A brief yet compelling letter from a hedge fund manager that lays out a case against climate-change skeptics was uncovered today, and I too thought at first blush that it would be a case of cats and dogs living together.

It’s not. It’s more or less perfect, actually. Written by Jeremy Grantham, chief investment strategist in Boston at hedge fund manager GMO LLC, the letter is accessible, objective, balanced, and (in my estimation) exactly right.

The climate-change analysis starts on page 7.

Download (PDF, 76.46KB)

(Link via Treehugger.)

I can’t say that I read the Forbes blog Billions, which is “about the world’s richest people,” too often. This morning, The New York Times DealBook drove me there and reminded me why.

In an interview with Forbes’ Billions blog, the hedge fund manager Leon Cooperman gave his view of the plan recently floated by Gov. David A. Paterson and New York’s legislative leaders to tax out-of-state hedge fund managers.

Perhaps unsurprisingly, Mr. Cooperman, the the billionaire founder of Omega Advisors, is not a big supporter of the idea.

“Politicians need to understand there are consequences of their actions,” he told Forbes.

Yes, yes they do. And businesspeople need to understand there are consequences of their actions as well. In fact, it’d be nice if everyone on the planet realized their actions do come with real consequences. That’s exactly what the word “action” implies. The relationship between action and reaction is not independent to those who happen to be in the profession of creating policy.

I’d be thrilled if Cooperman were up for an actual discussion about the consequences of actions. Can a profitable, stable hedge fund also be a social utility for the rest of society? Should the financial system be reasonably accessible for ordinary people? Do most hedge fund managers view this particular policy idea as an assault on the wealth they’ve acquired?

These are important questions that I don’t see a lot of hedge fund managers being too quick to address.

For some real heavy lifting on the banking industry, read the new staff report from the Federal Reserve Bank of New York about the impact of shadow banking on contemporary markets. It includes a nifty an enormous diagram of shadow banking that, as the authors note, needs to be printed on a 36” by 48” poster in order to be legible.

Just what is shadow banking? The abstract explains:

Shadow banks are financial intermediaries that conduct maturity, credit, and liquidity transformation without access to central bank liquidity or public sector credit guarantees. Examples of shadow banks include finance companies, asset-backed commercial paper (ABCP) conduits, limited-purpose finance companies, structured investment vehicles, credit hedge funds, money market mutual funds, securities lenders, and government-sponsored enterprises.

Shadow banks are interconnected along a vertically integrated, long intermediation chain, which intermediates credit through a wide range of securitization and secured funding techniques such as ABCP, asset-backed securities, collateralized debt obligations, and repo. This intermediation chain binds shadow banks into a network, which is the shadow banking system. The shadow banking system rivals the traditional banking system in the intermediation of credit to households and businesses. Over the past decade, the shadow banking system provided sources of inexpensive funding for credit by converting opaque, risky, long-term assets into money-like and seemingly riskless short-term liabilities.

Full report, after the jump.

(h/t Calculated Risk)

Read the rest of this entry »

Not that I expect I’ll agree with much of it, but it’s going to be interesting to read Keith Gessen’s new book that examines the hedge fund industry, Diary of a Very Bad Year. An anonymous hedge funder he interviews in the book says:

But the amazing thing about that is the incentive structure at a hedge fund is so skewed to the upside that it seems to me like the only way you could restrain hedge fund portfolio managers from taking too much risk is either they have to put a lot of their own capital in the fund or there has to be a really big penalty for spectacular failure–to constrain hedge fund portfolio managers from taking advantage of the trader’s option, the fact that they get a big chunk of the upside but it’s not their money on the downside. The same is true, maybe even more true of proprietary traders at banks. You see people who’ve blown up in spectacular fashion go on to get another high-profile job. And the things you hear are, “I want to hire him; he’s learned a very expensive lesson.” Or, “He’s proved he’s a risk taker.” I can’t tell you how many time I’ve heard that! Yeah, he’s proved he’s an irrational crazy risk-taker!

An excerpt here suggests a stream-of-consciousness narrative structure that’s a pretty stark departure from other financial writers like Michael Lewis and Richard Bookstaber. Good. Financial texts could use a change-up.