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middle of the 2000s, the scale and persistence of hedge funds’ success was transforming the structure of the industry. The first generation of hedge-fund titans had been seen as freakish geniuses, whose eye-popping returns were possibly lucky and certainly not reproducible. But by 2005 nobody could argue that hedge funds were exceptional in any way: More than eight thousand had sprouted, and the long track records of the established funds made it hard to dismiss their enviable returns as the products of good fortune. Bit by bit, the old talk of luck and genius faded and the new lingo took its place—at hedge-fund conferences from Phoenix to Monaco, a host of consultants and gurus held forth about the scientific product they called alpha. The great thing about alpha was that it could be explained: Strategies such as Tom Steyer’s merger arbitrage or D. E. Shaw’s statistical arbitrage delivered uncorrelated, market-beating profits in a way that could be understood, replicated, and manufactured by professionals. And so the era of the manufacturer arrived. Innovation and inspiration gave way to a new sort of alpha factory. You could see this transformation all over the hedge-fund industry. By the early 2000s, there was no longer much doubt that long/short equity stock picking, as practiced by Julian Robertson’s Tiger, could deliver 308 MORE MONEY THAN GOD market-beating returns. The challenge was not so much to invent the strategy; it was to implement it successfully. Dozens of Tiger look-alikes sprang up to do the job, many of them run by men who had themselves worked for Tiger; and an eager industry of hedge-fund consultants and funds of funds emerged to allocate capital to the most promising among them. The biggest sponsor of Robertson clones was none other than Robertson himself. After shuttering Tiger in 2000, he turned his offi ces into an incubator for “Tiger seeds,” which managed his money, benefi ted from his coaching, and used the prestige of association with the great man to raise more capital from outsiders. Under the old Tiger model, Robertson had maintained personal control of all the big investment calls, but now he let his protégés run their own shows: He had switched from inventing an investment technique to franchising it. The switch provided Robertson with a lucrative final chapter to his illustrious career. By 2006 the reinvented Tiger complex was managing $16 billion. The premises on Park Avenue grew bigger than ever. The purest expression of the new factory chic was the so-called multistrategy hedge fund. Rather than claiming an edge in a particular investment style, the multistrategy funds began from the principle that you could develop an edge in whatever style you liked: You just had to hire the people. Like a pharmaceutical giant that vacuums up ideas from university researchers and biotech start-ups, the multistrategy factories collected multiple alpha-generating strategies under one roof, blending them together so as to diversify away risk, then shifting capital among the various styles according to market conditions. The factories talked little about invention and a lot about process; they viewed hedge funds less as vehicles for financial creativity than as financial products. A Chicago-based hedge fund called Citadel emerged as a prime exponent of the multistrategy mind-set; its goal, an executive explained, was “to see if we can turn the investment process into widget making.”1 Ken Griffi n, Citadel’s thirtysomething boss, was a keen consumer of management texts. His staff sneaked glances at the tomes on his desk so that they could brace themselves for the next six-step plan, and he pushed people out of his company PREMONITIONS OF A CRISIS 309 with a mechanical determination. Griffin liked to compare hedge funds to buses. People get on. People get off. The bus keeps rolling forward. The new multistrategy funds grew from babies to behemoths in the blink of an eye. Again, Citadel was a case in point. Griffin had started out trading convertible bonds from his dorm room at Harvard, and at the start of 2000, when he was still just thirty-one, he was running about $2 billion. Then the age of the manufacturer arrived and Citadel took off, so that its assets swelled to $13 billion by 2007. The firm found it could charge clients almost anything it pleased: It billed them for expenses amounting to more than 5 percent of their capital before slapping on the 20 percent performance fee.2 Griffin’s personal earnings were said to be the second-highest in the industry, just behind James Simons, and he let it be known that Citadel would one day compete with Goldman Sachs and Morgan Stanley.3 Meanwhile, Eton Park Capital Management, launched in 2004 by an ex-Goldman merger arbitrageur named Eric Mindich, offered another example of multistrategy growth. Mindich raised $3 billion in assets before even opening his doors; four years on, he was managing $11 billion. During the 1990s, all the top hedge funds had struggled with the burden of bigness, and many had returned capital to investors. But by 2007 alpha factories managing $5 billion plus accounted for 60 percent of the assets in the industry.4 A magazine published a list of all the hedge funds in the “Billion-Dollar Club.” If you were not on the list you were a nobody. There was a powerful logic in this rush to bigness. Small companies may excel at generating ideas, but big companies excel at implementation. Once the hedge-fund industry had progressed through its garageworkshop phase, it took sleek professional outfits to bring its inventions to market. The successful alpha factories boasted state-of-the-art computers that executed lightning trades, legal departments that understood the rules in multiple countries, treasury departments that negotiated the best terms from brokers, and marketing departments that churned out glossy monthly reports to satisfy high-maintenance institutional investors. Since their edge lay in the efficiency of their platforms rather than the originality 310 MORE MONEY THAN GOD of their ideas, it was natural to use the platforms to support multiple alpha-generating strategies—and multiple strategies meant that the new funds could manage huge amounts of money. The multistrategy format responded to customer pressure too. The fund-of-funds industry, which collected money from endowments and pension funds and allocated it to hedge funds, had amassed almost $400 billion in assets by 2005, partly by promising to shift capital nimbly among different hedge-fund strategies as market conditions altered. The way MBA-minded hedge funds saw it, they could cut out the middleman. If endowments were looking for a product that would shift flexibly among strategies, multistrategy hedge funds would build the widget that the clients wanted. And yet, for all its logic, the sudden growth of alpha factories made wise observers feel uneasy. Too many people were making too much money too fast. Opportunistic consultants staged workshops on how to open a hedge fund; a book called Hedge Funds for Dummies appeared in the stores; and grandees with no known background in asset management, such as Madeleine Albright, the former secretary of state, jumped into the industry. The frenzy recalled the extremes of the leveraged-buyout boom in the 1980s or the dot-com mania in the 1990s. Surely this bubble could not last? Wasn’t it bound to end painfully? IN THE MID-2000S, AS THE HEDGE-FUND BU BBLE WAS growing, an outfit named Amaranth emerged as the very model of the modern alpha factory. Its founder, Nick Maounis, was a convertiblearbitrage specialist by background, but he had hired experts in merger arbitrage, long/short equity investing, credit arbitrage, and statistical arbitrage; and in 2002, following the collapse of the corrupt energy company Enron, Maounis had snapped up several stranded employees to open an energy-trading operation. Maounis made the standard arguments for this mission creep: A blend of alpha-generating strategies would diversify away risk, and Amaranth would move capital aggressively among strategies as market conditions shifted. The fund’s energetic shape-shifting was a point of pride. In the first months after Amaranth’s launch in September 2000, PREMONITIONS OF A CRISIS 311 nearly half of its capital had been focused on merger arbitrage. A year later, that strategy had been cut to practically zero, and more than half of Amaranth’s capital was focused on convertible arbitrage. Scroll forward another year, and the portfolio began to shift into bond trades, and then into statistical arbitrage and energy. There seemed no good reason for a pension plan to hire a fund of funds when it could go directly to Amaranth, bypassing the middleman’s fees, particularly since Amaranth’s results were excellent. In its first three full years of operation, Amaranth returned 22 percent, 11 percent, and 17 percent—this at a time when the S&P 500 was mostly heading downward. Yet for all Amaranth’s glittering appearance, there was a certain hollowness about it. Contrary to his marketing patter, Maounis had no clear edge in deciding which strategy to shift into. He upped his allocation to investment styles that had worked well recently and cut back on those that fared poorly; but there was no sure way to identify which strategies would succeed in the near future.5 Moreover, precisely because alpha had become a commodity, dozens of rival factories were driving down returns by manufacturing the same thing: Amaranth’s shape-shifting was less about cleverly timing market cycles than about desperately searching for the next trick to keep profits from tanking.6 And because Maounis was allocating capital to specialist traders whose books were difficult to understand, his decisions were necessarily affected by instinct. Gut feelings about the various traders on his team could sway decisions dangerously. These dangers came together in the shape of a young Canadian named Brian Hunter. Standing six feet five inches tall, occasionally donning a jersey of the National Hockey League’s Calgary Flames, and equipped with a graduate degree in math, Hunter was imposing physically as well as intellectually. He was earnest, soft-spoken, and unfailingly calm, and from the moment he landed at Amaranth in 2004, his returns from trading natural gas stood out conspicuously.7 He had spotted an anomaly in winter gas prices. Unlike oil, which is shipped around in tankers, natural gas is delivered mainly in pipelines; supply routes cannot easily be changed to fill unexpected local shortages. As a result, gas prices are volatile: Time and again, a blast of cold weather would cause demand for household 312 MORE MONEY THAN GOD heating to spike, and in the face of rigid supply, prices would leap upward. Hunter’s discovery was that options whose value would shoot up in a shortage were strangely cheap—they represented bargain weather insurance. Hunter loaded up on these options, figuring he had found a classic asymmetrical trade: The most he could lose was the small cost of buying the options, but if a shock hit the market and the gas price spiked, he could earn many times more than that. Another way of cashing in on the same insight was to buy a pair of futures contracts: Hunter would go short a summer contract and long a winter contract, betting that the narrow spread between the two would widen if winter prices leaped upward. The strategy had worked in recent winters, and in November 2004 it came good again. The price of natural gas jumped to around 80 percent above its low point in the summer, and Amaranth cashed in handsomely. In the spring of 2005, Maounis confronted an unpleasant dilemma. Many of Amaranth’s strategies were faring poorly. Convertible arbitrage had hit a wall and showed no sign of recovering. Maounis had invested heavily in statistical arbitrage, telling colleagues he wanted a piece of James Simons’s action, but he had little to show for it. The one star act in the Amaranth lineup was Brian Hunter and his winter gas; but in April, Maounis learned that Hunter had been offered a $1 million bonus to sign on with a rival firm, SAC Capital. Feeling his back against the wall, Maounis took a chance. Rather than lose his star player, he promoted him. Hunter became cohead of Amaranth’s energy desk, gaining the authority to place his own trades; meanwhile, Maounis pumped up the share of his firm’s capital allocated to the energy desk from 2 percent the previous spring to around 30 percent. With these two decisions, Maounis effectively bet his company on a thirty-two-year-old trader who had been with him for barely one year. In the go-go atmosphere of the mid-2000s, this was the sort of thing that happened. Hunter’s promotion was all the more remarkable given his background. He had come to Amaranth from Deutsche Bank, where he had supervised gas trading. In December 2003, his trading group had lost $51 million in a single week, but Hunter’s response was nothing if not brazen. In a suit he later brought in New York state court, Hunter ascribed the loss PREMONITIONS OF A CRISIS 313 to “an unprecedented and unforeseeable run-up in gas prices,” as though his failure to foresee the market’s behavior rendered him blameless. He pointed to the “well-documented and widely known problems” with Deutsche Bank’s trading and risk-management software, which made it hard to exit losing trades—as though his taking of excessive risks could be laid at the door of Deutsche’s managers. Hunter also argued that even though his group had registered a loss, he himself had earned $40 million for the bank during 2003: Therefore, he deserved a bonus. By February 2004, Deutsche Bank’s managers had concluded that there was no place for Hunter on their trading team. This was the man whom Amaranth was now promoting.8 Four months after that promotion, Maounis had cause to celebrate. Hunter had continued to bet that winter gas prices might spike, and suddenly the mother of all weather shocks arrived: In August Hurricane Katrina slammed into the Louisiana coastline, flooding New Orleans and ravaging gas-production rigs in the Gulf of Mexico. The next month Hurricane Rita followed, and the nation’s gas supply was hit again. By the end of September, natural gas prices had hit a record, and the effect on Amaranth’s returns was dramatic. Having been down 1 percent in the first half of 2005 because of the sluggish performance of most of its strategies, Amaranth was up 21 percent by the end of the year, while the average hedge fund mustered a return of just 9 percent. Hunter and his gas trades earned $1.26 billion, accounting for just about all of Amaranth’s profits, and Hunter reportedly pocketed a tenth of that.9 Thanks to his performance, Amaranth’s assets swelled to about $8 billion, making it the world’s thirty-ninth-largest hedge fund. In its annual Christmas mailing, Amaranth sent clients toy gasoline pumps and a card that quoted Benjamin Franklin. “Energy and persistence alter all things,” the card proclaimed. Seldom had one of the Founders been taken so out of context. On any reasonable reckoning, Hurricanes Katrina and Rita constituted freak events. But whereas Hunter had been ready to blame unforeseeable extremes for his Deutsche Bank losses, he was happy to take credit when unforeseeable extremes made him a hero. Maounis grew increasingly enamored of his young star. He seemed to view Hunter as a convertible 314 MORE MONEY THAN GOD arbitrage trader transported to a different space. He was generating profits while taking little risk: There was no way that winter gas would fall below the price of summer gas, so his potential losses appeared limited.10 Amaranth’s risk department only reinforced Maounis’s conviction; at one point, a member of the risk team responsible for natural gas assured Maounis that Hunter was the greatest commodity trader he had ever witnessed. Hunter had no difficulty persuading Maounis to allow him to move his family and trading team to his native Calgary. He commuted to his Canadian office in a Ferrari, though sometimes snowy conditions forced him to use a Bentley. During the first months of 2006, Hunter’s successful run continued. His trades earned profits of roughly $2 billion between January and the end of April, again driving nearly all of Amaranth’s performance. At a time when the average multistrategy hedge fund was up just 5 percent since the year’s start, Amaranth was up roughly six times more; Maounis began to say that, although he had failed to strike gold in statistical arbitrage, he had discovered another secret weapon that was just as potent.11 And yet to some savvy observers, Hunter’s extraordinary profits were cause for alarm. There was no way that Hunter could be generating this sort of money without taking outlandish risks; and besides, there was a darker worry. With the rise of the new alpha factories, hedge-fund capital devoted to energy trading had soared from around $5 billion in 2001 to more than $100 billion in 2006: The trades were growing crowded. Thanks to this flood of capital, any strategy that made sense to energy specialists at hedge funds was almost bound to come good as others piled in. But it could also blow up if the stampede reversed itself. In the case of Brian Hunter, an extreme version of this phenomenon seemed to be occurring. The weight of his own money might be driving his profits. Amaranth had allowed him to ramp up his positions in a niche market: By the end of February, Hunter held an astonishing 70 percent of the natural-gas futures contracts for November 2006 delivery on the New York Mercantile Exchange and about 60 percent of the contracts for January 2007. By means of this enormous position, Hunter was betting that November gas would fall in value and that January would rise; PREMONITIONS OF A CRISIS 315 and so long as he added aggressively to his wager, his view was likely to be self-fulfilling. After all, it was not clear that his strategy was making money because market fundamentals were on his side. By early 2006, gas output had recovered from the devastation of the hurricanes, and mild winter weather was reducing gas demand, so that by April the quantity of gas held in storage was nearly 40 percent above the previous fiveyear average. Under these circumstances, the success of Hunter’s bet on summer/winter spreads seemed hard to explain—except when you looked at the astonishing growth in his positions. By around the end of April, Amaranth owned upward of one hundred thousand NYMEX contracts, or more than 40 percent of the total outstanding for all months on the exchange. Hunter was a momentum trader who traded on his own momentum.12 In May 2006, a team from the private-equity giant Blackstone visited Hunter in Calgary. Blackstone ran one of the longest-standing funds of funds, and it had invested $125 million in Amaranth. But now it was having second thoughts. Amaranth might be up a whacking 13 percent in April alone, but the size of Hunter’s profi ts showed he was taking dangerously large bets in a volatile market. Amaranth’s risk control department had calculated that because winter gas prices would never fall below summer prices, the most Hunter could lose in a single month was $300 million, a tolerable 3 percent or so of equity. But Hunter’s own trading had rendered this assessment obsolete: The spread between summer and winter gas had widened from $1.40 in mid-February to $2.20 in late April as Hunter had built his positions, meaning that there was plenty of room for the spread to shrink disastrously. Besides, the small size of the gas market—and the fact that the main buyer of Hunter’s positions was none other than Hunter himself—created a liquidity risk: Hunter would have nobody to sell to if he needed to get out of a position. Blackstone informed Amaranth that it would withdraw its capital at the next opportunity. There was a penalty fee for short-notice redemptions, but Blackstone was happy to pay it.13 Meanwhile, Maounis was finally reckoning with the fact that his star trader had overreached himself. He told Hunter to cut back on his risk, 316 MORE MONEY THAN GOD but this was easier said than done: Nobody wanted to buy Amaranth’s contracts, just as the Blackstone team had worried. The moment Hunter tried to unload some of his positions, the market turned, and the glorious results of April were followed by horrifying losses. By the end of May, Amaranth was down by more than $1 billion—nearly four times more than the risk department had deemed possible. Maounis and his lieutenants scrambled to stabilize their operation. Traders in other strategies were told to cut back positions in order to free up capital, and Amaranth paid Morgan Stanley a large fee to shoulder some of Hunter’s exposure.14 But it was too little, too late. Hunter’s wild profits and losses had come to the notice of other gas traders, and it was clear that his positions were too big to hold on to. What’s more, there was no particular mystery about what these positions were: You just had to check which pairs of contracts had widened during March and April to figure out which ones Hunter had been piling into.15 Like Long-Term Capital caught in its bond trades, or like Julian Robertson caught in US Airways, Amaranth was trapped. “It was naïve to think that they could get out of the market with a size of 100,000 positions,” one rival trader later said. “I knew Amaranth would eventually implode. It was just a question of when.”16 Amaranth managed to hang on through the summer. Hunter was under instructions to reduce his positions, but since he could not do that without incurring crippling losses, he played a waiting game, hoping that something would let him out of his predicament.17 At the end of July, the rumor of another late-summer hurricane brought the old bravado back. Hunter jacked up his bets sharply, causing the summer/winter spreads to widen and triggering the implosion of a rival hedge fund named MotherRock that had the opposite bet on.18 In August, Maounis granted an interview to the Wall Street Journal, bravely declaring, “What Brian is really, really good at is taking controlled and measured risk”; looking back on that extraordinary comment, one Amaranth veteran compared Maounis’s enduring faith in the young man to that of a jilted lover.19 But the moment of truth was approaching. Amaranth suffered losses at the end of August and faced a margin call from its brokers. PREMONITIONS OF A CRISIS 317 The hurricane season ended uneventfully. Predatory rivals began to target Amaranth’s positions.20 ON A RAINY MID-SEPTEMBER DAY, MAOUNIS TOOK A LIMousine ride from his office in Greenwich to the Pierre Hotel in Manhattan. The traffic was bad; he should have taken the train; but managers of multibillion-dollar hedge funds are seldom at home on public transport. Maounis was on his way to a Goldman Sachs hedge-fund conference that was emblematic of the times. A ballroom was set up with dozens of tables, each manned by a team of hedge-fund chieftains; groups of institutional investors moved from stall to stall, listening to a pitch and then hurrying off to hear the next one. Maounis speed-dated his way through a couple of investor groups, repeating the patter that he knew by heart—Amaranth had a world-class fundamental equity team, a world-class credit team, a world-class quantitative team, a world-class commodities team, and all of this was wrapped up in a world-class infrastructure. Then an unwelcome e-mail arrived. There was trouble back at the offi ce. That Thursday, September 14, was effectively the end for Amaranth. The fund lost $560 million in a single day, as the spread on one of its key summer/winter positions collapsed to a third of its size at the start of September. At a tense meeting at Maounis’s home that evening, Amaranth’s top brass agreed they needed to raise capital immediately to meet margin calls. Maounis called Goldman Sachs to see if it would buy his energy portfolio. Other Amaranth officials reached out to other banks, desperately hoping for a bid from somewhere. By Saturday morning, squadrons of investment bankers were descending upon the Amaranth office in Greenwich, jamming its parking lot with fancy cars and devouring the Pop-Tarts in its pantry. Teams of intense analysts conferred anxiously with bosses at country homes in the Hamptons; meanwhile, Amaranth’s positions hemorrhaged money in after-hours trading. Goldman made an offer, then Merrill Lynch made an offer, and early on Monday morning Amaranth thought it had a deal to stabilize the fi rm by selling a chunk of its assets to Goldman. It looked as though the 318 MORE MONEY THAN GOD Long-Term Capital plotline would repeat itself. A risk-loving hedge fund had blown up. The Wall Street establishment would pick up the pieces. Maounis knew he had to get the news of Goldman’s offer out fast. The New York Mercantile Exchange would open soon. By now every commodity trader in the world had heard of Amaranth’s distress, and it would be open season on Hunter’s gas positions. Maounis sent out a letter to his investors, reporting that Amaranth had lost half the capital it had managed at its peak, but assuring them that a deal to raise fresh capital was “near completion.” That Monday morning in Chicago, Ken Griffin, the boss of the multistrategy fund Citadel, was working out at home on an elliptical trainer. The contraption was rigged up with monitors so he could keep track of the news at the same time as his e-mail, and a message from Scott Rafferty, Citadel’s head of investor relations, popped up in Griffi n’s in-box. The e-mail reported that Amaranth was down 50 percent. For a second or two, the number didn’t fully register; Griffin continued to pump the pedals up and down, thinking, It can’t say that. Then he stopped and hurried to the phone. He needed to speak to Rafferty. “Fifty?” Griffin demanded. “Over what period?” “A month,” Rafferty responded. Griffin thought about what Vinny Mattone had told Meriwether when Long-Term Capital was failing. If you are down by half, you are not going to recover. Meanwhile in Greenwich, Maounis organized a conference call to clinch the deal with Goldman. But when the two firms began talking, along with officials from the NYMEX, Amaranth’s clearing broker, J.P. Morgan, torpedoed the project. J.P. Morgan’s brokerage department had lent the firm money to finance its gas trades, holding the futures contracts as collateral; now that the value of this collateral was doubtful, the bank was uncertain of repayment. The law gave J.P. Morgan the right to pursue Amaranth’s assets through the bankruptcy courts, and even to claw back assets from other firms that bought them as Amaranth was going under. From Goldman’s perspective, the threat of a clawback created an impossible hurdle: It was hard enough to value Hunter’s gas book amid PREMONITIONS OF A CRISIS 319 all the market turmoil, but legal uncertainty made the deal unthinkable. Goldman wanted Morgan to promise not to come after it through the bankruptcy courts. Morgan balked and the deal faltered. As Wall Street’s banking titans wrestled one another to a stalemate, Amaranth’s chief operating officer, Charles Winkler, got a note from his assistant. He had received a call from Ken Griffin, and he hurried to his office to return it. Winkler had worked for Griffin at Citadel, and the two men had been friends. But when Winkler got Griffin on the line, he found he was not in the mood for pleasantries. “Charlie, what can we do and how can we help?” Griffi n demanded. This was an audacious question. Amaranth’s gas positions had already bled $4 billion or $5 billion by Monday morning; how could a $13 billion hedge fund digest this radioactive portfolio? If the likes of Goldman had worked through the weekend without nailing a deal, what made Griffi n think he could do better? Winkler knew Griffin too well to write him off, so he answered his question forthrightly. “It’s real simple,” he said. “We need a bridge loan and a couple hundred million to stay in business.”21 Griffin began marshaling the resources of the firm that he had built around him. Buying a book that constituted a large chunk of the entire gas market would involve multiple risks: He needed to get his mind around the logic of the trades, how they were financed, who the counterparties were, whether Citadel’s computer systems were capable of handling them. The whole premise of a multistrategy hedge fund—that the edge lay in the efficiency of the platform—would now be tested to the full. If Griffin thought his firm was a potential rival to Morgan Stanley and Goldman Sachs, this was his chance to prove it. Griffin arranged some forty Citadel staffers into groups to work on the transaction. He put two lieutenants on a plane to Greenwich, and the pair of them showed up looking half the age of their investment-banking rivals. Meanwhile, he got on a conference call with Maounis and his top advisers. By lunchtime the discussion had gone way beyond a bridge loan; Amaranth was losing money so fast that it needed to off-load all its energy 320 MORE MONEY THAN GOD positions, not just its gas positions. The more Amaranth’s positions unraveled, the greater Griffin’s advantage over his investment-banking rivals: For the banks, every movement of the goalposts required consultation up and down a chain; Griffin, chief executive and chief deal maker rolled into one, was free to react instantly. The same speed advantage applied at lower levels of the firm. Citadel’s technology chief knew how to get trade data transferred from Amaranth’s computers, loaded into Citadel’s system, and synced up with Citadel’s accounting and risk-management software: A larger bureaucracy might have required a committee or two to do that.22 In the Long-Term Capital crisis eight years earlier, Goldman Sachs had announced an interest in buying the distressed portfolio but had not pulled off a deal. This time a hedge fund had grown large enough to play in the big league, and it was proving relentlessly effective.23 By the evening, the talks between Amaranth and Citadel had eclipsed the talks with all the various investment-bank suitors. But one obstacle remained. Amaranth’s sale of its energy book might lead to bankruptcy, in which case the transaction might be subject to review by a court. Like Goldman Sachs earlier that day, Citadel could not value Amaranth’s book in the face of this uncertainty. Griffin and his team worked through the night, looking for a way around this legal obstacle. Then, in a lucky break, a solution arrived on Tuesday morning. An executive from J.P. Morgan called to propose a deal: Morgan would waive its right to claw back assets in bankruptcy provided it could be the 50 percent purchaser of Amaranth’s positions. Griffin accepted, but then a new challenge arose: What if some other creditor pressed a claim on Amaranth that undermined Citadel’s calculations? Assessing this risk required understanding the nonenergy parts of Amaranth’s portfolio: Was there another broker that had fi nanced trades that were now insufficiently backed by collateral? Griffin did not know the answer, and for a moment the deal seemed set to slip away. But then Bob Polachek, one of the two Citadel staffers who had camped out in Greenwich, came up with the missing information. He had taken it upon himself to check all of Amaranth’s brokerage statements by working through the PREMONITIONS OF A CRISIS 321 previous night. He assured Griffin that there were no undiscovered holes, and at 5:30 the next morning, the sale of Amaranth went forward.24 The sale was a triumph for Griffin and his investors. Partly thanks to J.P. Morgan’s offer, but also because Citadel’s execution platform had proved at least as good as those of the top banks, a hedge fund had stolen a deal that Wall Street had regarded as its own. The moment Citadel and J.P. Morgan took ownership of Amaranth’s portfolio, its value started to come back; predatory traders could see that the gas contracts were no longer about to be dumped, so they cut their bets and prices recovered. Citadel eventually earned a profit of about $1 billion from the transaction. Griffin’s plan to build the next Goldman Sachs had taken a signifi cant step forward. AMARANTH’S COLLAPSE CONFIRMED THAT HEDGE FUNDS had entered bubble territory. They had grown too fast for the available talent; under pressure to perform, they were capable of granting inexperienced traders the leeway to blow up spectacularly. The multistrategy format made this danger especially acute. Veterans such as Stan Druckenmiller or Louis Bacon understood risk because they traded every day, and they were determined to avoid a major loss because their own savings and reputation were bound up in their companies. But the new alpha factories were structured in a different way: They believed in delegation. The boss of a large multistrategy fund could not hope to be an expert in every risk his traders took, particularly when fast asset accumulation compelled equally fast adaptation to new styles. And once risk decisions were delegated down the chain, the multistrategy funds had to contend with a mild version of the problematic incentives that plague large banks and brokerages. Traders want bonuses; bonuses are won by betting big; and a firm’s central risk department seldom controls wizards who acquire an aura of invincibility. By the time Amaranth folded, $6 billion of its investors’ equity had gone up in smoke, a larger quantity than Long-Term Capital had incinerated. 322 MORE MONEY THAN GOD Yet Amaranth’s collapse could not fully explain the calls for regulation that followed. Charles Grassley, the chairman of the Senate Finance Committee, complained in a letter to Treasury secretary Henry Paulson that ordinary Americans were increasingly exposed to hedge funds via their pension plans; he demanded to know why the funds were allowed to get away with secrecy. But Amaranth had disclosed its strategies to its investors in monthly reports; indeed, it was the lack of secrecy that had made it a target once the market turned against it. Likewise, a survey of private economists conducted by the Wall Street Journal found that a majority favored tougher oversight for hedge funds, and one popular regulatory measure was compulsory registration with the Securities and Exchange Commission. But it was not at all clear what registration would achieve. As a result of Amaranth’s failure, American taxpayers suffered no harm; there was no round-the-clock crisis meeting at the New York Fed and no apparent damage to the fi nancial system. The pension funds that lost money were angry, but Amaranth had represented a tiny share of their assets. The effect of the fund’s collapse was no greater than the effect of a bad day for the S&P 500. In sum, the market had disciplined Amaranth for its errors while inflicting minimal damage on the wider economy. No regulatory clamp could have done better.25 Ever since Long-Term Capital’s demise, Wall Street had worried about the next hedge-fund blowup. Now the event had taken place, and the scars were barely visible. The critics of hedge funds continued to worry that these leveraged monsters could ignite systemic fires—after all, LongTerm Capital had done so. But Citadel’s lightning purchase of Amaranth’s portfolio had proved that there was another side to this story. Perhaps hedge funds might occasionally ignite fires. But they could also be the fi refi ghters. 15 Riding the Storm Daniel Sadek did not have an easy childhood. Born in Lebanon in 1968, his schooling was interrupted by the country’s civil war, and his body was scarred by a gunshot wound and a fl ying piece of metal. He left Lebanon for France, then fetched up in California at eighteen, landing jobs as a gas-station attendant and then later as a car salesman. But around 2000, the scales fell from his eyes. He was selling Mercedes cars—lots of them, one after the next—to customers who were in the mortgage business. Discovering that he could get a license to sell home loans without taking classes, Sadek embarked upon a fresh career. If he had wanted to become a professional barber, he would have needed 1,500 hours of training to qualify for a state license. By 2005, Sadek’s company, Quick Loan, had seven hundred employees. It was one of the top fifty “subprime” lenders in the nation, meaning that it specialized in customers who were too risky to qualify for normal mortgages. Its marketing campaign was not subtle. “No income verifi cation. Instant qualification!!” promised one ad. “You can’t wait. We won’t let you,” proclaimed the company slogan. The California Department of Corporations recorded a string of complaints against Quick Loan, including allegations of fraud and underwriting errors.1 But Sadek did not let that cramp his style. He bought a mansion on the coast and an apartment 324 MORE MONEY THAN GOD in Vegas; he sported a necklace, flip-flops, and long hair; he acquired a collection of fast cars, some restaurant investments, and a movie company. When his actress girlfriend needed a film part, he bankrolled a production called Redline. It was “an action flick loaded with cars, chrome, and silicone,” the Boston Globe’s reviewer wrote, “everything you’d expect it to be, and yet so much less.” During the course of filming and promoting the movie, the cast demolished more than $2 million worth of Sadek’s sports cars. “Fear nothing; risk everything,” ran the movie’s tagline. In 2006, Kyle Bass, a hedge-fund manager in Dallas, heard about Sadek and his filmmaking. The story confirmed what Bass was starting to suspect: The American mortgage market was in the grips of something truly wild—a bubble that exceeded anything that might exist within the hedgefund industry. Between 2000 and 2005, the volume of risky subprime loans had quadrupled, and a growing share of these loans was fl owing to people who could not repay. “Prior bankruptcy. Tax Liens. Foreclosures. Collections and Credit Problems. OK!” proclaimed another Quick Loan ad, as though the firm was actively seeking out deadbeats. Sadek’s attitude toward this seeming suicide was summed up by his movie. As Kyle Bass put it later, “When they started catapulting Porsche Carrera GTs and he says, ‘What the hell, what are a couple of cars being thrown around?’ I’m thinking, ‘That’s the guy you want to bet against.’ ”2 Around the time that Amaranth was blowing up, Bass and his company, Hayman Capital, figured out how Sadek’s mortgages were being packaged together and sold off in the form of mortgage bonds. Bass shorted a large quantity of those bonds, then settled back and waited. Other hedge-fund managers had similar epiphanies. For Michael Litt, the cohead of a large alpha factory called FrontPoint Partners, the light went on when he visited the mortgage desk at Lehman Brothers. The mortgage team had recently relocated to a gigantic new trading fl oor; and while Litt was touring the premises, he heard a group of traders teasing one of their buddies. A tailor had come to measure the men for some new $6,000 suits, and this guy had ordered only one—to any self-respecting mortgage jock, he was positively wussy! A little while later, Litt was on a plane home from London, reading a report from the Bank for International RIDING THE STORM 325 Settlements that explained how sophisticated finance had suppressed market volatility. Litt remembers thinking that something was wrong; looking out the window he could see the outline of Greenland, which had once been hospitable to human settlement and then had frozen over. At forty thousand feet it suddenly hit him. Volatility was low because the world was awash with wild money; but abundant liquidity was giving the false sense that stability was due to some magical structural improvement in the financial system. Investors from Asia to Arabia were wiring billions of dollars to fund managers in New York, buying every piece of paper that Lehman’s mortgage desk could sell, and yet the smart folks at the Bank for International Settlements appeared to be missing the freeze that would follow. Litt rebalanced FrontPoint’s portfolio to get ready for a shock. In the fall of 2006, the firm bet against the subprime mortgage sector and took a bearish stance in several other trading strategies.3 Over the course of the next year, Hayman Capital and FrontPoint both profi ted handsomely.4 But the man who made the mother of all killings on this mother of all bubbles was an unassuming fi gure called John Paulson. Neither tall nor short, neither handsome nor plain, neither glad-handingly eager nor offensively standoffish, he came across as Mr. Average. After graduating from Harvard Business School in 1980, he had progressed from a management consultancy to an early hedge fund named Odyssey Partners and thence to Bear Stearns, where he worked on mergers and acquisitions. In 1994 he had launched a tiny hedge fund of his own, setting himself up in a Park Avenue building that incubated several other hedge-fund start-ups. Over the next decade, Paulson and Company succeeded steadily, growing its capital from $2 million at inception to $600 million in 2003; then the great hedge-fund asset boom carried it away, so that by 2005 it was managing $4 billion. Even then, Paulson kept his profile low. He had only seven analysts on his staff; and although he had amassed a personal fortune, he had done so in the quietest way possible.5 Paulson was a loner and a contrarian. He had no doubt of his own ability and no need for affi rmation. Plowing his own road as a boutiquehedge-fund manager, he had honed the art of the unconventional long 326 MORE MONEY THAN GOD shot. He specialized, for example, in a form of merger arbitrage that focused on long odds: As well as investing in mergers that were expected to be consummated and collecting a modest premium, Paulson sometimes bet against the ones that might blow up, or in favor of ones where the market might be shocked by a surprise bid from a rival acquirer. Paulson also made money by calling turns in the cycle. When the economy was booming, he looked for the moment to go short, and vice versa. Some of the people who worked for him had the same maverick vibe. Paolo Pellegrini, a tall, elegant Italian with heavy-framed glasses and a permanently amused twinkle in his eyes, had spent years chasing fruitlessly offbeat ideas; “I’m a romantic type,” he said later.6 When Pellegrini signed on as Paulson’s analyst for financial companies in 2004, he realized that for the first time in his life, his unconventional style was welcomed. Much of Paulson’s skill lay in the detail of his positions. He expressed his skepticism about booms via a strategy known as capital-structure arbitrage, which started from the fact that the various bonds issued by a given company might be treated differently in bankruptcy. So-called senior bonds had the first claim on the company’s remaining assets and so would get paid back first; junior bonds made do with whatever was left over. So long as the company was healthy, investors didn’t focus on this dull legal nuance, so the senior and the junior bonds traded at similar prices. But if the economy was weakening, an opportunity arose. Paulson could assess which companies were heading for bankruptcy—they might be in a cyclical industry, for example, or they might have too much debt. Then he could short the junior bonds that would get hit the most if the company went down, sometimes hedging his position by going long the senior bonds. In early 2005, Paulson started to feel that the economic cycle was getting ready to turn downward. Bonds that he had bought at a discount during the previous recession were now trading at silly heights; fi nancial markets were frothy thanks to a long period of low interest rates. Paulson began to hunt for the best way to bet against this bubble. He wanted to find American capitalism’s weakest spot—the thing that would blow up the loudest and fastest if the economy slowed even a little. The dream RIDING THE STORM 327 target would combine all the standard vulnerabilities: It would be in a cyclical industry, it would be loaded up with too much debt, and the debt would be sliced into senior and junior bonds, so that Paulson could short the junior ones, where all the risk was concentrated. Paulson experimented with shorts on car-company bonds, on the theory that consumers were taking out car loans that they could not afford. He shorted an insurance company and a couple of home lenders. But there was a risk in all these trades. The car companies, insurers, and home lenders all had value as franchises—they had buildings, brands, customer relationships—so even if they collapsed under the weight of their debts, they would probably still be worth something. If Paulson was going to be contrarian, he wanted to short something that could be totally wiped out. In the spring of 2005, he hit on the right target. The target was mortgage securities, which combined every imaginable charm that a short seller could wish for. Home prices, and therefore mortgages, were certainly cyclical, even though the great American public had convinced itself that home prices could only go upward. Equally, home prices were built on huge mountains of household debt, and the moment that families hit hard times, they would be unable to make their payments. As to the division of junior from senior debt, Paulson had never seen anything quite like the feast that the mortgage industry served up. Lenders like Daniel Sadek generated mortgages that were sold to Wall Street banks; the banks turned these into mortgage bonds; then other banks bought the bonds, rebundled them, and sliced the resulting “collateralized debt obligation” into layers, the most senior ones rated a rocksolid AAA, the next ones rated AA, and so on down the line to BBB and lower—there might be eighteen tranches in the pyramid. If the mortgages in the collateralized debt obligation paid back 95 percent or more of what they owed, the BBB bonds would be fine, since the first 5 percent of the losses would be absorbed by even more junior tranches. But once nonpayments surpassed the 5 percent hurdle, the BBB securities would start suffering losses; and since the BBB tranche was only 1 percent thick, a nonpayment rate of 6 percent would take the whole lot of them to zero. In contrast to auto-company bonds, there was no franchise value to worry 328 MORE MONEY THAN GOD about, either. A bankrupt company might be worth something to someone. A pile of loans with zero payout is worth, simply, zero. In April 2005, Paulson placed his first bet against these mortgage securities. He bought a credit default swap—an insurance policy on a bond’s default—on $100 million worth of BBB-rated subprime debt. There was a huge asymmetry in the risk and the reward: He paid $1.4 million for a year’s worth of insurance, but if the securities were wiped out, he stood to pocket the full $100 million. The question was whether the odds of default were good: You can get a juicy payout by betting on a single number in roulette, but that’s because your chances of winning are abysmal. To figure out the odds, Paulson turned to Paolo Pellegrini, the offbeat Italian. Armed with a $2 million research budget, Pellegrini bought the largest mortgage database in the country, hired an outside firm to warehouse the numbers, and brought in extra analysts to figure out the past behavior of default rates. Pellegrini’s first discovery was not encouraging. He and Paulson had begun by thinking that families with unpayable mortgages were bound to default. But now Pellegrini saw there was a catch: so long as house prices continued to head up, homeowners would be bailed out by the option of refi nancing.7 But Pellegrini made a second discovery as well. The mortgage-industrial complex argued that house prices, which in the summer of 2005 were appreciating at a rate of 15 percent annually, would never fall across the country in a synchronized way; it had never happened before, so bonds backed by bundles of mortgages drawn from different states were regarded as relatively riskless. Because Pellegrini was a newcomer to the mortgage game, he was unburdened by this article of faith, and his number crunching showed that its basis was shaky. If you adjusted house prices for inflation, there had been national slumps in both the 1980s and 1990s, so there was every reason to suppose that the extraordinary run-up of the early 2000s would be followed by another downturn. Moreover, to block the option of refinancing, it was not actually necessary for house prices to fall; if prices merely went flat, home owners would lack the collateral to take out new and larger mortgages. Pellegrini’s analysis suggested that zero house-price appreciation would eventually lead to a mortgage default RIDING THE STORM 329 rate of at least 7 percent, wiping out the value of all BBB bonds. The verdict could be summed up in a phrase: Zero would mean zero. By early 2006, Paulson’s initial mortgage bets had failed to make money, and some of his investors were muttering that he had strayed beyond his competence. But the more Paulson contemplated the results of Pellegrini’s research, the more he was convinced that he had found the opportunity of a lifetime. House-price appreciation was slowing as the Fed’s interest rate hikes pushed up the cost of mortgages, so the odds of flat house prices had to be at least even: This was like betting on red in a roulette game. But the potential reward was seventy or eighty times the stake, double the payout from betting on a single roulette number. Paulson drew up a simple table to describe what he could do. If he set up a fund with $600 million of capital and spent 7 percent of that taking out insurance on BBB mortgage bonds, the worst that could happen was a loss of $42 million. The rewards, on the other hand, were almost limitless. If the BBB bonds suffered a relatively mild default rate of 30 percent, the fund would gain 341 percent, or $2 billion. If they suffered a default rate of 50 percent, it would gain 568 percent, or $3.4 billion. And if the bonds suffered a default rate of 80 percent, which Paulson considered highly likely, the fund would gain 909 percent—an astonishing $5.5 billion. When Paulson explained this to investors, a few thought he had gone crazy. A gain of 909 percent? When did that ever happen? But Paulson was not a man to be deterred. In the summer of 2006, he set up a new hedge fund to do exactly what his table said, seeding it partly with his own money and enlisting Pellegrini as the comanager. The challenge was how to do the trades in the size that he now wanted. Paulson could bet against mortgage bonds by borrowing them and selling them short, a cumbersome operation. Or he could buy an insurance policy—a credit default swap from a bank—but that depended upon finding a bank that was interested in selling. To Paulson’s great good fortune, in July 2006 Wall Street’s top investment banks created an easier option: Hoping to earn themselves a stream of trading commissions, they launched a subprime mortgage index, known as the ABX. Paulson now found that, on any given day, it was easy to buy insurance on, say, 330 MORE MONEY THAN GOD $10 million of subprime paper. Then, a week or two later, he took a call from one of the big banks. The man on the line was an ABX trader. “What’s your picture?” the trader demanded. He was willing to deal with Paulson in size. How many millions’ worth of subprime bonds did he want to buy insurance on? Paulson considered. He didn’t want to scare the trader off. If the guy knew how much insurance Paulson really wanted, he surely would not be stupid enough to sell without first moving the price against him. “Five hundred million,” Paulson ventured. “Done,” the trader responded. “Another five hundred million,” Paulson said. “Done,” the man repeated. He wasn’t flinching in the least. Then he said again, “Tell us your total picture.” “Call me again tomorrow,” Paulson said, and the next day he bought insurance on another $1 billion of subprime bonds. In the first half of the year, he had hustled to lay his hands on $500 million of this stuff. Now, in just two days, he had bought four times that quantity. “Tell us your picture,” the trader said again. Paulson thought to himself, this is the holy grail. He remembered Soros’s words: Go for the jugular. “I’ll do another three billion,” he said.8 At this, there was a silence on the line. The trader agreed to another billion, then balked at doing any more. But by calling around the other banks, Paulson established positions totaling $7.2 billion for his credit fund.9 At the end of 2006, he launched a second fund with the same strategy. A few weeks after that, the tide turned for Paulson. On the afternoon of February 7, 2007, New Century Financial Corp., the country’s second largest subprime lender, made a startling announcement. Its fourth quarter earnings, due out the next day, would have to be postponed because the fi rm was still calculating losses—a shock given that it had been expected to report a healthy profit. It turned out that New Century’s subprime loans were blowing up still faster than the skeptics feared; some of its borrowers were unable to make their first payments. That same day, the RIDING THE STORM 331 British bank HSBC, which was the third-largest subprime lender in the United States, announced that it would have to set aside $10.6 billion in loan- loss reserves because of busted mortgages. The following morning, as the share prices of New Century and HSBC tumbled, Paulson was sitting at his desk when his head trader informed him that the ABX index had slid five points. Because of his massive positions, a 1 percent decline in the ABX handed Paulson a profi t of $250 million; in a single morning he had netted $1.25 billion, about as much as Soros had earned from his wager against sterling. At the end of that month, when Paulson reported his February results, his offi ce received a phone call from an incredulous client. “Is this a misprint? It’s 6.6 percent, right, not 66 percent?”10 The results were not a misprint. Once house prices stopped appreciating, overindebted families began turning in their keys, so that BBB- rated mortgage securities were worth practically nothing. Within months New Century had declared bankruptcy and HSBC had sacked its U.S. executives; but every blow to the mortgage industry was a bonus for Paulson. On a hot day in the summer, Paulson was in the middle of a meeting with a pair of potential clients when a colleague came in and whispered something in his ear. Paulson abruptly excused himself, leaving his guests in the stuffy conference room. When he returned after a few minutes, he could not wipe a wide smile off his face. His visitors eventually asked him if there was somewhere else he needed to be. Unable to contain himself, Paulson divulged his secret. “We just got our marks for the day,” he blurted out. “We made a billion dollars.”11 PAULSON’S MEMORY OF SOROS’S INJUCTION TO GO FOR THE jugular was more fitting than he realized. The subprime bubble was a twenty-first-century version of the policy errors that earlier hedge funds had exploited. In the 1970s, incompetent central banks had stoked inflation, allowing commodities traders to ride glorious trends. In the 1990s, 332 MORE MONEY THAN GOD central banks had committed themselves to untenable exchange-rate pegs that macro traders like Soros attacked gleefully. By the 2000s, infl ation and unsustainable currency pegs were gone; but the passing of these follies made way for a new one. Because inflation had been vanquished, central banks felt free to stimulate economies with low interest rates, rendering money cheap and creating the conditions for an asset bubble. Because exchange rates were now stable, Wall Street was emboldened to take other sorts of risk, leveraging itself up and further adding to the bubble. Each new era brought a fresh kind of blunder, creating a fresh opportunity for traders too. The heyday of macro hedge funds might be over, but a new heyday of credit hedge funds had arrived. John Paulson was the new George Soros. There was another sense in which the Soros memory was relevant. The famous macro trades had yielded extraordinary profits because there were willing suckers on the other side—in 1992, it was the British government. Equally, Paulson’s subprime mortgage trade required a sucker: He could only build vast short positions on mortgages if somebody else was buying them. Of course, the mystery was who these buyers were—and why they were so eager to throw away their money. When the mortgage bubble burst in 2007 and 2008, extraordinary losses cropped up all over the financial system. Daniel Sadek’s handiwork, and millions of other loans that smelled equally putrid, had been packaged and sold to investors from Japanese insurers to Norwegian pension funds. Inevitably, some hedge funds were caught holding subprime garbage too; a couple of medium-sized outfits called Peloton Partners and Sailfi sh Capital sank under the weight of mortgages. Peloton, in particular, was hardly a model of financial prudence: Its London-based managers became famous when their secretary stole £4.3 million from their accounts without their realizing that anything might be amiss, though they told the jury at her trial that their bank account felt “one or two million light.” Still, by any reasonable reckoning, the hedge-fund sector as a whole survived the bubble extraordinarily well: By and large, it avoided buying toxic mortgage securities and often made money by shorting them. In 2007, hedge funds specializing in asset-backed securities, a category including mortgages, were up 1 percent on average, according to Hedge Fund Research, RIDING THE STORM 333 a data provider in Chicago—in other words, they completely dodged the subprime bullet. Meanwhile, hedge funds as a whole gained 10 percent during the year—not bad for a crisis.12 If hedge funds mostly recognized subprime assets for the garbage that they were, who did lead the buying? The answer, to a large extent, was banks and investment banks—firms such as Citibank, UBS, and Merrill Lynch. On first inspection, this seems strange. These firms were proud of the trading desks that managed their proprietary capital. And yet, unlike hedge funds, the banks and investment banks bought subprime mortgages by the bucketful. Citibank’s losses were so astronomical that the U.S. government was forced to rescue it, buying more than a third of its shares. UBS ended up needing a lifeline from the Swiss government. Merrill sold itself to Bank of America to avoid going down. And whereas the failure of hedge funds such as Peloton and Sailfish—like the earlier failure of Amaranth— cost taxpayers nothing, the failure of Citi and its peers imposed enormous burdens on government budgets and the world economy. Why this stark contrast with hedge funds? There are four principal reasons, and they begin with regulation. Banks that take deposits, such as Citi and UBS, are required by regulators to hold a minimum amount of capital in order to shore up their solvency. This should have made the banks more resilient than hedge funds when the mortgage bubble imploded. But capital requirements, while necessary, can become a crutch: Rather than running their books in a way that rigorous analysis suggests will be safe, banks sometimes run their books in a way that the capital requirements deem to be safe, even when it isn’t. Subprime mortgages presented a classic example of this problem. Bonds backed by toxic mortgages were given the top (AAA) rating, partly because the rating agencies were paid by the bond issuers, which dulled the incentive to be critical. Once the AAA seal of approval was affixed to subprime assets, banks were happy to hold them because capital requirements allowed them to do so without putting aside much capital. Regulation and ratings agencies thus became a substitute for analysis of the real risks in mortgage bonds.13 Because hedge funds are in the habit of making their own risk decisions, undistracted by regulation and ratings, they frequently fared better. 334 MORE MONEY THAN GOD If capital standards turned out to be a mixed blessing, the second problem hinged on incentives. Hedge-fund incentives are not perfect. The managers keep a fifth of the profit in a good year but don’t give back a fifth of their losses in a bad year; therefore they may be tempted to gamble recklessly. But hedge funds have a powerful advantage. Their managers generally have their own wealth in their funds, which gives them a strong reason to control risks effectively. By contrast, bank proprietary traders do not risk their personal savings in the pools of money that they manage. Instead, bank traders often own company stock. But the value of that stock is driven by a variety of different profit centers within the bank. If the prop desk loses money, its errors will be diluted by the other business lines. The stock may react marginally or not at all. The effect is too weak to change prop traders’ incentives. This contrast points to a third reason why the banks fared poorly in the credit bubble: Those multiple profit centers distracted executives. The banks’ proprietary trading desks coexisted alongside departments that advised on mergers, underwrote securities, and managed clients’ funds; sometimes the scramble for fees from these advisory businesses blurred the banks’ investment choices. Again, the subprime story illustrated this problem. Merrill Lynch is said to have sold $70 billion worth of subprime collateralized debt obligations, or CDOs, earning a fee of 1.25 percent each time, or $875 million. Merrill’s bosses obsessed about their standing in the mortgage league tables: The chief executive, Stan O’Neal, was prepared to finance home lenders at no profit in order to be first in line to buy their mortgages.14 To feed their CDO production lines, Merrill and its rivals kept plenty of mortgage bonds on hand; so when demand for CDOs collapsed in early 2007, the banks were stuck with billions of unsold inventory that they had to take onto their balance sheets. The banks therefore became major investors in mortgages as an unintended by-product of their mortgage-packaging business. When the scramble for commissions distorts investment choices in this way, it is hardly surprising that the investment choices are horrendous. The final explanation for the banks’ fate hinges on their culture. Hedge funds are paranoid outfits, constantly in fear that margin calls RIDING THE STORM 335 from brokers or redemptions from clients could put them out of business. They live and die by their investment returns, so they focus on them obsessively. They are generally run by a charismatic founder, not by a committee of executives: If they see a threat to their portfolio, they can flip their positions aggressively. Banks are complacent by comparison. They have multiple streams of revenue and their funding seems secure: Deposit-taking banks have sticky capital that enjoys a government guarantee, while investment banks felt (wrongly, as it turned out) that their access to funding from the equity and bond markets made them all but impregnable. The contrast between hedge-fund paranoia and bank complacency emerged most clearly in the years after Russia’s default and the Long-Term Capital crisis in 1998. For the most part, hedge funds responded to that shock by locking up investors for longer periods and negotiating guarantees from brokers to stabilize their capital. Meanwhile, banks trended in the opposite direction: Their buffers of equity capital fell by about a third between the mid-1990s and the mid-2000s. Even in 2006 and 2007, when the mortgage bubble was bursting, many banks were too sluggish to adjust. They sold John Paulson billions of dollars of mortgage insurance via the new ABX index, but they did not stop to ask themselves what Paulson’s buying might tell them. The contrast between banks and hedge funds was summed up by the story of Bear Stearns, even though there was a twist to it. Bear Stearns had a reputation as a vigilant manager of its trading risks; it was exactly the kind of institution that would not be expected to buy poisonous mortgage securities. But by the mid-2000s, Bear had emerged as the number one packager of mortgage-backed securities on Wall Street, up from the third slot in 2000; and to keep the sausage factory going, Bear had bought up subsidiaries that made subprime loans directly to home buyers, both in the United States and in Britain. Inevitably, this expansion shifted managers’ attention: They were less focused on what mortgages might be worth than on how to create lots of them. Meanwhile, in 2003, Bear devised an ambitious “10 in 10” strategy for its asset-management division: Revenues and profits from this unit would rise to 10 percent of Bear’s total by the year 2010, never mind the fact that Bear’s asset-management subsidiary 336 MORE MONEY THAN GOD was starting down this road from a position of insignifi cance. Again, this pursuit of fee income helped to seal Bear’s fate. The bank hurriedly assigned unqualified executives to build out its asset-management business by launching internal hedge funds, and some of these funds loaded up on subprime debt. That misjudgment set Bear on the path that led to its collapse the following year—and to the Federal Reserve being forced to absorb $29 billion of Bear’s toxic securities. The failure of Bear’s internal hedge funds could be seen as evidence of hedge funds’ riskiness. But the truth is that the Bear funds were a product of bank culture, not hedge-fund culture. Like other hedge funds launched under the umbrella of large banks, the Bear funds were managed by people who were seeded within a large firm, not by entrepreneurs who launched independent ventures. They raised capital with the help of the parent bank’s network and brand, which lowered the barriers to entry that freestanding hedge funds must reckon with. They knew that if they failed, the parent bank might bail them out, softening their vigilance. The investment thesis of the Bear funds underlined their close ties to the mother ship. Two of the funds were run by Ralph Cioffi, who had previously worked on Bear’s sales desk, peddling mortgage-backed securities to institutional clients. His plan for his hedge funds was to buy those same mortgage-backed securities and leverage them up by an astonishing thirty-five to one. This was the sort of risky bet that made sense to a deep-pocketed, fee-hungry parent. It would have been less likely to fly with a real hedge fund. Ralph Cioffi himself was not the sort of figure who could have launched his own hedge fund easily. As a salesman, he had virtually no experience in controlling portfolio risk—indeed, some Bear executives argued that he should not be allowed to do so. Paul Friedman, the COO of Bear’s fi xed-income desk, said afterward, “There were a fair number of skeptics internally who couldn’t figure out how this guy—who was bright but had never managed money—was now going to be running money. He knew nothing about risk management, had never written a ticket in his life that wasn’t someone else’s money.”15 Likewise, Cioffi was short on managerial ability: In a brief stint as a supervisor, he had performed disappointingly. Even with Bear smoothing the way, Cioffi had trouble handling the RIDING THE STORM 337 administrative challenge of running a hedge fund. He failed to secure the approval of his fund’s independent directors before buying securities from other divisions of Bear Stearns. The paperwork was in such a disastrous state that a law firm had to be brought in to investigate. In a complaint that summed up the trouble with hedge-fund subsidiaries within banks, an investor protested that it had put money in Bear’s funds because of the parent firm’s reputation for managing its own risks and claimed that Bear treated outside clients differently.16 The truth was that Bear and other banks that jumped onto the hedge-fund bandwagon were less intent on risk management than on leveraging their brands. If you wanted a reason why John Paulson made billions from the mortgage bubble and his former employer went out of business, the non-hedge-fund character of Bear’s internal hedge funds came close to supplying it.17 In June 2007, Cioffi’s leveraged subprime mortgage funds blew up. They had been marketed on the strength of the Bear Stearns brand, so now Bear felt obliged to rescue them with an emergency loan— vindicating the view that deep-pocketed parents dull the incentive to be vigilant. Meanwhile, Paulson’s mortgage wager generated the biggest-ever killing in the history of hedge funds. By the end of 2007, his fl agship mortgage fund was up a cumulative 700 percent, net of fees.18 His company generated an estimated $15 billion in profits, and Paulson himself pocketed between $3 billion and $4 billion—he was “the man who made too much,” according to one magazine profile. The following year, when Paulson recommended changes to Treasury secretary Hank Paulson’s bank bailout plan, his reception in Congress recalled the deference that Soros frequently enjoyed. “I was thinking we probably had the wrong Paulson” in charge, remarked Representative John Tierney of Massachusetts. Yet if Bear’s failure and Paulson’s triumph constituted a victory for hedge funds, it was too early to be sure that they would survive the shocks that followed. THE MONTH AFTER THE BEAR FUNDS FAILED, KEN GRIFFIN of Citadel headed off to France on vacation. He was a man in his prime. 338 MORE MONEY THAN GOD His formidable firm occupied a landmark tower in Chicago’s downtown business district. He had paid $80 million for a painting by Jasper Johns. He had recently married his French bride at the Hameau de la Reine in Versailles, the eighteenth-century mock village where the young Queen Marie Antoinette had once played peasant. But in the summer of 2007, Griffin found his vacation impossible to enjoy. Every day began with phone calls back to Chicago and ended the same way, and by Friday morning, Griffin had had enough. “Don’t take this the wrong way,” he told his wife. “You can come or you can stay. I’m going.”19 That Friday, July 27, was the day when the subprime troubles morphed into a larger credit crisis. Loans from guys who catapulted Porsches, byzantine collateralized debt obligations with eighteen layers, the whole pyramid of side bets on the ABX index—until just recently, all could be dismissed as a mania confined to one corner of the markets. But that Friday a Boston-based hedge fund named Sowood Capital Management began to catch fire. Its $3 billion portfolio was down sharply, and it was starting to receive margin calls from brokers.20 The remarkable thing about this development was that Sowood had avoided subprime securities. Its boss, Jeffrey Larson, had made his reputation working for the Harvard endowment, which had matched Yale’s enthusiasm for absolute return by creating its own stable of in-house hedge-fund managers. By the end of his twelve-year stint with Harvard, Larson had been running $3 billion of the $20 billion endowment. Then in 2004 he had persuaded Harvard to seed an independent multistrategy fund. The new firm, Sowood, had acquired about seventy employees. It had notched up gains of 10 percent annually in its first three years, largely by focusing on credit markets. At the start of 2007, Larson had rightly sensed that default rates might be heading upward. In a version of the capital-structure arbitrage that John Paulson favored, he bought relatively safe “senior” bonds and shorted riskier paper, positioning himself to do well in a downturn. The subprime losses that buffeted Bear Stearns did not appear to threaten him and might even be good news. In early July, Larson injected another $5.7 million of his personal savings into Sowood.21 RIDING THE STORM 339 Soon after that, Larson was forced to reckon with his error. Other leveraged players that had lost money in mortgages were raising capital by dumping nonmortgage positions; and in the third week of July, Sowood’s holdings of corporate bonds began to suffer serious losses. High-quality bonds that were supposed to be fi ne in a downturn were often the easiest to sell, so they were dumped first; when traders deleveraged indiscriminately, the logic of capital-structure arbitrage went out the window. Larson turned to his old mentors at Harvard, hoping for an emergency injection of capital; Harvard decided that would be too risky. By the morning of Friday, July 27, the news of Sowood’s troubles had spread around Wall Street, and traders began to position themselves for a contagious spiral. Margin calls might force Sowood to dump its corporate-bond portfolio in a fire sale, hitting other bond funds, triggering more sales and driving the market downward. Of course, these fears were self-fulfi lling, and the bonds fell hard that afternoon. Sowood was hemorrhaging money, and even when the market closed for the weekend, the fund continued to get hit in after-hours trading. Around lunchtime on Sunday, Jeff Larson placed a call to Ken Griffi n.22 Larson recalled how Citadel had bought Amaranth’s trading book the previous year. He asked whether Griffin might want to do the same for Sowood’s portfolio. The sooner Sowood could find a buyer, the sooner it could stop predators from targeting its positions. Larson needed a deal before the markets opened the next morning. Griffi n got on the phone to his lieutenants. Gerald Beeson, one of the two executives who had parachuted into Amaranth, had just started his own vacation on a beach near Chicago. He drove back at top speed, dialing several colleagues on the way; he stopped off at home to throw on some long pants and raced to the airport. By around seven o’clock that evening, half a dozen Citadel officials had taken over a conference room at Sowood’s offices in Boston, where they discovered that Sowood had also summoned Morgan Stanley. As the two teams examined Sowood’s portfolio, it quickly became clear that many of the positions were diffi cult to value; they consisted of derivatives that were traded “over the counter” between companies, rather than on a transparent, centralized exchange, 340 MORE MONEY THAN GOD so only a firm that traded all these instruments itself had a hope of fi guring out the going rate for them. Sowood’s tangle of legal arrangements with brokers and trading partners had to be assessed. The data that described its trades had to be uploaded into the buyer’s systems. At around 9:00 p.m., the head of the Morgan team called Griffin in Chicago. “Ken, we’ll pick this up in the morning.” “We’ll get this done by then,” Griffin answered. He heard a noise on the line. He wasn’t sure if the other guy was laughing at him. By 7:00 a.m. on Monday, Griffin had done what he had promised. He and his team had worked through the night and bought Sowood’s entire trading book. Jeff Larson explained to his investors that “Citadel offered the only immediate and comprehensive solution.” Sowood’s two funds were down 57 percent and 53 percent for the month; Harvard’s endowment had taken a $350 million hit; but at least the nightmare had now ended.23 The deal was announced publicly, calming the fear that Sowood might dump its positions. The bond market recovered more than 4 percent that day, and the panic was over. One hedge fund had imploded, threatening to start a systemic fi re. Another hedge fund had swooped in, acting as the fi reman. Almost immediately, a new fi re started. THE NEXT FRIDAY, AUGUST 3, A RATINGS AGENCY ANnounced that Bear Stearns’s debt might be downgraded. It was the first time a Wall Street fi rm’s financial health had been questioned in the crisis, and Bear Stearns’s stock fell so hard that its bosses convened a conference call in an attempt to calm investors. More than two thousand people dialed in, but there was no calming effect at all. Bear’s chief financial officer blurted out that the credit markets were behaving in the most extreme manner he had witnessed in his long career; “he fucking blew the market up,” Bear’s treasurer said sweetly.24 On CNBC a few hours afterward, the financial pundit Jim Cramer fanned the flames. “It is time to get on RIDING THE STORM 341 the Bear Stearns call!” he ranted, excoriating the Fed for sitting on its hands. “We have Armageddon.”25 Cramer could not guess where the next fire would come from. But away on the sidelines of the subprime drama, quantitative hedge funds were starting to sense trouble. In the second half of July, computerized systems that traded equities were no longer performing well, and some were even losing money. As the quants analyzed the problem, they discovered something disturbing. It was not that a new risk was swamping the buy and sell signals that had been profitable for years; the signals themselves were no longer working. The quants had programs that bet on momentum in stock prices; programs that bet that momentum would reverse; and programs that bet that cheap stocks with low price-to-earnings ratios would outperform expensive ones.26 All these bets were fizzling at once. Somewhere out there in the trading universe, one or maybe several quants were liquidating their holdings, perhaps because they had lost money on their mortgage bets and needed to raise cash. Their forced selling was driving prices against anyone who had a comparable portfolio.27 At the end of July, Mike Mendelson, a hard-charging ex-Goldman quant, decided it was time to cut the risk in his trading book. Mendelson now worked for AQR, an investment company set up in 1998 that managed $10 billion of capital in hedge funds and another $28 billion in traditional ones. AQR’s chief founder, Cliff Asness, had contributed to the academic literature on pricing anomalies in stocks; having programmed his computers to milk these effects, he delivered steady, uncorrelated returns while also sleeping soundly. Although AQR’s losses in late July had been too modest to disturb anybody’s rest, Mendelson had heard that another big quantitative fund had suffered a bad loss. Erring on the side of prudence, he trimmed leverage. Then, in the fi rst days of August, AQR’s models started to work again. Whoever had been liquidating quant positions must now have stopped. The trouble seemed to be over. On Monday, August 6, Mendelson sat through some routine meetings at AQR’s office, a utilitarian suite in a featureless building just by Greenwich station. Around midmorning, he strolled out to the local Subway 342 MORE MONEY THAN GOD sandwich store, and as he waited in line he checked his funds’ performance on his BlackBerry. He peered for a few seconds at the screen. The numbers were all red, and they were not small, either. In the past three hours, AQR had lost tens of millions of dollars.28 “Oh, God, this is ridiculous,” Mendelson thought to himself. Some quant somewhere must be deleveraging, but on a monstrous scale. Or maybe several quants were bailing all at once? How long could this go on? The one thing Mendelson knew was that he would have to cut leverage quickly. If a fund has $100 of capital to support $800 of positions, a 5 percent loss will leave it with $60 in capital and $760 worth of positions: Its leverage rockets up from eight to one to more than twelve to one.29 If there is another 5 percent loss the next day, the leverage will not merely rise another 50 percent; it will practically triple, from twelve to one to thirty-three to one. A third 5 percent setback will drive leverage to infinity and beyond, since the fund’s capital will be negative. Back in AQR’s offices, Mendelson and his colleagues sketched a hyperbolic curve on a notepad, showing how leverage could accelerate upward. The only way to survive was to keep leverage on the flattish, left-hand portion of the curve. If AQR’s funds were down 5 percent, they might have to sell almost two fifths of their positions to keep leverage stable. Otherwise they would begin a death spiral. Meanwhile, versions of this drama were playing out at other quantitative hedge funds. Most were not like Jim Simons’s Medallion: They were trading well-known price anomalies, not esoteric secrets; “there is no E=MC2 under the hood,” as Asness put it.30 Even Simons confessed that his large fund for institutional investors traded on signals that were understood by others; everyone had read the same academic papers, had looked at the same data, and was making the same types of bets, especially on stocks with momentum and value.31 In normal times, this didn’t matter: Even if an army of funds was chasing “value,” there were dozens of ways to measure this phenomenon, so crowding was limited. But as with all investment strategies, crowding did turn out to matter during a panic: Selling by one big fund caused losses at other ones, especially since RIDING THE STORM 343 quantitative strategies had grown large enough to shove prices around.32 Once rival funds started to incur losses, the logic of the hyperbolic curve would force them to sell too. By Monday afternoon, Mendelson began to see how bad things could get. Not only would AQR have to sell a huge chunk of its positions to keep its leverage stable in the face of initial losses. As its competitors sold too, it would have to sprint to stay still, racing other quants to cut the size of its portfolio. The next day was even more brutal than Mendelson had expected. AQR’s models lost money twice as quickly as on Monday, and the fi rm instructed its computers to dump billions of dollars’ worth of positions. The good news was that technology made it possible to liquidate a portfolio much faster than in earlier years; the bad news was that AQR’s rivals could liquidate just as quickly. Every quant was firing off torpedoes at every other quant; there were rumors of funds that were down 10 percent or worse. At the Renaissance campus in Long Island, Jim Simons huddled with his top lieutenants in front of the computer screens, tweaking the parameters on his models like a pilot navigating a hurricane. Cliff Asness, AQR’s founder, blew up in the office and smashed computer screens.33 He took a call from Ken Griffin, who by now had a reputation for buying the corpses out of car wrecks. “I looked up and saw the Valkyries coming and heard the grim reaper’s scythe knocking on my door. I did my best to run to the light,” Asness said later.34 While this chaos unfolded, policy makers appeared to occupy a parallel universe. On Tuesday, August 7, the second day of the quant quake, the Fed’s interest-rate committee issued a warning about the risks of infl ation. The next day President Bush visited the Treasury to meet with his economic advisers. “[I]f the market functions normally, it will lead to a soft landing,” he said hopefully. On Thursday the tone from Washington began to change, but less because of the carnage at quantitative funds than because of trouble from Europe: The giant French bank BNP Paribas had suspended redemptions from three internal money-market funds, citing “the complete evaporation of liquidity.” Subprime losses were clearly scaring the markets, and the European Central Bank responded with $131 billion in emergency liquidity. By Thursday afternoon, the 344 MORE MONEY THAN GOD Fed’s chairman, Ben Bernanke, had turned his office into a makeshift war room, and his chief lieutenants dialed in from various vacation locations. Early the next morning, the Fed reversed its earlier emphasis on infl ation, pledging to provide enough cash “to facilitate the orderly functioning of fi nancial markets.” Meanwhile in Greenwich, Mendelson was starting to see light at the end of the tunnel. It had nothing to do with the Fed’s U-turn and everything to do with other hedge funds. Starting on Tuesday, Mendelson had begun to call brokers and friends in the markets—anybody who might know anything about how other leveraged quant funds were positioned. The business was dominated by a handful of firms. There was Jim Simons’s new fund, which ran more than $25 billion of institutional money. There was Highbridge Capital, a subsidiary of J.P. Morgan. There were D. E. Shaw, Barclays Global Investors, and Goldman Sachs Asset Management. Mendelson wanted to know how much the big players had cut leverage so far: If they got themselves down into the flat part of the hyperbolic curve, the selling pressure would end and the storm would be over. After working the phones all day Tuesday, Mendelson reached a buddy just after midnight. The guy had rushed back early from vacation and was falling apart: He was exhausted, blabbering, at the end of his tether. Mendelson could tell he was about to liquidate his whole book. He ticked one fi rm off his list and hit the phones again the next morning. By Thursday evening, Mendelson had figured out that only one big player had yet to cut leverage. He guessed it might be one of the hedgefund subsidiaries of his old firm, Goldman Sachs: the $5 billion Global Equity Opportunities Fund. Goldman’s executives had decided that the fund’s positions were too big to sell, so its leverage had rocketed up as its bets got hammered. When the market opened on Friday, one of two things would happen. Either the fund would liquidate, hitting other quant funds for a fifth straight day. Or it would be recapitalized by its parent company.35 When Friday morning came, Mendelson could not care less about the Fed’s stance on inflation. He was looking at his own trading model. Within a few minutes, it was generating profits—its performance practically RIDING THE STORM 345 screamed out that the Goldman subsidiary had been rescued and that the quant liquidations had ended. Acting on that signal, AQR began to releverage as quickly as possible; the more it could catch the upswing as money flooded back, the more it could make up for the past four days of carnage. The following Monday, Goldman Sachs announced publicly what Mendelson had already guessed. It had recapitalized the Global Equity fund with $3 billion in fresh money.36 The quant quake of August 2007 ended as abruptly as it had started. Friday and Monday were great days for the models, and most of the quants recouped at least part of their losses. But the drama prompted a new round of debate about hedge funds, and the agonizing outlasted the disruption in the markets. Granted, Amaranth and Sowood had been rescued by a fellow hedge fund, making it hard to argue that the sector was destabilizing. Granted, hedge funds—or at least, nearly all freestanding hedge funds—had dodged the mortgage bullet, suggesting that they were better money managers than their banking rivals. But the storm in the equity market was surely a warning. The most sophisticated hedge funds had lost control of their models. The rocket scientists had blown up their rockets. The most persuasive critics came from within the hedge-fund establishment. Andrew Lo, an MIT professor who ran his own hedge fund, published a widely cited postmortem on the quant quake; and Richard Bookstaber, an MIT alumnus who had worked at several major funds, pressed the warnings he had recently published in a pessimistic book on fi nance.37 Lo and Bookstaber contended that the rise of leveraged hedge funds created a new threat: Trouble in the mortgage or credit markets could saddle a multistrategy fund with losses, forcing it to liquidate equity holdings; distress could leap from one sector to the next; the financial system as a whole was riskier. Lo and Bookstaber linked this warning to a gloomy view of hedge funds’ investment performance. There were too many quant funds chasing small market anomalies. This crowding diminished investment returns, which in turn drove hedge funds to use dangerous amounts of leverage to maintain profi ts. There was some truth in all this pessimism. During the LTCM crisis, 346 MORE MONEY THAN GOD credit markets had been in turmoil but quantitative equity funds had been fine; the rise of leveraged traders helped to explain why the fire had jumped the fire wall this time.38 But it was one thing to say that crowding was a problem in moments of turmoil, quite another to assert that it was forcing down returns in the good times and making dangerous leverage inevitable. Lo’s paper presented the returns from one quantitative strategy—buy stocks that are doing badly and sell ones that are doing well—and made much of the fact that profi ts from this simple contrarian model had deteriorated since 1995, apparently substantiating the case that hedge funds had no choice but to employ more scary leverage. But basic contrarian strategies were not central to the quant quake, because the quants themselves could see that there were limited profits in them. The big money in quant funds was in other strategies—for example, sell expensive growth stocks with high price-to-earnings ratios and buy cheap, dowdy ones with low ratios. The price gap between growth stocks and value stocks had shown little sign of narrowing in the years leading up to 2007; as Asness put it, “We are fond of saying that if these strategies are truly horribly overcrowded, then someone has apparently forgotten to tell the prices.”39 Other quants made versions of the same point. Marek Fludzinski, the head of a hedge-fund company called Thales, tested virtually identical trading strategies to see if the presence of one of them would erode the other one’s returns; remarkably, it did not, suggesting that crowding was not actually a problem.40 It was true that uncrowded bets could suddenly feel intensely crowded in a moment of turmoil; but this held for virtually all trading strategies, not just quantitative ones. “Of course, ‘good investing gets clocked as some investors rush for exits’ is not as catchy a story as ‘quant brainiacs follow their computers to a well-deserved doom,’ so I’m probably not going to win this battle in the media,” Asness lamented.41 If quant strategies were not as crowded as the critics suggested, and if scary amounts of leverage were therefore not inevitable, what of the charge that hedge funds increased the risk of broad systemic blowups? Here too the Lo-Bookstaber critique needed to be qualified. During the fi rst three days of the quant quake, the signals in the traders’ models performed abysmally, but the broader market remained calm—the average American RIDING THE STORM 347 household with its nest egg in an index fund would have noticed nothing, undermining the notion that this was a crisis for the whole fi nancial system. On the fourth day of the quant quake, the market did suffer a hard fall, but this reflected the crisis in the credit markets more than the tremors in quant land. The great thing about liquidating so-called market-neutral strategies was that the effect on the overall market was neutral: For every stock the quants sold, they covered a short position. It was true that if Goldman Sachs had not rescued its subsidiary, the deleveraging would have lasted longer, potentially forcing multistrategy funds to dump positions in other markets and spreading the trouble. But the way things actually turned out, the market punished overleveraged traders while the broader system suffered little harm. This was how capitalism was meant to discipline its children. No regulator could have done better. In the final analysis, it was hard to disagree with Mike Mendelson’s verdict on the quant quake: “A bunch of us lost a bunch of money and had a really tiring week, which sucked, believe me. But I don’t think it was a big public policy issue.”42