n+1 magazine has an incredible interview with an anonymous hedge fund manager. The HFM discusses everything from our weak currency to the lazy bond rating agencies who are, in their own way, complicit in the subprime meltdown:

n+1: What’s a paradigm shift in finance?

HFM: Well, a paradigm shift in finance is maybe what we’ve gone through in the sub-prime market and the spillover that’s had in a lot of other markets where there were really basic assumptions that people made that, you know what?, they were wrong.

The thing is that nobody has enough brain power to question every assumption, to think about every single facet of an investment. There are certain things you need to take for granted. And people would take for granted the idea that, “OK, something that Moody’s rates triple-A must be money-good, so I’m going to worry about the other things I’m investing in, but when it comes time to say, ‘Where am I going to put my cash?,’ I’ll just leave it in triple-A commercial paper, I don’t have time to think about everything.” It could be the case that, yeah, the power’s going to fail in my office, and maybe the water supply is going to fail, and I should plan for that, but you only have so much brain power, so you think about what you think are the relevant factors, the factors that are likely to change. But often some of those assumptions that you make are wrong.

n+1: So the Moody’s ratings were like the water running…

HFM: Exactly. Triple-A is triple-A. But there were people who made a ton of money in the sub-prime crisis because they looked at the collateral that underlay a lot of these CDOs [collateralized debt obligations] and commercial paper programs that were highly rated and they said, “Wait a second. What’s underlying this are loans that have been made to people who really shouldn’t own houses–they’re not financially prepared to own houses. The underwriting standards are materially worse than they’ve been in previous years; the amount of construction that’s going on in particular markets is just totally out of proportion with the sort of household formation that’s going on; the rating agencies are kind of asleep at the switch, they’re not changing their assumptions and therefore, OK, notwithstanding something may be rated triple-A, I can come up with what I think is a realistic scenario where those securities are impaired.”

Much more good stuff over there. Why are hedge fund managers so fascinating?

Interview with a Hedge Fund Manager [n +1 via Kottke]
(Photo:Getty)

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