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The Catastrophe Capitalist

Enron made Chanos’s career. He followed the trail of Enron’s fraudulent accounting and did as much as anyone to bring its malfeasance into the light, by sharing his insights with a reporter. Historically, short-sellers and reporters have made convenient allies. Journalists and shorts are both natural skeptics who want to challenge authority (Kynikos is the Greek root for “cynic”). In many ways, digging into a company’s finances is analogous to reporting an investigative story. Not surprisingly, Chanos employs former journalists from the Financial Times and the Times of London.

Reporters, too, have a vested interest in cultivating short-selling sources. When a short-seller uncovers fraud, it often translates into the sort of epic story that can make a business reporter’s career. After Chanos tipped Bethany McLean, then at Fortune, to the problems at Enron, she landed a $1.4 million book deal and an Oscar-nominated documentary, and she recently was hired as a contributing editor at Vanity Fair. McLean and Nocera recently nabbed a reported seven-figure book deal chronicling the fall of Wall Street.

Some believe these symbiotic interests can steer reporters to favor Chanos’s point of view over the defense of a CEO or a company’s PR department. “Everyone wants to be the next Bethany McLean,” says one anti-short corporate lawyer.

Of all the journalists whom Chanos deals with, McLean—a former Goldman analyst turned financial writer—maintains a special relationship with Chanos that is the subject of lore and jealousy among rival business writers. At Fortune, McLean wrote features about the Australian bank Macquarie and Fairfax Financial—both companies on which Chanos had significant short positions. Through McLean, Chanos had access into the pages of Fortune.

Fairfax Financial, a Canadian insurance company, is now suing Chanos and a group of hedge-fund all-stars including Steve Cohen and Third Point’s Daniel Loeb. The suit reads like a mash-up of a John le Carré novel and Den of Thieves. Fairfax alleges that Chanos and his fellow short-sellers paid for negative stock-research reports that helped drive down Fairfax’s stock price. Chanos’s allies, including Nocera, dismiss Fairfax’s charges, maintaining that the suit will have a chilling effect on legitimate criticism of companies.

Chanos sees China as the next domino to fall.He’s loaded up short positions in Chinese infrastructure companies.

But the suit paints a different picture of Chanos’s trading tactics. Throughout the summer of 2006, Roddy Boyd, then a New York Post business reporter, published a series of critical pieces about Fairfax that alleged Enron-like dealings by V. Prem Watsa, the company’s CEO. The suit claims Chanos and Loeb told Boyd, who, like McLean, is a former financial analyst, that Fairfax was “the next Enron,” and that Chanos was a background source for his reporting. Both Boyd and Chanos deny the allegations.

Whatever the case, Chanos wasn’t right this time. Unlike Enron, Fairfax hasn’t been charged with any wrongdoing, and the stock has gone up since Boyd covered the company. In September, John Gwynn, a stock analyst named in the suit, was fired by his brokerage for allegedly leaking his Fairfax research to the hedge-fund managers. Chanos is still short Fairfax and refuses to talk about the case. So far the suit is wending its way through the discovery phase in New Jersey state court, and a trial is slated for next year.

If the heads of Lehman and Bear Stearns have been the last year’s primary villains, the shorts have attracted their share of negative attention. The SEC opened an investigation into whether short-sellers spread misinformation that may have contributed to the banks’ downfalls (to date, they haven’t turned up any wrongdoing). In September, the SEC banned short-selling for 799 financial stocks while forcing notoriously secretive hedge funds to disclose to the SEC which stocks they’ve shorted. “We feel like guys in a foxhole together taking shell fire,” one angry short-seller puts it.

So even as he’s been reaping his profits, Chanos has been fighting a PR war. “I’m trying to lay the groundwork for people to understand what happened, so when the facts come out, maybe they’ll see that the people who were raising the alarms aren’t the ones to blame,” he says. He sees the political posturing as nothing more than blaming the messenger. For the past two years, he has been warning of the impending financial reckoning to almost anybody who would listen (after he went short, conveniently). In July, he met with Treasury Secretary Hank Paulson over lunch at the offices of Eton Park, the $12 billion hedge fund run by the ex-Goldman trader Eric Mindich, according to one person who was at the lunch. Three days after Lehman Brothers imploded, Chanos sent an e-mail to State Attorney General Andrew Cuomo and copied his father, Mario, the former governor, on the message. Earlier that day, Cuomo had held a press conference and attacked short-sellers, calling them “looters after a hurricane.” Short-sellers weren’t responsible for the crisis, Chanos wanted Cuomo to know. If the market ever recovered, Chanos cautioned, according to one person familiar with the exchange, Cuomo would be on the wrong side of history.