Solid return on $250,000.
The second read “A Class of the Kelemen Group Master Trust.”
Legal fingerprints all over that description. If Popowski’s firm didn’t do the work, who did?
The phone rang. It was Halek. “You awake, Grove?”
“Not only awake, I have good news for you.”
“Which is?” he asked, somewhat startled by my early-morning energy.
“I spoke with my mom over the weekend. She says Catholics are letting Jews into heaven.”
“Great. Tell your mom that Jews are letting Catholics onto Wall Street.” Halek never missed a beat.
“Nice.”
“Jack Oil,” he said, shifting to business. “I’m about to do you a favor.”
Favor?
The mere mention of Jack always made me perk up and pay attention. It was JJ’s company after all. He was my biggest client, a guy important enough for me to put everything else on hold. That included Charlie Kelemen and his unfortunate stew.
Macbeth’s witches can take a number.
“I’m all ears, Cliff.”
“Is JJ going to hedge?” he asked.
“No clue.” Cliff was not one to pressure for a trade. He had posed the same question on Friday. Here it was Monday, the market not yet open, JJ probably not in the office, and Halek was dragooning me for a trade. Not his style. “Why do you ask?”
“You may lose that business.”
“How’s that?”
“You know the drill,” he replied. “No borrow, no zero-cost collar.”
“Shit.” Cliff had just spoken volumes.
JJ owned $190 million of one stock.
That’s risky as shit.
The markets can cut share prices 60, 70, or 80 percent in seconds. If Jack Oil crashed 50 percent, for example, JJ would lose $95 million. That’s why I wanted him to hedge.
A zero-cost collar would insure JJ against losses greater than the first 10 percent. Of the $95 million loss, JJ would eat the first $19 million. That’s 10 percent of $190 million. But with SKC’s hedge in place, my firm would pay him $76 million. That’s $95 million minus the $19 million. JJ limited his downside and avoided catastrophic losses.
He could have avoided all risk simply by selling his shares. But JJ was bullish on the stock and wanted to retain upside. Typically, we could structure a trade that gave him appreciation equal to the first 20 percent. If JJ’s position increased 20 percent to $228 million, therefore, he kept every dime. It beat selling if you were a CEO betting on your company’s future.
Anything over $228 million belonged to SKC. That upside was valuable to my firm. Selling it was valuable to JJ. By trading some of his upside for downside protection, he never wrote a check to cover the insurance. That’s why we call these derivatives “zero-cost collars.”
I’d take that trade all day long. A risk of down 10 percent for upside of plus-20 percent.
There was no alchemy in a zero-cost collar. If SKC agreed to insure JJ’s position, we would borrow shares of Jack Oil and sell them short. In effect, we hedged our own obligations as the stock collapsed. Our gains would fund the payments to Jumping JJ.
There was only one problem according to Cliff.“No borrow, no zero-cost collar.” Shares are seldom available to borrow in unlimited quantities. Many factors affect the supply. Who owns the shares? How volatile are they? Has demand consumed the available reserve? The reason made no difference. If SKC could not borrow Jack, we would never collar JJ’s stock.
One other thing. There are no visible commissions in zero-cost collars. We don’t explain the inscrutable mechanics of “delta hedging.” But make no mistake. Costless collars contain plenty of cha-ching. This is Wall Street, not church.
We charge high prices for downside protection—one dollar when a reasonable price is ninety cents. We pay low prices for upside participation—one dollar when the fair market value is $1.10. The dollars zero out so clients don’t see our profits. But missing a big collar, assuming JJ authorized it, would cost me a few hundred thousand dollars in earnings.
That was the least of my problems.
“What’s the issue with the borrow, Cliff?”
“It’s tight,” he replied.
“That’s nothing new,” I countered. “There aren’t many lenders under normal circumstances.”
“The lenders are the same,” he explained. “There may be a trade that forces my desk to borrow all their available shares.”
“Is the demand from hedge funds?”
“No.” He paused before answering, “Inside PCS.”
“Who?”
“You know I can’t answer that.” It would have been inappropriate for Halek to discuss another broker’s business.
“Cliff, listen to me. Jack Oil’s major shareholders are all institutions. Fidelity. Vanguard. Major hedge funds. To my knowledge there’s only one client of PCS with a major position in the company. That’s JJ. I cover him. And he’s not ready to hedge.”
“The issue isn’t who,” Cliff shot back. “I don’t know who the client is. Don’t care. The issue is the borrow. There’s someone with a competing interest. If JJ wants to trade, he needs to get off the dime.”
“You’re right. Thanks. I’m still curious who the broker is.”
“Figure it out. I’ve said too much already.”
The realization struck me like a falling piano. “Gershon’s been sniffing all over Jack Oil.”
“You didn’t hear it from me,” Cliff replied.
What the hell is she doing?
CHAPTER NINETEEN
By the time Cliff and I finished, the research analysts had updated their stock opinions with one of three ratings: “buy, sell, or we don’t have a fucking clue.”
It was eight A.M., five minutes before the start of our firm-wide Strategy meeting. Chloe waved from her desk, already plugged into that monstrous headset, already advising clients what to make of Wall Street’s indecision.
Annie beamed, light tan, golden-blond hair, starched white blouse. “How’d you do in the race?” she asked as I rose to leave.
“Tenth out of one hundred and twenty-four,” I reported, neither pride nor apology in my voice.
“Got your ass kicked? You’re not putting on weight, are you?” She patted my stomach playfully as though patrolling for paunch.
“Hey now.”
“No middle-age mush,” she concluded. Approval registered in her voice. “Wouldn’t pay to lose the six-pack.”
“I’ll make a note.”
“Tough love, Boss. Tough love.”
______
Upstairs in our auditorium I checked e-mails and fidgeted with my BlackBerry. Scores of colleagues from every division, Investment Banking to Global Capital Markets, filled the rows. More and more women had joined our firm through the years. But they were still the minority.
Patty Gershon’s cream-colored Chanel stuck out like a sore thumb among the drab business suits. Her signature Ferrari-red lipstick, bright and glossy, said,
Look at me
. She sat next to Sutherling, the energy banker who had referred Thayer. The two laughed and waited for Strategy to begin. They were clearly enjoying each other’s company, Lady Goldfish glomming onto the banker who had given me a $100 million referral.
She’s pumping him for leads.
I looked away, avoiding the temptation to stare. Several rows up, an especially dense cluster of bald men caught my attention. They looked like a rack of worried cue balls, tapping into their BlackBerrys, fretting about the week ahead. Ordinarily, the sight would have been amusing. Not today. Patty was bugging the shit out of me, my mood growing worse by the minute.
She’s outflanking me with Sutherling.
Our four hoary strategists—global, domestic, fixed income, and economic—would begin soon. Every Monday they predicted the market direction for the upcoming week. From a top-down perspective, their conclusions generally parroted the analysts who preceded them: “buy, sell, or we don’t have a fucking clue.”
What’s your game, Gershon?
After watching Strategy for eight years, I can report with absolute conviction that “smart money” leaves much to be desired. SKC’s panel discussions—ego fests of Malthusian magnitude—often disintegrated into verbal sparring sessions, heavy on one-liners, light on facts. Our four pallbearers of market gravitas would clear their throats with annoying regularity, quip about each other’s false teeth, and suck the room clean of all oxygen.
Otto Galbraith, SKC’s resident perma-bear, opened discussion the same as always. He forecast Armageddon with one of his trademark wisecracks: “The market is going to hell in a Prada handbag.”
The room sputtered with nervous laughter. The cue balls punched their BlackBerrys, all thumbs blazing. Barely cracking a smile, I glanced back at Patty.
What’s your interest in Jack Oil?
Gershon edged closer to Sutherling, her hand holding the back of his seat, not quite touching his shoulders. He was divorced, his marriage the casualty of late nights and countless business trips to the oil fields of Texas. Patty was divorced, too, her failed marriage the stuff of shudders, a grim reminder there are worse things in life than eighteen months of celibacy. The mother of three, she was knocking out a big career in an environment where middle-aged white guys still retained a chokehold on power.
Cut her some slack.
Unfortunately, there was only one logical explanation for Patty’s interest in Jack Oil’s borrow. And with it, all my charitable instincts dissipated.
You better not be talking to JJ about a collar.
Patty would never pitch my client so overtly. Even Kurtz, the boss with no backbone, would shut her down. Wall Street’s managers resolved coverage disputes through simple questions: Who opened the account? Who got there first? Any revenues yet? Patty would never win that argument. She knew it. I knew it.
Pay attention to Strategy.
Otto was my moneymaker. I ordinarily listened to his advice and wrote down every word, though not for the reasons he thought. Whatever he recommended, I did just the opposite. If he said, “Buy pharma,” the abbreviation for pharmaceuticals, I shorted the sector with a vengeance. When he said, “Sell,” I backed up the truck.
Gershon has no chance with JJ.
There are plenty of cynics among stockbrokers. Glib analysts have burned all advisers at one time or another. There was more to my investment style, though, than simple disenchantment. Through the years, our chief economist had crafted an almost unblemished track record for being wrong.
Otto on Google in 2004: “Management’s untested. I doubt the stock ever trades over its IPO price.” Google went public at $85. It’s over $500 now.
Otto on oil in 2005: “Crude prices will range between forty and fifty dollars a barrel for years.” It crossed $70 this summer. It’s headed higher, as best as I can tell.
Otto on Wall Street last year: “Two thousand seven will be a banner year for financial services.” Right now, banks and brokerages are grappling with billions in bad assets from the subprime mortgage fiasco.
Never one to be daunted by personal error, our chief economist preached doom and gloom throughout the greatest bull market of the twentieth century. Had I listened to his advice, my clients would have bolted long ago. In fairness, Otto got it right once. As early as 1999, he forecast the burst of the technology bubble. He labeled his most infamous publication “The Coming Rupture of Dot-comdom.” An unfortunate image if you ask me.
It bothered me that SKC’s chief economist was such a steady and reliable contra-leading indicator. But clients loved my portfolio returns. We laughed and agreed, “It’s a beautiful thing.”
As Otto spoke, I glanced at Patty and happened to find her appraising me. She winked once, blew a Ferrari-red kiss in my direction, and turned her attention back to the panel discussion. Afterward, I didn’t hear another word my moneymaker was saying.
There are times when every top producer needs to rally, even from Gershon-induced funks. Monday morning was one of them. Slipping out of Strategy a few minutes early, I returned to the fourth floor. Frank Kurtz, with support from SKC’s entire chain of command, had asked me to lecture a class of freshly minted MBAs.
It was hardly “teaching.” My job was to tell war stories before our rookies began cold-calling in earnest.
“Open their eyes,” Kurtz had said. “Get them jacked up so they hit the ground running.”
Do I look like Tony Fucking Robbins to you?
Frankly, I had never expected to teach at SKC. Top producers did not tutor. We stalked bazillionaires and ate what we killed. It would have been a career-limiting gesture, however, to send “no” all the way back to the CEO. I willed myself to suck it up and forget Lady Goldfish, to forge ahead with my class.
Zola Mancini, a newbie with a monster personality in a modest package, caught me in the hall leading to the classroom. She stood about five-five, though I was uncertain about her exact height. She always wore heels and moved with seductive grace, a practiced swish of the hips that made it impossible to tell where athletic legs ended and Gucci heels began.
Those legs made some men whip their heads around in double takes.
Others focused on the shirts that bunched at her breasts. For me it was Zola’s black hair. A thick shock of kinky curls consumed her head. It was as though the hair follicles had exploded. Silky streamers of unruly locks ran wild across her dark, exotic features.
