Sheelah Kolhatkar: Hedge Funds Are The Robber Barons Of Our Time

Sheelah Kolhatkar, former hedge fund analyst and staff writer at the New Yorker, thinks hedge funds have enjoyed enormous unfair advantages for far too long.

In her recent book Black Edge: Inside Information, Dirty Money, and the Quest to Bring Down the Most Wanted Man on Wall Street, she details out how many hedge funds use financial engineering and accounting tricks -- even illegal insider information -- to fill their coffers at investor expense. And then they use those ill-gotten gains to influence politics.

The hedge fund industry grew up quietly out of almost nothing into this enormous force on Wall Street. There's almost $3 trillion estimated to be under management at hedge funds around the world -- but hedge funds are lightly regulated, so we don’t always know what's going on in that sector.

The people who have founded many of these hedge funds have become enormously wealthy. They have become the new robber barons of our time. The most successful among them have amassed multi-billion dollar fortunes largely based on trading and extracting very large fees from their investors for trading their money.

These people now exert outside influence in our society, including as major political donors and lobbyists and in the world of philanthropy and other areas as well. So, I always like to keep an eye on that world -- I think there’s a lot going on there that explains what’s going on in Washington, and we don’t always realize it’s connected

In this podcast, Chris and Sheelah discuss the racket the hedge funds run, and as a case study, give close examination to the US government's tortured (and ultimately, unsuccessful) efforts to convict hedge fund kingpin Steve Cohen of SAC Capital on insider trading charges. Given their vast resources and paid influence, these modern robber barons remain practically untouchable.

Click the play button below to listen to Chris' interview with Sheelah Kolhatkar (44m:50s).

This is a companion discussion topic for the original entry at

Lamp posts aren’t just good for hanging street lights.enlightened

It seems to me, the more I dig into things, that insider trading, rackets and fraud at the highest levels are really more the rule than the exception.
Perhaps this is just what should be expected from humans? Or maybe its just something that appears during a late cycle expansion - this one including the expansion of empire beyond its useful limits, and humans into a tasty, available energy source.
Maybe the loss of a narrative that makes sense, and in which we can believe, untethers people from a sense of fair play and social cohesion liberating them to not follow rules and take whatever they can?

Reflecting on your comment made me remember the insider trading that has been the hallmark of many/most small town economies. From secret hand shake societies to country club golf courses the allure of the deal based on special knowledge is almost universal. Many a start up business has been doomed to failure for failure to make correct contacts. Many a fortune has been sealed at the expense of outsiders.
A bigger town or city provides more niches to operate without bowing to the local powers that be, but there are limits to what one can accomplish on the outside.
All of this behavior is writ large in your hedge fund discussion. Very typical human behavior, but not fair by any measure.

The Richmond Fed president resigned yesterday in regards to leaking information in, wait for it… 2012.
Here’s a link to the New York Times piece. Of course he won’t face any legal charges, nor is it likely will the people who traded based on his confidential information. This again confirms the concept that there are two sets of rules, one for us and one for them.
It’s astonishing that it took 5 years for them to figure this out and for him to resign, but it just goes to show that even Fed presidents are guilty of disclosing this information. Here’s a quote from the Marketwatch article on the same topic: "When Medley published a report by the analyst the following day…it contained this important detail about one of the policy options and I realized that my failure to decline comment on the information could have been taken by the analyst, in the context of the conversation, as an acknowledgment or confirmation of the information,”. So, basically his argument was that by not denying information that information was inadvertently confirmed to the analyst. Why is a Fed president talking to a private financial analyst to begin with? Isn’t that just opening the door to some sort of insider trading whether or not it’s intended?
Great Podcast and this article just confirms it.

"Always be nice to bankers. Always be nice to pension fund managers. Always be nice to the media. In that order" - John Gotti
I wonder if that applies to hedge fund managers and other short sellers?

I can’t help but be reminded of the Latin proverb, “Quod licet Iovi, non licet bovi”, of which a possible modern translation would be “Gods do what the herd may not.”* Bankers can inside trade, but we can’t. Celebrities can possess drugs, but we can’t. The Fed can print money but we can’t. And so on. Laws are for the herd while the gods live out their epic dramas.
*(For latin buffs, I know this isn’t literal, but it’s pretty spot on for this discussion)

Regulations don’t work. The Regulated capture the Regulators ALWAYS. The only solution is punishment, punishment by the market which means no bailouts! The Wells Fargo sales scam would not have happened if Wells Fargo and the other big banks were left to meet the market enforcer and bankrupting them to sell off what assets remain in 2009.