Diary of a Very Bad Year - How a Literary Magazine Ended Up Interviewing a Hedge Fund Manager

This is part of my series retelling Diary of a Very Bad Year. Today we’re covering Keith Gessen’s introduction.

A friend of a friend

Keith Gessen got introduced to the anonymous hedge fund manager (HFM) in late 2006. Someone called HFM a “financial genius” who ran the emerging markets desk at a midtown hedge fund. Gessen was skeptical. He knew plenty of people from college who went into finance, but mostly for the lifestyle. Working hard, drinking beer, watching football.

HFM was nothing like that. For him, finance was an intellectual thing. He talked fast, sometimes too fast to follow, and told funny stories about the world he worked in.

The first interview

When the financial meltdown started showing up in the regular news, Gessen asked HFM to explain it. They sat in a coffee shop in Brooklyn on a Sunday afternoon in September 2007 and talked for two hours. Subprime mortgages, paradigm shifts, expertise problems, black box trading systems. Gessen was an educated guy in his thirties living in New York, and he’d never heard of any of this.

It took him a while to transcribe the tapes. He was worried the interview didn’t work out. But when he finally read it through, he was amazed. HFM had explained the causes of the crisis more clearly than anything Gessen had read anywhere else.

They posted it on n+1’s website (n+1 is mostly a literary magazine). They figured literary people would find it interesting. They were right. But they didn’t expect business sites to pick it up too. Turns out HFM’s explanations were just as new to finance people as they were to everyone else.

The interviews kept going

After the collapse of Bear Stearns in March 2008, they did another interview. Then another in September 2008, right before Lehman went bankrupt. Then roughly every two months after that. Nine interviews total, spanning from fall 2007 to summer 2009.

Each time, HFM told Gessen something he didn’t know. And as the crisis went on, HFM started having doubts about his own industry.

What Gessen noticed looking back

Reading over the transcripts, Gessen noticed a few things.

First, HFM never stopped thinking. He held a certain belief in markets being efficient, but he was always open to new information. As the crisis got worse, he watched banks pull his financing, saw them go right back to risky behavior as soon as things calmed down, and started drawing harder conclusions.

Second, Gessen admits he was “shockingly and embarrassingly ill-informed.” He considers himself a person of the left who thinks economics drives human life. But he knew almost nothing about how economics actually worked. He left his ignorance in the interviews on purpose. Sometimes HFM pressed the hard questions that Gessen should have asked.

It gets personal

Gessen had a personal stake too. A close friend had taken out a home equity loan during the property boom around 2003. The friend’s business had failed and he borrowed against his house, hoping things would turn around. When home prices crashed, that loan became a disaster. Gessen wanted HFM to help him understand what would happen.

Even worse, a friend’s uncle who was a mortgage broker went bust and committed suicide. Summer 2008, after housing collapsed but before the broader economy felt it.

What the book is

The interviews are left mostly intact. Some boring parts cut, some repetitions removed. But where HFM was too optimistic, a bit callous, or just wrong, they kept that in. During the final edit, HFM added footnotes to update things.

In the end, HFM couldn’t tell Gessen what would happen to his friend with the bad loan. Nobody could. But the book gives you a rare look inside how the financial system actually works. Not the Hollywood version of screaming bankers on speakerphones. More like the place where serious minds use science and intuition to figure out if credit spreads will move in the next 24 hours.

And through it all, you get a portrait of a smart person who’s honest about the world he works in, including the parts he’s not proud of.

Next up: Chapter I - Primetime for Subprime, where the first interview happens and HFM explains how the whole subprime mess started.