There’s a variation of the Golden Rule — I don’t think it’s a stretch to call it a perversion — that is the bedrock of the business of Money, a business that goes by the shorthand of ‘Wall Street’. This not-so-Golden Rule is the source of pretty much all of the unexpected Bad Things that happen from time to time in markets, where there’s a shock to the system that ‘no one could have foreseen’, like a sudden crash in the price of something or like a run on a bank or an investment firm. That perversion of the Golden Rule is this:
Do unto others as they would do unto you. But do it first.
It’s a perversion of the Golden Rule in two ways. First and most obviously, it’s got that extra sentence about doing the thing before the other guy. But second and less obviously, it’s normative-negative, which is a ten-dollar phrase to say that it’s not talking about doing good things (‘as you would have them do’), but is pretty obviously saying that you should do something that will actively hurt the other guy.
If you’re in the business of Money for more than a nanosecond, you will see this not-so-Golden Rule in action all around you. More to the point, if you want to stay in the business of Money and be successful in the business of Money, you must adopt and live by this not-so-Golden Rule yourself. Seems harsh, I know, but as Hyman Roth so aptly put it in The Godfather, Part II, “this is the business we have chosen.”
Do unto others as they would do unto you. But do it first.
It’s a perversion of the Golden Rule in two ways. First and most obviously, it’s got that extra sentence about doing the thing before the other guy. But second and less obviously, it’s normative-negative, which is a ten-dollar phrase to say that it’s not talking about doing good things (‘as you would have them do’), but is pretty obviously saying that you should do something that will actively hurt the other guy.
If you’re in the business of Money for more than a nanosecond, you will see this not-so-Golden Rule in action all around you. More to the point, if you want to stay in the business of Money and be successful in the business of Money, you must adopt and live by this not-so-Golden Rule yourself. Seems harsh, I know, but as Hyman Roth so aptly put it in The Godfather, Part II, “this is the business we have chosen.”
The first time I experienced that blecch feeling keenly was in December 2007 when I called our Bear Stearns rep and told him that we had decided to leave Bear Stearns as our hedge fund’s prime broker and we were pulling our money out. A prime broker is basically the ‘bank’ for a hedge fund. They provide lots of services, but the main ones are that they lend you money against the value of your portfolio so that you can buy more stock without using actual cash to go long (bet that the stock price will go up), and they locate and secure the shares of stock that you have to borrow in order to go short (bet that the stock price will go down). In exchange you pay them interest on the ‘leverage’ you used to buy more stock, just like you’d pay interest on a bank loan, and even more importantly from their perspective (and also just like a bank) you ‘deposit’ your stock holdings and some cash with them, which they can use to fund the loans and leverage they’re making available to other clients. It’s arguably the most important counterparty relationship that most hedge funds will have, certainly back then, and it’s a very profitable business for Wall Street investment banks, certainly back then.
What you need to understand is that I didn’t like working with Bear Stearns … I loved working with Bear Stearns. Loved the people, loved the attitude, loved the business terms. Bear Stearns was famously unafraid to take a chance on up-and-comers, both in its hiring of non-pedigreed entry-level employees (preferring, in legendary CEO Ace Greenberg’s words, to hire people who were ‘PSDs’: poor, smart, with a deep desire to be rich) and in its willingness to work with non-pedigreed hedge funds like mine. To be sure, it helped that the larger firm of which my fund was a part was filled with ex-Bear employees, all friends who would vouch for me and my partner. This was back in the day when vouching for someone meant something. It still does, I suppose, but a lot less than it used to. Bear stepped up to be our hedge fund’s prime broker from the very start, putting real time and real effort into a dinky little fund when nobody else would. Yes, they made good money off our business as we grew into a non-dinky fund, but I also owed a personal debt of gratitude to Bear Stearns for taking a chance on us.
And it didn’t matter.
Once I figured out in late fall of 2007 that if we had a nationwide decline in home prices, Bear Stearns faced enormous potential losses in the mortgage-backed securities that they owned, losses big enough to wipe out the entire bank because of their internal leverage on assets – or rather, once I suspected that I had figured this out, because you never know this stuff for sure unless you’re on the inside — then I knew for a certainty that it was only a matter of time before other prime broker clients of Bear Stearns would come to the same suspicion. And once that word got around — that there were doubts and suspicions about Bear Stearns as a counterparty — then I knew for a certainty that what would start as a trickle of clients taking their money out of the prime brokerage ‘bank’ would become a stream and then a river and then … well, then the dam breaks and the investment bank fails and if you’re still there as a prime brokerage client you get really, really hurt.
It didn’t matter if I was right about Bear Stearns and the risks to their balance sheet. I was, but I swear that didn’t matter. What mattered was the not-so-Golden Rule of Wall Street. What mattered is that you must act first when you have even a suspicion of counterparty risk, well before you know for sure whether or not you are ‘right’ about that risk, because everyone else on Wall Street will act first if you don’t. And if you don’t act first, or at least early … if you wait until you’re sure that there’s a counterparty risk … well, you’re screwed.
In December 2007, Bear Stearns still traded for over $100/share. In three months, it was below $5, before finally being taken out by JP Morgan for $10/share in a mercy killing. From suspicions to lights out in three months. Life comes at you fast when the not-so-Golden Rule of Wall Street comes into play. Getting out when we did saved our fund untold hassle and legal tie-ups, gave us the time to move to another prime broker out of strength and not desperation, and set us up for a career-making year in 2008.
Is this sort of run on the bank a self-fulfilling prophecy of doubt and ruin? Yep. If everyone had just kept their prime brokerage account in place would Bear Stearns have survived? Maybe. Do you have a choice but to get out before everyone else does, no matter how much it pains you personally and no matter how much your getting out might accelerate the sad and disappointing outcome? Nope. This is the business we have chosen. (...)
Why am I telling you this story?
I’m telling you this story because I think that Trump a) recognizes he made a mistake by overplaying the tariff card, b) is sidelining the ideologue pro-tariff crew like Navarro and Miran, and c) is actively looking for off-ramps and de-escalation in the China trade war. I think he may find an off-ramp and de-escalation in the China trade war, and that would be a wonderful thing for the United States and the world.
And it doesn’t matter.
by Ben Hunt, Epsilon Theory | Read more:
Image: Margin Call (2011); Godfather Part II
[ed. Trust lost is almost impossible to regain. See also: ‘Trump wanted to break us’, says Carney as Liberals triumph in Canadian election' (Guardian); and (the not to be missed) Crashing the Car of Pax Americana. (Epsilon Theory).]
"Mirroring a theme of the campaign, Carney told election-night supporters that Trump wanted to “break us, so that America can own us”, adding: “That will never, ever happen,” to shouts from the crowd.
He also gave a stark assessment of a world order once defined by an integrated global trading system with the US at the centre, saying such a system was over, and he pledged to reshape Canada’s relationships with other nations.
“We are over the shock over American betrayal. But we will never forget the lessons,” he said."
[ed. And this: 2035: An Allocator Looks Back Over the Last 10 Years (AQR):]
"We really did not see this underperformance coming. After all, the prior 30 years saw much higher IRRs on private equity than total returns on public equity. What we didn’t count on, I mean who could see this coming, was this outperformance reversing. I mean, what better way is there to estimate what will happen in the future than looking at what happened in the past!?"
