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Trump, the Toxic Legacy of the Financial Crisis

Today, the Lost Angeles TIMES published my oped as part of a a package on the first anniversary to Trump's election. Space was limited, so I tho...


Featured Book

The Ragged Edge of the World
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Articles by Category
endangered animals
rapid climate change
global deforestation


Winds of Change
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Afterword to the softbound edition.

The Octopus and the Orangutan
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The Future In Plain Sight
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The Parrot's Lament
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Silent Partners
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Affluence and Discontent
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The Alms Race
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Apes, Men, & Language
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Eugene Linden's Publications

Books [reverse chronological order]

THE OCTOPUS AND THE ORANGUTAN; More True Tales of Animal Intrigue, Intelligence, and Ingenuity. Hardcover: Dutton; Aug. 2002.

THE PARROT'S LAMENT; And Other True Tales of Animal Intrigue, Intelligence, and Ingenuity. Hardcover: Dutton; Sept. 1999. Softbound and 11 foreign editions

THE FUTURE IN PLAIN SIGHT: Nine Clues to the Coming Instability. Simon and Schuster: August 1998. Soft: Plume; Feb. 2002

SILENT PARTNERS: The Legacy of the Ape Language Experiments. Hardcover: TIMES Books; April 1986. Soft: Ballantine; August 1987. Foreign: Dobutsusha Ltd., Japan; 1987.

AFFLUENCE AND DISCONTENT: The Anatomy of Consumer Societies. Viking/Seaver Books: 1979.

THE ALMS RACE: The Impact of American Voluntary Aid Abroad. Random House: 1976.

APES, MEN, AND LANGUAGE. Hardcover: Saturday Review Press/Dutton; Jan. 1975. Soft: Penguin; Feb. 1976, revised edition, 1981. Seven foreign editions.

Selected List of Articles [reverse chronological order]

The Nature of Cuba, Tiny frogs. Vst swamps. Pristine rivers. Whether by design or default, the island boasts the Caibbean's best-kept wildlands. But for how long? , Smithsonian, May, 2003 [COVER]

Who's Going to Pay For Climate Change?; The threat of lawsuits — and an exodus of insurance companies — may finally force corporations to think green,; February 7, 2003

Eugene Linden Diary, Slate; June 25-28, 2001.

The Road To Disaster; If Brazil paves this route through the Amazon, the earth's largest rain forest could go up in flames, Time; October 16, 2000; ENVIRONMENT; Pg. 96. [INTERNATIONAL COVER]

The Big Meltdown; As the temperature rises in the Arctic, it sends a chill around the planet, Time; September 4, 2000; ENVIRONMENT; Pg. 52. [INTERNATIONAL COVER]

Condition Critical; An exclusive look at a U.N. assessment of Earth's ecosystems shows they are strained to the limit, Time; Spring 2000; STATE OF THE PLANET; Pg. 18. [COVER]

Bats And Brokers; Looking for clues to explain Tuesday's market gyrations? Observe a bloodsucking mammal, Time; April 17, 2000; Pg. 92.

Facing Our Ecofolly; Environmental abuse and overpopulation mean the worst is yet to come, Time; January 31, 2000; TIME LATIN AMERICA; LATIN AMERICA; Viewpoint; Pg. 19.

Forcasting the Digital Age, Slate Dialogue; First entry: October 14, 1998.

Volatility: Get Used to It; The global market magnifies our worst instincts, Time; September 28, 1998; INT TIME ATLANTIC; Viewpoint; Pg. 89.

Smoke Signals; Vast forest fires have scarred the globe, but the worst may be yet to come, Time; June 22, 1998; ENVIRONMENT/PLANET WATCH; Pg. 50.

How to Kill a Tiger; Speculators tell the story of their attack against the Baht, the opening act of an ongoing drama, Time; November 3, 1997; TIME ASIA; Pg. 24.

What Have We Wrought?; Our descendants in the next century may find themselves paying dearly for the material magic of the consumer society, Time; November 1997; TIME ASIA SPECIAL ISSUE/OUR PRECIOUS PLANET; OVERVIEW; Pg. 10.

Legions of the Dispossessed; Land degradation is creating multitudes of ecomigrants who cross borders and threaten the security of nations, Time; November 1997; TIME ASIA SPECIAL ISSUE/OUR PRECIOUS PLANET; VIEWPOINT; Pg. 28.

A World Awakens; History Shows that societies pollute first and pay later. Will the new awareness change our ways before it’s too late? Time; November 1997; TIME ASIA SPECIAL ISSUE/OUR PRECIOUS PLANET; PERSPECTIVE; Pg. 80.

A Way to Break the Impasse on Global Warming, The New York Times; September 27, 1997, Saturday, Late Edition - Final, Section A; Page 15; Column 1; Editorial Desk.

From Rio to Ruin?; Maybe not. As the U.N. Dithers, the poor take action, Time; July 7, 1997; VIEWPOINT; Pg. 33.

Antartica; Warnings from the ice the conventional wisdom is that climate change will be gradual and moderate. But what if it is sudden and extreme? A frozen wilderness may hold the answer, Time; April 14, 1997; ENVIRONMENT; Pg. 54. [INTERNTIONAL COVER]

Global Fever; Climate change threatens more than megastorms, floods and droughts. The real peril may be disease, Time; July 8, 1996; ENVIRONMENT; Pg. 56.

The Tree Gods Are a Bit Testy, The New York Times; June 22, 1996; Op-Ed.

The Exploding Cities of the Developing World, Foreign Affairs; January/February 1996;

ESSAYS; Pg. 52.

The Tortured Land; An epic landscape steeped in tragedy, Siberia suffered grievously under communism. Now the world’s capitalists covet its vast riches, Time; September 4, 1995; Pg. 42. [COVER]

Chain Saws Invade Eden; Vast, pristine forests in South America's sparsely populated Guyanas ought to be safe. Not so., Time; August 29, 1994; U.S. Edition, ENVIRONMENT; Pg. 58.

Ancient Creatures In A Lost World; In an isolated, rugged region that divides Vietnam and Laos, scientists find a trove of new species, Time; June 20, 1994; U.S. Edition, ENVIRONMENT; Pg. 52.

Population: The Awkward Truth, Time; June 20, 1994; U.S. Edition, ESSAY; Pg. 74.

Tigers On The Brink, Time; March 28, 1994; U.S. Edition, Pg. 44. [COVER]

Burned By Warming, Time; March 14, 1994; U.S. Edition, ENVIRONMENT; Pg. 79.

Sustainable Follies, Time; May 24, 1993; U.S. Edition, ENVIRONMENT; Pg. 56.

Who Lost The Ozone?; How the world waited too long to rescue the shield that protects earth from the sun's dangerous UV rays, Time; May 10, 1993; U.S. Edition, ENVIRONMENT; Pg. 56.

Will the System Defeat Al Gore? Time; February 1, 1993; U.S. Edition, ESSAY; Pg. 74.

Megacities,Time; January 11, 1993; U.S. Edition, Pg. 28. [COVER]

The Green Factor; Does protecting the planet destroy jobs? Time; October 12, 1992; U.S. Edition, ENVIRONMENT; Pg. 57.

The Last Eden; A trip into a remote African rain forest is a journey back in time to a world where the animals have never encountered humans. Time; July 13, 1992; U.S. Edition, Pg. 62. [COVER]

Summit To Save The Earth; Rio’s Legacy; Time; June 22, 1992; U.S. Edition, Pg. 44.

Summit To Save The Earth; Population: The Uninvited Guest, Time; June 1, 1992; U.S. Edition, Pg. 54.

Apes and Humans: A curious kinship, National Geographic; March 1992. [COVER]

Demanding Payment for Good Behavior, Time; February 3, 1992; U.S. Edition, ENVIRONMENT; Pg. 52.

Hot Air at The Earth Summit?; As the U.S. stonewalls a Rio meeting, citizens offer a planet-saving proposal, Time; November 4, 1991; U.S. Edition, ENVIRONMENT; Pg. 77.

TIME cover story: ">Lost Tribes, Lost Knowledge, Time; September 23, 1991; U.S. Edition, CULTURES; Pg. 46. [COVER]

Foreign Aid; Good Intentions, Woeful Results; How an ambitious environmental program ended up damaging the tropical rain forests, Time; April 1, 1991; U.S. Edition, WORLD; Pg. 48.

Endangered Earth Update; Is the planet on the back burner?; War and recession may be grabbing the headlines, but the relentless trashing of the world’s air, land and seas continues apace, Time; December 24, 1990; U.S. Edition, ENVIRONMENT; Pg. 48.

The Last Drops; Population growth and development have depleted and polluted the world's water supply, raising the risk of starvation, epidemics and even wars, Time; August 20, 1990; U.S. Edition, ENVIRONMENT; Pg. 58. [INTERNATIONAL COVER]

Dashed Hopes and Bogus Fears; The Smithsonian chronicles an unpredictable Information age, Time; June 11, 1990; U.S. Edition, TECHNOLOGY; Pg. 58.

Earth Day; Will the Ballyhoo go bust? Time; April 23, 1990; U.S. Edition, ENVIRONMENT; Pg. 86.

Can We Really Understand Matter? Time; April 16, 1990; U.S. Edition, SCIENCE; Pg. 57.

How the Earth Maintains Life; An intriguing scientific theory continues to win adherents, Time; November 13, 1989; U.S. Edition, IDEAS; Pg. 114.

Special Report: Greening of Geopolitics; How the U.S. Can Take The Lead in the Third World; First: stop sending mixed signals, Time; October 23, 1989; U.S. Edition, ENVIRONMENT; Pg. 63.

Playing with Fire; Destruction of the Amazon is "one of the great tragedies of history", Time; September 18, 1989; U.S. Edition, ENVIRONMENT; Cover Story; Pg. 76. [COVER]

Putting the Heat on Japan; Accused of ravaging the world's forests and seas, Tokyo starts to clean up its act, Time; July 10, 1989; U.S. Edition, ENVIRONMENT; Pg. 50.

BIODIVERSITY; The Death of Birth; THE PROBLEM: Man is recklessly wiping out life on earth, Time; January 2, 1989; U.S. Edition, PLANET OF THE YEAR; Pg. 32. [COVER]

Putting Knowledge to Work; Suddenly, artificial intelligence produces some results, Time; March 28, 1988; U.S. Edition, TECHNOLOGY; Pg. 60.[COVER]

Boom in the Bust Market; Taking Stock in Bankruptcy, Time; October 12, 1987; U.S. Edition, ECONOMY & BUSINESS; Pg. 52.

The Gambia; signs in the wilderness, The Atlantic; March, 1986; Vol. 257 ; Pg. 32.

Let A Thousand Flowers Bloom Inc., April, 1984, THE AGE OF THE ENTREPRENEUR; Pg. 64.

Politics Means Getting To Say You’re Sorry Wall Street Journal, Op-Ed 1984.

The Demoralization of an Army: Fragging and Other Withdrawal Symptoms Saturday Review; January 8, 1972.[COVER]

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Short Take

I’ve just read Black Edge, by Sheelah Kolhatkar, which is about the huge insider trading scam that characterized Steve Cohen’s SAC Capital at the height of its power. I’m going to offer the thoughts it prompted in two parts. The first will delve into the trade itself, and the second will explore the fallout from this insider trading scandal and subsequent events in the market.

Part One:

A good part of Black Edge focuses on one specific instance of insider trading at SAC Capital: Mathew Martoma’s quest for advance knowledge of the results of trials on the efficacy of Elan Pharmaceutical’s experimental drug to halt Alzheimer’s disease. The drug, bapineuzumab, was designed to attack the amyloid plaques that Elan’s scientists viewed as the cause of cognitive decline. In his quest for “black edge” (illegal inside information) Martoma and his compatriots compromised the integrity of the procedures for drug trials and ruined the life and reputation of a distinguished scientist.  Even that wasn’t enough for them. SAC also had access to vast amounts of biotech expertise, both from PhDs on their payroll, and the expert networks they paid handsomely to give them access to researchers with direct access to the studies and trials.


In the short run, this inside information paid off for SAC as Martoma’s advance knowledge of the results allowed the hedge fund to reverse a billion dollar position and make a profit of over $180 million versus certain losses of hundreds of millions had they not gotten advance information on a disappointing field trial. In the long run, while Steve Cohen skated, the insider cases led to $1.8 billion in fines, the dissolution of SAC, and jail time for Martoma.


In retrospect, it was all so stupid. SAC could have come to the conclusion that Elan’s drug was not going to work without resorting to anything illegal.


Instead of deploying all this massive intellectual firepower on getting advance word on the results of the trials, the analysts might have started by asking how solid were the assumptions on which the therapy was based: namely, whether attacking the plaques would halt or reverse the progress of the disease.


Even in 2008 and 2009, there were a number of researchers at distinguished universities who questioned that basic assumption. The alternate theory was that the plaques were not the cause of the disease, but rather an analogue of scabbing, the result of the body’s attempt to protect the brain from infection.


 In subsequent years, this alternate view has gained some traction, with some now arguing that Alzheimer’s is akin to an autoimmune disease in the sense that as the environment in developed countries has become more antiseptic, protective devices in the brain have turned on the brain itself as the infections they evolved to fight have disappeared. In any events a drumbeat of failed trials with drugs attacking amyloids has discredited this approach. As Tara Spires-Jones, of Edinburgh University’s Centre for Cognitive and Neural Systems put it in an interview with Britain’s Independent, “Most of the trials have been based on the assumption that amyloid is important in causing Alzherimer’s diseas, as opposed to something that happens alongside it. That assumption, I think, is probably wrong…”


Even in 2007, SAC’s analysts should have known that many attempts to fight Alzheimer’s by fighting the formation of plaques had failed. Given all the time the fund spent analyzing the drug and trials it must occurred to someone to ask whether Elan was barking up the wrong tree. Maybe someone there did just that, but there’s no indication that the decision makers ever questioned the assumptions upon which the drug was built.


Maybe that wouldn’t have mattered. SAC wanted certainty. Clearly, detailed advance knowledge of the results of a field trial is more compelling than a dissenting theory on the nature of the disease. Had SAC questioned the assumptions of the study, they never would have amassed a position in Elan, and they probably wouldn’t have had sufficient certainty to short the stock prior to the results being announced.


What can be drawn from this? There are implications about the pressures of the markets – SAC employees felt that had to cheat to maintain performance – but there are also implications about the culture of world of investing.  Alzheimer’s is a horrifying disease, but the book makes a strong case that neither Cohen, nor anyone else at SAC, gave a rat’s ass whether the drug worked or not; they only cared about knowing the results before anyone else and about how other traders would view the data when it came out.  The same probably applied to every other fund playing Elan.


It isn’t news that the markets are amoral, but this amorality has real world consequences. The punishment the market meted out to Elan (and other companies with failed trials) makes all but the largest companies risk averse about investing in therapies for difficult diseases. There is a short-term logic to this from an investor’s point of view, but, increasingly, the market sets research priorities, and the market’s priorities – controlling costs and maximizing short-term profits – may not serve the needs of society. Researchers know that breakthroughs often come from learning from failed previous attempts.  So where will breakthroughs come from as fewer and fewer companies risk failure?


Part Two:


Further thoughts on Black Edge by Sheelah Kolhatkar

The insider trading scandal at SAC confirmed a widely held suspicion among ordinary investors that Wall Street is a rigged game where powerful players can cheat with impunity.  Regardless of the truth of that suspicion, the widely held perception that this is the case has had its own reverberations. In a delicious irony, one of the derivative effects of the market crash and subsequent insider trading scandals has been to make more likely a future in which black edge is less useful.


Bear with me.


What happened with Elan revealed a contradiction at the heart of the markets. SAC was driven to seeking black edge by the ruthless competition of the markets. In the minds of their analysts and portfolio managers, access to publicly available information wasn’t enough because competing funds had their own PhDs pouring over the same information. Moreover, competing funds also had access to the same expert networks (which might be viewed as “grey edge”) as did SAC.


In such a situation, we’d expect that different analysts would take different perspectives on the prospects of the drug and the trials. I would have expected that at least some analysts would question whether the assumptions behind the drug were correct. The market says that wasn’t the case. Rather the hedge fund world was massively longs before the release of the trial results, and Elan’s subsequent 66% price drop suggests that the herd mentality applied on the way down too.


So market efficiency drove SAC and some others to seek black edge, while the subsequent drop exposed a herd mentality and deep inefficiency that made the market anything but a black box that continuously adjusts prices for all information.


The result for the markets is analogous to the evolutionary theory of punctuated equilibrium: markets will proceed smoothly until some event produces rapid change. Because, as the crash of 2008 demonstrated, the big price-change inducing event can come from any number of directions inside or outside the economy, many investors are giving up on analysis of individual stocks and moving to passive investment funds and ETFs. The size of this shift is staggering. The amount of managed money in passive strategies has risen from an estimated 6% in 2006 to as much as 40% today (these figures vary depending on definitions of what a constitutes passive strategy).


That latter figure may be larger given the relationship between value investing and money moved by algorithms and quantitative strategies.


Quantitative types try to beat their peers by focusing on changes in pricing or volatility, and/or seeking an edge through speed and data crunching, rapidly identifying anomalies, and then trading at warp speed. Many hundreds of billions of dollars now take this route into the markets. And results have proven that this approach can work; some of these funds have done fabulously well.


So, stepping back, it becomes clear that the trillions of dollars invested through passive strategies and ETFs basically piggybacks on the decisions of active managers relying on traditional analysis of individual companies and sectors. Moreover, the hundreds of billions of dollars of money invested in quantitative, momentum, derivative, and volatility strategies, also piggybacks and even amplifies, the decisions made by traditional investors as those decisions become evident in price movements.


So the response to the pain inflicted by past booms and busts and insider trading scandals has created a situation today where the huge amounts of money moves in sync with an ever smaller base of active managers. Value investing based on analysis of individual companies has become an ever-smaller tail wagging an ever larger dog.


Perversely, this, in turn, has created a situation where in the next crash, Steve Cohen, the quant and momentum funds, and even the Warren Buffets will ultimately have no edge. All it will take to set the next crash in motion is for a fair number of investors to say, “gee I think I should shift more to cash.” Then the passive investment funds will be forced to sell, and they will sell regardless of the merits of any individual stock. This will cause volatility to rise and the billions of dollars of investments tied to volatility will also start selling, and as this is happening, the algorithmic traders, the momo guys and the others looking for direction to exploit will jump in juicing the sell off.  The trigger might be some external event, or something as banal as a simple change in mood, but no insider will have any better insight as to when this occurs than anyone with access to a newspaper.


As a coda, it’s worth noting that Steve Cohen has now been cleared to manage other people’s money. At the end of Black Edge the author quotes a savvy market player as saying that the day Cohen could do that, money would come pouring in. Well, according to the New York Times, that day is here and money is not pouring in. Maybe this is because his fees are too high, or because the insider trading scandal has made him tainted goods. Or maybe, it’s because investors doubt that he can achieve his former results without black edge.

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