David Shaw and the Rise of Jeff BezosThu 8:14 pm Europe/London, 20 Oct 2022
Jeff Bezos has spent decades creating a heroic backstory to the founding of Amazon. But when one investigates the truth behind the manipulated mythos, the narrative Bezos has had written into the history books quickly falls apart. This article will investigate the powerful company behind the creation of Amazon, an entity which predicted the internet revolution years before Tim Berners-Lee had even announced the creation of the World Wide Web.
We will examine the hedge fund which installed its own recruits into the top positions within the sectors of the internet that had the most potential for making vast profits. The company in question monopolised large parts of the Web before most people had even been online. This is the story of D.E. Shaw and the rise of Jeff Bezos.
Before the World Wide Web, there was no Amazon, Google, CNET, or eBay. While the vast majority of humans had no idea that the internet was going to become so all-encompassing, one large financial organisation began, like nothing which had been before, to capitalise on its foreknowledge of the coming internet era. Even when the internet revolution had begun, most people didn’t understand how these slow-loading web pages, limited in their functionality, could possibly end up having such a comprehensive impact on every part of modern society.
As the technologies which made the modern cyber-realm possible took shape, there was a selection of powerful hedge funds and financial institutions which had begun to calculate the winners and losers of this newly-forming technological era. One of the biggest of these players was a futuristic and one-of-a-kind financial institution originally set up by a man named David E. Shaw, PhD. This major mover and shaker of the internet revolution has remained relatively unknown to the many people who use the Web today, and the extraction of Shaw from the annals of history is assuredly purposeful.
D.E. Shaw & Co. was more than just a hedge fund founded by a former professor; it was the company that co-opted the internet revolution and that began creating some of the giant monopolies which still dominate the online realm today. To understand the coordinated capitalisation, manipulation and monopolisation that has characterised the digital world in our generation, we have to go back to the time before the majority of us knew about the coming internet age. In doing so, we soon discover that the standard account of Jeff Bezos and the hype surrounding the creation of Amazon is just another fabricated story which falls apart under closer inspection.
Amazon was not a company started by a hard-working college graduate who sold second-hand books out of the back of his car. Rather, it is a company which was designed by an élite futuristic hedge fund that used game theory and complicated computer algorithms to predict the trends of the coming digital age. We can now trace the real founding of Amazon and the creation of the Bezos myth.
D. E. Shaw & Co.—the Digital Corporation Factory
David Elliot Shaw was the founder of a financial institution like no other. In a Fortune Magazine piece entitled Wall Street’s King Quant David Shaw’s Secret Formulas Pile Up Money. Now He Wants a Piece of the Net, the reader of 1996—now over a quarter of a century ago—was told:
D.E. Shaw & Co. is the most intriguing and mysterious force on Wall Street today.
Truer words may never have been spoken, because what was happening behind the closed doors of Shaw’s Manhattan-based enterprise was a new and mostly unexplored form of financial prophecy. The folks at D.E. Shaw & Co. were using complex mathematical models to predict what kind of digital platforms were most likely to become the dominant forces in the imminent internet era, with the hedge fund conspiring to seed some of the biggest early tech companies into being.
These newly-formed companies would have a massive competitive head start, and they were planning to utilise that advantage so that they could eventually dominate and in time monopolise some of the largest potential markets which the internet was correctly expected to create over the following decades.
The company which Shaw had founded was unlike most financial institutions of its day. The atmosphere was calm and relaxed; there were no crazy-eyed traders screaming into phones, as one might expect to see at a typical Wall Street company of the era. Shaw’s was a place where small rooms full of newly-recruited graduates tracked computer screens and talked quietly on their phones. This calm focus seemed even more out of place when we consider that Shaw’s trading volume during the mid-Nineties was sometimes equal to 5% of the total volume of the New York Stock Exchange.
This was far from a normal financial institution in many different ways. It had been created in 1988 by Shaw, with the company having its first premises above a small Communist bookstore in a less desirable part of New York City before being installed in a new, more permanent setting in a Manhattan skyscraper soon afterwards. Shaw had founded his new company with $28 million given by the Tisch family and Paloma Partners, who were both heavily linked to the US Democratic Party. Shaw, a Californian by upbringing, was a Stanford alumnus but this business venture was not his first time out East; he had previously been a professor in computer science at the prestigious Columbia University.
Like many New York-based hedge funds, D.E. Shaw & Co. was predictably tight-lipped about its investments, but its employees were renowned for being especially secretive, even for a big financial organisation. Shaw was a pioneer in “quantitative investing”, with his focus on developing sophisticated computer programs to “identify and profit from anomalies” in the market. Institutional Investor released an article entitled The Power of Six in 2009 which made mention of D.E. Shaw’s infamous company secrecy. The author, Michael Peltz, observes:
Few hedge fund firms have a more well-deserved reputation for secrecy than D.E. Shaw & Co.
Like Coca-Cola Co., which zealously guards the formula for its prized syrup, D.E. Shaw has always vigilantly protected its proprietary trading algorithms. So secretive was the firm during its first few years of its trading that some employees didn’t even tell their families where they worked, let alone what they were doing there.
One of the employees who worked at this sophisticated hedge fund during the companies primordial development was to become one of the richest men in the world around a decade later: the supposed founder of Amazon, Jeff Bezos.
Bezos had studied electrical engineering and computer sciences at New Jersey’s Princeton University, graduating with the highest honours and receiving his bachelor’s degree in 1986, two years before D.E. Shaw & Co. had been founded. Bezos briefly worked for Fitel, a company which linked financial traders worldwide with financial organisations; after Fitel, Bezos took a job at Bankers Trust. It was four years after graduating that Bezos managed to land an interview with the relatively new company on the Wall Street scene, D.E. Shaw & Co.
The hedge fund which Shaw had created recruited its staff in a different manner than many of its competitors. Instead of hiring people to fit a specific role, Shaw’s executives were hunting down those whom they saw as being the most intelligent and were then placing the successful candidate in the most appropriate position available. After interviewing Bezos, a partner of Shaw’s told his boss that Jeff was likely to “make someone a lot of money some day”.
David Shaw soon arranged to meet Bezos in person and, after their initial encounter, described him as “having an unusual balance between intellect and creativity”, finding the future Amazon boss to be friendly and enthusiastic. The world was on the cusp of an epochal shift, and Jeff Bezos had found himself in the right place at the most opportune moment.
Employed alongside Bezos at D.E. Shaw was Halsey Minor, who was also go on to found one of the monopolising internet sites of the future, the software download site, CNET. While working together at D.E. Shaw, Minor and Bezos collaborated on a project to create a news-by-fax service, and although that eventually proved unsuccessful, the project did lead to Bezos being made the youngest-ever senior vice-president at the D.E. Shaw hedge fund. By 1990, he had even taken charge of the company.
Bezos left D.E. Shaw in 1994 to found Amazon, and in that same year he began building up the account for public consumption of how his supposed creation came to be.
Once it had become clear that Jeff Bezos and Amazon were a great success, the backstory about his rise to power began to be forged. A year after Bezos had been made Time Magazine’s Person of the Year, Virginia Brackett’s book, called simply Jeff Bezos, was published by Chelsea House Publishers as part of a series entitled Latinos in the Limelight. The collection featured Jeff Bezos alongside America’s most sought-after Hispanic personages of the era, with some of the other subjects of the series being Antonio Banderas, Jennifer Lopez, Ricky Martin and Christina Aguilera.
When one first comes across this book, it may come as some surprise to discover that Jeff Bezos is billed as a Latino. In fact, Bezos was legally adopted by his mother’s second husband, Mike Bezos, with Brackett’s book stating, “Mike Bezos officially adopted Jeff, who in turn chose to adopt Mike’s Cuban heritage”—with the author going on to observe:
This closeness has caused some reports to mistakenly identify Mike as Jeff’s birth father.
Mike Bezos had originally immigrated as part of Operación Pedro Pan, which saw more than fourteen thousand children (unaccompanied minors in today’s parlance) sent to live in the US without their parents, as noted by Jennifer Landau in her book entitled Jeff Bezos and Amazon.
The latter book also makes note of Bezos’ ostensible awakening to the internet’s massive growth while he was employed at Shaw’s hedge fund:
While researching the Internet at D.E. Shaw, Bezos discovered a startling statistic. Web usage was increasing at the incredible rate of 2,300 percent a year! Bezos knew that anything growing at that fast a rate might seem invisible to people one day but could be everywhere the next.
In truth, there was not much startling about the discovery. Bezos was senior vice-president at a uniquely-positioned hedge fund created by the “King of Quant”, and the firm was proactively focused on capitalising the internet’s most powerful emerging markets. This had been what D.E. Shaw had gone into business to do in the first place.
Finding Mrs Bezos
While discussing Bezos’ time at D.E. Shaw, the aforementioned biographer Virginia Brackett also reveals that this is where Bezos met his future wife, a colleague named MacKenzie Tuttle. Like all of D.E. Shaw’s employees, MacKenzie had been carefully selected and then placed into a position where her potential seemed best suited. Like Bezos, MacKenzie had graduated from Princeton and had previously served as an assistant for Toni Morrison, a powerful authoress who was awarded the Nobel Prize in Literature in 1993. That same year, 1993, MacKenzie and Jeff married, and it is around this point on the timeline that the public story behind the rise of Bezos becomes carefully crafted.
Landau helps keep the Bezos myth alive in Chapter Three of her recounting of the Amazonian lore:
Like many New Yorkers, Jeff and MacKenzie Bezos didn’t own a car, so they flew to Texas over the Fourth of July weekend of 1994 to get an old Chevy Blazer from his parents. [On the way home,] MacKenzie took on most of the driving so that her husband could write out a thirty-page business plan for his new company.
The narrative being seeded was of an unprepared newlywed couple having to buy a second-hand car from their parents to set up a business; however, in reality this was a case of a high-flying former hedge fund senior vice-president and his wife who had insider insights and were about to create a monopolising company.
Brackett’s book may raise eyebrows in its aim of heroically retelling the rise of Jeff Bezos, but it does reveal some pertinent facts. Jeff Bezos did not actually leave D.E. Shaw & Co. and then set up Amazon; in fact, the company began to be formed while Bezos was still senior vice-president at the hedge fund. Brackett writes:
When Jeff explained to David Shaw his desire to begin his project, the boss understood. He recognized in Jeff his own desire to accomplish things yet untried
In this part of the backstory, the Bezoses turn to their relatives and cadge $300,000 to invest in an unknown startup in return for a 6% stake, which to the wonderment of all parties turns into billions within a few years.
Finding the myth
Many books have been published over the past 25 years which depict the same Jeff Saga, often using the same wording and imagery, and each maintaining the same narrative. Tom Robinson’s Jeff Bezos: Amazon.com Architect; Stuart A. Kallen’s Jeff Bezos and Amazon; Joseph Sherman’s Jeff Bezos: King of Amazon; the two aforementioned works by Brackett and Landau—all of these books were written from the same template, each of them veritable puff pieces which have been used to construct a tightly coherent narrative around the creation of Amazon.
If you were to believe the official backstory which has been built around the founding of the most powerful company on Earth, you’d probably believe that—in 1994—a bedraggled Bezos, dressed in hand-me-down clothes, in need of a loan from friends and family, was having to sell books from the back of his parents’ station wagon (estate car) to make his dream come true. Actually, Bezos was very wealthy already, with an abundance of lucrative experience and support gleaned from one of the most successful and distinctive hedge funds in history, topped by priceless foreknowledge of the coming internet era.
As previously mentioned, Bezos set up Amazon at around the same time that his hedge fund colleague, Halsey Minor, set up CNET, with each of them soon monopolising his selected market. Within five years, Jeff Bezos had been accoladed with the title of Time Magazine’s Man of the Year, and he was attracting a lot of attention. At the same time, Bezos was becoming a household name, he also began to look for other areas in which to expand his flourishing enterprise, as well as an opportunities to invest the vast wealth he was generating.
Bezos was so confident in the future of Amazon that he had invited his family members to purchase shares in his future company. This also helped to create an idealised mom-and-pop origin story for a business which was to become a cyber-Goliath and the leading online retailer, with all the competition struggling to play catch-up as Bezos’ beast became an almost perfect monopoly in an emerging sector.
The picture painted of Jeff Bezos is one of a young, independent entrepreneur who stumbled upon the new niche of online bookselling as the route to becoming a billionaire. In reality, an already very wealthy Jeff Bezos was placed into a position of dominance by a decidedly futuristic hedge fund. In this very special enterprise, large swathes of the internet were bought up before most people even understood the concept of something as basic as an e-mail.
This kind of foresight may seem almost indistinguishable from magic for some, but the wizardry was of a numerical order. The last three decades of the previous millennium were filled with enterprising mathematicians who were busy capitalising on emerging markets which were only just being envisioned. Jeff Bezos was selected to run one of the main internet monopolies which the mavens at D.E. Shaw & Co. foresaw arriving in the near future, during a time when the internet was still just a twinkle in the eye of its creator.
D.E. Shaw’s Influence and the Real Internet Revolution
What is extremely notable about the development of D.E. Shaw & Co. is the close political connections that the company and its founder had with the US Democratic Party in general and the Clintons in particular. In 1986, Shaw left Columbia University to join Morgan Stanley & Co., becoming vice-president there for “automated analytical trading technology”. Soon, he had formed D.E. Shaw & Co. as a separate entity, and by 1992 he was also becoming heavily involved in US politics.
When Bill Clinton was running for federal office, Shaw became central to the would-be President’s plans to reform the US Commerce Department. In 1992, Shaw wrote a white paper for Clinton which mapped out his proposed reform programme. In August 1993, Shaw also donated $50,000 in what is termed “soft money” to the Democratic National Committee, but these were not the only funds which Shaw would go on to give the DNC and its affiliates. Over the course of Clinton’s two-term presidency, Shaw actually donated over $700,000 in soft and hard funds to the governing Democrats.
Only four months after his initial $50,000 donation to the DNC, Shaw participated in the Clinton-Gore economic conference, which took place on Clinton’s home turf of Little Rock, Arkansas, discussing investments in new technologies. In January 1993—the same month that Jeffrey Epstein was invited to the nascent Clinton White House—Shaw recommended increasing the funding for technology research; reforming the US patent system; and several other policies which he claimed would foster technological innovation and increase American economic competitiveness.
In November 1993, still in his first year of office, Clinton signed an executive order which established the President’s Committee of Advisors on Science and Technology (PCAST), a private-sector advisory group which was to advise the White House Office of Science and Technology Policy. On 4 August 1994, Shaw was one of the nineteen members appointed to PCAST. Out of the nineteen appointed, eight had contributed either to Clinton’s campaigns, Gore’s campaigns, or the Democratic Party. It was around this time that Jeff Bezos left D.E. Shaw & Co. to form Amazon. David Shaw’s activity advising the Clinton administration did not end in 1994. In fact, Shaw was advising Clinton, Gore and the DNC on various matters throughout the Clinton presidency.
By 1998, D.E. Shaw & Co. had become a success story, with much of the meat and bones behind its public face still veiled in mystery. The runaway success of its mysterious and complicated dealings had often induced journalists and mainstream media outlets to detach themselves from reality and become overly positive in covering this powerful and well-connected hedge fund.
However, D.E. Shaw & Co.’s era of positive spin was beginning to hit the buffers. The New York Times journalist, Joseph Kahn wrote an article on 21 July 1998 entitled The Quantitative Leap; Investing by the Numbers Doesn’t Offer a Great Edge, which began with a rhetorical question:
Put some of the world’s smartest math scholars together with the fastest computers. Give them a wealth of historical data and a few billion dollars. Do they have a chance of predicting swings in the stock market?
The article investigated the supposed success of D.E. Shaw in particular. After much consideration of whether Shaw and employees had been completely successful and whether quantitive trading was quite all it had been made out to be, the conclusion of the article seems to sum up the reality of the situation aptly, with a quantitive strategist named Edgar Peters being quoted as stating:
The idea of some Holy Grail strategy that works a majority of the time is nice, but it is just a dream […] If anyone could really predict [the market] with any degree of reliability, the market would die.
It was soon evident that D.E. Shaw & Co.’s techniques were not as reliable as many had made them out to be, and massive amounts of money was about to be lost as the ‘quant’ bubble finally burst.
D.E. Shaw & Co. was a hedge fund like nothing which had ever existed before, and by 1998 its staff had also made themselves a too-big-to-fail behemoth. Shaw had managed to build a hedged bond portfolio—through the Bank of America—which included $10 billion in US Treasury securities, as well as $4 billion in Japanese bonds. In 1997, the bank lent $1.4 billion to D.E. Shaw & Co.; however, as a Los Angeles Times article in October 1998 described:
Wild swings in markets worldwide caused severe trading losses for many such hedge funds with large, leveraged bets on stocks and bonds.
The banks original loan to D.E. Shaw & Co. was unsecured, leaving the Bank of America to take the financial hit: a $372 million write-down. No matter the losses, D.E. Shaw & Co. still managed to hold on to its total capital of $47.3 billion, with assets at the time totalling $600 billion. By December 1998, it was being reported that D.E. Shaw & Co. was cutting its workforce just before the Christmas holidays.
When Tim Berners-Lee first announced the creation of the World Wide Web on Usenet in 1991, the digital world which D.E. Shaw & Co. had already mapped out in detail became possible for the very first time. Within three years, Shaw’s recruits were beginning to create companies which his hedge fund’s complicated confidential computer algorithms had predicted to have the greatest potential of becoming internet monopolies.
David Shaw and his unique enterprise had mapped out the coming internet revolution in great detail by using game theory and computer modelling, and it was through this technique that David Shaw’s team was able clandestinely to map out the development of such a brand-new, paradigm-shifting technology as the internet, and then to capitalise on that foreknowledge.
Jeff Bezos and many of his associates at D.E. Shaw & Co. were arguably part of the biggest caper ever to take place in human history. Within the space of thirty years, the majority of the world’s biggest companies were to be trading on the internet, and everything from food to entertainment was to be offered online.
Shaw’s team of internet privateers ensured that there was no equal opportunity available to those developing their businesses in this new online realm. They had predicted monopolies forming during the internet age and, instead of allowing the average entrepreneur or businessperson to fight it out on an even keel, Shaw’s employees began determinedly taking over the online world. D.E. Shaw & Co.’s monopolisation of the digital realm created hyper-centralised pockets of digital power and saw a new era of cyber-authoritarianism come one step closer to being made manifest.
It wasn’t only Jeff Bezos and Halsey Minor who cut their teeth at Shaw’s secretive company; there are some other, very significant, former employees of D.E. Shaw & Co. who have continued to make waves themselves. John Overdeck left the hedge fund and created Two Sigma Investments, another New York-based hedge fund following in the footsteps of Shaw in more ways than one. Whereas in the past D.E. Shaw & Co. became pioneers in using computer modelling to predict trends, Two Sigma Investments is pioneering the use of artificial intelligence and machine learning to create its own trading strategies. Overdeck wasn’t just a managing director at D.E. Shaw & Co.; he was also a vice-president at Amazon.
Others who have been employed at D.E. Shaw & Co. include Trey Beck, described in a CNBC article as a “philanthropist and major [Democratic] party financier”. That article states:
Beck, who was managing director at investment firm D.E. Shaw, has given to Democratic-aligned groups for years. He made five-figure donations to the Democratic National Committee, the Senate Majority PAC and Priorities USA Action.
Shaw’s forethought had allowed him to make some keen investments that were only possible because of his almost precognitive understanding of the vast opportunities which the coming internet era would bring. D.E. Shaw & Co. had made a pile of money quietly, but by January 2005 it was being reported that the hedge fund was losing its ability to continue doing business in the shadows. For six years and more after it lost such a vast amount of the Bank of America’s money in the glare of publicity, D.E. Shaw & Co. had been relying on a loophole in US securities law to keep trading in secret, but the Securities and Exchange Commission (SEC) lifted the firm’s confidentiality in December 2004.
D.E. Shaw & Co.’s ability to stay under the radar had allowed the hedge fund to remain mysterious and—as with Bezos and Amazon—had added to the mythos surrounding the company. In fact, D.E. Shaw & Co. had made a most of its money early on, by betting big on the coming internet era, and such a lucrative opportunity may have fated Shaw’s hedge fund to peak prematurely.
Shaw himself, perhaps sensing this, left the life of a hedge fund magnate and began looking for his next lucrative project. Although he had capitalised on what may have seemed like a once-in-a-lifetime opportunity with his early investment in the internet revolution, he was still very capable of calculating where the next big opportunity was likely to come from. In 2001, David Shaw began to remove himself from the day to day running of D.E. Shaw & Co., a process which was completed over the following year, and he instead began concentrating his efforts on a new emerging market with the potential to produce both paradigm-shifting technologies and massive returns on investments. In 2001, Shaw created D.E. Shaw Research, where he became chief scientist, and moved into full-time scientific research in computational biochemistry.
Staying in New York City, he also became an adjunct professor of biomedical informatics at Columbia Medical School, as well as a senior research fellow at Columbia’s Center for Computational Biology and Bioinformatics (C2B2). In 2022, D.E. Shaw Research (listed as DESRES) announced that it was entering an exclusive global license agreement with pharmaceutical colossus Eli Lilly. A Financial Times article cheekily entitled “Pharma bro David Shaw” stated that the deal was:
For the clinical development and commercialization of a DESRES’s program of Kv1.3-targeted therapeutics for the treatment of various immunological and inflammatory diseases.
From Shaw’s investments over that last two decades, it is clear that he believes the markets with the potential for the greatest growth in the future will be in the biomedical sector, a fact that many people already recognise all too well.
Jeff Bezos has come a long way since he was supposedly modestly selling books out the back of his parents’ car; yet none of us is ever likely to know how far, nor hear the real story behind his rise to power. Instead of the truth about the rise of Jeff Bezos, we are fed a scripted version of history which is sterile and patronising, a story which was likely contrived in the secretive offices of D.E. Shaw & Co. during the early Nineties.
Soon, if the techno-despots are allowed to continue taking complete control, all we’ll be left with are their tall tales, presented to us as a simple package, and none of us will know what we don’t know. In that world of embellished narrative, all those who have grappled their way aloft monopolies such as Amazon will be heroes.