The Catastrophe
Capitalist
In the bleakest stock market of the past 70 years, when hedge funds and
401(k)s alike have cratered, few people are smiling. But short-seller Jim
Chanos, whose fund is up 50 percent, is having the time of his life.
Jim Chanos
The salmon-colored
pages of the Financial Times are not the place you turn to these days to
find good news. But on the morning of November 4, Jim Chanos, president
of Kynikos Associates on West 55th Street, the world’s biggest short-selling
hedge fund, read an article in the paper with irrepressible glee. A colleague
had e-mailed him a link. The headline: GOLDMAN FUND LOSES $990M AFTER 10
MONTHS.
Chanos had
reason to be happy, and not because he had any stake in the outcome. His
East Hampton neighbor, Marc Spilker, managing director of the Goldman Sachs
division responsible for the billion-dollar loss, was finally receiving
his comeuppance. In June 2007, Spilker decided to widen the rather narrow
footpath from his house on Further Lane to the beach. One afternoon, Spilker
dispatched a crew to widen the path by bulldozing the hedges between his
mansion and Chanos’s. Chanos was outraged. “I hope this is not
a harbinger of how other Goldman senior executives may act when the markets
become ‘just not lucrative enough for us!’ ” he wrote to
friends at the time in an e-mail that just happened to find its way to the
New York Post. Several months after the Post leak, Chanos pulled nearly
$3 billion out of his Goldman trading account, costing the bank some $50
million in annual fees, according to a source, and brought a suit against
Spilker. (Goldman disputes these numbers.) Now, a year later, as Chanos
sat at his Bloomberg terminal reading the Financial Times’ account
of Spilker’s recent hedge-fund woes, a smile broadened across his face.
He sent out another mass e-mail to his friends, staff, and financial journalists,
directing them to the news. “Mark [sic] Spilker (Head of GS Internal
Hedge Funds, and Horticultural Hater) strikes again!”
It might be
fun to share in a little Goldman-bashing with Chanos, until you realize
that you and he are in very different circumstances. Your 401(k) has been
plunging at the rate his fund is rising. Chanos is arguably the most successful
hedge-fund manager on Wall Street right now. As hedge-fund all-stars bleed
red—SAC Capital’s Steve Cohen is said to be off 18 percent this
year, Citadel’s Ken Griffin as much as 44 percent, and even David Einhorn,
who presciently called Lehman’s implosion, has seen his fund, Greenlight
Capital, slide a reported 26 percent—Chanos’s short positions
have earned him a return of a reported 50 percent. He now manages some $7
billion. Trader Monthly estimated his paycheck in 2007 at over $300 million,
and he’s on track to earn a similar payout this December. While many
Wall Street refugees are liquidating their art collections and listing their
trophy houses on the market, Chanos is buying. This summer, he closed on
a new $20 million triplex on 75th Street, off Fifth Avenue.
As a short-seller,
Chanos earns a living by borrowing and then selling shares of a company
he thinks will experience trouble. When the stock tumbles, he buys back
the depressed shares and returns them to the lender, pocketing the difference.
In other words, Chanos is a financial undertaker. He makes a profit when
companies die. And when there’s an epidemic, he gets richer still.
one afternoon
last month, Chanos sat in a brown leather chair at an oval table in his
eighth-floor conference room. A whiteboard covered one entire wall, for
his analysts to scrawl out potential investment ideas. On the adjacent wall,
the bookshelves resemble a library of financial doom, lined with titles
such as Bubbles: And How to Survive Them, How to Profit From the Coming
Real Estate Bust, and Conquer the Crash.
Chanos was
excited that afternoon. He had just read a report that China’s electric
consumption had dropped 4 percent, despite official government statistics
that the Chinese economy was growing at 8 percent. He relished the implications.
“I think they’re making up the numbers!” he said. As Wall
Street picks up the pieces of the broken financial system, Chanos is already
one step ahead. He sees China as the next domino to fall in the global meltdown.
In recent months, Chanos has loaded up short positions on the infrastructure
companies that have rushed to build China’s new highways, bridges,
and tunnels. Now he is waiting for their share prices to tank.
Watching Chanos’s
trades over the last six months is like reliving the economic meltdown in
slow motion. Since the summer, he has been cashing in his short positions
in cratered banking and real-estate stocks, as the crisis has spread from
the subprime-mortgage sector to become a full-scale economic meltdown. Starting
in 2006, Chanos took up sizable short positions in residential home builders
like KB Home and WCI, firms that transformed places like South Florida and
Phoenix into exurban nightmares. This past summer, Chanos cashed out his
portfolio’s 30 percent stake in financial-sector and real-estate stocks,
after bank shares plummeted in the wake of the Bear Stearns collapse. Chanos
then went short on construction and engineering companies, predicting that
the credit crisis would spill over into a full-fledged global recession
and places like China and Dubai would see their overheated economies freeze
up. And he bet against his fellow hedge-fund managers’ mania for art
collecting, making a bearish gamble on Sotheby’s. Last month, Chanos
closed out his short position in Sotheby’s after the auction house’s
stock plummeted from a high of nearly $60 to $8. “That wasn’t
a hard one,” he says, smugly.
Chanos doesn’t
practice the rapid-fire computer trading of a quant fund like SAC Capital
or Jim Simons’s Renaissance Technologies. He pushes his analysts to
dig into the minutiae of a company’s financial statements. He ferrets
out accounting gimmickry that he says companies use to spin their results
and inflate profits (he’s particularly skeptical of the toxic practice
of “mark to market” accounting, which allows companies wide latitude
in valuing illiquid assets).
Once Chanos
develops a thesis, he goes all in, taking up a short position while waiting
for the rest of the market to come around to his way of thinking. This year,
of course, the job has been easier—just about everything cratered,
so he’s had an extremely good batting average with his massive short
positions. And since he called the credit crisis early, the stocks he picked
to collapse have had a long way to fall. On top of his 2 percent management
fee, Chanos is paid when his fund rises more than the market falls.
But when the
market is not dropping so precipitously, the game is much more nuanced.
More than other hedge-fund managers, Chanos has long made use of a potent
weapon: the media. Chanos is a media operator. According to the New York
Times business columnist Joe Nocera, Chanos is “a guy who’s willing
to talk to reporters, and reporters gravitate towards people who will give
them information.” You can think of Chanos like the pre-2008 John McCain—the
media is his base. In this information culture, Chanos has built valuable
relationships with journalists who take his ideas seriously, promote his
point of view, and ultimately help make him rich. Like Washington, Wall
Street is a game that is fueled by the selective leak. The right tip can
mean the difference between winning or losing millions.
To get his
ideas into the market, Chanos has often sent his research to reporters he
trusts and e-mails stories he finds interesting to groups of journalists
and other fund managers.
Earlier this
year, that tactic produced substantial blowback. After Bear Stearns went
down, in March, Wall Street’s beleaguered CEOs launched an attack on
shorts like Chanos, accusing them of manipulating the media, leaking damaging
rumors to journalists, and profiting from their banks’ demise. Chanos
understands the expediency of going after the guy who announces the party
is over. “People who lose money always need someone to blame,”
Chanos says. Over the last few months he’s launched numerous counterstrikes.
In July, he sent an e-mail to reporters linking to an article about British
regulators’ efforts to curtail short-selling on the London Stock Exchange:
“It’s almost sickening now that the regulators ‘on the beat’
while the biggest credit collapse in modern financial history unfolded are
now patting themselves on the back for their ‘brave’ stance on
short-selling!”
And what about
the ranks of average Wall Street traders who rode the boom and are now losing?
Chanos feels sorry, sort of. “The marginal people on the trading desks,
there’s no skill set,” he says. “If they don’t trade
derivatives, I don’t know what they can do. The next stop is driving
a cab.”
But pity only
goes so far. Chanos sees himself as a kind of truth-teller. “I’ll
always understand the Schadenfreude aspect to short-selling. I get that
no one will always like it,” Chanos says. “I’m also convinced
to the deepest part of my bones that short-selling plays the role of real-time
financial watchdog. It’s one of the few checks and balances in the
market.”
He’s
not in the game for charity, though. “It’s from enlightened self-interest,”
he says. “I’m not doing this for free.”
If Chanos
is something of a Wall Street pariah, the feeling is mutual. A self-professed
“limousine liberal,” Chanos disdains Wall Street’s elite
culture. “The sense of entitlement that everybody has because nothing
has gone wrong for them is frightening to me,” he says.
One afternoon
earlier this year, Chanos was relaxing in a cream-colored chair in his Upper
East Side living room. “A bachelor pad,” he joked. Several years
ago, Chanos and his wife separated, and, at 50, he’s become a feature
in the Hamptons club scene. Rival hedge-fund managers gossiped when the
Post reported this March that Ashley Dupré was a frequent houseguest—“Uncle
Jim,” she reportedly called him. (“I never introduced her to the
governor,” Chanos told me.) Chanos had just driven in from his office
in East Hampton and looked like the South Fork player he wants to be: designer
jeans, a red striped Façonnable shirt, and a navy blazer. Chanos
has a thick chest (his trainer told me he can bench-press 300 pounds). His
weathered face is lined with deep, topographical contours, and his blond
mane parts severely, crashing wavelike across his forehead.
While he lunches
at Michael’s, chairs the board of the Browning School, and is a major
Democratic fund-raiser, Chanos fashions himself as a Wall Street outsider.
“Most of the people I socialize with are not in the business,”
he says.
Chanos grew
up far from the power corridors of Wall Street. He is the oldest of three
brothers; his father, a second-generation Greek-American, owned a chain
of dry cleaners in Milwaukee; his mother worked as an office manager at
a steel company. As a fifth-grader, he was introduced by his father to the
stock market, and he was hooked. At Yale, he quickly gave up on a premed
major and signed up for economics classes. But despite his lanky frame and
Coke-bottle glasses, Chanos didn’t want to be a nerd. He rowed crew,
chaired his dorm’s social committee, and threw boozy postgame parties
for his friends on the hockey team. “He was one of those special guys
who could light the candle at both ends and never get burned,” says
his former suitemate Keith Allain, who now coaches Yale’s hockey team.
“When he had parties, he spent the week before making mixtapes. He
introduced me to Bob Seger.”
After graduation,
Chanos moved to Chicago. He eventually landed at the brokerage firm Gilford
Securities. Early in his career, he discovered the value of uncovering frauds
and using the media to move the market. In the summer of 1982, he started
tracking the insurance firm Baldwin-United, which was then a darling of
Wall Street. Its stock was soaring, and the company had blue-chip supporters
like Merrill Lynch. But Chanos had his doubts. After getting a tip from
a disgruntled insurance analyst, Chanos wrote a research report that recommended
shorting Baldwin stock. Wall Street lashed into his thesis. Powerhouse lawyer
Marty Lipton called Chanos’s boss and threatened to sue.
Back in New
York, Dick Stern, a Forbes writer, got wind of the brewing fight between
Chanos and Baldwin. Stern started researching a story and flew to Chicago,
where Chanos guided him through his financial analysis. Stern then interviewed
Baldwin’s CEO in a suite at the Chateau Marmont, peppering him with
questions Chanos had suggested. “Jim gave us the outline,” Stern
recalls. As Stern continued to work on the Forbes piece, Chanos acted as
a crucial background source. Stern would call him late at night at his Chicago
apartment and play back the tapes of his interview with Baldwin’s CEO
to dissect. In December, Forbes published Stern’s piece, which came
down on Chanos’s side. Months later, Baldwin collapsed, filing a $9
billion bankruptcy. At the time, it was the largest corporate meltdown in
history.
The Baldwin
bankruptcy put Chanos on the map. At just 26, he was recruited by Deutsche
Bank in New York. In the spring of 1984, Chanos began analyzing Michael
Milken’s Drexel Burnham junk-bond empire. “That was my next jihad,”
he says. At one point, private detectives were sent to nose through Chanos’s
trash outside his East 92nd Street townhouse.
When Chanos
recommended shorting a Drexel-financed company called Integrated Resources,
his bosses at Deutsche Bank balked: The company pressured the bank’s
top executives to bury his research. Chanos was furious. According to his
boss at the time, Jim Levitas, Geraldo Rivera, who’d heard about the
situation, wanted to do a story. “Jim likes publicity. He was interested
in getting it aired,” Levitas told me. “I had to tell Jim, ‘No,
we can’t do that.’ ”
Then, on September
5, 1985, The Wall Street Journal named Chanos prominently in a damaging
front-page piece that accused short-sellers of slimy tactics like spreading
rumors and even impersonating a Journal reporter to get access to insider
information. His bosses at Deutsche Bank hated the attention, and Chanos
soon found himself out of a job.
Over martinis
at a bar near South Street Seaport, Chanos and a colleague talked about
what to do next. Chanos decided to strike out on his own and, with his former
boss Levitas, launched Kynikos in 1985 with $16 million. A year later, Levitas
burned out, unable to endure the stress of betting against companies and
waiting for stocks to decline. “Constitutionally, I couldn’t make
a living being short,” he says now. “Jim is able to endure the
pain.”
By 1990, Chanos
was managing $600 million. But he nearly went bust as the tech bubble pushed
the bull market to record highs. Chanos posted losses of 30 percent in 1991,
15 percent in 1992, and 40 percent in 1993. Stocks kept rising, and there
were no companies to bet against. By the mid-nineties, Chanos was on the
ropes, and his fund was down to less than $150 million from a high of $600
million. He survived only when Dirk Ziff, heir to the Ziff Davis publishing
fortune, agreed to give him office space and pump new money into Kynikos.
Enron made
Chanos’s career. He followed the trail of Enron’s fraudulent accounting
and did as much as anyone to bring its malfeasance into the light, by sharing
his insights with a reporter. Historically, short-sellers and reporters
have made convenient allies. Journalists and shorts are both natural skeptics
who want to challenge authority (Kynikos is the Greek root for “cynic”).
In many ways, digging into a company’s finances is analogous to reporting
an investigative story. Not surprisingly, Chanos employs former journalists
from the Financial Times and the Times of London.
Reporters,
too, have a vested interest in cultivating short-selling sources. When a
short-seller uncovers fraud, it often translates into the sort of epic story
that can make a business reporter’s career. After Chanos tipped Bethany
McLean, then at Fortune, to the problems at Enron, she landed a $1.4 million
book deal and an Oscar-nominated documentary, and she recently was hired
as a contributing editor at Vanity Fair. McLean and Nocera recently nabbed
a reported seven-figure book deal chronicling the fall of Wall Street.
Some believe
these symbiotic interests can steer reporters to favor Chanos’s point
of view over the defense of a CEO or a company’s PR department. “Everyone
wants to be the next Bethany McLean,” says one anti-short corporate
lawyer.
Of all the
journalists whom Chanos deals with, McLean—a former Goldman analyst
turned financial writer—maintains a special relationship with Chanos
that is the subject of lore and jealousy among rival business writers. At
Fortune, McLean wrote features about the Australian bank Macquarie and Fairfax
Financial—both companies on which Chanos had significant short positions.
Through McLean, Chanos had access into the pages of Fortune.
Fairfax Financial,
a Canadian insurance company, is now suing Chanos and a group of hedge-fund
all-stars including Steve Cohen and Third Point’s Daniel Loeb. The
suit reads like a mash-up of a John le Carré novel and Den of Thieves.
Fairfax alleges that Chanos and his fellow short-sellers paid for negative
stock-research reports that helped drive down Fairfax’s stock price.
Chanos’s allies, including Nocera, dismiss Fairfax’s charges,
maintaining that the suit will have a chilling effect on legitimate criticism
of companies.
Chanos sees
China as the next domino to fall.He’s loaded up short positions in
Chinese infrastructure companies.
But the suit
paints a different picture of Chanos’s trading tactics. Throughout
the summer of 2006, Roddy Boyd, then a New York Post business reporter,
published a series of critical pieces about Fairfax that alleged Enron-like
dealings by V. Prem Watsa, the company’s CEO. The suit claims Chanos
and Loeb told Boyd, who, like McLean, is a former financial analyst, that
Fairfax was “the next Enron,” and that Chanos was a background
source for his reporting. Both Boyd and Chanos deny the allegations.
Whatever the
case, Chanos wasn’t right this time. Unlike Enron, Fairfax hasn’t
been charged with any wrongdoing, and the stock has gone up since Boyd covered
the company. In September, John Gwynn, a stock analyst named in the suit,
was fired by his brokerage for allegedly leaking his Fairfax research to
the hedge-fund managers. Chanos is still short Fairfax and refuses to talk
about the case. So far the suit is wending its way through the discovery
phase in New Jersey state court, and a trial is slated for next year.
If the heads
of Lehman and Bear Stearns have been the last year’s primary villains,
the shorts have attracted their share of negative attention. The SEC opened
an investigation into whether short-sellers spread misinformation that may
have contributed to the banks’ downfalls (to date, they haven’t
turned up any wrongdoing). In September, the SEC banned short-selling for
799 financial stocks while forcing notoriously secretive hedge funds to
disclose to the SEC which stocks they’ve shorted. “We feel like
guys in a foxhole together taking shell fire,” one angry short-seller
puts it.
So even as
he’s been reaping his profits, Chanos has been fighting a PR war. “I’m
trying to lay the groundwork for people to understand what happened, so
when the facts come out, maybe they’ll see that the people who were
raising the alarms aren’t the ones to blame,” he says. He sees
the political posturing as nothing more than blaming the messenger. For
the past two years, he has been warning of the impending financial reckoning
to almost anybody who would listen (after he went short, conveniently).
In July, he met with Treasury Secretary Hank Paulson over lunch at the offices
of Eton Park, the $12 billion hedge fund run by the ex-Goldman trader Eric
Mindich, according to one person who was at the lunch. Three days after
Lehman Brothers imploded, Chanos sent an e-mail to State Attorney General
Andrew Cuomo and copied his father, Mario, the former governor, on the message.
Earlier that day, Cuomo had held a press conference and attacked short-sellers,
calling them “looters after a hurricane.” Short-sellers weren’t
responsible for the crisis, Chanos wanted Cuomo to know. If the market ever
recovered, Chanos cautioned, according to one person familiar with the exchange,
Cuomo would be on the wrong side of history.
But some hedge-fund
rivals don’t necessarily want Chanos to be carrying the mantle for
the industry. In March 2006, Chanos started his own lobbying group, the
Coalition of Private Investment Companies, to promote hedge funds in Washington.
But recruitment wasn’t easy at first. At one dinner with a group of
female hedge-fund executives at the University Club in 2006, the audience
pelted Chanos with questions about why he was starting a rival lobby when
the industry already had an established lobbying group on Capitol Hill,
the Managed Funds Association. “He was practically stuttering,”
one person at the dinner remembers. “It was so ego-driven,” another
attendee says.
And while
tensions between the groups have since eased, Chanos maintains that hedge
funds, known for their secretive ways and grotesque displays of wealth,
risk starting a class war. “The fact that hedge-fund and private-equity
people pay lower taxes than schoolteachers and soldiers is absolutely an
abomination,” he says. “It’s a pretty self-absorbed industry.
I want to try and change it.”
Chanos’s
sense of righteousness has tracked roughly with the size of his returns.
“I feel a little bit personally affronted,” he says when I ask
him in September about the public criticism. “I’m defending myself.
That’s why I’ve been so vociferous in this fight. I’m used
to being vilified. I have a tough skin on that, I think many people are
never going to love this. I don’t know if it’s from The Godfather
or what, but you know that saying: ‘This is the business we’ve
chosen.’ ”
On the morning
of November 13, Chanos stopped by CNBC’s studios to guest-host Squawk
Box. It was a victory lap, of sorts. The debate over short-sellers had eased.
The ban on shorting banks had expired and the SEC also lost a fight to force
hedge funds to publicly disclose their short positions. After posting some
of the highest profits of any trader, Chanos was basking in the limelight
that had previously eluded him. Hosts Becky Quick and Joe Kernen fawningly
plugged him for investment advice, touting his 50 percent returns (which
Chanos declined to confirm). As one of the only guys on Wall Street making
serious money, Chanos may have finally earned some cred.
Later that
day, he received an e-mail from two Greek-American ladies in Connecticut
whose portfolios had been hard hit. “We have a lot of respect for your
accomplishments and that you are Greek too!” they wrote. “We both
speak fluent Greek and are attractive and even know how to Greek dance.
Can we treat you to spanakopita? We hope to hear from you very soon!”
Chanos isn’t
dwelling on the attention he’s finally won. He’s already moved
on, looking for his next short targets. He’s now investigating the
health-care industry and defense companies that will likely see cutbacks
and face tighter regulation during an Obama administration. For depressed
investors still piecing together their wounded portfolios, it’s not
a pleasant thought to contemplate the next wave of failed companies. For
Chanos, it’s just playing the game.
“It sounds
kind of crass, but I like being right,” he says. “It’s interesting
and fun to find these companies that you see gaming the system and pulling
one over on their investors. It’s fun to point it out. It’s great
to say, ‘No. These guys are bad guys!’ ”
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