Diary of a Very Bad Year Chapter 6 - Everyone Gets Angry

This is part of my series retelling Diary of a Very Bad Year. Today we’re covering Chapter VI - the start of Part 3: Aftermath.

It’s April 2009. The Dow sits at 8,029. Unemployment is at 8.9%. And people are angry.

The phrase “populist rage” enters the national vocabulary. Congress yells at AIG executives for spending bailout money on manicures and fancy retreats. A bus tour takes people past the mansions of AIG execs in Connecticut. Ruth Madoff gets turned away from her hair salon. Newspapers are closing left and right. And gun sales are up because people think Obama will take their guns.

This is the backdrop for Chapter VI. The panic is fading, but the anger is just getting started.

HFM goes to China

HFM flew to Beijing to check on a property investment. China had gone through its own property bubble. Luxury developments everywhere, 5-star hotels going up in cities that barely needed one. Speculators buying apartments with nobody at the end of the chain to actually live in them.

But here’s the thing. Unlike American buyers, Chinese buyers had a price target in mind. They knew what rents were, what a reasonable yield looked like. So when developers cut prices, buyers showed up. February and March 2009 saw a real rebound in sales.

China was also doing its own stimulus. Lending picked up. People started believing China could hit 8% growth. That mattered for the world, not because China’s economy was huge, but because optimism is contagious. If China is growing, investors feel less terrified.

Will the dollar lose its crown?

The interviewer asks about whether China will ditch the dollar. HFM’s answer is basically: not anytime soon.

Why? Most international debt is denominated in dollars. Countries hold dollar reserves because they owe dollars. For another currency to replace it, you’d need companies and governments borrowing in that currency instead. That’s a slow process.

And who would replace it? The euro has a fundamental problem. The countries sharing it aren’t politically aligned. What happens when Italy tanks but Germany’s doing fine? The eurozone could splinter. Sterling? UK is too small. The yen? Japan has its own mess. The renminbi? Not even convertible.

HFM puts it simply. It’s not that the dollar is great. It’s that everything else has equal or worse problems. In currency markets, that’s the same thing as being great.

One fun detail: Chinese businesspeople found the situation a little amusing. The power dynamic had flipped. Now it was China lending to America out of responsibility, not just for its own export strategy. HFM’s word for it was “gentle raillery.”

Is Citibank a zombie?

“Citi’s definitely a zombie bank. Of course!”

HFM doesn’t hesitate on this one. He thinks shareholders should be zeroed out. Preferred shareholders too. Maybe even senior debt holders should take a haircut. Depositors would be protected, but everyone else holding Citi paper should face the reality that the bank is deep in negative equity.

So why hasn’t the government done this? Early in the crisis, too much uncertainty. Nationalizing Citi in January would have made Bank of America shareholders panic. Domino effect. But by April 2009, the situation is clearer. Stress tests are done. The worst banks are identified.

HFM thinks the real problem is that the people making decisions come from the financial sector. It’s not corruption exactly. It’s a failure of imagination. Nationalizing Citibank is so outside their mental model they can’t picture it. “Your lack of imagination is not a good grounds for a policy judgment,” he says. That line stuck with me.

Goldman runs everything

The interviewer asks about Goldman Sachs. HFM admits the people there are smart. But Goldman alums don’t just run hedge funds. They run the government.

Both the Bush and Obama administrations were too soft on banks. And not in the symbolic way, like arguing about executive bonuses. That’s a sideshow. Real toughness means saying: this institution needs to be nationalized, these shareholders wiped out, these losses made real.

HFM is clear he’s not a banker. He’s a hedge fund guy. And many in the hedge fund world agree the bailouts have been too gentle.

Where did the money go?

This is where the interview gets really good. The interviewer pushes hard. If all this money was misallocated, somebody got it, right? Where is it?

HFM walks through the chain. A developer builds houses nobody needs. A bank funds the developer. A depositor funds the bank. The depositor thinks his money is still there. But what backs that deposit is an empty house in Arizona nobody will ever live in. The loss exists. It just hasn’t been assigned yet.

The interviewer keeps pushing. Wall Street people who structured and sold these securities made tons of money. They kept it. Regular people who had nothing to do with this are losing their jobs.

HFM’s response is honest but uncomfortable. You can’t claw back money years after the fact. Rewriting contracts retroactively destroys trust. But going forward, compensation in finance should include clawbacks from the start.

You can feel the interviewer’s frustration. And that frustration is basically what “populist rage” means.

HFM needs a break

At the end of the chapter, HFM announces he’s taking a semi-sabbatical. In ten years, he’s taken two one-week vacations. The crisis burned him out. Not just the markets. His counterparties have gotten more unethical. People are stealing company money, refusing to pay debts, taking advantage of the chaos. About 40% of his time goes to fighting these battles. Hiring lawyers, arguing on the phone.

He compares himself to metal fatigue. You can bend metal back and forth for a while. But eventually it gets brittle and cracks.

Taxes going up don’t help. Neither does the fact that saying “I work at a hedge fund” has become socially embarrassing. Put it all together and he’s stepping back.

It’s a surprisingly human moment from someone who usually talks in credit spreads and yield curves.

What sticks with me

Chapter VI is where the book shifts from “what happened” to “what now.” The panic is over. The apocalypse didn’t happen. But nobody is happy. The public is angry. The hedge fund manager is exhausted. And the fundamental question remains unanswered: who pays for all of this?

HFM’s answer is that losses need to be allocated. Shareholders should lose money. Some banks should be nationalized. But he also admits that the people making these decisions can’t imagine doing it. And so the zombie banks keep getting fed.

Previous: Chapter V - Year-End Closing

Next up: Chapter VII - Life After the Crisis