strivers are. But there’s another way–and it’s the way that they themselves would like to see it–that makes them into modern heroes. Achilles strove for pre-eminence: so did Ivan Boesky! So did Wm. Ackman! What heroes we all are! How Nietzsche would approve of us!

The belief that we are the heroes that Nietzsche wrote about is entirely compatible with hurling any amount of contempt at Ackman himself–it’s exactly how Achilles treats Agamemnon, after all. Does Corey really critique Ackman’s ethos, or just want to demonstrate his own superiority?

This is also why Chris Bertram’s reference to “egalitarian anti-dominator instincts” seems a bit overly optimistic. I doubt that “the other guys in the room” who now want to “take him down for it” are really champions of egalitarianism. They’re just other would-be dominators.

34

bianca steele 03.10.13 at 5:27 pm

It’s true, people I’ve known from upper Westchester County were kind of snobby. Some of them were nice snobs though. And Columbia is way down there on the totem pole, down below Princeton, and probably Brown and Dartmouth: a safety school, IIRC, if you were from Chappaqua or thereabouts.

@18 I’m not sure. If you replaced a few details of the bike anecdote with “cancer survivor pushing himself or herself,” we wouldn’t be talking about it the same way. I think the relevant personality trait is the will to push hard and the mental toughness to pretend physical and other constraints don’t exist. We don’t say of people who get cancer and can’t push themselves to later win a bike race, that they’re losers. Anyone who felt that way would be committing the same mistake Corey Robin mentions in the OP, imagining that it’s good to treat homeless people contemptuously.

And are we supposed to be mad about someone trying to take down Herbalife? I don’t know what the story is here.

35

William McJunkin 03.10.13 at 5:48 pm

This is a superb analysis.

When you remark that “Ackman’s mistake is that he takes the “smartest guy in the room” business too seriously” I’m also reminded of Slavoj Zizek’s claim that there’s nothing more dangerous and subversive from the standpoint of an established order than to over-identify with its founding or guiding principles, to “take the system more seriously than it takes itself”.

36

DrDick 03.10.13 at 5:54 pm

I have always been amazed by folks that see this sort of thing as a competition. Seems like just another penile substitute to me.

37

LFC 03.10.13 at 5:54 pm

pedant:
It’s really not clear that he condemns Ackman’s outlook.

I think it’s very clear that he condemns Ackman’s outlook.

38

pedant 03.10.13 at 5:54 pm

@29–
Okay, let’s suppose that there really were a stable personality trait called “Mental Toughness”, which we could add to the Big Five. A trait such that, if an individual manifests it in one situation or domain, they are thereby significantly more likely to manifest it in strongly divergent situations and domains.

It sounds like an admirable trait to me, and to you too, given that you associate it with cancer survivors etc. So if Ackman had manifested this trait on his ride, and if his associates were extrapolating from that behavior to his possession of it, then their inferences should be approving ones–gee, that Billy certainly is mentally tough! He certainly has an admirable personality trait, that I would admire when manifested by a cancer survivor!

But that’s not what they did. They construed the story as revealing deep and contemptible flaws in him–he looked “ridiculous,” he was “hopelessly unable,” “His mind wrote a check that his body couldn’t cash.”

The trait that they extrapolated from his behavior was not “mental toughness”. It was loserdom. Impotence. Contemptibility.

So when you say that you think “the relevant personality trait is the will to push hard and the mental toughness etc.”, then I think that such a trait might be relevant to many things, but not to explaining the group dynamic in this particular group. It’s not the trait that they perceived in this episode, or that they project onto Ackman.

About Herbalife, I agree– predatory outfits like that should be put out of business (though I’d rather it happen without profits accruing to other predators).

39

bob mcmanus 03.10.13 at 5:58 pm

26,28:”He who stares into the abyss…”

Those who tackle Nietzsche tend mostly to reveal themselves, or the Use and Abuse of Philosophers.

40

pedant 03.10.13 at 5:59 pm

@31–

Ah, well: my mistake then. I was wrong.

Thanks for pointing me to the evidence.

41

Watson Ladd 03.10.13 at 6:12 pm

Wow, that financial sector is so bad. If only there were funds that wouldn’t actively invest and charge low fees. Maybe they could spend a bit on advertising to make sure people knew they existed, and publicly point out that they charge these low fees. And if only I could put my money in them via the internet, say by going to Vanguard.com. That would be so wonderful.

Hedge fund managers only hurt their investors, who are to dumb to realize the hedge funds cannot beat the market. I’m not seeing how ordinary investors are harmed. I’m also not seeing how excessive risk taking, in this case burning out ones glycogen reserves on a bike ride, isn’t a sign of being rather more foolish then one should be with scarce resources.

42

MikeJake 03.10.13 at 6:13 pm

@19

I can’t totally agree with you, because in the absence of government regulators willing to actually regulate, I think there is value to an Ackman willing to call out Herbalife as a pyramid scheme and make a big, public financial and reputational bet against them.

I’m not trying to lionize these guys or anything. Whatever happens to Herbalife, they’ll find a way to make money off of it. I just don’t think it’s necessarily all useless gambling.

43

bob mcmanus 03.10.13 at 6:22 pm

My impression after reading 25% of Corey’s last book was that it had a double ambition, of not only humiliating and destroying the intellectual foundations of the Republican Party, nay Western conservatives of all times but also destroying for all time those founders of conservatism, so no one one would ever read Plato, Burke, etc without bursting out laughing.

Now that that job is accomplished, and a entire shelf of political theory has been shredded, Robin has moved on to economics and existential philosophy. In one slim volume, by the revelation of connections no one has ever noticed in such detail, Robin will not only destroy forever Hayek, Mises, Friedman, Menger, Walras, etc but also make Nietzsche, maybe Heidegger, Adorno, Jaspers, Ricouer, Foucault unreadable for serious thinkers for 500 years.

And what is best? To have readers who will tell you that you have succeeded, brilliantly and with style.

44

Maria 03.10.13 at 6:37 pm

I think it’s curious that the ‘guy’ part of ‘smartest guy in the room’ is so obvious as to apparently be invisible.

45

bianca steele 03.10.13 at 6:47 pm

@pedant
You seem to think the issue is whether or not he finished the course, and faster than anybody else. I think the issue is whether or not he thought he was better than the other competitors, that he would be able to do without training what they could already do, that when they told him to listen to his pain and slow down, what they warned him about didn’t apply to him unless he wanted it to. And also that he had an annoying personality.

46

pedant 03.10.13 at 6:59 pm

@38–
I have to say, I don’t know what “the issue” refers to here.

I made a comment way back in 18 about the inferences that Ackman’s buddies drew from the cycling episode. They saw it as evidence of something contemptible. And I speculated that they were treating it as a sign of some more general personality trait, and thereby making a common error in our understanding of others.

You came in at 29 and said “I’m not so sure”. Okay; you’re welcome to disagree with me. I tried to figure out what you were disagreeing about, and concluded (perhaps wrongly) that you thought that the trait Ackman had manifested was “mental toughness”. Was that how you meant to disagree with me in your 29? Maybe I lost the thread already at that point.

In 29 I offered some reasons to think that “mental toughness” was not the trait that Ackman’s buddies were attributing to him.

Now in 38 you say we disagree about what “the issue” is. Yeah, maybe–I really don’t know what the issue is. I’d be glad for some help.

@37:
“They’re all smart, but in different ways: one sees deeply, one sees quickly, one sees things no one else sees.”

I think you just scored on the last category.

47

Lawrence Stuart 03.10.13 at 7:10 pm

Oddly (in a very book nerdish sort of way) enough, I am just now reading a book (William Fitzgerald’s Agonistic Poetry…) that deals with the ‘Pindaric mode.’ Pindar wrote commissioned odes for the victors of the olympic games — games which were pretty much a direct surrogate for war, and thus a chance for the agathoi to prove themselves through agon without all the mess of actually slaughtering one another.

The point of Pindar’s poems, says Fitzgerald, is to re-assimilate the victor into the community which the victory, in potentially dangerous ways, has elevated him above. The poet, as representative of the broader community, receives the victor, and the victor, in laying down substantial coin for the commission, receives the praise of the community: but the praise comes at both a monetary and social cost. The poems implicate both victor and poet in a network of obligations and limitations stretching back to the gods. The pursuit of glory is noble, and victory is sweet, but the centrifugal energy of individual achievement (of both victor and poet) is always subject to the strong centripetal pull of communal responsibilities. The poet’s role, broadly speaking, is to re-evoke the mythical centre that holds the ordered social cosmos together.

With our modern monetary olympians, the centre has long since loosed its hold. The centripetal force (obviously not the ancient gods, but something like liberty, equality, fraternity) has become weak, and the caustic maverickyness of our various and sundry masters of the universe threatens to dissolve such cohesion as still exists.

48

Mao Cheng Ji 03.10.13 at 7:14 pm

“Hedge fund managers only hurt their investors, who are to dumb to realize the hedge funds cannot beat the market.”

There are no investors in hedge funds. And of course they beat “the market”. Insider trading is the game.

49

Jaycie 03.10.13 at 7:18 pm

But Ackman operates in a world—and it’s not just Wall Street; you can also find it in DC, the media, the law, and some parts of academia—where rankings of this sort mean something. They have to: no matter what the endeavor, someone always has to come out on top or in first.

Only some parts of academia? ;-) For an example of such a mindset in physics, I give you the recent NY Times article ‘The Professor, The Bikini Model and the Suitcase Full of Trouble’, from which:

As [physicist Paul] Frampton tells it, his life is one unbroken line of impressive grades, advanced degrees and innumerable citations of his work in cosmology and physics. There is certainly much truth to this. … But then there is Frampton’s tendency to transfer his professional accomplishments to his personal life. In what a fellow physicist described as a “very vain, very inappropriate” talk delivered on the 80th birthday of Murray Gell-Mann, a Nobel laureate in physics, Frampton veered into autobiography, recounting how his ability to multiply numbers in his head at 4 led him to see himself as “cleverer than Newton.” This line became a refrain throughout the talk. Interspersed with the calculations and hypotheses were his Oxford grades, which, he said, showed that he, like Newton, was in the top 1 percentile for intelligence. Frampton insists that he was merely joking and that his sense of humor was misinterpreted as self-regard. Yet in many of my conversations with him, he seemed to cling to the idea of his own exceptionalism.

I have come to realise there are certain varieties of stupidity only very intelligent people exhibit, and ‘There’s only one kind of smart and I’ve got it!’ is certainly one of them. Running into the cliff face of such arrogance is a memorable experience. One senses insecurity at the heart of it; ‘I have to be the best to be loved’, and/or, ‘I am my grades; if my grades are low I am worthless’ are possibilities. And if a tremendously clever person believes these things, their success in academia and elsewhere will tend to reinforce them, leading to just the kind of infuriating top-dog-ism at the height of their careers that will lead their competitors (and even colleagues) to yearn for their demise. One hopes they have riders in their lives that will guide them back home in such a case…

50

Bill Gardner 03.10.13 at 7:24 pm

Chris @5:
I have no idea whether Boehm’s anthropology is correct. But I can’t see how that horrible image — the family member murdering the sociopath in the forest — comports with a norm of treating all others as equals.

51

Bill Benzon 03.10.13 at 7:42 pm

Count me among those who took the SAT long ago and can still remember my score. I think.

52

LFC 03.10.13 at 7:42 pm

pedant @34

from OP:
“when a competitor’s ambition is so unhinged”

one doesn’t usu. refer to a person’s ambition as unhinged if one means to signal approval

53

rf 03.10.13 at 7:49 pm

“Count me among those who took the SAT long ago and can still remember my score. I think.”

I remember my leaving cert (irish SAT) but mainly because it was so bad..that’s alternative

54

marcel 03.10.13 at 7:49 pm

1) Tzimiskes wrote:

“There has to be room for a segment of the financial industry that has a different culture than this. Though it seems like our institutions have to be set up in a way to prevent this because everything I read about the industry seems to indicate they are selecting for this arrogant hubris even though the bulk of the job they should be doing is reducing risk. But having interviewed with some financial firms recently it seems this attitude is endemic at all levels, it’s all about maximizing sales and revenue and even bring up the notion that you understand risk or want to make sure you are making a good sale, rather than any sale, and they’re pushing you out the door. It’s not about being the best, it’s about setting up easy to measure metrics for the contest that tends to favor those that are most aggressive and reckless.”

I see that Watson Ladd mentionedVanguard, which is one response. What came to my mind was Taleb and his Black Swan: apt, I think, because everything I’ve read about him suggests that he believes himself to be “the smartest guy in the room”.

2) pedant wrote:

“The bike ride becomes legend because everyone involved is making a kind of compounded, generalized form of the Fundamental Attribution Error: if this guy loses at anything, anywhere, then he must have the personality type of Loser. (It’s worse than “if he tells the truth on this occasion, then he must be an honest person;” it extrapolates from one behavioral domain to another. “If he can’t bike, he must be crap at chess.”) They believe it, despite the availability of more plausible situational explanations (e.g. lack of training). And Ackman believes it, too.

They think that there are fundamental personality types, Loser, and Winner, and that events merely reveal these facts about you. Imagine people capable of such a pathetic misunderstanding of human psychology. What losers.”

Interesting take. When I read “His mind wrote a check that his body couldn’t cash,” I (likely giving too much credit to the wisdom of the speaker) understood it to be casting aspersions on Ackman’s judgment. That certainly seems sound.

3) Maria observed (and boy, oh boy did she ever):

“I think it’s curious that the ‘guy’ part of ‘smartest guy in the room’ is so obvious as to apparently be invisible.”

As is often the case, the feminist comment from a woman is the funniest in the whole thread, pointing out the mote in all of our eyes… Except:

This kind of stupid competition, which Michael Lewis portrayed so well in Liar’s Poker (think “big swinging dicks”) is still fairly rare among women. Yes, women compete in a variety of stupid ways (which have long been parodied in western culture, both high and low), but this sort of competition for its own sake, to dominate others and compel them to recognize and submit to your superiority, remains pretty rare at least when (many?) men are around. And when I see it, it remains me of women’s business suits from the early 1980s when women felt that they had to ape men (and I do mean ape).

(I do hope I’ve closed all my tags appropriately and closed all my quotes, esp. those in the tags. This blog really needs a preview button!)

55

marcel 03.10.13 at 7:50 pm

HEY! Corey – I hope you (or one of the other bloggers) are there. Please pull my last comment out of moderation hell!

56

marcel 03.10.13 at 7:52 pm

Where I wrote:

And when I see it, it remains me of women’s business suits from the early 1980s …

I meant

“And when I see it, it reminds me of women’s business suits from the early 1980s …”

57

Omega Centauri 03.10.13 at 7:59 pm

Maria @37 I think it’s curious that the ‘guy’ part of ‘smartest guy in the room’ is so obvious as to apparently be invisible.
At least as I see it, the personailty trait we are discussing requires the owner to have three Y chromsomes. Be happy that you are three chromosomes away from having this affliction, those of us of the other sex, had better be on our good behavior, because at best we are only two chromosomes away.

58

pedant 03.10.13 at 8:00 pm

@45–

That signals disapproval of a particular competitor. It does not necessarily reflect disapproval of the general ethos.

Indeed, even people who wholeheartedly endorse the general ethos will themselves disapprove of a particular competitor in these terms. When Aristides and Themistocles were at the height of their powers, and were both candidates for ostracism, they both gave speeches in the forum saying that their competitors’ ambitions were unhinged.

That’s why it’s not very good evidence that Corey really disapproves of Ackman’s ethos, rather than fully sharing it, and just wanting to do down Ackman in particular.

But, hey–it’s also not clear to me whether any of us in this conversation have escaped the desire to be the smartest guy–or person, thank you Maria–in the room. I know that I haven’t–even though I long ago moved into a job where everyone around me is smarter than I am. Many of us still sucker to the value-system. E.g. someone who can’t even say “snooty” without saying it in a snooty way. Or someone who showers contempt on Columbia for being a safety school.

Most of us here are probably ideologically egalitarian, and we may even act so as to make the world a more egalitarian place. Which is good! But it’s harder to escape the ethos of elitism.

59

rf 03.10.13 at 8:04 pm

..Or someone who uses examples from the lives of Aristides and Themistocles in a thread about a hedge fund manager ; )

60

Bill Benzon 03.10.13 at 8:05 pm

@P O’Neill #10: Indeed, that story about Prince Alwaleed bin Talal is most interesting, suggesting that the easiest way to win at cut-throat competition is to cheat.

61

pedant 03.10.13 at 8:15 pm

@51–
Guilty as charged. Though you’ll see that ostracism got into the conversation in the OP, through Robin’s citation of Nietzsche. It was Wikipedia that told me about Themistocles and Aristides having been rival candidates for it one year.

62

Omega Centauri 03.10.13 at 8:27 pm

To get back to the mental toughness thing. I think there is an issue here that applies to most abilities, and that is having the wisdom to use ones uber-ability, when and only when appropriate. Its kind of like being in some group conversstion, and realizing you have the chance for a super clever ultimate-putdown of someone. Do we do the wise thing and resist the temptation, or do we try to impress everyone with our supposed cleverness, no matter what the cost to another it may entail?

63

Corey Robin 03.10.13 at 8:33 pm

Pedant at 28, 50: I assure you I condemn wholeheartedly the entire ethos. I thought my position was so obvious — and the worldview of all of these guys, not just Ackman, so preposterous — that I didn’t need to belabor it. If you doubt my sincerity, a quick perusal of my posts here, and where I’m coming from, should clear things up.

Maria at 37: That was one of the reasons I kept repeating “smartest guy in the room” over and over again.

64

marcel 03.10.13 at 8:35 pm

Also (once, if ever, my comment preceding this one is removed from moderation, where I wrote “mote” when commenting on Maria’s observation I should have written “beam”. My biblical knowledge, esp. of the NT, is not really up to snuff.

65

rf 03.10.13 at 8:44 pm

“That was one of the reasons I kept repeating “smartest guy in the room” over and over again.”

Allow me to introduce you to Katie Hopkin’s articles in the Mail

http://www.dailymail.co.uk/femail/article-2281959/Apprentice-star-Katie-Hopkins-admits-I-wont-let-children-play-friends-I-deem-beneath-them.html

66

Chris Bertram 03.10.13 at 8:48 pm

Bill @43: it isn’t a case of family members murdering sociopaths, it is a case of the group defending itself against someone who wants to be be boss and can’t rein in their urge to dominate others. Egalitarian norms have to be defended and out on the savannah you can’t lock up serial killers and psychopaths. Anyway, read the book(s) … it is interesting stuff. (Oh, and the reason family members do it is to minimize the risk of vendettas.)

67

Gene O'Grady 03.10.13 at 8:48 pm

In a previous I spent several years on the managing committee of the condominium complex where we lived — for some reason they entrusted the financial management to me and I turned out to be pretty good at it. In general our quite diverse board, with seemingly minimal relevant training, did pretty well (although since we were in California we had the Davis (yes, that’s Gray Davis)-Sterling act to back us up, the single best piece of legislation passed in my life time) with the issues that came before us, largely because we were at least smart enough to realize that there were a lot of interests to balance. The times it all fell apart were almost invariably when we were confronted with a Smartest Guy in The Room. Then we tended to make bad decisions inadequately thought through.

In another previous life I worked with people who were military reservists, usually on health and safety issues. I recall one Navy guy coming back from two weeks in Saudi Arabia and telling stories about Marines who were too tough to listen to him on hydration and ended up just like the hedge fund manager in the story.

By the way, I did not get 800’s on my SAT’s, but only a combined 1526. I did get 800 on the Latin achievement exam — hinc illae lacrimae.

68

pedant 03.10.13 at 8:57 pm

@56–
Thanks, Corey.
“If you doubt my sincerity, a quick perusal of my posts here, and where I’m coming from, should clear things up.”

Previous to this post, I had not known where you were coming from, but now (with help from you and LFC) I do:
Chappaqua, Princeton, and Yale.

So that sets my mind at ease.

69

hix 03.10.13 at 9:14 pm

Financial sales is a rather dirty business and it helps to be sufficiently dumb to not realice what one does to ones customers by selling the unecessary complicated overpriced crap that is typically sold. That way one can sleep at night and receptive customers do not see the lie when the salesman is unaware himself.

70

mud man 03.10.13 at 9:35 pm

@Chris Bertram #6: “… quietly dealt with on a hunting trip …” It happened a lot during Vietnam. But hedge fund capitalists didn’t go and still don’t.

Likewise the late Pierre Clastres’ Recerches d’Anthropologie Politique, who points out that among Amazonian tribesmen, farting in some sleeping person’s face is an always-funny, a useful equalizer. But somehow the Big Men have got ahead of the game. Bob Dylan: I ain’t gonna work for Maggie’s Paw no more. He puts his cigar out in your face for kicks; his bedroom window is made out of bricks. The National Guard is standing ’round his door …

71

Ebenezer Scrooge 03.10.13 at 9:51 pm

Two things; one trivial.
1. “Smartest guy in the room” implies a scalar ranking of abilities. Most human abilities do not scalar rank very well. One exception is mathematical ability. I would wager that most of the commenters here who could remember their SAT scores could also remember the best mathematician in their high school class. There is no such clarity with other intellectual skills, or maybe even athletic skills.
2. SAT scores are hard to forget. But if you’re the appropriate age, draft numbers are even harder to forget. I was #309–so nobody called me “Sarge.”

72

LFC 03.10.13 at 10:06 pm

C’mon, pedant. Re-read the post. Its basic position is obvious, as CR said. (Sorry i don’t have time to type more rt now.)

73

Walt 03.10.13 at 10:18 pm

Here’s an appealing quote from the VF article:

I’ve really sort of had it with this guy Ackman,” Icahn said. “He’s like the crybaby in the schoolyard. I went to a tough school in Queens, and they used to beat up the little Jewish boys. He was like one of these little Jewish boys, crying that the world was taking advantage of him. He was almost sobbing, and he’s in my office, talking about this Hallwood, and how I could help him.

74

Bill Gardner 03.10.13 at 10:32 pm

Chris @59 — thanks for the pointer. I’ll take a look at his book.

75

Bill Benzon 03.10.13 at 10:38 pm

I second the recommendation of Christopher Boehm. I’ve not read his most recent, but Hierarchy in the Forest is very good. He argues that we have hierarchical inclinations from our primate ancestors and egalitarian inclinations that are specifically human.

My draft #: 12. I was a conscientious objector.

76

Jason Weidner 03.10.13 at 10:40 pm

Sounds like a good example of the object of Aaron James’s Theory of Assholes, the asshole defined as:

(1.) allows himself to enjoy special advantages and does so systematically;
(2.) does this out of an entrenched sense of entitlement; and
(3.) is immunized by his sense of entitlement against the complaints of other people (p. 5).

With the source of entitlement being a belief in his superiority.

77

Jason Weidner 03.10.13 at 10:41 pm

Sounds like the subject of Aaron James’s Theory of Assholes, with an asshole being defined as:
(1.) allows himself to enjoy special advantages and does so systematically;
(2.) does this out of an entrenched sense of entitlement; and
(3.) is immunized by his sense of entitlement against the complaints of other people (p. 5).
and the sense of entitlement being derived from a feeling of superiority.

78

engels 03.10.13 at 10:51 pm

the desire to take-down would be dominators (“assholes” in the vernacular) is very deeply embedded in our human nature

Also deeply embedded in collective memory, stories about this back-firing:

http://en.wikipedia.org/wiki/Joseph_%28son_of_Jacob%29

79

engels 03.10.13 at 10:54 pm

Sounds like the subject of Aaron James’s Theory of Assholes

But will we ever see a grand unified theory of assholes and bullshit?

80

garymar 03.10.13 at 11:49 pm

Draft number: # 41.

That’s the only time my myopia conferred a survival advantage!

The only I now remember from schooling is my GRE Verbal.

81

garymar 03.10.13 at 11:50 pm

Actually #43. The other number has to do with Life, the Universe, and Everything.

82

marcel 03.11.13 at 12:03 am

83

Tony Lynch 03.11.13 at 1:08 am

Bianca #34: “The mental toughness to pretend physical and other constraints don’t exist.”

Why call entertaining a manifest falsehood – and an obvious and available falsehood – “mental toughness”? I really want to know.

84

Vance Maverick 03.11.13 at 1:21 am

rf #32: von oben herab ~= “downward from above” ~= de haut en bas.

And still I’m happy to read Robin, and look forward to more books.

85

bianca steele 03.11.13 at 1:39 am

Tony Lynch @ 83
Because if those constraints were imaginary–if, for instance, they were made up by people who just wanted him to fail, or to keep people without inherited money out of finance–it would make sense for him to go ahead in spite of them. And because there are arguably some constraints that people believe are there, but really aren’t, like a fear of not being able to get back into shape after an illness. And some people do overcome physical pain and manage to keep going to the end, of whatever they’re trying to do. If you can’t predict what’s going to succeed and what’s going to fail, being “tough” and predicting you’ll always succeed is as rational as learned helplessness and predicting you’ll always fail.

It makes perfect sense that Ackman, who believes he’s “the smartest guy in the room,” would choose the former, in sports, as well as at work.

86

Tony Lynch 03.11.13 at 2:04 am

Well, this helps.

You aren’t saying that it is “tough minded” to ignore truths about constraints. It just kinda looked like that. You are saying it’s “tough minded” to ignore “imaginary constraints” (I’d prefer, “rational”).

The really interesting bit is the “perfect sense” claim. Is it this – a Cartesian formulation – “if you’ve found once that what you took to be a real constraint wasn’t a constraint, then it is ‘perfectly sensible’ to treat all constraints as imaginary?”

(In my view – & I won’t go into it here – this Cartesian Principle is false. )

87

bianca steele 03.11.13 at 2:38 am

Tony,
I’m having a hard time figuring out where you’re coming from. Why in the world would you assume beginning from a belief in lots of constraints, and discovering some are false–rather than suddenly discovering a putative constraint you’ve never thought of before? I don’t have time to write a dissertation (much less research the dissertation I’d need to figure out your point of view, then distill it down to a comment box, no matter how worthy your point of view may be), and it would be rude to critique every phrase of your post closely. I’m perfectly happy to leave it at, “I think I was reasonable in using the term ‘tough-minded,’ and you don’t agree, for reasons I don’t know.”

88

Linnaeus 03.11.13 at 2:51 am

In my neck of the woods, the SAT was not the most significant standardized college admissions test (I took it because I had the crazy notion that I could get into MIT, which was quickly dispelled); the one you really wanted to make sure you did well on was the ACT.

89

Salient 03.11.13 at 3:24 am

I don’t think it’s Winners/Losers so much as Enviable/Envying, evidence that plenty of high finance types think of themselves as courting envy rather than power. “The smartest guy in the room” really means “the guy that every other guy in the room sorely resents because they envy the fact that he just made himself look better than them.”
(I’m taking Corey’s lead in emphasizing the ‘guy’ part.) It really doesn’t mean you scored highest or ranked first. It’s all about appearances, and transient ones especially, moments where everyone Notices.

A hyperegotist power-seeker would believe themselves capable of world-class training and might attempt to undertake it, believing they could develop the capability. A hyperegotist envy-seeker would believe themselves capable of looking like they have undergone world-class training, and would act as if they already have the capability.

The envy-seeking model would also explain, in a hand-wavy way, why so many high financiers obsess about short-term gains. It’s probably quite possible to accrue more power (and maybe more money) cultivating prudent long-term investments, but it’s sure as hell not flashy enough to get you Noticed.

90

maidhc 03.11.13 at 3:38 am

Chris Bertram : In The Serpent and the Rainbow by Wade Davis, which describes his investigations into the phenomenon of the zombi in Haiti, he describes how people were selected by the secret societies to be made into zombis. One of the main criteria was a sort of disconnectedness with the community. He gives one example of a relatively prosperous man who had illegitimate children and refused to support them. The concept of secret societies that enforce community norms came from West Africa.

This was in the 1970s, not the Late Pleistocene.

91

Meredith 03.11.13 at 4:21 am

Lawrence Stuart on Pindar: well observed, important.

Nietzsche on the ancient Greek world is far from the last word (really, people!). And as some others here have noticed, if you want to go to that world (say, to Homer), you’re going to find much more than you might have imagined. You could also check out the likes of Solon. Let me recommend Vivavsan Soni’s Mourning Happiness: Narrative and the Politics of Modernity.

As for me, I return now to Horace. He had a few things to say about the Ackman’s of this world. (And how not to let them get to you. The world really is a much bigger and more interesting place.)

92

PatrickinIowa 03.11.13 at 4:21 am

#14 in the draft. I didn’t have to do CO alternative service because the draft was working on 13 when it ended.

I remember my SAT. They’ve changed it now, so I’d have to go online to compare it with my students’, and I don’t. And in any case, the one I kicked ass on was the GRE verbal.

My dad’s a radiologist. Half of his practice lost their asses in the 1982 recession. He didn’t–he had a financial guy who was told, on no uncertain terms, safety first and then my dad butted out. When I asked him how it was that Dr. So-and-so had invested in so obviously stupid a scheme as the one that beggared him, Dad said, “The trouble with my doctors is that they’ve been treated like the smartest people in the class their entire lives. They think that if they can read an x-ray, they can read the market.” At that moment, I realized how brilliant a man he really was.

93

Rich Puchalsky 03.11.13 at 4:46 am

These people aren’t tough-minded, they’re narcissists. Of course they believe that they can do things they can’t. In any case, tough-mindedness if defined as “believing by default that barriers are illusory” may be better than learned helplessness, but it’s not what you want in someone managing investments. What you want is a rational evaluation of risk.

“pedant” above is right that the whole sector these people create is parasitic on society;; Cranky Observer is right that individually these people are nightmare managers who destroy organizations. But their personal characteristics are highly suited towards impressing people who are impressed by narcissists. Look at how Ackman got his start: he pulled in a cool quarter million from Marty Peretz, his first sucker.

Which I think is really what the others hated Ackman for in the bike race story. It wasn’t that he was a jerk. It was that he was a failure in keeping up their image. Loeb, the one who arranged the ride, was a marathoner and Ironman and who knows what else: in other words, he had made sure to act out being Superman in his hobbies. When Ackman tries the same thing without preparation and fails comically, it’s like the Wizard of Oz knocking over the curtain, and they have to reject him as a loser in order to make it clear that he’s really not one of them or he becomes contagious.

94

Kaveh 03.11.13 at 5:00 am

I like Rich’s analysis–they’re afraid Ackman will make them all look like poseurs.

95

Tony Lynch 03.11.13 at 8:13 am

Me Too!

96

maidhc 03.11.13 at 9:35 am

I’m thinking of the Firesign Theater:

“The accursed is reminded of the absence of his rights under the Secret Code of Military Toughness, and is advised to act accordingly.”

97

Trader Joe 03.11.13 at 1:15 pm

I hear the comments about “ill gotten gains” and “parasites on society” and all that and I’ll not defend the few among the herd that aren’t that way and which you never hear about because as a rule, they aren’t attention seekers – just good at what they do.

Fortunately, one of the ways the “smartest guy in the room” uses to measure the size of his manhood is by making ridiculously large contributions to the arts, medical research and universities causing at least some of the gains to be put to good use. Oddly enough I’ve never run across any of these causes refusing a contribution from a hedge fund manager so apparently the conceits about sources of wealth are just another vector of hypocracy.

98

Tomsk 03.11.13 at 1:57 pm

To proclaim that might makes right and that as the strongest you’re going to take whatever you want is obnoxious. But to proclaim this, take a swipe at the nearest person, trip over your shoelaces and end up hopelessly entangled in a clothes airer crying out for help is both obnoxious and comical. The bicycle episode fell into the latter category; surely this is why it earned Ackman the contempt of those around him?

99

Squirrel Nutkin 03.11.13 at 5:02 pm

#97 I have long since learned that there were more systems than democracy in this world, but what is “hypocracy”? Government by Simon Cowell?

100

somaguy 03.11.13 at 5:22 pm

“I was in unbelievable pain,” Ackman recalls.

If cramping during an athletic activity is “unbelievable pain,” well, I’m not sure what to say.

Also, running out of glycogen reserves generally happens after about 70 miles, since the human body has ~3000 calories worth of glycogen. “Bonking” after 32 miles isn’t bonking, it’s a poor level of physical fitness.

101

Trader Joe 03.11.13 at 5:55 pm

@#99
Just put me down as worst speller in the room.

102

Jerry Vinokurov 03.11.13 at 6:08 pm

#97 I have long since learned that there were more systems than democracy in this world, but what is “hypocracy”? Government by Simon Cowell?

Government by Flavor Flav, surely.

103

Rich Puchalsky 03.11.13 at 6:19 pm

The “parasites on society” bit wasn’t intended moralistically, at least not from me. I’ve heard multiple studies that active management of funds doesn’t add value, not once you total over all of the managers. Indeed, it subtracts it, because you have to pay them something. And any apparently successful individual fund manager can either be having a long run of luck (fairly easy to do because of survivor effects; the people who have bad luck near the start disappear) or be simply good at insider trading.

104

heckblazer 03.11.13 at 6:30 pm

Walt @ 73:

Icahn’s own family is Jewish, which makes me wonder precisely how personal his memories of crying schoolboys are.

105

Frank in midtown 03.11.13 at 7:17 pm

@43
Dang, I missed my cue badly, what’s best?
To crush your enemies, see them driven before you, and to hear the lamentation of their women.

106

lemmy caution 03.11.13 at 8:30 pm

This was an interesting article by a guy who went to a herbalife center in queens:

http://brontecapital.blogspot.com/2013/01/notes-on-visiting-herbalife-nutrition.html?spref=tw

He sees it being similar to support groups like like AA. They sell the shakes but people like it because it motivates them to lose weight. Doesn’t mean that the company is not exploitative but it seems pretty useful at the local level.

107

Main Street Muse 03.11.13 at 8:40 pm

To Watson Ladd @41 – have you not heard of Long-Term Capital Management? Or hedge fund contagion? Hedge funds don’t just hurt their investors; when recklessly managed, they can contribute to the collapse of our economy.

Here’s a 10/08 BusinessWeek story on such a crisis: http://buswk.co/10wVp7u

In 1999, the Treasury Department issued this report on the LTCM crisis: http://1.usa.gov/XDTtLv

This report noted: “The principal policy issue arising out of the events surrounding the near collapse of LTCM is how to constrain excessive leverage. By increasing the chance that problems at one financial institution could be transmitted to other institutions, excessive leverage can increase the likelihood of a general breakdown in the functioning of financial markets.”

To Maria @44 – yes, the smartest “guys” tend to be male, but I will tell you, I was once on a school playground committee with some of the most competitive people in the universe – and they were moms, not men. Marathon runners, triathletes, geniuses. I think they could take down Billy and his cohorts. If only they had “leaned in” rather than checked out of the work force…

108

Matt Waters 03.11.13 at 9:23 pm

Having read through about half the presentation, it seems like it would be a solid short in a logical world.

First of all, there is an extremely disingenuous accounting at the top of their earnings statement. Unlike most companies, their top-line number does not correspond to real debits to cash or accounts-receivable. That number is on the third line. They instead assume a per-unit price out of thin air to create the top-line number and make the difference “gross margin.” Make no mistake, their real cash flows are not from the end consumers but merely from the wholesalers. How this practice is kosher with the SEC and their auditor is beyond me, because it’s basically like Coke adding Kroger’s margins to their own top-line sales.

Looking at the real balance sheet, the basic truth of how their business works comes out:

– Nearly all of their cash inflows are from selling the product at very high gross margins, which is why their shake has a 2-3x markup on similar shakes.
– Through various mechanisms, nearly all of this gross margin goes to levels above the first-line buyer. In some cases the first-line buyer does not have a real end buyer and it’s “self-consumption,” which makes little sense because in most cases the product can be bought cheaper online.
– Despite rules against it, many distributors buy more than they’re selling to buy a way into the higher echelons with lower product prices and more recruitment bonuses.

So Herbalife gets much more cash flow per product than competitors with higher prices, but correspondingly pays much more for their distribution chain than others pay their retailers. This all says that Herbalife should ultimately be unsustainable, but a pyramid scheme may not be completely unsustainable. It can’t grow to infinity, but the number of distributors is also far less than the world population. The cash flows from the pyramid scheme can be sustained for a timeframe longer than most investors’ time frames.

What Ackman needs to happen, and what he’s trying to make happen, is to somehow get word down to any possible distributor, especially in other countries. They’re the true “customers” and unlike real customers, they either go to higher levels or they drop out, with nearly all dropping out.

The best case scenario is perhaps going private and then selling their products in legitimate ways. That would have a value greater than zero. But if they hold onto their current model, then it’s likely that it will eventually reduce their business value to zero.

109

Tim Wilkinson 03.11.13 at 9:52 pm

Surely ‘the West is the best?’

110

Andrew F. 03.11.13 at 9:54 pm

Ackman’s mistake is that he takes the “smartest guy in the room” business too seriously. He really thinks he’s that dude. So much so that he’s willing to treat the other guys in the room as if they weren’t. That’s a no-no, and now they’re going to take him down for it.

That’s quite a conclusion to draw from the article, which seems to be composed of little more than gossip. The fact that Ackman built a multibillion dollar hedge fund probably says a little more about his social skills than the snide remarks drawn from a few of his competitors.

And are we really going to draw a conclusion about someone’s personality or character based on an anecdote about a holiday bike ride relayed thirdhand via quotes selected by the author and the author’s own descriptions – an author whose own interest lies in hyping any personal conflict in the story?

One might instead weigh whether those inveighing against Ackman have a monetary interest in persuading him, and his investors, that they have great personal commitment to seeing Ackman’s short fail. In that case, the only narrative here is: arrogant hedge fund manager and other arrogant hedge fund managers take opposing sides in trade; some of them say nasty things to gleeful columnist.

111

engels 03.11.13 at 10:11 pm

Is someone who is considered an asshole by people who are themselves assholes more or less of an asshole on account of that fact?

112

PatrickinIowa 03.11.13 at 11:30 pm

“You run into an asshole in the morning: you ran into an asshole. You run into assholes all day: you’re the asshole.” – Raylan Givens.

113

BillCinSD 03.12.13 at 2:45 am

#102 Jerry Vinokurov

“#97 I have long since learned that there were more systems than democracy in this world, but what is “hypocracy”? Government by Simon Cowell?

Government by Flavor Flav, surely.”

No that’s a hyphopcracy

114

tc 03.12.13 at 8:39 am

if bill didn’t take algebra trig, geometry, and caculus with ed barlow he wasnt even the smartest kid at greeley, let alone a room representing the wider world

115

reason 03.12.13 at 9:26 am

Tzimiskes @23
“This kind of hyper-competitiveness has to be correlated with outsize risk taking and lower returns in the very long run (though survivorship bias would definitely mask this).”

I have a theory (I wonder if anyone has seen studies of this), that the hedge fund industry is indeed parasitic, but that this is not necessarily true. Hedge funds exploit being limited liability in a way that individuals can’t. Yes they take big risks by using very high leverage. Ultimately this costs their bankers (and people who use those banks, and taxpayers who end up subsidising those banks), but the downside is limited via limited liability. The very rich using lots of hedge funds will probably be net winners even if some go bust.

116

hix 03.12.13 at 11:23 am

When the payment structure is such that a manager who literarly puts all money on red in a casino has an expected return of almost 12% as is the case with a 2/20 no share off the downside compensation systems, the investors are sure to be major loser.

117

Main Street Muse 03.12.13 at 11:53 am

Reason @114 “Ultimately this costs their bankers (and people who use those banks, and taxpayers who end up subsidising those banks), but the downside is limited via limited liability.”

I don’t understand the “limited downside” to this behavior. In that the US taxpayer remains the backstop of banks, the crash of 2008 seems to indicate that there is an excessive societal cost to allowing some of the very rich who use hedge funds to be “net winners.” Frankly, because TBTF banks cannot survive without an implied promise of a federal bailout, the type of gargantuan ego noted in the OP has become a threat to society. At some point, we need to stop privatizing profit and subsidizing loss for these people.

118

roger gathman 03.12.13 at 12:24 pm

There will always be jerks.
The thrust of the Enlightenment cult of virtue had to do with the idea that there is a dialectical relationship between institutions and character – vicious institutions could generate vicious characters, but at the same time, they could not eradicate virtue. And virtuous characters could overthrow vicious institutions and institute virtuous ones. Thus the need to inculcate virtue in the citizen – not simply free the citizen to pursue happiness any way he or she thought best.
The deregulation of the financial markets might be thought of as a good case of creating vicious institutions that systematically weed out virtue, and promote vice. The notion that they distribute capital to where it is socially needed seems pretty much disproven by the history of the last thirty years. But the notion that they actually promote and generate vicious character hasn’t really been pursued by any sociologist, partly because the whole notion of character seems to be a moral anachronism. And yet I think that notion isn’t wholly obsolete – it is the social form into which personality slips, and as a social form certainly both is determined by and determines the shape of institutions. I’ve long felt that the critique of personality – which comes out in the idea that banksters are greedy, for instance, or that they are assholes – is wrongfooted. Instead, the problem is that an ethos of generosity and social responsibility within unregulated enterprises is a positive handicap. And that describes the social circle in which, apparently, Ackman moves and thrives.

119

bob mcmanus 03.12.13 at 12:49 pm

115: Where do you think they get their money? Besides leverage.

And where will that money go if we control the banks and hedge funds? Is there enough art? Can we have 100 Versailles? At least that creates jobs?

If you have an income of 100 million a month, what would you do with it?

It is not just a matter of limiting rich folk’s amusements in gambling and speculation, and Ackman exists because Waltons and Saudi Princes want him to, but also, if we aren’t taxing the rich into penury, to force them to put their money into more socially productive investments. And train them into new status markers.

Gonna take a whole lot of regulating and educating. Guillotines would be easier. Things get really crazy when inequality gets this bad, and usually ended up with the gentleman’s toy of war.

120

JanieM 03.12.13 at 1:07 pm

Thus the need to inculcate virtue in the citizen – not simply free the citizen to pursue happiness any way he or she thought best.

Skimming through the Tech Review alumni pages the other day, I came upon this:

As a visiting scholar and MIT’s first Buddhist chaplain in the early 2000s, the Venerable ­Tenzin Priyadarshi was stunned by the lack of ethics training in the U.S. education system.

“In today’s society, people are increasingly not religious or spiritual,” ­Priyadarshi says. “Whatever exposure they might have had to a religious version of ethics is gone. We assume people are going to learn about ethics without any training or reflection—that’s a big gamble.”

When the global financial crisis hit in late 2008—caused, in part, by breaches in business ethics—he organized informal student workshops to discuss ethical responsibility in professional and personal life. Through these popular workshops, the need for an ongoing forum for examining ethical issues became clear.

“MIT graduates receive the best training in engineering and management—they’re running Wall Street and becoming heads of state,” ­Priyadarshi says. “But how can they become leaders in ethics and work to create an ethical framework in society?”

After conversations with colleagues, alumni, and donors, Priyadarshi helped create the Dalai Lama Center for Ethics and Transformative Values at MIT in 2009.

I was going to redirect my (admittedly paltry) annual alumni donation to one of Aaron Swartz’s causes this year. Maybe a direct donation to the Dalai Lama Center will do just as well.

121

Trader Joe 03.12.13 at 1:42 pm

Reasn and Main Street @ 114 and 115

There are zero instances of hedge funds causing the bailout of TBTF banks. None. Not even close.

Loans made to hedge funds to facilitate leverage strategies amount to a miniscule percentage of bank loans. Far less than 0.5%. There is no federal guarantee backstopping hedgefund loans or losses. All hedgefund loans are collateralized by assets.

Perhaps what you mean is that banks sometimes choose to be counter-parties to transactions engaged in by hedgefunds and that they sometimes sustain losses when they find they have not adequately hedged their own exposures. This has happened and does happen, but its called investing and has been engaged in for centuries and its true sometimes investments do and have caused banks to fail. Isolating these losses to hedgefunds is improbable at best since banks engage in trillions of dollars of transactions for their own accounts which have nothing to do with hedgefunds of any kind.

Finally – hedgefund losses are subsidized the exact same way losses are subsidized on your own Federal return. There is no tax preference in these losses not available to anyone.

When a hedgefund fails, which is actually pretty rare, the losses flow to the investors the same “high net worth individuals” so often disdained here (hedgefunds in almost all cases require investors to have a $1 million liquid net worth, sometimes higher). There is no bailout but they do get to deduct losses against other gains.

There is no SIPC guarantee – that’s why they are hedgefunds – the investors trade lighter regulatory oversight for no guarantee funds.

I don’t disagree with your premise that there are hedgefunds that take ‘big bets’ but its not fair to say they don’t eat their own cooking. The risk to the rest of us has more to do with potential market volatility than absorbing or subsidizing their losses.

122

James Wimberley 03.12.13 at 2:45 pm

Is there an investment bank run entirely by women? If not, why not? It looks like an opportunity.

123

Steve LaBonne 03.12.13 at 2:58 pm

I agree with Joe on this one. Long Term Capital Management was the biggest hedge fund failure we’ve seen so far AFAK (s0meone please correct me if I’m wrong) and its bailout was entirely private (via a consortium of its creditors). If rich folks want to gamble their own money with the Smartest Guy In The Room, more power to them. They don’t need the kind of regulatory protection against the sharks that the average person needs.

124

bianca steele 03.12.13 at 3:02 pm

heckblazer @ 104

Don’t even go there. You’ll be sorry you did. engels @ 111 too.

It is what it is.

125

Navin Kumar 03.12.13 at 3:05 pm

At the risk of turning a minor joke (44, 54) into a major tangent …

Most of the commentors here seem to have no issue with the idea that men are more competitive than women. However, if one group of individuals is more competitive than another, wouldn’t we expect them to engage energetically in, and win, more competitions? If the workplace is a kind of tournament with promotions and raises as the prize (quite a lot of literature on this) wouldn’t we then expect to see more men at the “top” of corporate hierarchies? Could the competitiveness of men (more social* than biological) explain the gender gap, rather than discrimination at the workplace?

Curious to see what the evidence is for and against this hypothesis.

*Women in matriarchal societies tend be as competitive as men in patriarchal societies.

126

Rich Puchalsky 03.12.13 at 3:11 pm

“its bailout was entirely private (via a consortium of its creditors)”

This “private buyout” was strong-armed by the Federal Reserve, which “was concerned about the potential for secondary (indirect) losses by firms and individuals not associated with LTCM and the potential threat to already volatile markets worldwide.” (Quote from here.) In other words, it was too big to fail, and if private investors hadn’t stepped in under the threat of regulation of the industry, it would have required government money. Those private investors stepping in after being brought to the table by the government was not automatic by any means.

127

Steve LaBonne 03.12.13 at 3:19 pm

In other words, it was too big to fail, and if private investors hadn’t stepped in under the threat of regulation of the industry, it would have required government money.

I see no reason to deal in counterfactuals on this one. The scale being nothing near the scale of failures of the most recent financial crisis, I’ve seen nothing to suggest that the situation in fact came anywhere close to requiring public money. (That the bailout was coordinated by the Fed is to be expected; who else could do it?) Even a “TBTF” hedge fund is nothing like the behemoth that the TBTF banks are.

What I do object to is the glaring tax loophole for hedge fund manager compensation. That should be fixed, which would also reduce the incentive for funds to grow too large. But aside from that, I think regulators have much more important places to focus their limited attention and resources.

128

Bruce Wilder 03.12.13 at 3:47 pm

The income tax loophole is the least of the problems. What do you imagine the hedge funds are actually doing to “earn” a return? Where is the value-added?

The presumptions that the activities of these entities are either benign or isolated, in relation to the financial sector or the political economy as a whole, are unfounded.

129

Steve LaBonne 03.12.13 at 3:56 pm

Lots of managers of all kinds get paid big bucks not just for not adding value, but for actually destroying value. I think hedge funds are just not one of the more important aspects of that problem.

130

Trader Joe 03.12.13 at 4:00 pm

123 & 124
I’d concur LTCM was the closest and agree it was a Fed strong-arm, but its unknowable what the losses might have been or if there would have been the feared contagion. Given the bull-markets of the day I’d surmise the losses would have been easily absorbed – and certainly far less than what we saw in 2007-09 – but I can’t really prove that other than the ultimate unwind of the LTCM produced relatively small losses and its investors weren’t even fully wiped out.

The fund manager compensation loophope you mention (and I agree with the point) mostly only applies to buyout and VC oriented funds where carried interest is normal form of return. Regular stock and bond and commodity funds don’t usually payout that way.

131

Main Street Muse 03.12.13 at 4:02 pm

From the Bloomberg piece I link to above (dated 10/21/2008 – as the economy collapsed):

“Investors on Main Street have another reason to fear opening their brokerage statements: the rapidly shrinking hedge fund industry. In the coming months, hundreds of hedge funds may shut their doors, sparking a massive fire sale on all sorts of investments. Just about anybody with a 401(k) or pension plan will feel the pain, since the sell-off will only exacerbate the plunge in stocks, bonds, and commodities—which make up the core of most people’s portfolios.

The 10,000 hedge funds with more than $1.7 trillion in assets are caught in a vicious cycle. Worried investors are pulling out their money—some $31 billion through September, according to Hedge Fund Research.”

Here’s a WSJ story from 3/18/2009 that indicates hedge funds will get AIG bailout funds: http://on.wsj.com/15KkX3M

So hedge funds can get swept up in an economic tsunami. And the costs of this kind of risk can be born by tax payers.

Not long ago, John Paulson (hedge fund genius) worked with Goldman Sachs to short a CDO (Abacus) that Goldman Sachs was selling to its clients. Paulson “earned” a billion dollars on that deal. Clients on the other side lost a similar amount. Deal cost Goldman Sachs a miniscule $550 million fine levied by the feds.

Sorry. Not buying the story that hedge funds are harmless to the greater economy. In what other sector could a company work both sides of a trade like bankers? Thanks to hedge funds, they can… and do.

132

Trader Joe 03.12.13 at 5:47 pm

Main Street @130

While it may be true that $31B came out of hedge funds, slightly over $700B came out of conventional mutual funds, 401k plans etc. as a result of individual investor decisions. Which do you think had the bigger impact on share prices? The evil hedge funds or the retail investor? I know which sells more papers for bloomberg.

The WSJ article talks about credit default swaps. Do you know how those work? Its like betting on the Superbowl – one side picks up, the other side picks down. As the article notes, the hedge funds picked housing down – that turned out to be like betting on the Ravens.

But DB and GS don’t just make one bet. Just like the house in Vegas, they take another position to hedge the first one – just like the house in Vegas. If you do it right, you’re indifferent whether the Ravens or the 49ers win (housing up or down)….all you care is you charged a trasaction fee for every bit of the action. Its not always possible to hedge perfectly and I believed I acknowledged that volatility is a by-product of hedgefund activities. If the book isn’t balanced that’s not the hedge fund’s fault any more that its the Raven’s bettors fault that the house lost money….the fault lies with the bank for not perfecting their hedge.

Are the banks vulnerable? Sure. I agree. The magnitude of their positions is significant and event correlation can be unpredictable – dozens of potential issues. But to blame a subset of the banks customers (the hedge funds) isn’t the right way to look at it. Its like blaming the straw because your Happy Meal gave you indigestion.

133

Main Street Muse 03.12.13 at 6:01 pm

Trader Joe – Really – when you can win big by betting against the US housing market – there’s some rather alarming moral/ethical/financial bankruptcy going on there. Seriously.

IF the financial sector were not backed by the full faith of the American government (taxpayers), this wouldn’t be an issue. No one would care. HOWEVER, this kind of excessive risk (hedged, yes, by people like John Paulson) is excessively dangerous, BECAUSE it requires a large federal bailout when things go awry (to the tune of trillions of dollars to prop up failed businesses – even the US government bailouts provides the financial sector with a nice hedge against failure…)

And please note that no one is blaming just the “straw” for “indigestion.” Hedge funds are not the straw. They’re the $31 billion fries that go with that $700 billion burger. All part of the “happy meal” that’s killing America.

134

Trader Joe 03.12.13 at 6:57 pm

We’re talking at right angles to one another.

My point I suppose, is that bank losses during the financial crisis were not caused by hedge funds, they were caused by the banks themselves. If they underwrite the loans properly the housing market doesn’t bust….if they hedge their book properly, they don’t lose money on CDS. You might not like that some hedge funds profited from the failure of the housing market but just as many lost money on it – just like the Superbowl.

A hedge fund doesn’t cause the gain or the loss any more than the bettor on the Ravens causes the 49ers to lose. The outcome of the game is independent of the bets made on it.

A moral/ethical argument is another matter and not where this discussion began. I’m sure there will be an appropriate thread in the future. The start of this discussion was a vague assertion that that hedgefunds caused bailouts at TBTF banks and that is simply not true whether you would like it to be or not.

135

hix 03.12.13 at 8:39 pm

Ltcm was expensive enough without direct bailout. While hedge funds were not at the core of the financial crisis, they made things worse. Most visibly those funds that brought down Bear Stearns. The real problem is going forward, since hedge funds are now the escape mechanism to do all those things banks did on their own books before.

136

Main Street Muse 03.12.13 at 9:00 pm

Trader Joe “You might not like that some hedge funds profited from the failure of the housing market but just as many lost money on it – just like the Superbowl.”

This is exactly the problem with the financial sector today – it’s turned “banking” into a Vegas craps table. The house gets to keep the profit when the mark loses. And the government gets to pick up the tab when the house loses.

The original assertion was from Watson Ladd – that hedge funds only hurt their investors. That’s simply not true. They are part of a sector that has been extremely costly to the economy.

137

roger gathman 03.13.13 at 12:46 am

136 – too true. There’s been a sly turn in the justification for the deregulation of financial markets that have so advantaged hedge funds. The original justification was not that rich guys need rich games – it was that the straight jacket of regulating financial instruments, such as currency future trades, actually hurt the economy by stifling the efficient flow of funds. But you know, once the derivatives markets got going, the new justification was exactly the opposite – hedge funds had no effect on the general economy, only rich people lost in them, so there was no reason to regulate them. However, this means there is no reason to allow them either. Why not regulate them out of existence if they do no good? And if they can do no harm, they can do no good. Time then to get rid of hedge funds.

138

Heedless 03.13.13 at 4:15 am

137 – The value that Hedge Funds provide is two-fold. First, they allow businesses to insure against volatility. A simple example would be Southwest Airlines buying oil futures to protect themselves against spikes in the price of jet fuel, while Exxon sells those futures to protect themselves from price drops. The instruments that banks use are considerably more complex, but the principle is the same. Hedge Funds set up the trades and take a percentage from each party.

Second, they strengthen the secondary market for debt. This allows banks to charge lower interest rates on their loans (although the loans do ultimately need to be paid, something that banks and hedge funds both seem to have forgotten in the run up to the financial crisis).

139

John Quiggin 03.13.13 at 4:23 am

Haven’t followed the thread closely, but the collapse of Bear Stearns in 2008 was precipitated by the failure of its hedge funds the previous year. The Fed bailout of Bear was a major step on the road towards the full-scale meltdown later in the year. So, the notion of hedge funds as innocent bystanders looks pretty silly to me.

140

reason 03.13.13 at 9:10 am

MainStreetMuse @117

I meant limited downside for the rich. Unlike if they used the leverage themselves where the downside is equal to whole of the credit.

141

Trader Joe 03.13.13 at 11:23 am

139 Quiggan

Bear Stearns was not bailed out. They were sold to JP Morgan and Bear Shareholders received cash and stock in JP Morgan. There were some temporary guarantees by the Fed during the transition – but not a dime was expended by the Fed or taxpayers on Bear Stearns.

Try again to find an example of hedge funds causing bailouts.

142

roger gathman 03.13.13 at 3:44 pm

142 – as I said, the argument was exactly that futures and derivatives would do social good – the Southwest airlines exam;ple seems to have replaced the example of Enron selling natural gas futures contracts and smoothing the way for natural gas power plants, perhaps because something – as I recall – went wrong with Enron.
However, Trader Joe is making the Greenspan argument, which is that just because a hedge fund causes the bankruptcy of a bank that starts a cascade leading to the blowing up of the financial system, technically that bank wasn’t bailed out. So hallelujah, and let’s not regulate those things. It is the type of Creo Magnon argument that the neolibs and right used in the nineties to let loose financial chaos, from which we are suffering today. It doesn’t pass the smell test, but Wall Street and its subsidiary, the Obama Treasury Department, still stick to this story. Myself, I can see some use for derivatives, but only if the peer to peer only market setup for their exchange is destroyed, and derivatives are sold in transparent markets, like stocks.

143

roger gathman 03.13.13 at 3:48 pm

ps – I should add that the shadow financial sector has created bastard banks – like say GE – that aren’t regulated like banks, though they engage in banking activity and were saved by the Fed as banks. AIG is another example. And there should not be such entities.

144

Trader Joe 03.13.13 at 5:27 pm

Roger et al
Apparently I’m not getting through here. The banks aren’t failing because of hedge funds, they are failing due to some other real factor in the real economy – in the recent financial crisis it was the collapse of the housing market. In 1998 when LTCM nearly failed it was the Asian market.

Hedge funds are market participants. They don’t cause housing markets to fail. Its why these products are called derivatives – they are derived from something – some real something that happens in the real world, not on a trading monitor.

While the collapse of an internal hedge fund may have weakened Bear Stearns – that was a vehichle for investing in mortgage backed securities. It was the collapse of the mortgage backed securities which itself was the product of poor lending standards, inflated asset prices…maybe five or six other things…that resulted in investment losses. The could have had the bonds sitting in a shoe box rather than in a hedge fund, its still the bonds which declined – not the vehicle.

In Bear’s case their investment errors led the firm to be sold to JPM Morgan. It was the shareholders of Bear that were largely wiped out (not entirely). Not the Fed. Not tax payers. Bear didn’t wreck Fannie and Freddie – they did it to themself. Bear didn’t cause Lehman or AIG or Morgan Stanley or anything- they each made their own versions of bad investments about the direction of the real economy.

I know its popular to blame hedge funds for everything. I “get” that this is a strongly held perception, its just not really in accordance with facts. To go back to my superbowl analogy – the players don’t fumble or score touchdowns because people are wagering on the game. People’s wagers on the game prove to be good or bad based on what actually happens on the field.

In the recent financial crisis the real economy in the U.S., Europe and China had some critical fundamental issues – market winners and losers were created from those fundamentals, not the investment decisions related to them.

145

Tim Wilkinson 03.13.13 at 9:33 pm

Trader Joe:

ridiculously large contributions to the arts, medical research and universities causing at least some of the gains to be put to good use.

Let’s pretend just for a moment that these people have no legitimate claim to control over those funds – now ask why we should be grateful that they choose to apportion some of them to such causes, at their discretion and without commitment or oversight? Why should society’s resources be allocated according to the whims of these people (along with corporate sponsors) for their own gratification or self-aggrandisment and with whatever strings they may decide to attach? I’m sure the recipients would be very happy not to have to come grovelling to such individuals for funding, if they didn’t have to.

Hedge funds are market participants. They don’t cause housing markets to fail. Its why these products are called derivatives – they are derived from something – some real something that happens in the real world, not on a trading monitor.Are these the same markets which are supposed to ensure optimal allocation of real investment by sending valuation signals? See also: stolen goods, receiving, offence of, sentenced on a par with theft, reasons why.

They could have had the bonds sitting in a shoe box rather than in a hedge fund, its still the bonds which declined – not the vehicle. And presumably we are to envisage a shoebox manager who decides what goes into and comes out of the shoebox and when. You are quite right, in this scenario it probably won’t be the shoebox that fails.

The risk to the rest of us has more to do with potential market volatility… So we’re all agreed: hedge fund managers, by their gambling in pursuit of personal gain, impose risks on the rest of us.

146

Jordan 03.14.13 at 12:38 am

@144 – To be, shall we say, slightly over the top:

Person A: Throws a bunch of gasoline on the house. Hey, it will keep bugs away or something! Its good!

Person B: Throws a match at the house. It burns.

Trader Joe: This is clearly person B’s fault.
Various Others: Ignore person B. This is person A’s fault.

147

Dan 03.15.13 at 5:53 pm

If anyone missed the epic live showdown on CNBC (that’s where the quote about little Jewish boys from Queens originates):

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