Sunday, February 22, 2009

Michael Steinhardt, a hedge fund pioneer and one of the greatest stock pickers ever, got his start in investing when his father gave him some shares of stock for his bar mitzvah. This wasn't an exercise in upper-crust breeding. As Steinhardt later wrote in "No Bull; My Life In and Out of Markets," his father, a gambler and friend of mobsters, eventually went to prison for buying and selling stolen jewelry.

Born in Brooklyn, Steinhardt worked in the brokerage business before starting a hedge fund with two friends. After they left, it became Steinhardt Partners. Steinhardt, now 68, retired more than 13 years ago. But he has been keeping busy, helping to finance the now-defunct New York Sun, giving more than $125 million to Jewish charities and maintaining a sprawling estate in Westchester County, N.Y., where he keeps exotic animals.

And he did not emerge from the current meltdown totally unscathed: He lost about $2 million he had given to a money manager who in turn gave it to Bernie Madoff.

Steinhardt spoke with the Post's Steven Mufson about what economists got wrong, how unholy private equity seems and the approximately 2 ½ seconds the Obama administration appears to have spent on the stimulus plan. Below is an edited version of their conversation.

You took a year off in the late 1970s and once a week you studied Torah. The Talmud says that a person who digs a pit is responsible for damages if an ox or ass falls into it and dies. Who should be responsible for the financial pit we have fallen into?

I wrote something recently that tried to answer that question. Who are the villains of this experience? I focused on people like [former Bear Stearns chief executive] Jimmy Cayne who played poker while Bear Stearns burned; [former Lehman Brothers chief executive] Dick Fuld, who I saw in a restaurant waving to his friends like a hero a month or two months after Lehman Brothers went bankrupt. Is Mr. [Maurice] Greenberg [former chief executive of AIG] feeling uncomfortable at all about AIG? And what about [former Treasury Secretary] Bob Rubin's enigmatic role at Citigroup -- and for that matter over the past 20 years of public life?

Now there are other ways to think about it. In terms of people, you could say it was [House Banking Committee Chairman] Barney Frank and [Senate Banking Committee Chairman Christopher] Dodd, who wanted to offer housing to people who shouldn't have gotten it anyway. You could say a lot of different things. You might ask where was [Federal Reserve chairman Alan] Greenspan.

You met Greenspan 40 years ago when he was a consultant. You wrote that you "learned little from listening to him." What's your view now?

What do you think? I had a conversation recently with an economist friend of mine. He said you should not believe that there is any relationship between the economics profession and predictions. I always thought that's what they were there to do. At least in part.

If you look back to 2008, [Fed chairman Ben] Bernanke was so far off it's just plain embarrassing. Maybe if you're head of the Fed you're supposed to say things that don't make sense. The whole economics profession was so far off it was pathetic.

What we are living with at the moment is a certain undercurrent of arrogance that does not sit well with the American people. The arrogance is the politicians, including the president, who in some sense is a tabula rasa. Here is a guy who has no experience in anything except maybe balancing a family budget. Maybe. Who is now threatening the country . . . maybe threatening is not the right word, but it sounds like threatening, with catastrophe if this stimulus package is not passed yesterday.

There is a certain arrogance in the people around him who have just come into office who have abracadabra come up with a stimulus package in 2 ½ seconds. You're talking about an amount of money that is heretofore unheard of, thrown around in ways that don't make sense. These guys are saying that if we don't do anything in three weeks we're going to fall off a cliff. We've already fallen off a cliff.

Many people believe that hedge funds are villains and that they should be regulated.

If you look back at the experience of hedge funds, they have not been responsible for any problems in the economy today. When the hedge fund genre started there was an unstated principle that the reason to invest in hedge funds was that they would achieve superior performance -- both pre- and post- their egregious fees. I lived my 29 years

as a hedge fund manager in anxiety because I was one of the few people in the financial world who received such

egregious fees and I felt that to deserve them I had to be the best or near the best performing money manager in America. Over time that feeling in hedge funds evaporated.

You have said that there comes a time in business cycles when lots of people, fearful about investing, buy Treasury bonds and that then you could buy stocks with your eyes closed and make money. Is this cycle different?

Yeah, I have to say I think it is. Because it seems as if this moment is a moment when the sins of the past are being paid for. The excesses of the last 10, 20 years are catching up with us.

When you think about the innovations of the last 20, 30 years, one of them was something called private equity. I hear that [Treasury Secretary Timothy] Geithner is going to use private equity as one of the sources of money for his bank plan. But what is private equity? A wise guy getting some money and buying a public company and taking it private and doing all sorts of cutesy things and taking it public again. What does he do? I don't know. Something always seemed funny to me about that. There's something unholy about it. There is something somehow unproductive about the thing.

Is a hedge fund productive?

You bet. We shift capital to its most effective and productive uses. By your astute judgment of where to put money, you are an important part of the capitalist process.

Warren Buffett has said that if you're not willing to own a stock for 10 years, do not think about owning it for 10 minutes. You have said that you never owned a stock for 10 years, but that you profitably owned some very good companies for 10 minutes. Are you the anti-Buffett?

Number one, he has the best public relations of any businessman in the world. Is that a left-handed compliment? Number two, he has probably used the tax system to his advantage better than any person I know.

Are you really different from your father or is trading stocks like gambling?

If my father had been more educated, he'd have owned the world.

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