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The Catastrophe Capitalist

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The disputed path between the Further Lane homes of Chanos (left) and Goldman's Spilker.   

While he lunches at Michael’s, chairs the board of the Browning School, and is a major Democratic fund-raiser, Chanos fashions himself as a Wall Street outsider. “Most of the people I socialize with are not in the business,” he says.

Chanos grew up far from the power corridors of Wall Street. He is the oldest of three brothers; his father, a second-generation Greek-American, owned a chain of dry cleaners in Milwaukee; his mother worked as an office manager at a steel company. As a fifth-grader, he was introduced by his father to the stock market, and he was hooked. At Yale, he quickly gave up on a premed major and signed up for economics classes. But despite his lanky frame and Coke-bottle glasses, Chanos didn’t want to be a nerd. He rowed crew, chaired his dorm’s social committee, and threw boozy postgame parties for his friends on the hockey team. “He was one of those special guys who could light the candle at both ends and never get burned,” says his former suitemate Keith Allain, who now coaches Yale’s hockey team. “When he had parties, he spent the week before making mixtapes. He introduced me to Bob Seger.”

After graduation, Chanos moved to Chicago. He eventually landed at the brokerage firm Gilford Securities. Early in his career, he discovered the value of uncovering frauds and using the media to move the market. In the summer of 1982, he started tracking the insurance firm Baldwin-United, which was then a darling of Wall Street. Its stock was soaring, and the company had blue-chip supporters like Merrill Lynch. But Chanos had his doubts. After getting a tip from a disgruntled insurance analyst, Chanos wrote a research report that recommended shorting Baldwin stock. Wall Street lashed into his thesis. Powerhouse lawyer Marty Lipton called Chanos’s boss and threatened to sue.

Back in New York, Dick Stern, a Forbes writer, got wind of the brewing fight between Chanos and Baldwin. Stern started researching a story and flew to Chicago, where Chanos guided him through his financial analysis. Stern then interviewed Baldwin’s CEO in a suite at the Chateau Marmont, peppering him with questions Chanos had suggested. “Jim gave us the outline,” Stern recalls. As Stern continued to work on the Forbes piece, Chanos acted as a crucial background source. Stern would call him late at night at his Chicago apartment and play back the tapes of his interview with Baldwin’s CEO to dissect. In December, Forbes published Stern’s piece, which came down on Chanos’s side. Months later, Baldwin collapsed, filing a $9 billion bankruptcy. At the time, it was the largest corporate meltdown in history.

The Baldwin bankruptcy put Chanos on the map. At just 26, he was recruited by Deutsche Bank in New York. In the spring of 1984, Chanos began analyzing Michael Milken’s Drexel Burnham junk-bond empire. “That was my next jihad,” he says. At one point, private detectives were sent to nose through Chanos’s trash outside his East 92nd Street townhouse.

When Chanos recommended shorting a Drexel-financed company called Integrated Resources, his bosses at Deutsche Bank balked: The company pressured the bank’s top executives to bury his research. Chanos was furious. According to his boss at the time, Jim Levitas, Geraldo Rivera, who’d heard about the situation, wanted to do a story. “Jim likes publicity. He was interested in getting it aired,” Levitas told me. “I had to tell Jim, ‘No, we can’t do that.’ ”

Then, on September 5, 1985, The Wall Street Journal named Chanos prominently in a damaging front-page piece that accused short-sellers of slimy tactics like spreading rumors and even impersonating a Journal reporter to get access to insider information. His bosses at Deutsche Bank hated the attention, and Chanos soon found himself out of a job.

Over martinis at a bar near South Street Seaport, Chanos and a colleague talked about what to do next. Chanos decided to strike out on his own and, with his former boss Levitas, launched Kynikos in 1985 with $16 million. A year later, Levitas burned out, unable to endure the stress of betting against companies and waiting for stocks to decline. “Constitutionally, I couldn’t make a living being short,” he says now. “Jim is able to endure the pain.”

By 1990, Chanos was managing $600 million. But he nearly went bust as the tech bubble pushed the bull market to record highs. Chanos posted losses of 30 percent in 1991, 15 percent in 1992, and 40 percent in 1993. Stocks kept rising, and there were no companies to bet against. By the mid-nineties, Chanos was on the ropes, and his fund was down to less than $150 million from a high of $600 million. He survived only when Dirk Ziff, heir to the Ziff Davis publishing fortune, agreed to give him office space and pump new money into Kynikos.


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