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 Kolhatkar 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).
Chris Martenson: Welcome to this Peak Prosperity podcast. I am your host, Chris Martenson, and it is March 27, 2017. Today, we’re going to be talking more about the fraud and structural issues that seem to be running rampant, if I can put that across both of those terms, the financial landscape here in the United States. Now, in the past we’ve talked with Bill Black, Carolyn Baum, Danielle DeMartino and together they have painted a picture for us that… with Bill Black talking about control fraud as a structural form, Carolyn Baum really diving into a lot of the issues as she dove into some of the very specific cases of bank malfeasance, Danielle DeMartino talking about how the fed is institutionally sort of myopic in looking in one direction and maybe not another.
We’re going to really add to that story today. We are talking with the author of the New York Times best-seller Black Edge: Inside Information, Dirty Money, and the Quest to Bring Down the Most Wanted Man on Wall Street. That author is Sheelah Kolhatkar, a former hedge fund analyst, a staff writer at the New Yorker, and there she writes about Wall Street, Silicon Valley, economics, national politics among other things. Previously, she was a features editor and a national correspondent at Bloomberg Businessweek and a regular contributor to Bloomberg television. She has profiled characters as diverse as Massachusetts senator Elizabeth Warren, that would be my senator, PIMCO founder Bill Gross, hedge fund mogul John Paulson, and President Trump. In 2010, her work was honored with a New York Press Club award and she is the author of this book, Black Edge which we’re going to be talking about today.
Black Edge, it’s a real-life thriller about the government’s attempts to get Steve Cohen of SAC Capital on insider trading charges. I can’t wait. Welcome to the program, Sheelah.
Sheelah Kolhatkar: It’s great to be here, thanks.
Chris Martenson: Let’s start here: tell us about Black Edge. Why did you write it and what really drew you to this topic?
Sheelah Kolhatkar: For starters, I formerly worked as a hedge fund analyst before I got into journalism. So, I have always been very interested in that part of the economy. The hedge fund industry kind of grew up quietly out of almost nothing into this enormous force on Wall Street. There are almost three trillion dollars estimated to be under management at hedge funds around the world and hedge funds are lightly regulated. So, we don’t always know what is going on in that sector, but 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 outsize 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.
Chris Martenson: So, as a quick aside then, this industry which I know you work for and I know lots of people are in the hedge fund industry and I do anger them from time to time, but it’s really a skimming operation in many respects. They don’t produce houses, cars, clothes, goods. They’re really just there trading and basically pulling money off and that’s ok, I guess, but if we really want to understand the story, we have to understand the absolute massive degree of financialization that has really begun to dominate the American economy. You were there during the growth of that industry. Was there a sense within that industry of… do they feel like… are they doing well for the world or… What’s the sense there?
Sheelah Kolhatkar: Obviously, there are thousands of different hedge funds and they all do different things. So, of course, you don’t want to lump them all in together. Some of them are doing very long term activist investing where they’re getting really involved with individual companies they’re invested in. Others are trading on global markets. Others are just trading derivatives and options. Then there are others that do this more short term stock trading, mostly, around different corporate events and that is the area that is the focus of the story that I write about in this book. That particular sector became extremely competitive. When I started out in the business there were far fewer hedge funds and it was much easier to go to work every day and make money trading, depending on whatever your strategy was as a hedge fund manager. Over the last 20 years, people