Diary of a Very Bad Year Chapter 7 - Picking Up the Pieces

This is part of my series retelling Diary of a Very Bad Year. Today we’re covering Chapter VII.

It’s May 2009. The Dow is at 8,504. Unemployment is 9.4 percent. Over 342,000 homes got foreclosed that month. But the worst of the panic? That part seems to be over.

And HFM is sitting in a coffee shop on a Monday morning. Not at his desk. At a coffee shop. He’s on what his firm calls a “working sabbatical.” Three days a week instead of five. He’s been doing this for three weeks and plans to keep it going through the summer.

Why? Because after a year and a half of constant crisis, he’s burned out.

Fixing Toilets and Chasing Debtors

So what does a hedge fund manager do with his days off? HFM tried fixing things around the house. He broke a toilet. He broke a sink. He got “neutral results” on a shower. Not exactly a second career.

But the real work never stops. His BlackBerry is still on the table at the coffee shop. He still checks markets. And a huge chunk of his time goes to something deeply unpleasant: chasing people who owe him money.

Here’s the thing about private investments. When things go well, they don’t take much of your time. But when they go bad, they eat your life. HFM describes it like writing options on your own time. You assume not all your investments will blow up at once. You assume low correlation. But in this crisis, everything blew up at once. Every single private deal needed attention at the same time.

He calls himself “time insolvent.” He declared “time bankruptcy.” There’s money he could recover if he just had enough hours in the day. But he doesn’t.

Smash It Up

The dunning process is ugly. When a company genuinely can’t pay, HFM works with them. They figure out a restructuring. No hard feelings.

But some companies play games. They can pay, or at least pay something, but they choose not to. They know the courts are clogged, the lawyers are booked, and the lenders are busy with other fires. So they just stop paying.

That’s when HFM gets creative. Plant stories in the press. Call the company’s customers. Create enough legal noise that the debtor decides it’s easier to just pay up.

And sometimes, when recovery would be tiny anyway, the strategy is pure destruction. If you’re only getting 3 cents on the dollar, you might as well drag the company through the most painful bankruptcy process possible. Not to get your money back. To build a reputation. So the next borrower thinks twice before stiffing you.

“Everybody says: Wow, these guys are crazy,” HFM explains. And that’s exactly the point.

The Tallest Tower That Became a Parking Garage

HFM gives a great example of the kind of dumb deals that got funded during the boom. Someone wanted to build the tallest tower in Europe. In Russia. No tenants lined up. Massive engineering challenges. Long timeline. A bunch of hedge funds threw money at it anyway.

By 2009? The project defaulted. The grand tower is becoming a parking garage.

And it wasn’t just real estate. Brazilian meatpackers got enormous loans. Seven or eight of the top companies, mostly family-run, with terrible accounting, questionable assets (a big chunk of their “assets” were tax rebates the government owed them but never paid). Many of them defaulted too.

This is what happens when money is too cheap and too easy. People fund things that should never get funded.

The Missed Opportunities

Here’s what hurts. In December 2008 and January 2009, there were obvious bargains in the public markets. Bonds trading way below their real value. Everyone could see they were cheap. But almost nobody could buy them.

Why? Because everyone was playing defense. “What if all our investors want their money back? What if we lose our financing?” That fear kept everyone on the sidelines. And that’s exactly why the bonds were so cheap in the first place.

By the time conditions eased and people could start buying, prices had already bounced back. HFM’s fund caught some of the rally, but nowhere near what they could have gotten if they’d known they were safe.

It’s the cruel irony of financial crises. The best opportunities appear exactly when you’re least able to take them.

The Stress Test Theater

The government ran stress tests on nineteen major banks. HFM is not impressed.

He calls it “Kabuki theater.” The market basically told the regulators what results would be acceptable. If every bank failed, that would destroy confidence. If every bank passed, nobody would believe it. So the ideal outcome was about half failing, but not by too much, except for the obviously sick ones.

And that’s exactly what happened. Nine needed capital, ten passed. Bank of America had the biggest hole at $34 billion. Citibank needed some too.

The real question was never “are these banks healthy?” Everyone knew the answer was complicated. The question was “is the government going to change its story soon?” And the stress test said no. So investors felt safe enough to buy bank stock, knowing the regulators wouldn’t suddenly demand more capital next month.

HFM has mixed feelings about the banks surviving. Keeping sick banks alive prevents panic. But it also means badly managed institutions keep running. And Bank of America’s problems were largely self-inflicted. They bought Countrywide, the poster child for subprime. Then they bought Merrill Lynch at the worst possible time, for a lot of money. “Sometimes you ask for what’s behind door number three,” HFM says, “and sometimes it’s a goat.”

Obama and the Green Shoots

HFM was initially optimistic about Obama. Now he’s more cautious.

The fiscal stimulus was necessary, sure. But HFM worries that many of the new programs aren’t temporary. They’re permanent new entitlements dressed up as crisis response. And some tax policy changes could make it less attractive for companies to stay headquartered in the U.S.

As for the broader recovery talk, HFM isn’t buying the “green shoots” narrative. The financial heart attack may be over, but the real economy problems are massive. Mortgages still underwater. Consumer spending shifting. Americans starting to save again instead of spending more than they earn. That’s healthy long-term but painful in the transition.

And he sees a tough choice ahead: either deflation drags the economy down, or the government overdoes the money printing and causes inflation later. Threading the needle between those two seems unlikely.

The Regrets

This is the most human part of the chapter. HFM talks about looking back at his career during his days off. He fantasizes about a time machine. Going back and undoing bad trades. Making the good ones bigger.

His team spent six months doing what he calls “crash reports” on every bad investment. Like the NTSB investigating a plane crash. They looked at every step. Where did they deviate from their process? Where was the process itself wrong? Where were they in businesses they weren’t staffed for?

They found a lot. Some businesses they should never have been in. Some due diligence steps they skipped. Some jurisdictions where they needed a much higher bar to get involved.

But beyond the systematic review, there’s the personal stuff. The dwelling. His first boss told him you can’t dwell on bad decisions. You learn and move on. But that boss was always dwelling himself. “He knew it was an unhealthy thing.”

HFM ends the chapter wondering if he should quit entirely. Maybe zero days a week is better than three. But he also knows that mastery in a discipline is emotionally rewarding. And he’s not sure there’s anything else he can master at this point.

“There definitely have been more days in the office lately when I’m dealing with some dirt-bag foreigner who borrowed money from me, pissed it away, and doesn’t want to pay me anything, and I say to myself: I have enough money, I don’t need this headache anymore, I’m going to work on fixing the toilets in my house.”

That might be the most honest thing any hedge fund manager has ever said.

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Next up: Chapter VIII - Vacation Plans