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Authors: Joshua Cooper Ramo
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order, would continue to appear
to us as a senseless riot.
4. Saint-Tropez
One morning in July 2007, the investor Bill Browder woke up in his vacation house in the south of France. It was Browder’s
habit to write a letter to investors in his $2 billion Hermitage Fund once a month, not only updating them about the state
of the fund and its investments but also expressing his thoughts about the markets more generally. Browder had started doing
this more than a decade before, when he was launching Hermitage with a small investment from Edmond Safra, the legendary Lebanese
banker. Hermitage was a fund that invested in one of the most unstable markets in the world — Russia — and Browder’s ups and
downs there had made him a legend in the world of investing. (A legend not a little burnished by the fact that he was the
grandson of Earl Browder, a former head of the American Communist Party.) Browder’s investment model at Hermitage wasn’t just
to buy and sell Russian stocks. It was to buy shares in the most corrupt, worst-run Russian companies and then press them
to change. A company whose shares traded at $1 because it was overseen and looted by goons could be worth $10 a share if it
was managed even slightly better. Buy, agitate, sell: this was Browder’s strategy. And, given the people he was dealing with,
between “agitate” and “sell” he made sure he had plenty of security if need be.
Working in Russia over the years had accustomed Browder to the fact that markets could snap in ways that are largely unimaginable,
susceptible to sandpile-type forces that are invisible until they strike. In 1998, for instance, Hermitage had almost been
wiped out when the Russian stock market lost 93 percent of its value in a matter of weeks. Was this avalanche triggered by
some terrible Russian problem? Some deep hole in his investing strategy? No, the root cause was a confidence crisis that had
begun more than a year earlier. In Thailand.
Browder had been through a number of such neck-snapping “how did
that
happen” crises, and they had sharpened how he thought about markets. “When you’ve been in a market that really can go to
zero, it changes the way you think afterward,” he told me. “The main lesson is that just because something is too terrible
to contemplate doesn’t mean it’s not going to happen.” At heart Browder was someone who believed that markets could be well
run and efficient. After all, the whole premise of Hermitage was that if you could clean up companies, they could attain their
real value on the Russian exchanges. But the lesson of his years in Russia was that as solid as the foundations of a market
might look at any given moment, they were, in fact, made of sand. And if you forgot that for even an instant, you would end
up like the dozens of his fellow investors Browder had seen broken and bankrupted over his decade and a half in Russia.
In that summer of 2007, Browder was in the midst of a very good quarter — his fund was up some 30 percent in the past few
months — but this habit of living on his toes, of looking for any sign that the landscape around him was about to avalanche
away, drew his attention to a news item in the papers that July morning. In New York an auction of debt from leveraged-buyout
deals had failed to draw enough bidders and was shut down. To most of the investing world this looked simply like a small
hiccup in an otherwise well-functioning financial system. But Browder recognized it for what it was: a sign that the world
had run out of the ability to absorb new debt. It was the end of a Ponzi-like scheme and, he knew, the start of an avalanche
that might reach a historic, tragic scale. Having been through this before, in Russia, he knew exactly how bad the markets
could get. It gave him a very clear sense of what was perhaps about to happen to global markets. No preparation could be too
much. “This is it,”
to us as a senseless riot.
4. Saint-Tropez
One morning in July 2007, the investor Bill Browder woke up in his vacation house in the south of France. It was Browder’s
habit to write a letter to investors in his $2 billion Hermitage Fund once a month, not only updating them about the state
of the fund and its investments but also expressing his thoughts about the markets more generally. Browder had started doing
this more than a decade before, when he was launching Hermitage with a small investment from Edmond Safra, the legendary Lebanese
banker. Hermitage was a fund that invested in one of the most unstable markets in the world — Russia — and Browder’s ups and
downs there had made him a legend in the world of investing. (A legend not a little burnished by the fact that he was the
grandson of Earl Browder, a former head of the American Communist Party.) Browder’s investment model at Hermitage wasn’t just
to buy and sell Russian stocks. It was to buy shares in the most corrupt, worst-run Russian companies and then press them
to change. A company whose shares traded at $1 because it was overseen and looted by goons could be worth $10 a share if it
was managed even slightly better. Buy, agitate, sell: this was Browder’s strategy. And, given the people he was dealing with,
between “agitate” and “sell” he made sure he had plenty of security if need be.
Working in Russia over the years had accustomed Browder to the fact that markets could snap in ways that are largely unimaginable,
susceptible to sandpile-type forces that are invisible until they strike. In 1998, for instance, Hermitage had almost been
wiped out when the Russian stock market lost 93 percent of its value in a matter of weeks. Was this avalanche triggered by
some terrible Russian problem? Some deep hole in his investing strategy? No, the root cause was a confidence crisis that had
begun more than a year earlier. In Thailand.
Browder had been through a number of such neck-snapping “how did
that
happen” crises, and they had sharpened how he thought about markets. “When you’ve been in a market that really can go to
zero, it changes the way you think afterward,” he told me. “The main lesson is that just because something is too terrible
to contemplate doesn’t mean it’s not going to happen.” At heart Browder was someone who believed that markets could be well
run and efficient. After all, the whole premise of Hermitage was that if you could clean up companies, they could attain their
real value on the Russian exchanges. But the lesson of his years in Russia was that as solid as the foundations of a market
might look at any given moment, they were, in fact, made of sand. And if you forgot that for even an instant, you would end
up like the dozens of his fellow investors Browder had seen broken and bankrupted over his decade and a half in Russia.
In that summer of 2007, Browder was in the midst of a very good quarter — his fund was up some 30 percent in the past few
months — but this habit of living on his toes, of looking for any sign that the landscape around him was about to avalanche
away, drew his attention to a news item in the papers that July morning. In New York an auction of debt from leveraged-buyout
deals had failed to draw enough bidders and was shut down. To most of the investing world this looked simply like a small
hiccup in an otherwise well-functioning financial system. But Browder recognized it for what it was: a sign that the world
had run out of the ability to absorb new debt. It was the end of a Ponzi-like scheme and, he knew, the start of an avalanche
that might reach a historic, tragic scale. Having been through this before, in Russia, he knew exactly how bad the markets
could get. It gave him a very clear sense of what was perhaps about to happen to global markets. No preparation could be too
much. “This is it,”
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