by Sam Polk
“You ungrateful shit,” Dad said.
“That’s not what I meant, Dad . . .” I started. But he was livid. He didn’t talk to me for the rest of the meal. Eventually the waiter brought the check. He paid. We left.
For years I had a recurring dream about my father. In the dream I’m chasing him. I’m furious. I try to punch him, but my hands feel heavy and slow. I can’t connect. Even when I do, the punches glance off, don’t hurt him. I had that dream every night for a week after I got back from Charleston.
A few weeks later I was looking for a research report in the trading intranet, when I came across a document entitled CDS vs. Bonds—Compensation Comparison. I looked around to make sure no one could see my monitor. I knew I wasn’t supposed to open this file, but I double-clicked. It was an analysis comparing recent bond trader contracts to CDS trader contracts.
The Great Gatsby’s Nick Carraway was a bond salesman, which is to say that bonds have been around a long time. CDSs (credit default swaps, also called credit derivatives) were brand-new. They were essentially insurance policies on companies. You paid a quarterly fee, but if the company went bankrupt, you’d be fully compensated for the losses.
There were two key differences between CDSs and bonds. If you wanted to buy a million dollars’ worth of bonds, you had to invest a million dollars. But with CDSs, if you wanted a million-dollar insurance policy on a company, you hardly had to put up any money at all—leverage. And whereas there was a finite amount of bonds, the amount of CDSs that could exist was infinite. A company might only have $100 million in bonds outstanding, but there might be billions of dollars’ worth of insurance policies written on those bonds. CDSs were, in short, a sophisticated way for people to gamble without putting up any money.
Back when CDSs were being invented, macho, athletic bond traders dominated trading floors. They hardly noticed the math and physics majors hiding in the corners, working on Excel spreadsheets, quietly creating the new CDS market. Even as late as 2001, when I was an intern at CSFB, bond traders were the nucleus of the business.
That soon changed. In 2003, the year I started at Bank of America, CDS volumes eclipsed bonds. Soon they weren’t in the same ballpark. CDS traders began to generate huge profits. They were smarter, younger, and more profitable. They spoke in a complex language bond guys couldn’t understand. Power shifted; CDS traders now stood in the center of the floor. Bond traders went from being lions to dinosaurs in the blink of an eye.
The figures I saw on my screen showed bond trader contracts guaranteeing salaries of $750,000 to $1 million per year. I’d been shocked when I learned that traders just a few years ahead of me earned that kind of money.
The document showed that CDS traders made twice as much, earning $1.5 million to $2 million per year. Some had two-year guarantees.
I looked up to see Brendan returning to the desk from the bathroom, and I closed the document. The week before, Brendan and his wife had invited me over for dinner. I left his house radiating gratitude for our new friendship. Now I saw Brendan with a different eye. Brendan was no CDS trader.
It wasn’t just about the money. It was about where you stood in the Wall Street hierarchy. I wanted to be at the top. When I told Linda about it, she asked if I thought my desire to become a CDS trader had anything to do with my dad. “What do you mean?” I asked.
“Fantasies come from a wound,” she said. “If you feel powerless, you’ll create a fantasy where you have absolute power. What you really need is not to achieve the fantasy, but to heal the wound.”
I told her it wasn’t a fantasy. There was a very real difference between $1 million and $2 million per year. “Haven’t I healed the wound, anyways?” I asked. I’d told her how I cried after Marshall had offered me the money. I knew I’d been processing pain from my childhood, from my father, from OJ.
“You’ve started,” she said. “This work can take a lifetime.”
I wanted to be a CDS trader, but Bank of America didn’t traffic in CDSs. So I read everything I could—research reports, primers, books on credit derivatives—and kept my eyes open for an opportunity.
A few months later, Marshall started a new CDS trading group and hired a thirty-year-old named Alexei Lutov to lead it.
Alexei was based in Manhattan, so he flew down to Charlotte to meet the bond traders. His reputation preceded him. He owned two Ferraris. He wore thousand-dollar pinstriped suits. On the weekends he partied on the New York club scene—models and bottles. His contract was rumored to be a “2 by 2,” which meant he’d been guaranteed $2 million a year for two years. He was tall, red haired, and unhealthy looking, like skin draped loosely over a skeleton.
The bond traders took him out to a local bar known for its fried pickles and Ping-Pong table. I sipped Diet Coke and chatted with Brendan, watching Alexei out of the corner of my eye. When he was alone, I hurried over and introduced myself.
“I’m really glad to meet you,” I said. “I was excited to hear you’d been hired. I’d heard so much about you.” I told him I worked with Brendan McMahon and traded industrial bonds.
“So,” Alexei said, a smile playing on his thin lips, “how’s bond trading in Charlotte?”
I picked up on the subtle reference to Liar’s Poker, in which Michael Lewis described “Equities in Dallas” as the worst place a young Wall Street trader could find himself. He was slicing my job.
I smiled and shrugged my shoulders. “It’s a good place to start,” I said. “They let me trade after eight months, so . . .”
“Eight months,” he said. “That’s faster than I started trading.”
We stood there a moment. I saw Marshall across the bar. When I caught his eye, he lifted his glass.
Alexei saw it, too. “You and Marshall close?” he asked. His eyes were searching. I realized he was eager to impress Marshall. If I could position hiring me as beneficial to his relationship with Marshall, he might bite.
“Marshall hired me right out of Columbia,” I said. “One of his best friends mentored me at CSFB. I’ve been Marshall’s junior guy for over a year now. He’s almost like a father to me.”
Alexei was quiet. “Columbia,” he finally said. I knew Alexei had two degrees from Columbia.
After a moment, I turned to face him. “I’ve been reading a lot about CDSs. One day I’d like to trade both bonds and CDSs.”
Very few traders trafficked in both products; usually it was one or the other. I believed that traders of the future would be dexterous in both.
“Interesting,” he said. “How long are you planning to stay in Charlotte?”
“I miss New York,” I said.
The next day at noon Alexei came by my desk. When I stood, Brendan looked up and said, “Where are you going?”
“To lunch with Alexei,” I said, my face growing hot.
Brendan looked at me a long moment. “Got it,” he said.
I spent the next week in phone conversations with Marshall and Alexei. When it was settled, I called Brendan and asked if I could swing by his house.
When I got there, he seemed to know what I was going to say.
“I figured. I’ll miss you, man. I really loved being partners with you,” he said.
The day I left, Brendan came over and spent three hours helping me pack up my U-Haul. I left a big pile of thrift-store furniture on the front lawn. As I pulled away, Brendan stood next to the pile, waving.
CHAPTER 25
The Land of Ambition and Success
¤
Alexei and I became trading partners in New York. He was nice to me—he gave me a brand-new golf club my first week—but I disliked him from the beginning. Brendan traded with an old-school ethic; if a trade went against him, he never complained. In contrast, Alexei whined and wheedled whenever a trade went bad. He’d stand over the salesman, bemoaning the money he’d lost and making empty threats abou
t future business. His voice began to grate on me like nails on a chalkboard, which was unfortunate because now we spent twelve hours a day next to each other.
I missed Brendan. I missed sitting with my friend. But it was a matter of priorities. I got from Alexei exactly what I wanted. I became an expert in CDSs, and Alexei let me trade the telecom sector, one of the most high-profile sectors in the market.
My focus turned to finding a big trade that would establish me as a major player on Wall Street. Soon, I saw my opportunity.
A month after I moved back to New York, Verizon announced the largest single telecom-bond issuance in history. Most bond issues are between $500 million and $1.5 billion in size. Verizon intended to borrow $4 billion with a single bond issue. Bank of America was the lead bank, and I was the lead telecom trader, which meant I would trade the new deal.
Trading a new bond deal is like being onstage opening night. The lead banker announces the exact minute the deal will become “free to trade,” and as that moment approaches, the eyes of the market turn toward the trader. In the seconds before trading opens, the market seems to hold its breath. When it’s time, the trader sends out an electronic message with the opening prices to the entire market and yells those prices over the loudspeaker broadcast across the entire trading floor. Then, all hell breaks loose.
The first day a bond is issued, the trading volume in that bond is usually higher than it will ever be again, and sometimes price changes can be dramatic. If there’s overwhelming demand for a new bond—that is, if the market is strong and the interest rate is high—the bond price can ratchet materially higher, leaving the company furious at its bankers for charging them too high an interest rate. If the market is weak and the interest rate is too low, bonds can fall precipitously, leaving investors down money (“in the red”) and furious.
The day of the Verizon deal, tensions ran high. Under Marshall Masters’s leadership, Bank of America had recently become the number one–ranked investment grade trading desk on Wall Street, and this record-breaking bond deal would cement our position. That morning the market weakened unexpectedly and the bankers were worried about whether they could drum up $4 billion in orders. The bankers were led by Jeff Ponder, a former marine with a jaw that could slice apples. Ponder’s reputation was at stake, as was Marshall Masters’s (as was mine, though I didn’t really have one). Marshall’s face was serious when he pulled me aside after the deal was announced.
“I’m going to help you trade it,” he said.
“I can handle it,” I snapped, afraid I wasn’t going to get credit. “This is my shot.”
Marshall looked at me. “I know, Sammy. I’m just going to sit next to you and help if you need it.”
Late in the afternoon, the Verizon deal was struggling. Investors typically receive only a fraction of their orders—they submit an order for $50 million worth of new bonds but expect to only receive $15 million. But the aggregate orders on the Verizon deal were barely over $4 billion, so the bankers would have to completely fill every order. Investors were going to receive far more bonds than they anticipated. The market had dropped that day, which makes investors nervous. They’d be downright scared when they received full allocations of Verizon bonds. Everyone would be a seller.
Once the selling began it might not stop. Hedge funds can sense weakness; if an investment looks vulnerable, they sell bonds until the market is overwhelmed and the deal goes into free fall. Then, at much lower prices, the hedge funds will buy back the bonds they’ve sold, netting a handsome profit.
At 2:30 p.m. I stood with Marshall and Ponder. I felt like a wide-eyed kid finally allowed at the adult table. Marshall finished telling Ponder about the market weakness. Ponder’s brow furrowed.
“This is what you have to do, Ponder . . .” Marshall began.
“Don’t fucking tell me what I have to do!” Ponder barked. “This is my goddamned deal!” A thick snake of a vein throbbed on his taut neck. Heads turned. We were silent. Ponder’s outburst had confirmed the precarious reality of our situation.
Marshall flashed a toothy smile. “I have an idea,” he said.
His strategy was risky. He wanted to open the deal lower than where it was priced. Investors, losing money at the outset, would be furious. But no one likes to sell at a loss. Marshall believed that opening the new issue at lower levels would stem the initial selling and bring in discount buyers. If enough buyers came in, the bond would have upward momentum when it finally reached issue price and just might close up on the day.
After thinking for a minute, Ponder grudgingly assented, although he insisted the first trade occur at issue price, to save face. Marshall nodded. As he and I walked back to the desk he asked, “Do you realize how important this is?”
I nodded. If this deal traded poorly, no company would trust us to trade marquee new deals, and we’d lose our number one ranking. Not only would that mean less prestige—it would also mean less money.
I looked at the clock—3:57 p.m. Issue price was 99.75.1 I typed up a message to send out to the sales force that read, “Verizon new issue, opening 99.75-99.875.”2 Marshall sat next to me, both of us silent, feeling the electricity of anticipation. My hands tingled. I cracked my knuckles. At 3:59 I put my hand over the Send key and looked at Marshall. He smiled.
The clock suddenly blared 4:00. I hit Send, stood up, picked up the phone handset, which served as a microphone, and yelled, “New Verizon, opening at issue price 99.75-99.875.”
The room erupted. Every salesman was on their feet with a phone pressed to each ear; the lights of the phone turret lit up. Four salesmen tried at once to sell me bonds. I told the one closest to me I would take $10 million and told the others the market had moved. I shouted into the loudspeaker, “Verizon bonds going down; the new market is 99.5-99.625.”
It’d already been loud, but when I dropped the price of the bonds, the noise ratcheted higher. I was offering to sell bonds below where the new issue priced. Investors had just spent $4 billion and were immediately down money. Salesmen were getting screamed at by their clients and were in turn screaming at me.
“Are you kidding me? Below issue price?” yelled a salesman.
“What the fuck, Polk? What the fuck?” screamed a saleswoman.
“This is unbelievable,” hollered the head of sales. “Where the fuck is Marshall Masters?”
Marshall was sitting next to me. He had two phones pressed to his ears as he listened to brokers telling him where bonds were trading in the street.3 He had a big smile across his face. The entire market was focused on this bond; Goldman Sachs, Morgan Stanley, Lehman Brothers—everyone was trading it. The volumes were enormous.
“I’m putting a 99.375 bid in the street,” Marshall said to me coolly. That was a far lower price than I was paying to our accounts. If Marshall got hit, that meant that other firms were getting sold a ton of bonds and were capitulating.
So far no one had been willing to take a loss. Accounts hadn’t come in to sell after I dropped the price. And then, they did.
“I got Cornerstone here, would sell you twenty million at 99.5,” yelled one salesman.
“Done,” I yelled back.
“I got Red River here; they wanna hit you on twenty million more down there,” yelled another.
“Done,” I yelled back. I’d collected over $50 million in new Verizon bonds. There was nothing but sellers.
“I got Sharktooth here; they are a seller of twenty million at your bid price,” yelled a gray-haired, shark-faced salesman. Sharktooth was a predator; the fact that they were selling meant they smelled blood and were attacking. They would be selling bonds to every firm on The Street, hoping to effect capitulation. And it started to happen: Marshall yelled out, “We’re getting hit from the street at 99.375.”
I picked up the hoot and screamed out, “Verizon down again! New market: 99.375-99.5.” Bonds were now offered a full qua
rter point cheaper than where they were issued. If buyers were out there, this might draw them in. But so far it hadn’t. The selling continued. Anyone who was selling down here was losing real money.
“Polk, Grandview is looking to sell ten million at 99.375.”
“Done!” I yelled again.
I now owned $100 million in Verizon bonds. I had two assistants next to me furiously scribbling the details of every trade. Their heads never lifted.
I tersely whispered to Marshall, “We’re getting hit by everyone. What the fuck are we going to do?”
He looked up at me with a gleam in his eye. “I just bought seventy million from the street.”
I whirled toward him. “Are you fucking kidding me?”
We were now long $170 million in bonds, the biggest position by far that I had ever had. We had exploded over our risk limits. We couldn’t look down.
But Marshall wasn’t worried. He was loving this.
“Lock yourself,” he hissed. He must have sensed a pause in the selling. Locking yourself meant telling the market you will buy or sell bonds at the same price. It was, I realized, a brilliant idea. Traders usually make money by buying at one price and selling slightly higher. Locking myself was a signal to investors that I wasn’t taking a commission, so if they came in to buy bonds now, they’d be getting a deal.
It was a last-gasp plea for buyers. If we got hit on more bonds, we’d have to take the market down again. We couldn’t buy any more bonds to support the price. We’d only be able to watch as the deal puked.
I pounded out a message. “Verizon new issue, 99.375 lock!!” I hit Send, then stood and shouted into the microphone, “Ninety-nine and three-eights lock; come and get ’em!”
There was no reaction, only stunned quiet. Salesmen glared at me as they waited for their accounts to digest the fact that their new bonds had tanked. Investors were furious.
I saw the Sharktooth wire light up. They’d be sellers. I looked hard at the salesman who covered them, silently imploring him not to pick up. But he did.
