Diary of a Very Bad Year Chapter 9 Part 2 - The Final Interview
This is part of my series retelling Diary of a Very Bad Year. Today we’re covering Chapter IX, Part 2 - the final interview.
The crisis is winding down. The financial system survived. But what does “survived” actually feel like from the inside? This last stretch of the final interview answers that. And then HFM drops a bomb nobody saw coming.
5:30 AM Rumors and Sleepless Nights
HFM would get to the office at 5:30 in the morning. London was already trading, and the rumors were flowing. “Did you hear bank X is in trouble?” “Fund Y is being liquidated by their prime broker.” Every single day. Most of it was false. But some of it was true. Bear Stearns had its collapse announced a dozen times before it actually happened. Goldman Sachs got rumored dead half a dozen times.
And you become part of the machine. You call people, ask what they heard, pass it along. HFM admits it was mostly a waste of time. If a bank is really dying, they’re not going to broadcast it. But you need to feel like you’re doing something.
The real fear was the chain reaction. Here’s how it works in HFM’s head at 2 AM. A bank fails. His fund has some money there. That money gets frozen. It’s a manageable loss. But other banks see it happen and get nervous. They pull their financing. Now his fund has less cash. Maybe they need to sell some assets. Other funds see the selling and think, “They must be in trouble.” More lines get pulled. Everyone sells at the same time. Prices crash. More losses. More panic. The whole thing unwinds.
It’s a domino chain. Each domino was a 1% chance of falling. Then you watch the first one go. And suddenly you realize the next one is not 1% anymore.
When Banks Break Their Own Contracts
Here’s something that stuck with me. During the crisis, banks started ignoring their own contracts with hedge funds.
HFM’s fund had a financing arrangement with a bank. The contract said the terms couldn’t change without six months’ notice. One day the bank just called and said, “We’re multiplying your margin requirements by three or four. Post the money now.”
That’s illegal. The contract said so. But what are you going to do? Sue them? By the time the case gets through the courts, your fund is dead. And if other banks hear you’re in litigation with one of your lenders, they’ll all pull their financing too. You’re in a death spiral before a judge even looks at your case.
HFM’s fund could handle it because they ran conservatively. They had extra cash. They paid the money, found a better deal at another bank, and moved on. But the principle is terrifying. If one bank can ignore its contracts, what about the other ten financing arrangements you depend on?
He tells a story from 1998 about a hedge fund that bought Russian treasury bills and hedged the currency risk with a French bank. When the ruble crashed, the French bank said, “We’re not paying.” The hedge fund couldn’t meet its margin calls. Got blown out of its positions. Sued the bank. It took years. By then the fund was dead.
You win the lawsuit. So what? Your business is gone. Your reputation is gone. You can’t undo the damage.
Harvard Blows Up a Hedge Fund
HFM brings up Sowood Capital, a fund started by guys who used to manage money for Harvard’s endowment. They left, started their own shop, and Harvard put money with them.
The trade that killed them wasn’t even crazy. It was leveraged at a level that seemed reasonable based on past volatility. But things went haywire and they were done. Another fund, Citadel (run by Ken Griffin, Harvard class of ‘89), came in and bought their entire portfolio at a price that basically wiped out Sowood’s investors.
But here’s the part that makes HFM angry. The reason these guys left Harvard in the first place was because a bunch of alumni, mostly from the class of 1969, complained about how much Harvard’s in-house money managers were getting paid. They pressured the university until the talent left.
So what happened? Harvard ended up giving money to the same people, except now they were running external hedge funds. Getting paid more. With less oversight. And then one of those funds blew up and lost Harvard’s money anyway.
HFM does not hold back. He calls them “patchouli-stinking hippies” listening to their Woodstock albums. Harvard’s endowment ended up down 30% that year.
The Mistakes Worth Talking About
The interviewer asks if HFM made mistakes during the crisis. His answer is honest. The big mistakes were things he didn’t do. When the worst panic started fading in early 2009, there were incredible opportunities to buy distressed assets cheap. But he was too traumatized. Too scared it would slide back.
He says this happens every crisis. You tell yourself, “Next time I’ll be brave and pile in at the bottom.” But that’s emotional thinking. Because one of these times, the world actually might end.
His form of panic, he says, is deer in the headlights. He freezes. And that turned out to be okay, because it kept him from selling at the worst possible moment. The real mistakes in finance happen during the good times. The bubble years. That’s when you make the errors that cause the crisis.
The Announcement Nobody Expected
Near the end of the interview, the conversation is wrapping up. “Anything else?” the interviewer asks. And then HFM says it.
“I am considering retiring.”
The interviewer is stunned. This is the guy who gets up at 5:30 AM, who has been managing money through the worst financial crisis since the Great Depression. And he wants to quit.
He wants to move to Austin, Texas. His reasons are practical. No state income tax. Warmer weather. A university town with interesting people. His fiancee’s sister lives there. He’s tired of New York winters and New York taxes.
But the deeper reason is burnout. He’s been through too many crises. Too many sleepless nights. The emotional resilience is just gone. Even now that the crisis is over, the normal daily problems of the job feel heavier than they used to.
He went on vacation and at first felt withdrawal. Then by the end he realized he didn’t miss any of it. “Wow, this is great. I like not working.”
His friend Gary tells him he can’t just become a consumer of stuff. HFM disagrees. “I’ll take the other side of that bet.”
At a certain point, he says, you have to ask yourself: am I still enjoying this? Or am I just being Scrooge McDuck, piling up money I’ll never spend? Or worse, staying because I need people to call me a big hedge fund partner guy?
The answer is clear. He’s done.
The last words of the interview are perfectly HFM. The interviewer is still processing this bombshell. HFM says he has to go.
He has a squash match.
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Next up: Epilogue and Final Thoughts - wrapping up this book retelling.