Why I Left Goldman Sachs: A Wall Street Story (12 page)

I had to keep listening, hard, because everyone was in a hurry. Corey had drilled into me that when people were in a rush, you needed to slow them down, because if they gave you an incorrect instruction in haste, they would try to blame it on you. If someone said, “Buy me a thousand Microsoft June 30 call options,” I would say, “All right, you want to buy a thousand Microsoft June 30 call options, is that right?” Then they would have to say, “Yes, that’s right,” and then, and only then, would I execute the trade.

Between 8:20
A.M.
and 4:30
P.M.
, time vanished. I had never in my life done anything that stretched me to that capacity.

And at the end of the day, I hadn’t made a single mistake. I was as exhilarated as if I’d sprinted across the finish line at a marathon.

Just before 4:10
P.M.
on Thursday, August 14, 2003, a ferociously hot day in New York City, the overhead lights on the Goldman Sachs trading floor flickered. A moment later, they flickered again—the only evidence that a massive power blackout had taken down much of the northeastern United States. At no point did our terminals go off; the Goldman backup generator had kicked in seamlessly. A minute or two later, we were able to see, on CNBC (which broadcast constantly on monitors around the trading floor) and on Bloomberg (on our terminals), what had happened. Both news outlets immediately interrupted their usual scrolling ticker of headlines with a frozen headline in red type reading, “
POWER OUT IN VARIOUS PARTS OF THE NORTHEAST…AWAITING REPORTS FROM FEMA…
”

It was a spooky moment. September 11, 2001, was less than two years in the past; the United States had just invaded Iraq that spring; and we were on the fiftieth floor of one of the tallest buildings in downtown Manhattan. Oddly, it was the end of the summer internship program: I was mentoring a number of the interns who were spending time at my desk. They looked scared. I told them to get out of there. People were rushing for the elevators. Some ended up taking the stairs because they were nervous about what was going on.

The timing of the event couldn’t have been stranger. For one thing, it happened to be one of those relatively rare days when Corey was out of the office: I was the sole person on the entire six-hundred-person trading floor responsible for trading the futures contracts. For another, the futures markets were about to close temporarily, as they did every day between 4:15 and 4:30
P.M.
, for bookkeeping purposes on the Mercantile Exchange. When people want to react quickly in the markets, they don’t trade individual stocks or bonds—they buy or sell futures contracts, because these are the most liquid, transparent things you can trade. Between 4:15 and 4:30, investors were going to be forced to take a time-out. The market was closed.

At this moment, people began reacting very quickly. Even between 4:10 and 4:15, I could see on my screen that futures were ticking down: investors were selling. On Wall Street, the way traders gauge how people are perceiving any major event is by looking at the futures. If the futures are tanking, it means that the market is really scared. This market was scared. The phones were starting to ring: clients calling. “Are you guys going to be there if we need to do something when the markets reopen at four thirty?” they were asking. “We really need you to stick around,” they said.

An announcement began to blare, over and over, on the PA system: “Please evacuate the building in an orderly fashion…” But almost everybody had already left. There was blood in the water; it was important that someone stay. By 4:30, Michael Daffey and I were two of the few people remaining on the fiftieth floor; the trading floor had become a ghost town.

I had spoken to several clients during the futures closure, and they were talking about executing big trades—really big trades—when the markets reopened. Everybody was selling: shorting the markets, betting that the blackout was some sort of terrorist attack. One client in particular, a hedge fund, wanted to execute a significant-size trade: $2 billion in S&P futures. Yet he wanted to make the sale through a product that was not very liquid—what is called a “big futures contract” instead of an “E-mini.” The big contracts were five times the size—worth $250,000 per contract versus an E-mini at $50,000—and they were clunkier. E-mini contracts were created to give investors the ability to be nimbler and to trade in smaller increments, and they were available to be traded around the clock electronically. It was as if the client were planning to make his escape by car and had a choice between an old, dilapidated Toyota and a brand-new Lexus. In effect, the client was saying, “I want to drive this old Toyota because we’re really used to it.” Yet we knew, as experts, that he’d be much better off driving the Lexus. He’d be able to weave in and out of traffic more nimbly, he would get to his destination quicker, and the safety mechanisms on the Lexus were much better. That was the difference. The client wanted to trade a product that he was accustomed to but that was not very functional; and the trade was going to wreak all sorts of havoc on the markets, which in the end would be bad for him. I needed to get a partner involved.

I went to Daffey’s desk, which was probably twenty yards from mine, and said, “The market’s about to open, this client wants to sell two yards [billion] of S&P futures, but he wants to do the wrong contract. I’ve been adamant with him—I’ve told him that it’s not in their interest, and that they’re going to move the market much more doing it in the big contract rather than the mini.”

Daffey completely agreed with me. “Let’s call this guy,” he said.

Daffey didn’t know the client, so we called him together. “Look,” Daffey told him. “This is Michael Daffey; I’m the partner who runs Derivatives, and it’s not in your interest to trade the big futures—you’re going to crush the market. You’re going to trade E-minis.”

The guy was nervous, but he was hearing the voice of authority, so he put up no fight. “Okay,” he said.

But Daffey wanted the guy to formally acknowledge the trade. “Do you understand you’re selling two billion dollars of futures in the E-mini contract?”

“I acknowledge,” the client said.

Daffey and I could have left the building at 4:30 along with everyone else. We could also have let the client execute the trade the way he wanted to in the first place. As futures traders, we were acting as agents (who work strictly on commission) rather than principals (who take the other side of the client’s trade using the firm’s money), so we would have made a similar (not very large) commission either way. The reason we stayed is because we wanted to prove to the clients that we’d be there for them if they needed us. We thought it was the right thing to do. And we’d convinced this particular client to change his contract because it benefited him, not us.

The market reopened at 4:30, down a couple percent from the close, and I executed the trade with little market impact. The client felt he had done the right thing, and so did we.

I did about ten trades in the next half hour, all with jittery clients looking to short the markets, all for smaller but still relevant amounts: between $50 million and $500 million in notional value. At around 5:00, the phones stopped ringing. Daffey stopped by my desk. “I’m going to get out of here,” he said. “You really should, too.” Nobody knew yet what had caused the blackout. But by now the air-conditioning on the fiftieth floor had gone off. It was starting to get hot.

Everything in my body was telling me to leave, but my mind was telling me to stay. Corey had drilled into me, with those 150 trades we were doing daily, that it was essential to take a full hour at the end of every day, even when you were exhausted (and you were always exhausted) to triple-check each trade, one by one, to make sure you weren’t ambushed the next day with a problem you hadn’t spotted. The worst thing that could happen would be to come in the next day to find you’d left off a zero, or put in one too many, and you had a million-dollar problem on your hands.

I finished up by 5:30. Before I left, I called my biggest two or three clients and said, “I’m leaving now; is there anything else you need?” They said, “No, we’re out of here, too.” I was the last person on the fiftieth floor; it was now very hot.
Time for me to get out of here as well
, I thought.

I sent Michael Daffey an e-mail confirming everything I’d done since 4:30. “Client sold $2 billion; it went smoothly; these are the other trades,” I wrote, summarizing everything else. “I’m going to head out now.”

He e-mailed me back: “Great job, dude; you went the extra mile,” he said. “If you need a place to go, a few people are coming to my place in Tribeca.”

But at that point, I had no desire to socialize with anybody from work. I just wanted to get the hell out of there and go home.

The elevators weren’t working, so I walked down all fifty flights of stairs. The stairwell was sweltering, eerily lit by the emergency light. By the time I got to the ground floor, I had completely sweated through my khakis and a blue Brooks Brothers dress shirt.

The street was full of hot, exhausted people, some of them sitting on the steps outside the building. I immediately recognized two of the summer interns I’d been mentoring on our desk. It suddenly went through my mind that tomorrow was to be the final day of their ten-week program. They were on edge, waiting to find out if they’d get a job.

They looked at me expectantly. “Do you have any idea what’s going on?” one of them said. I wasn’t sure whether he was talking about the blackout or the firm’s decision on his hiring.

All I could do was shake my head. “Wow, guys, crazy way to end the summer,” I said.

As I walked off into the asphalt kiln that was Lower Manhattan, it occurred to me that while my own summer internship felt like five minutes ago, three years had gone by. I had just executed more than $2 billion in futures trades in the midst of a blackout. This felt like a seat at the grown-ups’ table.

I was sitting in a hot tub in Vegas with three Goldman VPs, a managing director, a pre-IPO partner, and a topless woman. No, this is not the setup for a joke. This really happened. The woman was, let us say, unnaturally buoyant. As was the general mood in the tub. My new boss, Tim Connors, once dubbed the Mullet, was one of the VPs, and we had all flown in for his bachelor party. He was wearing a baseball cap marked with the logo of a company called TrendWatch. TrendWatch was a stock-charting product that predicted which direction the market was going. By this point TrendWatch’s job had become easy. The market was going only one way: up.

Welcome to high tide on Wall Street.

It was April 2006, and the deep recession that had struck the markets after September 11 had faded, as recessions inevitably do, and been replaced by a new bubble, thanks to easy mortgages and the Federal Reserve pumping cheap money into the financial system the way Vegas pumps oxygen onto unsuspecting gamblers.

The only trouble with bubbles is that it is hard to tell when you’re in one until it bursts. The technology bubble by now seemed a distant, almost ancient, memory. Bankers on Wall Street were toasting one another’s wisdom, just as homeowners were smiling as they watched their houses grow more valuable every week. The rising tide was making everyone feel smart.

I was allowing myself to feel a little bit smart, too. I had survived the brutal rounds of firings that had rocked Goldman from 2002 through 2004; I had gotten promoted from analyst to associate—a bump that was meaningless to the outside world but one that only about 40 percent of analysts make. It was important because, as an associate, I was now a full-time employee of the firm—I was no longer on a two- or three-year analyst contract that the firm could decide not to renew. The next rung up the promotion scale was vice president, a rank typically achieved after four years as an associate, yet one that most people in the sales and trading business attained. The next level was managing director, and the topmost was partner—a level very few people reached. (Most prized of all at Goldman was to have been a pre-IPO partner: many of them were said to have made in the tens or hundreds of millions of dollars when the firm went public in 1999.)

If you were new at the firm and couldn’t quite tell who was a partner and who wasn’t, there were a couple of easy tricks. One was listening for something called the Partner Laugh. This occurred when the trading floor was dead quiet and suddenly you heard some kiss-ass VP erupting into fits of laughter and slapping his knee in response to some joke the person by his desk was telling. The longevity and high pitch of his laugh would tell you that the person by his desk was a partner. (A close relative to the Partner Laugh was called the Custy Laugh: short for Customer Laugh. This sounded just as fake but was reserved for sucking up to your biggest clients and usually was louder and built up at a more gradual pace than the Partner Laugh—only a trained ear could tell the difference.) The other way to pick a partner out of a lineup: they were always tanned—even in the winter months.

So how did I find myself in this Vegas hot tub? The change had occurred for me back when the markets were slightly less carbonated. Corey and I had become a well-oiled machine and were executing billions of dollars in futures across equities, commodities, fixed income, and currencies. We had expanded our product offering to include options (another type of derivative, one that gives the buyer of the option the right, but not the obligation, to acquire or sell an underlying asset at a future date at a specified price). Everything we were trading was as an agent (on behalf of the client), and we were collecting flat commissions when clients decided to trade with us. We were talking to the trading desks of the biggest mutual funds, hedge funds, and pension funds in the world, who had come to trust our safe hands.

By mid-2004, with a horrendous bear market all around us, our business was thriving, partly because we had started from a low base, but also because futures were a macro instrument and investors relied on them during tough market environments. In a year and a half, we had doubled the commissions in our business, and growth had become so rapid that we were allowed to hire a new person to join our team.

But just like Rudy before him, Corey now found it was time to move on: Daffey wanted his help in covering the macro hedge funds. Corey would now become a pure derivatives salesman—he would spend more time discussing with clients investment ideas in options, futures, and swaps, and less time executing. When he needed to execute, he would call his old desk: me. His departure was bittersweet for me. He had been generous and kind, and always set a high standard of integrity for me to follow. But I knew the move would be good for him, and I had a feeling he would keep looking out for me.

I had been his right-hand man; with his departure, I became the main futures trader. This helped me build my profile on the fiftieth floor. When anyone, from partner down to analyst, needed to trade a future, they came to me and my associate. Seeing all this flow had another benefit: it helped me sharpen, and gain confidence in, my views on what the markets might do next.

When Corey moved, I was given more resources—we got to hire a couple of new people, whom I trained. Still, the times continued to be hairy at the firm and more broadly on Wall Street: the firings continued; desks got cut down and merged. The Equities division started merging with FICC to form what would eventually become one giant, all-powerful (and sometimes all-knowing) Securities division. Along with this, my mini Equity Futures desk merged with the FICC Futures desk.

One day in January 2005, Daffey sent me an e-mail: “Dude, I have an idea for you. Swing by my office.” I headed down to forty-nine.

“I need your help,” he said as I walked in.

He began his spiel by talking about Laura Mehta, a woman he had hired recently from Morgan Stanley to be an MD in Derivatives sales and his effective number two. A number of clients had urged Daffey to try to hire her—she was a brilliant Princeton grad, and highly regarded by some of the biggest sovereign wealth funds, hedge funds, and asset managers on the Street. My initial perception of her was that she was a class act. In addition, she exuded a quality that was rare on trading floors: she was genuinely pleasant. When she arrived, Daffey had needed to pair her with someone, and he had assigned Tim Connors as her counterpart VP.

I had known Connors—as with Daffey, no one ever called him by his first name—in passing since the summer of 2000, when we were interns together: I at the undergrad level, he at the MBA. Another former college athlete (crew), he stood six-five, had the luxuriant mane indicated by his onetime nickname (though, in reality, his hair looked nothing like a mullet), and could be quite charming when the situation demanded. He had the ability to stay out till all hours drinking and smoking, then make it through work the next day.

I’d also noticed, in my early days on the Futures desk, that he could be impatient, irritable, and acerbic when frustrated. As he learned the business and became more comfortable in his role, though, he mellowed. And over time, we’d built a strong rapport; we shared a similar dry sense of humor.

Connors had had a rocky start at Goldman, working for some really hard-nosed managers he didn’t get along with. They were immune to his charms and alert to his occasional tendency to make detail-related errors: mixing up multipliers, buying instead of selling. The rap on Connors was that while he was a great salesman, he didn’t entirely understand the theoretical principles of derivatives. (This is more common than you might imagine, even at high echelons in the financial world. Derivatives are complex beasts.)

I have a vivid memory of an incident that happened with Connors in December 2002, around the time I first joined Corey’s team. He had made a client error, a quantity error, buying or selling the wrong amount of some futures contract. It was a large error, in the hundreds of thousands of dollars, but he had compounded the error by not notifying Daffey about it until hours later. Daffey, who didn’t anger easily, was irate. He stuck his head around his computer screen and shouted, “Connors, pick me up on line one!”

The way the Hoot works is that everybody could now quickly hit line one and listen in on mute. Corey quickly told me to pick up the line. He knew the context of the error already, and thought it would be a good teaching moment for me. But the Hoot was barely necessary. Daffey was so incensed that he was screaming quite audibly, absolutely laying into Connors as if he were a junior analyst—which he wasn’t: having started in the business a little bit later than some other people, he was an associate at the time, and in his early thirties.

“This is unacceptable!” Daffey yelled. “You’re old and mature enough to know you need to admit these things immediately! We have a lot of risk at stake, and if this happens again, there’s going to be big trouble!”

There was a time when it looked as if Connors could have been let go, but he held on. Daffey saw something in him, and was giving him another shot now, with Laura Mehta joining the firm. Connors had been “drifting in the wind,” Daffey told me in our meeting, until Laura came along. She had helped give him some focus and structure, Daffey said, but his attention to detail and organizational skills were still not his strong suit. To be fair, though, there are many people on Wall Street who are good at the big picture but not good at the details. As far as Connors was concerned, this was where I came in. Laura was too senior to get into the weeds; she was often in management meetings. Daffey needed someone by Connors’s side to help build the business. Would I do it?

I was immediately excited.
When the partner in charge of Derivatives Sales offers you an opportunity like this
, I thought,
you jump on it
. I jumped on it. The new job was an opportunity to learn a broader set of derivatives products and diversify my client base into sovereign wealth funds, quantitative hedge funds, and state pension plans. Also, I thought it would be fun.

And it worked out. The markets turned around in 2005, and our little Derivatives Sales team—Laura, Connors, and me—began to fire on all cylinders. The fanatical attention to detail that Corey had taught me helped our desk consolidate our gains. Connors and I made a great team. I did the heavy lifting, saw to the nuts and bolts, and did some schmoozing. He worked on strategy and did a lot of schmoozing.

Then Daffey himself was transferred.

It happened in the spring of 2005, a turning point on Wall Street. The recession was ending; the housing market was beginning to percolate. Moods around the financial markets were beginning to pick up. On the Goldman Sachs trading floor, Daffey’s boss, Matt Ricci, a former Yale basketball player and a very gung-ho partner, was leading the charge. Every Friday morning, Ricci used to stand up at the podium on the edge of the trading floor and give these sometimes rousing, sometimes cheesy pep talks to the troops. There was a microphone on the podium that broadcast into the Hoot, so if you were somewhere on the outskirts of the huge trading floor and couldn’t see Ricci, you still couldn’t escape his voice. And he was very fond of catchy abbreviations: a favorite of his was one he’d borrowed from David Mamet’s
Glengarry Glen Ross
—ABC, or “Always Be Closing.” (I don’t think he quite realized that Mamet’s play was a dark satire of unethical business practices.) He also relished GTB, or “Get the Business.” And then there were the sports analogies: “Let’s give it the full-court press.” “Let’s bring this one across the line.” “Let’s all raise our game into the end of the quarter.” “Let’s play through the whistle.”

He also coined some terms that became widely used around the franchise: one of them was
elephant trades
, trades that netted the firm over $1 million in revenue. An imposing figure, tall and always dressed in a suit, even on casual Fridays, Ricci used to love to stand at the podium and say, “Let’s go out and find some elephants today! Let’s go get the biggest trades to the tape!” People had mixed opinions on the guy. Some people found his stuff inspiring; others, not so much.

Ricci was also the guy who advanced the concept of gross credits, or GCs. For many years at Goldman, managers would judge an employee’s performance by several measures—some objective, some subjective. Most important: Was he commercial and did he bring in the business? This made up about 50 percent of the equation, and was obviously crucial to any organization whose primary purpose was to book profits. But the other half of the equation—and this is what made Goldman Sachs different from other banks for a long time—was more subjective: Was he a leader who set a good example for junior employees? Was she a culture carrier who promoted collaboration and teamwork and the values of the company? Was the person someone who had the long-term interests of the organization at heart? Could he or she at times have the foresight to turn away bad business, knowing it would be detrimental to the firm’s reputation in the long run?

Matt Ricci instituted a culture where the evaluation became far more scientific and specific: “What’s the number next to his name?” Your cumulative annual GCs became known as your “attribution” for the year. Over the years, GCs and attribution became things that people started worrying, talking, and fighting about more than stock markets and clients. It is human nature: if you are going to be measured by a number, you are going to do what you can to make sure your number is as big as possible. It was a change that would ultimately prove highly detrimental to Goldman’s culture and morale, even a decade later.

Matt Ricci was the guy who decided to transfer Michael Daffey, a morale-booster on the trading floor, to London.

It was a hugely disappointing move to everybody in the franchise, but it wasn’t completely illogical. It is an axiom in the investment banking business that the farther an office is from company headquarters, the more diluted its culture. And Goldman Sachs London, as an American bank competing with European banks, needed a shot in the arm. Management’s thinking was, if we move a major producer who embodies the culture, maybe he’ll raise London’s game. Successful people are often transferred out of the blue to Tokyo or to Hong Kong for similar reasons.