A million dollars isn’t cool.
A curious thing happened on Friday, something that probably went unnoticed by most Americans, either because they were just waking up from their food comas and heading to the malls to do their part in helping corporate America pile on to its already record-setting profits, or else because the average American would never notice (much less consider it curious) that a relatively obscure Wall Street hedge fund got hit with redemption requests from its investors totaling about 40% of the fund.
And what made it so curious for me, I guess, was the fact that we spend a lot of time in this country talking about wealth concentration, about the rich getting richer and the poor getting poorer, and about how the national share of after-tax income of the top 1% of earners has doubled over the last four decades from 7% to an absolutely staggering 14% of total income among all US households. And yet in all of these statistics, and throughout all of this hemming and hawing about whether or not we should be crying rivers for all those poor saps just trying to make ends meet in Manhattan on a measly $250k, I’ve never seen an illustration quite as symbolic as this.
But first some perspective: consider the story of Salomon Brothers, the investment bank profiled in Michael Lewis’ 1989 exposé Liar’s Poker, and consider the enormous financial success it enjoyed as the only shop in town with an established mortgage bond trading desk in the fall of ‘81, the moment when Congress unwittingly invented the mortgage-backed securities market by passing a tax break intended to help the struggling savings and loan thrifts but which resulted in a wild speculative frenzy, in the unparalleled leveraging of American banks and taxpayers, and in the creation of an untold number of complex financial instruments with bizarre sounding names like “collateralized mortgage obligations” that were minting money for the few people who could understand them until the party got busted up when the market lost 22% on one October monday in 1987 and American taxpayers were left on the hook to the tune of a $124 billion bailout to clean up the mess created by institutions like Home State, Midwest Federal, and Lincoln Savings and Loan.
In 1987 Salomon Brothers controlled $3.5 billion in capital.
Fast-forward a couple of decades: the American economy is reeling from a banking crisis brought on, in large part, by an ‘04 SEC ruling lifting the debt cap on investment banks, resulting in a wild speculative frenzy, in the unparalleled leveraging of American banks and taxpayers, and in the creation of an untold number of complex financial instruments with bizarre sounding names like “collateralized debt obligations” that were minting money for the few people who could understand them until the party got busted up when subprime mortgages all across the country started going bad and and American taxpayers were left on the hook to the tune of a $700 billion bailout to clean up the mess created by institutions like AIG, Merrill Lynch, Bear Stearns, and Lehman Brothers.
And that’s not the end of the happy coincidences.
Because here we are, it’s 25 years later, Michael Lewis has published yet another exposé profiling yet another Wall Street antihero—Steve Eisman this time, the hedge fund manager who stands in relation to 2007-08’s subprime market as Lewis Ranieri did to mortgage bonds in the 80s (Eisman being one of the few investors who went short on the housing bubble when the rest of Wall Street was going long, and as a result one of the few fund managers to make a killing when the market bottomed out)—and it was this antihero whose hedge fund—FrontPoint—got hit with those redemption requests on Friday. And it’s important to note that FrontPoint is a comparatively quaint little shop: it doesn’t register on anyone’s top 100 lists and it only weighs in at about a tenth the size of JPMorgan, which makes it all seem perfectly reasonable that nobody would notice—much less find it very remarkable—that this fund saw 40% of its ledger vanish on Friday.
So then why is that 40% so remarkable? Because that 40% is equivalent to $3 billion.
Or put another way: little old FrontPoint had 40% of its fund withdrawn and it’s still sitting on as much inflation-adjusted cash as Salomon boasted in its heyday.
And the rich get richer.
