All over the news today is a story about two Bear Stearns hedge fund managers who were indicted on charges that they defrauded investors. According to the Times, prosecutors are building their case on e-mails between the two men who were arrested today. “I think we should close the funds now,” wrote Matthew Tannin to Ralph Cioffi (they plead not guilty) before telling investors it was a good time to put money in their funds that were heavily invested in the subprime mortgage market. One allegedly withdrew his own money while investors lost about $1.6 billion, “setting off a financial chain reaction that has rattled global markets, led to more than $350 billion in write-downs, cost a number of executives their jobs and culminated in the demise of Bear Stearns itself,” the Times reports.
I argue in Slackonomics that it could very well be up to Generation X to bring the economy back from the brink. First, do we kill all the Hedge Fund managers? Not necessarily. In this week’s New York magazine is a profile of 39-year-old Hedge Fund manager David Einhorn, a very successful AND highly principled manager of Greenlight Capital. I almost wrote “but” instead of “and” as if successful and principled are mutually exclusive, but that is in fact my point — they aren’t! Putting these two ideas back together is one of the challenges facing Generation X as we move into positions of leadership.
One of the defining characteristics of this generation is that we are highly entrepreneurial — whether in the arts, sciences or business. Einhorn obviously falls into the latter category. He fits the Gen X profile in some other important ways, too. While most Hedge Fund managers are bizarrely secretive, Einhorn has actually used his success to speak out when he thinks something is amiss. And despite working a lot, “Einhorn runs his firm in a self-consciously humane way. High performance is expected, but there is no cracking of the whip and no overbearing hierarchy. Office doors are open; people tend not to work crazy hours,” writes Hugo Lindgren, which is very much a Gen X philosophy in reaction to the yuppie-in-overdrive culture of the boomers.
But most importantly, he has used short-selling to expose incompetence and fraud. Short-sellers have gotten a bad rap for trying to take down legit businesses. I claim no real knowledge of this, but I totally buy the argument that short-selling is the market’s way of speaking truth to power. As a journalist, I relate to this argument.
An old high school friend who asked not to be named (he is a short-sell hedge fund manager of the secretive variety) wrote to me after I sent him the Einhorn piece: “I am not certain of much when it comes to the market, but one thing I know is that short sellers are for the most part the real truth seekers when it comes to stocks. There are a few bulls that are legitimately trying to assess the value of a company, but most of them are merely stock promoters who only have an interest in making stocks go up, no matter the reason. One funny Einhorn story that also may appear as if I am trying to pat myself on the back, is that he owned a TON of New Century stock, which was the first high profile subprime company to go bankrupt. I was lucky enough to be short it, and constantly had to hear, “How can you be short this if Einhorn owns it?” To his credit, I think it’s fair to say Einhorn got religion about the subprime market pretty quickly after watching New Century go from $40 to $0.”