Chanos, as you may know, is the founder of hedge fund Kynikos Associates. He’s been in the news lately prognosticating on the “bubble” he sees growing in China.
But back in 1983, Chanos was fresh out of Yale and just starting his career as an analyst at brokerage firm Gilford Securities in Chicago. Meanwhile Baldwin-United, a piano company turned closed-end investment company, was a Wall Street darling. The company grew by 20 times in the 1970s and by 1981 had amassed $24 billion in assets. Fortune magazine published a profile of then CEO Morley Thompson, lauding his success.
But Baldwin had grown fast partly due to a new product it was selling called the single premium deferred annuity (SPDA). SPDA’s are like IRA accounts, but an investor pays one lump sum (over $20,000 usually) up front instead of making small payments. The tax-free SPDA then collects a high rate of interest over a number of years until the depositor is ready to start taking income from the account.
The accounting was even more convoluted on the business side, with Baldwin paying high commissions to brokers, then selling the annuities to a subsidiary. BusinessInsider goes into the details, if you’re interested. But the bottom line was that the whole scheme depended on interest rates not falling and a certain favorable tax treatment from the IRS continuing.
But Chanos smelled trouble. He did a cash-flow analysis on Baldwin and made a “sell” recommendation, going against the prevailing sentiment around him. The Street ignored his report and many analysts still had it as a “buy” for weeks. Then in December, 1982, bad news began to leak out. A cascade of whispers then rumors then Baldwin “restating” its numbers in 1983 finally led to $9 billion bankruptcy, the biggest in U.S. history at that time. CEO Thompson was even charged with several SEC violations for false and misleading news releases.
Chanos’ star burned brighter as he later joined Deutsche Bank and took on his next target: junk bond king Michael Milken’s Drexel Burnham Lambert.
Do you know of any other hedge fund stars whose careers have been launched by a single stellar trade or contrarian call? Add your comments below.