Why I Left Goldman Sachs: A Wall Street Story (10 page)

Each row contained a different derivatives sales pod, and the pods were classified according to the types of clients they covered. There were teams that covered macro hedge funds, long/short hedge funds, asset managers, mutual funds, pension funds, insurance companies, and Canadian-based clients. Every team had different intricacies and personalities, and Corey and I handled the futures business for all of them.

That first day, a Tuesday, the very first thing Corey did was call up Goldman’s guys on the Chicago Mercantile Exchange, Patrick Hannigan and Bob Johnson, and say, “I want to introduce you guys to Greg Smith; he’s going to be my right-hand man. Please treat him well as he gets up the curve.”

Chicago, as a city, has a prominent place in Goldman Sachs lore. Some of the firm’s most successful leaders—a disproportionate number—have come up through the Chicago office. Just to name a few: Hank Paulson, former Goldman CEO and U.S. treasury secretary; Bob Steel, former Goldman vice chairman and then CEO of Wachovia; and Byron Trott, who became known as “Warren Buffett’s favorite banker.” John Thain was born near Chicago, and Jon Corzine studied there. For info on these last two guys, Google “$68,000 antique credenza” and “MF Global debacle,” respectively. My connection to Chicago? Most of my family now lives there, and I think it’s a great town.

In the early 2000s, before electronic trading of futures became more mainstream, most of our client futures business was executed in the pits of the Merc (as the Chicago Mercantile Exchange was familiarly known), so we relied on Patrick and Bob’s accuracy, knowledge of the markets, and ability to execute quickly and seamlessly, all of which made us look good in front of our clients. These two guys had the safest hands in the business.

Hannigan and Johnson, Corey told me, were lifers at Goldman, and I came to see them as the moral center of the Derivatives desk. Both were warm, humorous, solid: family men. Patrick—in his mid-forties then, with a shaved head—was brilliant, quirky, and exceptionally well read. Bob, known as “the Captain” because of his leadership of the desk, was a little older, gray-haired and charismatic, and a stickler for honesty and accuracy.

The Merc, as I would soon discover from direct experience—it was a tradition for junior analysts to be sent to Chicago to see one of the last relics of old-fashioned trading in the financial world—still operated exactly as trading pits had operated since time immemorial, on the open-outcry system: with eye contact and hand signals and shouting instead of computer keyboards and terminals.

It was a totally transparent kind of trading, and as the facilitators of the trades, Patrick and Bob were also totally transparent—they wanted nothing more than to make the clients happy. There was absolutely no trickery to the way their business worked. Their reputation was based on a simple claim: nobody could handle a client’s order better, represent the client in the pit better, than Goldman Sachs. Patrick and Bob would fight hard for you, they’d get you the best price, and they’d represent you proudly and well.

Equally important, once Patrick and Bob took you under their wing, once they liked you, they would take significant steps to look out for you and make you look good. They were also inveterate coiners of nicknames for all the derivatives salespeople they dealt with in New York. I had once been Springbok, but Springbok got shot, stuffed, and mounted after Hannigan and Johnson had tested my mettle: with them, I became “Gregor MacGregor,” spoken with a Scottish burr. Why? Besides the play on my first name, they probably just liked the way it sounded.

They bestowed other monikers with similar logic. An Indian salesperson named Nitin—six-two and kind of tough-looking, and a great favorite with the ladies—became Nitin the Kitten. Then there was a six-foot-three redhead who, for no apparent reason, Patrick and Bob dubbed Cocoa—because he’d traded some cocoa futures? Maybe, maybe not. In any case, that guy
hated
being called Cocoa. Another tall associate—six-five this time—became known as the Mullet because of his big mop of hair.

Sitting a few seats from me was a guy they called the Jewish John Kennedy; they were referring to JFK
Jr.
This guy, Bobby Schwartz, was a year older than me, clumsy, and prone to making occasional trading errors, but highly book-smart and gifted with a photographic memory. Bobby had an uncanny (and irritating) ability not to have to pick up girls—they would simply walk right up to him and introduce themselves. I didn’t believe it until I saw it happen.

Worse, though, would have been to have no nickname at all. Not being christened by the guys at the Merc was a bad sign. Typically, the people who didn’t get nicknames were junior analysts who Hannigan and Johnson could tell early on were not going to make it. People who made million-dollar errors right and left. Walking disasters. As I would quickly see, derivatives were highly leveraged products: you were borrowing money for your bet, so returns or losses were greatly multiplied. If you mistakenly said “Buy” instead of “Sell,” or got the quantity wrong, you could rack up huge errors. First- and second-year analysts did this all the time, out of sheer carelessness. So before the Merc guys started joking around with you or bestowed a nickname on you, you had to prove you could be accurate. And accuracy meant survival.

My new education commenced. (I was also, at this time, studying for the Series 3 Derivatives exam—another regulatory requirement now that I would be trading derivatives.) Corey began our first lesson about three steps ahead of me, assuming that I understood trading terminology. “Please assume I know nothing,” I told him. “Start from the very beginning.”

So, at 7:00
A.M.
, before the trading day began, or at 6:00
P.M.
, after it ended, Corey and I would spend hours going over everything. The first priority, he told me, was to use the right terminology. Don’t fudge. Don’t say something that’s 80 percent correct. Say it 100 percent correctly at all times. “No ambiguity, no errors” was his mantra. Over and over again he said, “This stuff needs to come to you cold.”

One way I learned at first was to listen in on Corey’s client phone calls.

This was common practice for apprentices. Everybody on the desk had what was called a trading turret, a big rectangular phone bank with several rows of buttons and a small screen on which you could make, receive, and prioritize calls to and from clients and to the exchanges. Some of the buttons gave you direct connections to major clients such as T. Rowe Price or Fidelity or Wellington; some were the salespeople’s private lines; some connected to brokers such as Hannigan and Johnson at the Mercantile Exchange. (Theirs was a particularly popular line to listen in on. Not only could you hear the big trades that were going through, but you could also catch up on the latest gossip: who had gotten the most banged up at the holiday party, which management changes were coming, how bonuses were looking. A lot of this information seemed to flow through the guys in Chicago.)

Each salesperson had two phones: one was a handset and one was an earpiece or a headset. Anytime Corey was on with a client, he would point it out to me, and I would push the Mute button on my phone and pick up the line. I would listen in on his client conversations, and then, at the end of the day, I would ask about everything I hadn’t understood. Wall Street lingo, I saw right away, was not intuitive. “Hit your bid”? “Lift your offer”? I asked Corey for a refresher course.

A bid, he reminded me, is how much someone is willing to pay for something. An offer is how much someone is willing to sell something at. The way the markets work, he said, is that every security has a bid and an offer. Say there’s a stock I’d be willing to buy for $50 a share and willing to sell at $55. When a client asks, “What’s your market?” the correct response is “My market is $50 bid at $55 offer”—or “50 at 55,” for short. Then the client will think about it. Let’s say he wants to sell. He’ll say, “I hit your bid,” which means he sells it to me at $50. Or let’s say he decides he wants to buy it. He’ll say, “I lift your offer,” which means he buys it from me for $55.

And then there were the hand signals.

Even though the Goldman Sachs trading floor had become completely computerized by the time I arrived, salespeople and traders there (and on Wall Street generally) instinctively still used hand signals the same way the traders at the Chicago Mercantile Exchange used them: to indicate “I lift your offer” (the buyer’s open hand moving toward himself, closing into a fist) or “I hit your bid” (the seller’s open hand moving away from himself, then closing into a fist). When you first walk onto the floor of the Merc, Corey said, it’ll look like chaos, but in fact it’s a very orderly system. People will be buying and selling futures contracts through eye contact and hand signals.

Since I’d spent my first year and a half at Goldman Sachs dealing only with plain-vanilla stocks, Corey had a lot of work to do to get me up to speed on my newly adopted product. Futures, he contextualized for me, were the original form of derivatives, going back hundreds of years, to farmers who needed to protect their crops against droughts, rainstorms, and uncertainty of demand. In order to hedge themselves, the farmers would make deals with their buyers. Instead of taking the risk that their wheat could be worth $100 a bushel when they needed to sell it, or $200, or as little as $20—they would lock in a price of, say, $120 per bushel for future agreed-upon delivery. They were taking a gamble by setting a price now that might be too low, but hedging against the risk of being unable to sell all their crop in the future.

So futures contracts started out with the whole gamut of commodities—where you might have to take actual physical delivery of things such as wheat, milk, orange juice, pork bellies; gold, silver, iron ore. Then people started thinking, “Well, we can apply this to anything. Let’s apply it to stocks.” So there then arose stock index futures: you could implement your viewpoint on where the S&P 500—or the DAX, in Germany; or the FTSE (pronounced “footsie”), in the United Kingdom; or the CAC, in France—would be in the future. There were also interest rate futures and foreign-exchange futures. The introduction of futures on other asset classes led to more speculation, but also provided more avenues for investors to hedge their risk.

In any derivatives market (or almost any market, for that matter), investors are divided into two groups: hedgers (people who have a genuine use for the product, or who are looking to protect themselves) and speculators (in other words, bettors who are taking a view—looking to monetize their opinion). Who would take the other side of the hedgers’ trades, Corey asked, if speculators didn’t exist? The existence of both hedgers and speculators, he said, kept markets smooth, efficient, and liquid. It matched buyers up with sellers.

Corey explained that half the business on our desk was in equity index futures such as the S&P 500 or NASDAQ contracts. Of the other 50 percent, some was in commodity futures such as grains, orange juice, and pork bellies, and the rest was in currencies and interest rates: people betting on the future price of government bonds, or the dollar, the yen, or the euro.

As an early on-the-job training exercise, Corey had me start sending the rest of the derivatives desk informational e-mails about flows (the daily buying and selling done by clients) and trends we were seeing in the marketplace. It was a great training device, because it forced me to try to draw themes from the flow we were executing. It also gave me some early visibility to other people on the desk before I was allowed to trade. Sometimes just getting simple but reliable information in front of people can be quite powerful. A typical e-mail, on a day when we were seeing a lot of buying of technology, selling of crude oil, and two-way flow of German index futures, might read:

Corey vetted the e-mails at first, but then he came to trust my attention to detail. Next up was learning to execute my own orders.

It was mid-January 2003, 6:30
A.M.
The phones were already ringing: clients wanted to trade. The markets had been open in Europe for a few hours already; the Asian markets were closing. By now I had started speaking to clients, writing up order tickets, and executing client trades. At the beginning, Corey would stand behind me, watching and listening as I executed the orders in our trading system, which was called Spider. He checked my tickets to make sure I was writing them up correctly.

The tickets were triplicate forms about the size of a Starbucks napkin, with carbon paper between the sheets: the original was white; the middle copy, pink; the bottom copy, blue. Each ticket had a line down the center: the section on the left was marked “Buy”; the section on the right, “Sell.” Whenever a client called in, you immediately pulled out a ticket and waited for the order. Once it was given, you wrote the name of the future (or option) on either the left or the right side of the ticket, depending on whether it was a purchase or a sale, along with the size of the trade. Then you quickly inserted the ticket into the time stamp, a machine similar to a time clock a factory worker might use.

Time-stamping the ticket immediately was important: you needed an exact record of when you took the order from the client. Then you time-stamped it again when the trade was executed. That way, if the market was volatile—if it moved significantly in or against the client’s favor—you would have a paper trail to show that you had represented the client well and given the best possible execution. If a client gave you an order at 3:15
P.M.
and you didn’t execute it till 3:45, and the market had moved 100 ticks (one tick being the smallest increment a futures contract can move) in those thirty minutes, you could have a big error on your hands.