Barton Biggs the Hedgehogger Part 2 -- The Pulse of the Markets Before the Credit Crisis of 2008

Why was Hedgehogging on my reading list in the first place?

While the common reason to pick up this book would probably be Biggs being a longtime hedge fund manager, it was also really when the book was published that caught my eye: Although published in 2006, most of it seemed to have been written in the summer of 2005, three years prior to the infamous Credit Crisis of 2008. While much will be made of the rumblings that were taking place in the summer of 2007 and perhaps a little earlier, the year 2005 was a year rife with the fingerprints of a bull market in the eyes of a lot of folks (including the forecast of Biggs himself).

The value of reading a candid book by a hedge fund industry insider (probably the least transparent area of the investment industry) really brought a sense to the tone of the world at that time. Although Biggs himself was bullish, he did cast doubt on that sentiment. In particular, talking about the housing bubble and conceding the trillion dollar point on derivatives, stating “…it is true that derivatives, which are designed to mitigate specific risks, at the same time may actually be increasing systematic risk because every financial institution is entwined in the web.” (Biggs 123) As he just described the vehicle that really exacerbated what took place, such arguments being made as early as 2005 do suggest that folks did have enough to work with to draw the credit crisis as a reasonable conclusion.

The argument was out there. While folks might say, “Of course, of course but who would have known that liquidity would dry up as it did. That banks would cease lending, not just to businesses to allow them to grow or ordinary folks, but to each other.” Yes, a valid point, but the enablers…the causes to this effect…were well known, and it seemed actively discussed as problems that could cause a bear market. Hedgehogging helped illustrate that it wasn’t as much as a blind side a great many have suggested.

Moreover, David Swensen, who, as Biggs tells it, saved the Yale Endowment since he took over as Chief Investment Officer in 1985, didn’t “…believe that the lows of this bear market have been made.” (Biggs 160) In addition, oddly enough, he did also speak of “Vince” (pseudonym), who gave quite the apocalyptic vision of the downfall of the US.

Furthermore, another bubble is about to burst. Existing home prices have been rising 7% to 8% a year, financed by Fannie and Freddie. Luxury real estate values from Park Avenue to Beverly Hills and from Southampton to Aspen will collapse. In the aftermath of every burst financial bubble in history, paper wealth of all types evaporates. (Biggs 103)

And, he went on to say:

Secondary consequences take time--years--to happen, particularly when central banks cut interest rates drastically and flood the system with liquidity. But they can only be postponed not averted. In three years, the American economy will be in depression, the S&P 500 will be at 500, and there will be a revolution in America. (Biggs 103)

Not bad, eh? Reading the book at the time, it seemed like the obscene prediction, but he nailed the Great Recession (except the S&P never went lower than the high 600s) and the dramatic cutting of rates. I don‘t know about a “revolution,” but the Tea Party movement does sometimes seem a little irksome. ;)

Source:
Biggs, Barton. Hedgehogging. Hoboken: John Wiley & Sons, 2006.