[...]... why it happened that day It was beautiful weather, I was having meetings— HFM : n+ 1: Steaks? No, meetings, this was too early, during banking hours, and I was running around having meetings that were taking place in an office building of a bank called Banco General de Negocios And everything was great and then when I came down the elevator at the end of the day, late afternoon, there was a line of people... wrong about Bear being in trouble and I could lose a little money moving it around and so on and impose upon myself the inconvenience of moving my money a little money and a little brain damage But if I’m wrong and leave it, I could lose a lot of money.” That’s the balance of risk HFM : n+ 1: It’ll cause you brain damage? Not literal brain damage but, you know, inconvenience—brain damage So on one hand... event? Meaning that it’s ten standard deviations from the mean…meaning it’s basically impossible, you know? But it’s kind of a joke, because returns are very fat-tailed, so the joke that we always say is, “Oh my God, today I had a loss that’s a six-sigma event! I mean, that’s the first time that’s happened in three months!” It’s like a one-inten-thousand -year event, and I haven’t had one in the last three... sheet and realized that if assets have to be written down even a small amount, Bear can be insolvent And that creates a panic In reality I don’t think they had a solvency issue, but when the capital cushion is * so small it creates instability n+ 1: Can you tell me what happened with Bear Stearns? What were the steps? Bear was a bank that was very involved in the asset-backed and subprime market, both as... these assets on their books We thought it had been sold on to Europeans And it was: The Germans lost a lot of money, and some of the Chinese banks are announcing earnings in the next weeks, and the speculation is that a lot of them will have to announce write-downs related to subprime But Citibank had a ton of this stuff on their books and had to write down a * tremendous amount Almost all of the major... and the buyers are gone So that’s one financial linkage, but also there’s capital—the banks’ capital base Every time a bank takes a write-down, that erodes its capital base, and the bigger the base the more risk it can take There are rules for that—Basel II capital adequacy— and if a bank is writing down $10 billion, suddenly the risk-taking capability is reduced Assume basically the capital adequacy... good reason A good illustration of what can happen is Bear Stearns Bear is not a commercial bank, it’s an investment bank: It doesn’t have these capital adequacy rules, it’s not regulated by the Fed, and Bear, if your average bank had a capital adequacy rate supporting 10:1 leverage, Bear is more like 30:1 And that is one of the reasons confidence evaporated so quickly: People looked at the balance sheet... pools and really understand them, they kind of rely on the rating agencies, and that’s their downfall It’s kind of an interesting interaction in the sense that a lot of this mortgage project was almost created by the bid for the CDO paper rather than the reverse I mean, the traditional way to think about financing is, “Okay, I find an investment opportunity that on its face, I think, is a good opportunity... door of the bank, and I can’t tell you why it was that day Argentina had been in economic difficulty for the prior year, but that day the bank run started And then they had to impose basically a deposit freeze HFM : n+ 1: Were people mad? That’s what started the unraveling of the Argentine government; people were standing outside banks banging on pots and pans The run started the day I was there HFM : n+ 1:... doing the same thing—the phone stopped ringing, I stopped getting Bloomberg messages, everyone was just watching: “It can’t be! What’s going on? Stuff doesn’t lose that much value on no news in a couple of hours.” And really what was going on was that there was a run going on against Bear and people were getting wind of it HFM : n+ 1: There was no news, Bear never announced— Nothing like that In fact, . the hedge fund, the Argentinian pots-and-pans bank run of 1998, the state of hedge funds generally. For the second interview I asked one of our interns to transcribe it over the weekend, and we. the first news about the financial meltdown started appearing in the nonfinancial press, I asked him for an interview, to see if he could explain it to me, and on a Sunday afternoon in late September.