Jim Chanos has such a good long-term record betting on share price declines that he is known as “the catastrophe capitalist”. But he has struggled since the financial crisis. Jane Lewis reports.
Celebrated Wall Street short-seller Jim Chanos could hardly conceal his glee when he heard that Elon Musk had once again “called a hero of the Thai cave rescue a paedophile”, says Institutional Investor. Chanos began shorting the car-maker in 2015, “and has been nursing losses ever since”.
With nearly $10bn wagered against the stock, the 61-year-old founder of Kynikos Associates (the name means “cynic” in Greek) is hardly the only one betting against Tesla. But Chanos is “already a legend”, having secured his place in Wall Street history nearly 20 years ago by predicting – and profiting handsomely from – the 2001 demise of Enron.
A 30-year success story
His record is impressive. Kynikos is the only predominantly short-selling hedge fund of any size, and the only one that has stayed in business since 1985. However, Chanos’s shorts “have been bleeding red ink” ever since the financial crisis. Since peaking at $7bn in 2008, his funds have lost almost three-quarters of their assets. “It has been one giant short-squeeze market,” moans the financier once dubbed “the catastrophe capitalist”.
Money is one thing, but there’s “more than a little of the crusader” in Chanos, according to peers, who credit his “encyclopaedic” knowledge of companies – he has a side gig teaching market history at his alma mater, Yale – for the exposure of a roster of frauds.
As a 2013 profile in Yale Alumni magazine noted, Chanos is not just “the guy who called Enron”. His list of targets over 30 years stretches from Michael Milken’s junk bond empire to Dennis Kozlowski’s Tyco and Bernie Ebbers’ WorldCom – taking in subprime-mortgage lenders and homebuilders along the way. Some, who accuse Chanos and his like of destroying American companies for their own financial gain, view him as almost an “agent of Satan”. But he’s a far “more complex character” than the stereotypical labels attached to him might suggest.
His first coup
Born in Milwaukee into a Greek immigrant family with a chain of dry-cleaning shops, Chanos paid his way through college with a summer job as a union steel worker. He ended up at Yale, where he majored in economics and political science and started trading options. Like many short-sellers, he got into the game almost by accident. As an analyst at Gilford Securities in 1982, he was asked to analyse Baldwin-United – “a piano company that had transformed itself, by a series of acquisitions, into an insurance giant and Wall Street darling”.
Realising that the company’s financials were a sham, Chanos revealed it, hastening Baldwin into what was then the biggest corporate bankruptcy on record. Chanos famously repeated the trick at Enron after noticing similarities with Baldwin-United’s accounts.
This year, Chanos’s guns are trained on the medical and restaurant sectors, as well as Tesla, says CNBC. But he thinks there’s a far bigger reckoning coming. We’re at what he calls “the fraud part of the cycle”. He predicts a wave of malfeasance, with Silicon Valley playing a big role.
We live in “a post-truth environment” which has translated into a mood in which investors are willing to suspend disbelief, he told Institutional Investor. “Crazy companies are trading at really crazy valuations now, on top of their bad businesses. That’s kind of exciting.”