The salmon-colored pages of the Financial Times are not the place you turn to these days to find good news. But on the morning of November 4, Jim Chanos, president of Kynikos Associates on West 55th Street, the world’s biggest short-selling hedge fund, read an article in the paper with irrepressible glee. A colleague had e-mailed him a link. The headline: GOLDMAN FUND LOSES $990M AFTER 10 MONTHS.
Chanos had reason to be happy, and not because he had any stake in the outcome. His East Hampton neighbor, Marc Spilker, managing director of the Goldman Sachs division responsible for the billion-dollar loss, was finally receiving his comeuppance. In June 2007, Spilker decided to widen the rather narrow footpath from his house on Further Lane to the beach. One afternoon, Spilker dispatched a crew to widen the path by bulldozing the hedges between his mansion and Chanos’s. Chanos was outraged. “I hope this is not a harbinger of how other Goldman senior executives may act when the markets become ‘just not lucrative enough for us!’ ” he wrote to friends at the time in an e-mail that just happened to find its way to the New York Post. Several months after the Post leak, Chanos pulled nearly $3 billion out of his Goldman trading account, costing the bank some $50 million in annual fees, according to a source, and brought a suit against Spilker. (Goldman disputes these numbers.) Now, a year later, as Chanos sat at his Bloomberg terminal reading the Financial Times’ account of Spilker’s recent hedge-fund woes, a smile broadened across his face. He sent out another mass e-mail to his friends, staff, and financial journalists, directing them to the news. “Mark [sic] Spilker (Head of GS Internal Hedge Funds, and Horticultural Hater) strikes again!”
It might be fun to share in a little Goldman-bashing with Chanos, until you realize that you and he are in very different circumstances. Your 401(k) has been plunging at the rate his fund is rising. Chanos is arguably the most successful hedge-fund manager on Wall Street right now. As hedge-fund all-stars bleed red—SAC Capital’s Steve Cohen is said to be off 18 percent this year, Citadel’s Ken Griffin as much as 44 percent, and even David Einhorn, who presciently called Lehman’s implosion, has seen his fund, Greenlight Capital, slide a reported 26 percent—Chanos’s short positions have earned him a return of a reported 50 percent. He now manages some $7 billion. Trader Monthly estimated his paycheck in 2007 at over $300 million, and he’s on track to earn a similar payout this December. While many Wall Street refugees are liquidating their art collections and listing their trophy houses on the market, Chanos is buying. This summer, he closed on a new $20 million triplex on 75th Street, off Fifth Avenue.
As a short-seller, Chanos earns a living by borrowing and then selling shares of a company he thinks will experience trouble. When the stock tumbles, he buys back the depressed shares and returns them to the lender, pocketing the difference. In other words, Chanos is a financial undertaker. He makes a profit when companies die. And when there’s an epidemic, he gets richer still.
one afternoon last month, Chanos sat in a brown leather chair at an oval table in his eighth-floor conference room. A whiteboard covered one entire wall, for his analysts to scrawl out potential investment ideas. On the adjacent wall, the bookshelves resemble a library of financial doom, lined with titles such as Bubbles: And How to Survive Them, How to Profit From the Coming Real Estate Bust, and Conquer the Crash.
Chanos was excited that afternoon. He had just read a report that China’s electric consumption had dropped 4 percent, despite official government statistics that the Chinese economy was growing at 8 percent. He relished the implications. “I think they’re making up the numbers!” he said. As Wall Street picks up the pieces of the broken financial system, Chanos is already one step ahead. He sees China as the next domino to fall in the global meltdown. In recent months, Chanos has loaded up short positions on the infrastructure companies that have rushed to build China’s new highways, bridges, and tunnels. Now he is waiting for their share prices to tank.
Watching Chanos’s trades over the last six months is like reliving the economic meltdown in slow motion. Since the summer, he has been cashing in his short positions in cratered banking and real-estate stocks, as the crisis has spread from the subprime-mortgage sector to become a full-scale economic meltdown. Starting in 2006, Chanos took up sizable short positions in residential home builders like KB Home and WCI, firms that transformed places like South Florida and Phoenix into exurban nightmares. This past summer, Chanos cashed out his portfolio’s 30 percent stake in financial-sector and real-estate stocks, after bank shares plummeted in the wake of the Bear Stearns collapse. Chanos then went short on construction and engineering companies, predicting that the credit crisis would spill over into a full-fledged global recession and places like China and Dubai would see their overheated economies freeze up. And he bet against his fellow hedge-fund managers’ mania for art collecting, making a bearish gamble on Sotheby’s. Last month, Chanos closed out his short position in Sotheby’s after the auction house’s stock plummeted from a high of nearly $60 to $8. “That wasn’t a hard one,” he says, smugly.