Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter. Wildfires destroy property and ruin livelihoods. But not for Seth Klarman: the founder of US hedge fund Baupost Group pocketed billions of dollars in profits during the bankruptcy of Californian utility PG&E, whose equipment helped spark deadly infernos in 2017 and 2018.

That led to a row over who profits from such disasters, but leaves unanswered the question of who pays. Baupost had cheaply scooped up so-called "subrogation" claims — the right of insurers to recoup payouts to policyholders by suing the ultimate wrongdoer. California lawmakers almost decided such claims should not be tradeable this week, but a bill that would have cracked down on the financialisation of wildfire remedies fell apart on Tuesday.

PG&E and Southern California’s utility, Edison International, wanted far more. They hoped the legislature would ban subrogation altogether, even for insurers, as well as limit wildfire liability to $6bn per event. Their failure to get what they wanted knocked more than a quarter off their share prices this week.

But it’s not clear how any of this would address the problem of parcelling out financial responsibility when fires run rampage. When PG&E emerged from bankruptcy, California and its three major electricity utilities created a novel $21bn pooled insurance fund to cover future catastrophes, with equal contributions from companies and customers. In 2025, an additional $18bn vehicle was created.

Even those sums — exceeding the roughly $30bn of legal claims brought against PG&E for its role in the 2017 and 2018 fires — may not be adequate if such incidents happen more frequently in future. A fire near Los Angeles last year, where Edison has conceded its equipment was probably involved, could cost $15bn and a recent report from a state agency said future wildfire risk may not even be close to being mitigated. As with Thames Water in the UK, the mash-up of public and private responsibilities makes things extra complex.

In the US, utilities are often privately owned but heavily regulated by local and state authorities. PG&E and Edison say that without limits to the "tail risk" of a catastrophic fire, equity investors will not fund their heavy capital expenditure programmes. They have a point.

PG&E said on Wednesday it would cut its 2027 capital spending from $13bn to $11bn. California residents will pay one way or another, through some combination of the cost of housing, the price of electricity or the rate they pay for homeowners’ insurance. If one falls, artificially or otherwise, another may rise in response.

The real question, then, is whether it’s possible to shrink the aggregate cost of wildfires. Solutions might include safer equipment, or better processes to halt electricity transmission when weather is threatening. Keeping hedge funds from dabbling in the financial aftermath may remove some discomfort about people profiting from others’ misfortune, but it doesn’t obviously help.