6. An Officer and a Gentleman
Following the Letter I fiasco, management watched the way I traded like a baseball manager watches a slugger after he’s been hit in the head by a fastball. It took some time for me to regain my confidence, but I again found my stroke after connecting on a few solid trades.
I never understood if ADD people made good traders or if the constant assimilation of a sensory overload environment made traders ADD. Either way, Letter I stopped taunting me, and life again assumed a sense of normalcy. That was the way the business worked: make money and all was forgiven.
There used to be an ingrained ethos on Wall Street. I’m not talking about the country club mindset or the opaque engineering that would ultimately befall the industry; I’m referring to the day-to-day operations and the manner in which business was transacted. The phone lines weren’t taped when I first started at Morgan Stanley. Back then, it was just like Ruby said: All you had was your name and your word.
To quote Lou Manheim, “The main thing about money, Bud, is that it makes you do things you don’t want to do.” The modern-day financial crisis has shed light on the ramifications of the bad behavior that brought the cumulative imbalances to bear. While the spectrum of culpability extended from overleveraged consumers to the institutions that financially engineered the markets to policymakers that were complicit by acceptance, Wall Street acted as the enabler; in the end, they should have known better.
As I traversed my newfound profession in the early ’90s, however, I believed in what I did. In my mind, I was greasing the wheels of capitalism and performing a critical function that facilitated free markets. The disparity in compensation between a trader and, say, a teacher was— and remains—unacceptable. In my mid-twenties, I had never stopped to think about that, or the eventual ramifications of the largesse that was evolving. Once I tasted big money, I was addicted to swallowing more and when bonus season arrived at the end of the year, my compensation again doubled to $300,000. I was also promoted, becoming one of the youngest vice-presidents in the firm at the age of 26.
I couldn’t help notice the symmetry. At age 13, I was standing behind a counter serving bagels to affluent classmates from the other side of town. Thirteen years later, I could afford to buy the bagel store.
Todd A. Harrison, Vice-President, Global Equity Derivatives, Morgan Stanley.
My business card became my favorite possession. That was how I was programmed—money and status defined my level of success. I didn’t believe that I was arrogant or cocky, but in hindsight, my sensibilities were surely skewed.
I was consumed by the material possessions and conspicuous consumption that surrounded me, and did the type of things you might expect from a twenty-something who made a lot of money. I summered in the Hamptons, treated myself to a few Porsches, and migrated from one girlfriend to the next, keeping an eye out for a wife but not looking particularly hard. My grandmother often told me, “You won’t catch a clean fish in dirty waters.” But I didn’t listen. To be honest, I didn’t care; I was too busy having fun to worry about finding happiness.
Inside the office, I noticed a subtle shift in the general perception. Older salesmen and traders who were passed over for promotion adopted a different attitude. The mornings I rumbled in with a hangover were no longer considered cute or funny. I was an officer of the firm who took home a larger slice of the bonus pie; it was suddenly considered unprofessional, and resentment began to percolate.
That was my first real taste of Morgan Stanley politics; the nasty maneuvering that exists in most large organizations. I knew that if I continued to produce, the critics would be silenced. My innocence was gone, but it was replaced with power, and that was a trade I was willing to make.
After years of reaching for the brass ring, my grasp around it had firmed and I liked the way it felt. I upgraded my wardrobe, dined at the finest restaurants, paid back my college loans, and sent my family on fancy vacations. Life was good, or so I thought, as I had the types of things I was conditioned to aspire to.
Perhaps I was blinded by the dollar signs, but it didn’t register. As 1996 rolled through, I was certain that my best days were directly ahead.
Welcome to the Jungle
As I climbed the Morgan Stanley ranks, I took tremendous pride in what I did and how I did it. The equity floor was a financial juggernaut, and the derivative desk was at the center of it all. We all wore MORGAN across our chest like a badge of honor. It was us against Goldman Sachs, the two titans on the Street in a rivalry that made the Yanks and Red Sox look like high school sweethearts.
In the mid-nineties, “off-board” derivatives were created, and that opened the door to an entirely new revenue stream for Wall Street firms. Years earlier, when stocks and bonds became too “traditional,” options and futures were created as vehicles of trade. Eventually, exotic swaps and other instruments were introduced as the next tier of professional products.
Morgan Stanley was one of the first firms to price over-the-counter derivative products, and we would win business by 30, 40, or 50 volatility points (a subjective assignment in the valuation model). Customers “collared” their stock (bought puts and sold calls to lock in a price level) and laid off the risk without any footprints on an exchange; we gladly facilitated the orders, and we made a lot of money doing it.
Technology companies awoke to write “naked off-board puts” in lieu of stock buy-backs. If the short put options they wrote (which gave the company the right to buy their stock at a particular strike price) were exercised, the cost basis was cheaper than it would have been to buy stock in the open market. If not, the premium expired worthless, and the income slipped through a tax-free loophole.
Microsoft did it. So did Dell. Intel too. In time, as other firms entered the marketplace, increasingly more products were created, one more complex than the next. Wall Street had an uncanny ability to continually recreate and repackage risk, and sell that risk to customer segments that were eager to differentiate returns.
While my career path was on solid footing, I saw bad things happen to good people during the regime changes. The steady stalwarts—the guys who came to work and did their job each day—were passed over for promotion in favor of the politically savvy professionals who knew how to play the game. I learned a lot during those years, particularly when I was perceived as a threat to the establishment. That never made much sense to me, since I was a producer on the desk and an ambassador of our institution.
I was asked to recruit on behalf of the firm. They sent me to UCLA and North Carolina, put me up in swanky hotels, and told me to interview college coeds to weed out the best in breed for the privilege to enter our training program. Morgan’s blue blood flowed through my veins, and I did what I could to further our cause. I was a lifer, or so I thought at the time. In hindsight, I was naïve.
Agendas abound when money’s around, and they’re not always consistent with the best interests of the corporate mandate. I never kissed ass or sucked up, and that didn’t sit well with Mark Neuberger, the man who deftly navigated the changing landscape to become the managing director of the options department in 1996.
After the second management shakeup of my tenure at Morgan Stanley, Mark was slated to run the equity derivative trading operation. He stepped over a lot of good people to get there, including Jack Skiba, and unfortunately, his plans didn’t include an up-and-comer with plans of his own.
When several high profile traders defected to other firms, Mark was thrown into the role and eager to put his thumbprint on the operation. He assumed trading ownership of the most active tech stocks such as Dell, Intel, Microsoft, and Cisco—the positions with massive over-the-counter derivative positions and, by extension, the largest P&L (profit and loss).
His strategy was simple: He wanted to trade the most liquid names trafficked by the largest customers and leave the tougher trades for others to navigate. There were times when one of our customers entered an order in an illiquid stock, and Mark instructed me to facilitate the transaction.
“One firm-firm,” he said as he passed the risk, knowing that my P&L would bear the brunt of the damage. It was a delicate balance. To get the “easy” trades, we needed to absorb the more difficult risk, but his agenda was clear, even to me. Sometimes I facilitated the orders, and other times I refused. One time, when I took down a sizable chunk of call options that immediately moved against me for a six-figure loss, he laughed and said, “There it goes!”
After a few months of friction, I was summoned to the human resources department high atop our new tower at 1585 Broadway. When I walked into the conference room, several people were seated around a large oak table. Mark Neuberger sat at the far end.
I was informed that I was being put on probation for conduct unbecoming a Morgan Stanley professional. I studied the faces in the room, and when my eyes met Mark and he looked down at the table, I knew precisely what was happening. I had heard about ambushes like that, but I hadn’t seen it coming. A few months later, when I was handed my annual review, there, on a single piece of paper, it said that the other desk heads—the men who ran the listed and over-the-counter operations—didn’t trust me.
Odd, I thought. Jon Olesky, the managing director of the listed stock desk, was in charge of recruiting and personally picked me to represent the firm on the trips to North Carolina and UCLA. David Slaine, who ran the OTC desk, was my big brother in the firm and one of my closest friends. It was a power struggle pure and simple, and I interpreted this to mean that Mark didn’t want me around to challenge his authority.
I protested to Tom Clark, who was one wrung on the management ladder above Mark, and was told that I shouldn’t rock the boat. The firm had just sorted through a major shakeup and apparently, there was no room for controversy. He asked me to sign my review, as all employees were required to do. He wanted me to take one for the team. I was upset but didn’t want to leave the only firm I had ever worked for.
I didn’t want to leave my brothers.
I didn’t want to leave the cash register.
The Good Ship
Slaino didn’t like what he was seeing; he knew that I was being sandbagged, but since he headed a different department—and given the politics surrounding the defections—his protests fell on deaf ears. I refused to sign the review. I knew that as soon as I put pen to paper, my days at Mother Morgan would be numbered. Seven years, I thought to myself. I wasn’t going out like that.
A few months earlier, Raj Rajratanam and Gary Rosenbach, former partners at Needham & Company, had created a powerful new hedge fund. The Galleon Group opened for business with roughly $500 million under management, and they were the talk of the town. Slaino and Gary were friendly after spending years on the Street together, and David made the introduction. Gary was likeable enough when we first spoke and soon thereafter, I began to facilitate some of his options trades. The more money we made together, the more frequent the conversations became and the more I began to think about a new and different career path.
I didn’t want to leave Morgan, but I was fighting a losing battle. My relationship with Neuberger had deteriorated to a nonconversational place, and as he was my direct boss, I knew that he held the keys to my future. Every few days, Tom Clark called me into his office and asked me to sign the review, and each time I declined. I couldn’t put it off forever.
With David’s endorsement, I began having conversations with Galleon about moving over to their shop. They didn’t have a derivative specialist in house, and it felt like a natural fit. As pressure continued to build inside Morgan Stanley, I found myself delving deeper into the opportunity with increased frequency. I didn’t know much about hedge funds other than they were the customers and the potential existed to make a lot—and I mean a lot—of money.
After several meetings, we agreed that I would join The Galleon Group as the managing director of derivatives. I would receive a token salary, help shape the derivative exposure for the main fund, and derive the bulk of my compensation from a smaller portfolio that I would oversee.
I walked into Tom Clark’s office and shut the door behind me. I expressed my reservations about the falsities contained in the review, and he assured me that I would be taken care of.
“Will I really be taken care of?” I asked.
“You have my word,” he said, pushing the document in front of me as he uncapped his pen.
I signed the review, putting my better judgment aside, and when bonus time arrived, I was paid $500,000. I thanked management and waited patiently for the check to clear. Once it did, I walked into Tom’s office and tendered my resignation.
They were stuck—not only had they just paid half a million dollars to a departing trader, I was leaving to work for one of the biggest new hedge funds on the Street, which immediately made them one of Morgan Stanley’s prized targets.
Vikram Pandit, who would later become CEO of Citigroup, ran the Morgan Stanley equity division at the time and called me to his office to offer his congratulations. He said if there was anything I needed to please let him know. I didn’t even know that he knew my name; it was certainly the first time he expressed an interest in my well-being.
I gathered my belongings and said good-bye to the only professional family I ever knew. I felt like I out-traded the best desk on Wall Street; the power shoe was on the other foot, and I liked the way it fit.
I flew to Florida to surprise my grandparents and took them to the Lexus dealership, where I told them to pick out the car of their dreams. Ruby had always wanted a Lexus, and the look on his face was priceless; that type of story gets a lot of mileage in Boca Raton. I treated myself to a few watches; when I couldn’t decide between three high-end brands, I bought one of each. I ran around New York City and the Hamptons with a large group of friends and footed the bills for everyone involved. Travel was first class, and the hotels were the best in breed; I even qualified for one of those snazzy American Express black cards, which actually meant something to me at the time.
It was as if a magical money tree blossomed overhead and all I had to do was reach higher if I wanted—or needed—more.