Hedge Funds

Kant vs The Hedge Funds

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This is the quote by Anthony Scaramucci, a hedge fund manager who supports Trump, at a recent Romney retreat, cheering on the anti-Trump crowd to join him in defeating Hillary Clinton. (Hillary=White Walkers, get it?)

The problem with the hedge fund guys is that, in their mythology, they are all brave, valiant, noble warriors fighting against some dark forces. I understand the urge and underlying mental dynamics: It is difficult for a man to do his job while recognizing that the very nature of that job is predatory. A man is not made this way. At the end of the day he wants to feel good about himself.

Thus we often witness the construction of elaborate mental schemes by those with power and leverage, aimed at the public, but also, in a way, at themselves, because getting validation of their goodness through public channels – such as charity – mitigates their furtive feeling of worthlessness. Still, a public praise is a weak consolation to such a smart group of people, simply because they know more than that adoring crowd of know-nothings. That’s why, receiving public accolades at a charity gala is always met with self-deprecating modesty: that self-deprecation is hardly faked. Deep down they know that it is undeserved; they know how they made their money. Such inadequacy is manifested by their public admiration of the truly noble, mostly fictional characters: Jon Snow, Obi Wan Kenobi, Batman. They wish they were like that. For example, I’m willing to bet that Trump, who avoided service in Vietnam, wishes that he would have avoided that service in a manner of Muhammad Ali – by being a conscientious objector and spending time in jail for his noble beliefs – rather than being a soft-ass run-of-the-mill son of a rich man.

Often, the argument in the defense of such guys goes along the lines that they are smart and risk taking. Intelligence, awareness and risk-taking are important qualities in a person, as I, too, hold those in high-esteem. But the argument usually stops right there as if smarts and risk-taking are good qualities in themselves. For some reason, we as a society, don’t demand that those qualities were channeled to the public good or just simply good. For us, smarts in the service of self-enrichment is admirable enough.

This is a problem. Even worse so, as philosopher Immanuel Kant says in his ‘Fundamental Principles of the Metaphysics of Morals’, “without the principles of a good will those qualities may become extremely bad, and the coolness of a villain not only makes him far more dangerous, but also directly makes him more abominable in our eyes than he would have been without it.”

We only wish that our villains would be stupid and inept, but more often than not, they are not.

Kant, who spent decades pondering on the issue, makes a point separating goodness stemming from inclination from goodness stemming from duty. That is an important, illuminating distinction that renders the entire ‘hedge fund good guys’ argument impotent. Charity, a favorite public display of goodness, is an inclination, not a duty, and therefore, according to Kant’s logic is disqualified from an absolute good. He gives an example of a philanthropist clouded by sorrow of his own, that (the sorrow) extinguishes all sympathy for the lot of others. While he still has the power to benefit others in distress, he is not touched by their troubles because he is absorbed with his own.

This is an inclination, not a duty. But notion of duty is absent from our public conversation. We often argue that if an agent charges you a fare fee because otherwise the market forces would put him out of business, then such a dynamic should be celebrated as beneficial to both. Kant disagrees. Or rather, he’s unsatisfied with such motivations. If the market forces were not there to inhibit the unscrupulous agent, he then would be free to charge you whatever fee he wanted. For Kant the absolute good, or good will, is for an agent to do the right thing even when the restricting or triggering forces are absent. This is the kind of level of thinking that is out of reach to our valiant hedgies, and sadly, to the public as well. We still can allow a standard economic argument to end with a simple: “but it makes money” cudgel and go on our way.

Sad!

The Fallibility of Men

“Since we are dealing with Men, it is inevitable that we should be concerned with the most regrettable feature of their nature: their quick satiety with good.”

This is a comment J.R.R. Tolkien made about his new but quickly abandoned book “The New Shadow.” He wrote only 13 pages of it and decided it wasn’t worth writing further. Why? He thought that the story could progress only in one way: the men who are restless and discontented with peace and prosperity will seek new battles and adventures and will destroy the peace in the process. That triumphant moment when the good defeated evil at the end of The Return of The King would only last a brief second before men would bring turmoil to their own kingdom. There’s no need for Orcs or Dark Overlord – men will do it all themselves.

I’ll get back to the fantasy world later.

Last week a former RBS trader pleaded guilty to defrauding investors. It’s not big news in and of itself. But it’s a great illustration to the point I’m trying to make.

Adam Siegel was a young star at Bear Stearns back in the day. He became an MD while still in his 20s. When Bear collapsed in 2008 he jumped to RBS with a bunch of his colleagues. After the crisis RMBS/CMBS trading was on the decline so to make any kind of money in that business one had to become resourceful. And he did. His new business model involved shaving a few beeps off his counterparties. Nothing fancy really. In 2014 one of his colleagues pleaded guilty in the expanding probe and Siegel himself was placed on leave. What does he do? Goes home and rethinks his life? Ha, no. He jumps yet to another shop – Fortress – to join yet another Bear alumni Michael Nierenberg.

This story is a great example of the kind of restlessness of men that Tolkien was talking about. Life gave Siegel plenty of opportunities to retire, to abandon the game – his first employer collapsed, the other suspended him – and yet he’s incapable of walking away. Instead he jumps from one sinking ship to another, probably self-congratulating himself for his agility and perseverance.

For guys like him the worst punishment is not jail time or a large fine. For guys like him the worst punishment is being excluded from the game. Now that he’s pled guilty and is on bail, I assume that, at the very least, he’s banned from using his Bloomberg. Oh, man, denying a Bloomberg access to a trader is like denying crack to an addict. He wishes nothing more than to be able to check some quotes. If you told him that for the rest of his life he will never trade again, never hustle a client again, you would put him into a severe, suicidal-level depression. It would be an equivalent of a concert pianist breaking his fingers. Life is over.

Back to Tolkien and to a Man’s ‘satiety with good.’ Good, the way Tolkien understands it, is a boring concept to a modern-day American. To Tolkien good is content and idleness. To Siegel and to any ambitious American (and what American is not ambitious these days?) good is dissatisfaction and action. We are like Nicky Santoro who, after getting himself banned from every casino in town, keeps devising new schemes to stay in the game. “I gotta do something, I gotta do something,” Nicky tells Ace. “They ain’t getting rid of me. I’m staying here. Fuck’em.” In our current zeitgeist such tenacity and perseverance is considered virtuous.

But what if we can’t abandon the game because the game itself gives us comfort? What if it is the unfamiliarity of a new route, the lack of familiar structure that we fear? What if it is the quiet that we’re scared of? Life offers us many exits from our routine, but we can’t take it. If we truly loved the game the way we claim to – the kind of game we imagine we play: competitive, ruthless, favorable to the best player – then we should welcome any chance to “step out of the comfort zone”, as numerous self-help books advise us. But we don’t. For our trader Siegel to step out of his comfort zone would be to abandon the industry and, I dunno, coach Little League. He won’t do that voluntarily.

The funny thing is, while at the game, we often dream of freedom from “all this shit.” Numerous movies and TV shows have explored this human need. But, alas, as soon as such freedom is within our reach, we pull back, horrified. We are all masters at what we do, all right. But it’s better to practice our mastery in familiar waters.

But God speed to Adam Siegel. I wish that, if he avoids jail, he reunites with his P&L soon. Things can always get worse when ambition is denied an outlet. It’s not like he’s stiffing public workers or municipalities, right? And what’s a few basis points between friends?

A Modern Day Dilemma, Explored.

This Aeon magazine article, long and meditating on details, encapsulates my ideas – the kind of ideas that are increasingly becoming my main point of interest – on the two major irreconcilable forces that drive our identity: the fulfillment (or lack of it) that we find in work and our desire (and inability) to be good people. Can we have day jobs (the kind that can pay our bills) and be the good guys at the same time?

As I wrote a lot of posts on the topic, I could not have better condensed my sentiment into a simple sentence:

“The innocent moral imperative to stand on your own two feet helps sustain structures of inequality that have come to seem – no lesser word will do – barbaric. The work ethic has a lot to answer for.”

In other words, as we struggle to survive under the current economic structure and get better at it, as we become more resourceful at and more dedicated to our jobs, we inadvertently help sustain this vicious circle of inequality. What we think of as a virtue – being good at what you do, or, to be more precise, being good at no matter what you do – is, in fact, a vice.

The author makes a point that television, albeit a what we call high-quality TV, can actually provide an idea of what it would take to be a better person while doing your job, as opposed to merely lament, as old traditional TV shows did, on how meaningless our day work is. Here I want to put the TV part aside, however, and just focus on author’s superb analysis of the status quo.

“The work ethic used to mean putting yourself on the line. Today, physical risk has been replaced by speculative risk.”

The author juxtaposes a cop and a finance guy (and we don’t really need a TV show for that) to demonstrate that, while both work hard, one of them gets all the goods and the other is assigned with protecting the former’s property while risking his life doing it. If you’re doing good at your day job, like enforcing the law or care for the sick or the elderly, does that make you into a sucker? Then he goes to make a point, or rather ask a philosophical question, that I have been pondering for years:

“How much of what we call respectable work is something that nobody under any circumstances should be allowed to do? Such subversive questions are actively provoked by the long-running gangster shows The Sopranos, Boardwalk Empire and Breaking Bad. These particular series are all about men, and all a man wants to do is provide for his family. But given the rules of the game, providing for your family might entail committing acts you can’t tell your family about, including murder. That’s just how it is. It’s not your fault. You’re just doing your job.”

By veiling our dedication to our jobs, no matter how unethical, in a shroud of ‘providing for the family’ is a mental escape that many of us use to get through the day. And because we’re so busy, we have no time to examine it, to think of it from this angle, let alone to change anything about it.

It is interesting to see the author to conceive a situation, albeit utopian, where we would reconcile the competition and cooperation: a Zombie apocalypse. This is a situation where we would abandon a sharp division of labor and our individual specializations. As I routinely mock finance guys who go out of their way to seek physical hardships, whether out of boredom or excess energy or preparation for a total economic collapse, perhaps there’s some real truth to my scorn. These demonstrations of physical prowess are their subconscious manifestations, perhaps even a longing, for the world where the real meaning would exist. But if and when the real Zombie apocalypse happens and we’re forced to apply our physical skills to survive, the upheaval would also force us to have a conversation about what it means to do meaningful things. Are we prepared or even mentally equipped to have that conversation?

Yet Another Example of a Modern American Business Model.

This recent article in The Atlantic gives another great example of how our current economic system is tweaked to serve the few at the cost to the many.

In a nutshell, what happened is the homeowner had a loan with BofA, which he refinanced in 2009. The new, modified terms of the loan allowed him to avoid defaulting on it. Because the loan was insured by FHA, BofA has received the full payment from FHA and transferred the loan to the government agency. FHA then sold this loan, at a deep discount, to a hedge fund. In 2011 that homeowner finds out that the modified terms (and the reduced monthly payments he was paying) are being disputed by the new holder of the mortgage, Oaktree Capital, and that he now actually owes the full back payments (the original payments of the unmodified mortgage) if he wants to avoid foreclosure. Now, before we even move further with the story, I want to dwell on it. There’s too much to unpack here. Yes, yes, I understand this is business, and the businesses are not non-profits, and this is just an unfortunate situation for this one particular guy, and nothing illegal transpired and why don’t we just move along, because the firms that provide credit and liquidity to the markets are the arteries of the economy and let’s not get hung up on the one guy who got caught under the wheels of commerce. But I don’t want to move along. I want to understand why a guy with a mortgage, who follows the rules, is completely defenseless against such turn of events. What recourse does he have if a bank transferred his loan to FHA (a government agency), and FHA, instead of adhering to its principals of building stable communities and promote homeownership, discards this loan, at a discount, to the least scrupulous guys on earth – the hedge funds? What do you expect those hedge funds to do – to help this poor guy figure out how to keep his house? No, helping the guy is what the charity is for; but this is how we make money.

FHA selling loans to hedge funds is indicative of what happens when a government agency is forced to have a bottom line. This loans sales program came about under intense pressure from Congress – a legislative body deeply allergic to any kind of spending. This dysfunctional convergence of forces – legislation that is adamantly against spending, a government agency forced to fend for itself, and vultures looking to profit – as always has to be sorted out by the little guy who played by the rules.

Why and how have we allowed businesses to evolve to such a grotesque form – a form where their bottom line supersedes the rights of the ordinary citizens? The homeowner was doing all the right things, things that are routinely praised as guarantors of success by the conservative and neoliberal cheerleaders – he modified his mortgage terms and was adhering to those new terms. Then, out of the blue, some third party comes in and tells him that those terms are null and void and please pay up now. If this is capitalism, if this is free markets, how can one still insists, with a straight face, that this system is better than socialism? How is it better? What protection an average schmuck has against such unaccountable and wanton market forces? What did he do wrong?

This is a great illustration of how broken this whole system is. The big underlying problem is that to survive one has to cut corners and to make deals, often semi-legal or borderline illegal; or, better yet, to write laws that will make legal what would otherwise be illegal. FHA selling loans to hedge funds and washing its hands off of underwater homeowners were totally legal. Still, wheeling and dealing is a realm of the privileged. If you’re some guy who cuts corners by selling loose cigarettes on the street corner you’re gonna end up dead. But when the suits cut corners then we routinely get a talk about a sacred and untouchable ‘bottom line’, that has somehow evolved into the ultimate argument bludgeon.

And final philosophical point. Guys at Oaktree are not fools, at the end of the day they know what they’re doing. I know the type well – this is the bare-legged, super-fit guy you see running in Central Park during the rain or snowstorm, preparing for a marathon or an Iron Man, because he read in a self-help business book how overcoming obstacles makes one a winner. This is the guy who, when his daughter asks him “Daddy, what do you do?” pauses for a second, and then, snapping out of a momentary embarrassment that he’s not a firefighter or a pilot, explains, mostly to himself, that he’s a little cog that makes the big wheels of finance turning, the efficient mover of capital, the engine of the economy. This is the guy with a self-awareness (today’s hedge funders are all about meditation and mindfulness), but also a void that he can’t fill – neither with marathons, nor with underground fight clubs, nor with ostentatious charity. And it weighs on him. It weighs on him bad. And he can’t find an escape. 20 years from now, when he sits in some new-agey condo on the beach or a high-tech cabin in the Colorado Mountains, wistful and restless, it will dawn on him what a joke his entire life has been. But it will be too late.

Our Cult of the Underdog.

In a modern-day America, a good modest origins story is as necessary an attribute of a public figure’s self-identity as a Birkin bag is a necessary attribute of an Upper East Side trophy wife. As political season heats up and the candidates elbow each other to ingratiate themselves with the little guy, we should ready ourselves for the bi-annual onslaught of personal hardship stories. But come to think of it, the underdog story is a permanent American staple, election season or not.

Election year, however, offers a great insight into the power of such narrative, where political candidates, most of whom were born to uninspiring circumstances ranging from middle-class families to political dynasties, compete for ‘the shittiest childhood’ spot. There’s a problem there, as the candidates, raised in the postwar, economically prosperous America weren’t exactly subjects to a Great Depression or a WWII level upheaval. Here, lacking a true personal hardship story, they pivot to the story of their immigrant parents and grandparents, as if the suffering of ancestors is somehow a proof of one’s own hard life. How was it hard? Was he a barefoot 12-year old forced to work in a coalmine to feed his family? On genetic level? Damn, if only one could buy a crappy childhood!

To admit privilege, to admit the possession of power or influence, is to put oneself into a weaker argumentative position and to invite criticism. The privileged know this even if on merely subconscious level – they never miss a chance to tell a self-deprecating story. This strategy kills many birds with one stone, it deflects the critics and endears the narrator to an economically struggling audience.

In real life we’ve all met manifestations of such underdog mindset when we heard a successful person boast about how hard he worked to get where he is (usually a soapy immigrant story), and then, without missing a beat, complain about how it’s tough to live in a world where his tax dollars support all kinds of riff-raff. You see the trick here? While he’s eager to convey his success story he’s careful to mask it in a certain degree of martyrdom.

Positioning oneself as an underdog is a low-risk, high-reward strategy. Kim Davis, a Kentucky public official who refused to issue marriage licenses to gay couples knows this. Her ostensible underdog bona fides, validated by the stint in jail, were cemented at the moment of her release, in a surreal but too delicious to watch spectacle. The visuals of the event – the Eye of the Tiger soundtrack, the politicians jockeying to insert themselves into a photo-op with a bunch of country bumpkins, the crosses, the main character’s triumphant posture, arms in the air, akin to a pastor about to deliver a sermon to her flock, her husband in denim overalls and the scarecrow hat – were just too awesome. A fiction writer would kill to conceive and write a scene like this. But the scene was real and unscripted and thus powerful – there was no hint of irony in the entire show. Clearly, Kim Davis fancies herself to be a scrappy Rocky Balboa defeating, in an uneven and bloody fight, an all-powerful Ivan Drago. And that gives her power. She would not have that power if she merely performed her governmental duties, because a government official cannot be an underdog. What’s also interesting here is that one doesn’t even have to put up any sort of a real fight to achieve the accolades. These days one can achieve the glory of David fighting Goliath, without doing all the work. You don’t have to defeat the Goliath, you just have to bait him, make yourself into an underdog and take a stand, and next thing you know there are TV cameras and politicians and a cult following. Whether you’re in her camp or not you watched that scene in awe. The genius of that scene is undeniable. It could not have been conceived and executed as preplanned. It was a sporadic, organic display delivered in the most dramatic fashion to the hungry, rapturous audience. Somewhere, Karl Rove is biting his nails in envy.

As much as this Kim Davis’s kind of underdoggery is entertaining and attention-drawing, it can’t do much harm. 6 months from now we won’t even remember who Kim Davis was, like we don’t remember the outrage surrounding Rachel Dolezal a few months back.

It is the low-profile underdogs that worry me. It is the true elites with power, pretending to have none, that can do real harm. The greatest cache of low-profile underdogs can be found on Wall Street or among the billionaire ranks. I would argue that, among these elites, a quest for a personal narrative is as strong a motivator as monetary rewards. A smart billionaire with politics and a gospel to spread knows that denial of power is a power in itself. Acknowledgment of being in privileged position, of possessing power, would then require some kind of stewardship, a responsibility. But denial of power frees one from responsibilities. What kind of stewardship and responsibility can we expect from the majority of Wall Street players and hedgies who, with multi-million dollar paychecks, with an army of lobbyists, with a direct line to and an ear of lawmakers, still insist on describing themselves as ‘scrappy kids from Brooklyn’ – a tired metaphor, sure, but still a dominant sentiment among the finance crowd, doggedly resistant to self-reflection?

Such resistance – to the acknowledgement of one’s membership in a power elite – reveals a deep desire to be free from responsibility, to remain a child in essence, to be an immanent, passive participant, who merely reacts to events unfolding before him. Again and again, in the aftermath of the crisis, we heard one bigwig after another, defend themselves with “I didn’t know nothing” and “beyond my control” fables. They knew that to be in charge is to be accountable. To be perceived as a winner, to be transcendent, is to invite all kinds of unwelcome scrutiny. But when you’re an underdog you can use it as a shield from critics and a niche from which to attack others. Folksiness and bootstraps stories are immune from attacks by nosy journalists and Vox.com eggheads. It’s a smart positioning. One has to be a Trump to revel in the spotlight and the “winning.” But Trump has a rare quality of not giving a fuck, unlike many self-conscious “winners” on Wall Street, who feign modesty and shroud themselves in ‘poor me’ stories. Is it any wonder then, that the public, correctly, perceives them as the biggest douchebags?

Former Goldman Prop Traders Can’t Survive in the Wild.

Turns out Goldman traders are not at all what they’re hyped out to be, once they are deprived of their Goldman platform. Many went and started their own hedge funds and failed. One guy even managed to lose 7%. 7%! In this market! I guess he was long gold. How else one loses money in this market.

I’m almost disappointed. It’s as if Dr. Evil from bond movies turned out to be just an old grandpa with a cat – no handlers, no masterplan, no secret weapon. Once stripped of their magic lever that Goldman provided them they can’t walk on their own.

T’fy, blya! Such a major disappointment.

 

The Burden of the 1%.

BERNARD: But sometimes, Willy, it’s better for a man just to walk away.

WILLY: Walk away?

BERNARD: That’s right.

WILLY: But if you can’t walk away?

BERNARD: I guess that’s when it’s tough.

– Arthur Miller, Death of a Salesman

Wealthy Manhattanites reel from dull predictability of highly structured lives.

There’s this magazine, Departures – a great read if you care about what’s on the 1% wish list. The magazine comes free if you have an American Express platinum card. If you don’t have an American Express platinum card, there’s a good chance you’ll find this magazine in a bathroom of your rich friend, right by the toilet seat. Open any random page and the amount of bullshit will blow your mind. “Are you still waking up to a traditional alarm clock and showering with ordinary municipal water? That’s so old school,” begins one article. You are in luck: The showers infused with vitamin C, lighting that optimizes your circadian rhythms and task-specific aromatherapy will soon be available to some lucky health-obsessed and, well, solvent Manhattan dwellers.

The burden of the 1% is lack of alpha and lack of adventure. If you represent a market niche for that vitamin shower but have read Hemingway in your youth, you sense that something is not quite right. You sense some hard-to-nail-down dissonance. As a former member of the 1% I know the feeling. I was there myself. Back in the day, when I was a mid-level Wall Street employee I wasn’t exactly lacking the thrills at work. Back then the volatility resembled a wild bronco. I had to clear 3-4 points bid-offer just to break even. That’ll keep you awake at night. I’m not complaining, after all I was well-paid. I’m just showing off my battle scars. To a Wall Streeter everything is a battle or a game, you know. Then, when you’re off work, your life is a sterilized and predictable routine: gym, healthy eating habits, domestic help. Eventually, this dichotomy – dirty combat at work/decontaminated existence outside – becomes mentally draining. If you’re able to block those creeping thoughts about the nature of your existence, you’re lucky. I wasn’t that lucky. Like many others, I’m sure, I looked for rationalizations: there must be some purpose in all of this, some meaning. But there was none. It’s just one of those bullshit jobs with a good payoff. We were not really funding any businesses or providing liquidity. I refuse to believe that those still employed in those areas don’t realize that – they are way too well-read and overeducated to not appreciate the predicament. So many are looking for some mental release, for a justification. Because we are good, dammit! We are all good people just doing our jobs.

When you’re used to your career trajectory moving up at a 45 degree (or steeper) angle, you are at a loss when it inevitably begins to flatten; you’ve groomed yourself for battle after all. Your built-up ambition doesn’t slow down in correlation with the diminishing opportunities. It doesn’t just disappear. And then what? At some point acquiring luxury items stops bringing satisfaction. At some point your life becomes about seeking the next thrill. Mine did. Like in some vile videogame you must move to the new level, new quest – this time searching for meaning, validation, benevolence or adventure. Adventure is hard to come by in Manhattan, unless you are a homeless drug addict or a street hooker or, well, poor. One can search for meaning on various charity boards, the other may find refuge in drugs or alcohol. I’m indifferent to most drugs; I’m partial to coke, but it makes my nose bleed. Marathons are pointless in my view. I consider charity – a common mental refuge of the successful – to be just a contrived display of benevolence, a self-promotion tool. I like gambling though. But my point is this: outlets for a real adventure are limited for the top 1%. But that pent-up demand – to be someone beyond the P&L, beyond the “number” – is palpable among the Wall Street/hedge fund crowd. They can’t sit quietly in the room and enjoy the spoils. They must do something. That desire is not necessarily bad, it just has nowhere to go. To exacerbate the problem, there’s no alpha today, no volatility. Hedge fund managers feel emasculated. They are basically reduced to extracting value from others, relying on insider tips, bullying everyone down the food chain and engaging in insurance scams. I guess that explains Bernanke hatred: he took away the hedge funds’ thrill rides. There are very few opportunities today to show the world what a top dog you are. And it sucks having to think of yourself as a swindler or a bully. Ask any credit trader to describe what he does for a living and more often than not you’ll hear self-deprecating: “Oh, I’m just a monkey pulling a lever,” followed by a sheepish giggle. The reason for this faux humility is that he himself knows that what he does is bullshit, a high-paying bullshit. You would never hear something like this from a doctor or a teacher.

That’s where pretentious bullshit comes in. It takes many forms. Sometimes it comes in the form of a fake adversity. The popularity of various races “for the cure”, marathons, charitable trips to Haiti, underground Wall Street fight clubs speak of that furtive need. All of a sudden, the 1% want to be regular folk, or at least find what they think is regular folks’ experience: physical challenges, dangerous situations, scarcity of resources. That credit trader fake display of modesty is often followed by a story about how they flew to Vegas with the guys for a weekend and got into a drunken fight in a nightclub. They seek adversity so that they can “overcome” it and then tell stories. But in our sterile Manhattan/Greenwich cocoon we are just grasping at straws. Local businesses got smart about those repressed desires: they structure their businesses to look like they serve a bunch of destitute laborers. Ralph Lauren store in West Village sells those Boardwalk Empire themed clothes that will make you look like you just came from a Depression era stock footage. Naturally those clothes cost a small fortune. Trendy restaurants must contain words like “farm”, “kitchen”, “shack” or “mission”. Or how about those cronut lines in Soho? People stand in line for 3 hours to get a freaking pastry! Those are not exactly working folk standing in line for a piece of bread. Why do they do that if not for that rare sense of accomplishment? Or have you tried to get into Momofuku Ko? You have to know a guy who knows a guy who can get you a reservation, but even then you won’t be able to find the freaking place. You’ll be going up and down the 1st avenue block trying to find the goddamn door. It makes for a good adversity story though. Going to Per Se or Daniel does not sound like much of an adventure. I guess in the end it’s not so much about the product as it is about the process.

That’s the cruel predicament that the 1% got themselves into. The well-off work hard to eliminate the chance, the spontaneity in their private lives and then spend enormous amounts of money trying to recreate it in a controlled environment. Nassim Taleb, the author of Black Swan and Antifragile, calls this kind of phenomenon “touristification”. Even their thrill seeking time will be planned and scheduled and will have a private guide. Even when you travel to, say, Cambodia, all you gonna end up doing is riding in an air-conditioned car, occasionally stopping in some indigent villages to take pseudo-National Geographic pictures of dirty barefoot kids. While tracking gorillas in Rwanda you’ll have an option to stay in the slums for a night and lend a helping hand to orphaned children. Or if you really want to immerse in the lives of destitute there is a new trend in luxury “shanty town” vacations. Options include a $26 tour of Cape Town where you can experience feces in plastic bags being thrown at you (without plastic bag is extra?). Think about stories you’ll be able to tell back at your desk and at cocktail parties! And yet, you’ll still feel restless.

There’s a cure for that restlessness. I hate to sound pious but you can become a better person for real. The only way to help the poor and the destitute is to stop doing what you’re doing. It’s not like you have to do it. Stop trying to devise new ways to extract value from the rubes. Stop charging public pension funds million dollar fees for some questionable services. Fuck HFT, fuck CDX IG! You are looking for excitements in all the wrong places: it’s a world of diminishing returns for as far as I can see. Take the money you already have and retire or find another line of work. Some are doing it already. Seriously. It’s unorthodox, I know. What’s that? Leaving the industry will prevent you from funding your philanthropic foundation that helps poor people? Perhaps when you stop fleecing people in the first place they won’t need your mercy after all. Stopping this bullshit is what really matters. Walking away from your line of work is the real adversity, the real-life adventure that you so desperately seek. Think of it as if you’re throwing the ring of power into the fires of Mordor.

I understand that for many it may be all too real. People have families, bills, lifestyles to maintain. One can’t just walk away from all of this unscathed. Oh, well. I guess that’s when it’s tough.

Growing Inequality Can’t Be Cured by Charity.

It’s very hard to make a connection between one man’s actions and the other man’s suffering due to those actions. For a hedge fund manager it’s difficult to link his actions to a suffering of a small town teacher. His thinking goes: I exploit market discrepancies, I make money and pay taxes, I donate to charity. He may even think: I am genuinely a nice guy and I really want to help. It’s hard to trace the root of the problems back to himself and his colleagues and industry peers. That would require the rethinking, perhaps painful and unwelcome, of his entire existential premise: is he as good for the society as he thinks he is? And if he’s honest with himself, he will realize that the answer is not necessarily yes.

I wrote recently about how hedge funds these days, rather than engage in honest betting on markets are instead seeking to extract value at the expense of the communities, bully others for value or simply seek rent opportunities. None of those activities produce anything of value; they strip value from the existing caches. Then they use various tax loopholes. And then they donate to charity, being under the illusion that it can cure social ills and because, you know, they are not monsters.

That’s the model we’ve had for some time.

But here comes the danger. In another illuminating Bloomberg article (Bloomberg columnists are really on a roll, finding their mojo recently), we’re risking societal breakdown if we continue on the present course. This sentiment has been widely explored on the pages of my blog, but this article summarizes my thoughts in a concise and trenchant manner. Over the course of history many societies have reached this point. Many got out of this rather unscathed, if they embarked on the policy of alleviating the social and economic discrepancies (New Deal), many others have experienced a more painful chain of events.

I want to stress, again and again, that helping the poor does not turn us into Commies and socialists. It merely helps smooth out such transitions, it is in the very interests of those hedge fund managers. Blaming the poor, the unemployed and food stamps recipients on the lack of alpha is disingenuous and counterproductive.

Has the Culture of Entrepreneurship Gone Too Far?

The culture of entrepreneurship and risk-taking has always been a central theme of the American history and character, but in the last few decades it morphed into a rather bizarre and unnatural form.

America today reminds me of a poker table where one player has sucked in all the other players’ chips and insists on keeping the game going, dismayed that the customers don’t have any money. “Come on, people, what’s the matter with you? Let’s play!” He laments. But he gets no action. It is at this moment that he has to decide whether it is all about the money or all about the game for him: what’s the point of having all those chips if you can’t use them? The chips only have value if you can use them to get even more chips. But what’s the point of being great at taking other people’s money when there are no customers around? What’s the point of having billions in cash if you have nowhere to invest it? You know you’re good at your game, but the more money you have the less opportunities you have to demonstrate it. It’s much easier to make 20% return on $10 million than on $10 billion. And the thought of shopping for yet another Lamborghini is depressing, because you already have several in your garage.

Game, action – is what you seek at that point. Perfecting your skills and promoting your gospel is the reason you wake up in the morning. That’s the main reason, perhaps, that many billionaires go into politics. With this mindset you invite, or rather, insist on others participating in your game. You view any human interaction as a business transaction, an opportunity for one-upmanship. To keep playing that game you have convince all the suckers out there that they too, if they work hard, can learn to play it. It is only when millions of others are striving to become like you, to play at your table, by your rules, you can have a lasting legacy. If they don’t then you’re just a lonely guy with mountains of chips at an empty table. And after you used all the leverage out there to improve your returns and received all the political favors, it all still comes down to having players at your table. At some point, when the flow of new customers slows over the normal course of business, you begin to devise plans to extract fees from the existing ones to keep with the original pace of growth. That’s how we got the new business models with various “financial innovations” schemes: private equity funds or activist investors extracting value from already existing caches, like pension funds or profitable companies; raiding others for value rather than building it.

With such a mindset one becomes blind to the idea that, perhaps, making a few hires, parting with a few chips, would jump start the game. But lack of introspection is the name of the game. The ideology of competition has penetrated our political quarters and our national discourse so deep that we glorify the gamblers and pity or tolerate the salaried workers. Such over-the-top encouragement of risk-taking produced many bad players. Extracting value from companies through M&A, rent seeking, and trading synthetic indices is not entrepreneurship in its distilled form, because there’s no risk involved or no product being made. These bad players have entered the game over the last few decades and in order to win they began to manipulate the odds for all other players. They situated themselves permanently on the button (the best position in poker) by making deals with dealers and the floor managers. But of course, they don’t attribute their success to such a privileged position – they attribute it to their skills. They look at 9-to-5 cubicle workers as cost centers, because those schmucks don’t engage in a game. And yet they would like for them to join the table. We rarely hear stories of a businessman turning into an office worker, because that is viewed as a failure. College students are encouraged to scrape around or borrow money and start their own businesses. We expect, nay, demand, that everyone becomes a small entrepreneur. Good luck with that, kid. Except you won’t be doing M&A, or charging others 2/20, or collecting insurance premiums from dumb customers with money, the businesses with essentially zero risk – the kind of businesses only “serious people in suits” and incidentally the biggest advocates of risk-taking are engaged in. You’ll be spending that last $50K to open a cup cake shop or a restaurant that has an 80% chance of closing in a few years. Giving such an advice to someone right out of college is bad faith. Strangely, the loudest advocates of risk-taking are the ones who deal with no risk at all. But then what’s wrong if one simply wants a quiet life, a stable paycheck, some financial security? He’s seen the statistics – the majority of small businesses fail, so perhaps he decided that such gamble would be imprudent given their circumstances. And why should such a decision be derided by the gambling worshipers on top of the hierarchy? Those workers simply assessed the situation and decided, correctly, that it would be a bad investment. If anything they should be commended for it, not ridiculed and called names, like “moochers” or “takers”. Since when simply working for a paycheck became a point of derision?

Poker players in the casino have a choice not to play, they can stand up and leave the table if they don’t like the game. Average citizens do not have that luxury. If the business community still insists on fleecing those unfortunates who scrape by paycheck to paycheck the least they can do is stop calling them names.

Magnetar’s Capital New Trade

At Policymic.

If it’s all about business, then, perhaps, Magnetar can halt its cheap displays of benevolence. A $25,000 donation by the property manager to staff one police officer at one of city’s schools would be a nice gesture if it weren’t accompanied by the attempt to strip the very same community of $1.39 million. If Magnetar really wants to repair its image from times past and to demonstrate its goodwill to the local community, there’s a great and easy way to do it: Pay property taxes and stop extracting value at the expense of the locals.