7. Trading Places

I would love to say it was easy sailing as I reached for the rudder at The Galleon Group. The truth is that I navigated directly into a perfect storm.

A financial contagion began brewing after Thailand cut the peg between the Thai baht and the US dollar. I had witnessed similar situations on a smaller scale, such as the Orange County derivative scare at the end of 1994, but that was the first such scare that migrated worldwide. As we would experience years later a few times over, it would not be the last—some would argue it was only the beginning.

I wasn’t thinking about the Thai baht, nor was I focused on a hedge fund in Connecticut called Long Term Capital Management. I was unaware that a butterfly flapping its wings in Asia could create a tsunami on East 57th Street in New York City. I managed the derivative exposure for the main Galleon portfolio and traded my smaller book. As I had never experienced a losing year, I felt impervious as I began the new chapter of my trading career. I would soon learn that the facilitation skills I practiced at Morgan Stanley weren’t helpful on the buy-side, where you eat what you kill.

I enjoyed life as a customer; Morgan Stanley, Goldman Sachs, First Boston, Deutsche Bank, and other top-tier firms vied for our business, and their effort assumed many forms, including idea generation, capital commitment, expensive dinners, late nights at strip clubs, and eventually, lavish trips to the Super Bowl. Galleon’s assets under management ballooned to billions of dollars, and there was a lot of money being tossed around. Everyone on the Street wanted a slice of that pie.

Brokers stumbled over each other to make a positive impression. Yankee tickets weren’t enough; they had to be box seats. Dinner? You name it; anywhere, any time. Can’t get a ticket to a concert? Not a problem; someone always had a connection to the front row.

Those were the perks, but the other side wasn’t as pleasant. I was surrounded by seasoned professionals, but I struggled with the new process. I no longer had customer order flow to lean against or a well-heeled franchise to tap into. It was a completely different dynamic, and one for which I was entirely unprepared.

There were about eight of us sitting in the main room. Raj sat in an office behind a glass partition within shouting distance from Gary, who ran the trading operation and executed orders on his behalf, as well as his own trades. There were five partners in total and a handful of traders, but I was the only trader with an options background, and I viewed that as my meal ticket within the organization.

I toggled between my two roles, focusing primarily on the derivative portfolio for the flagship fund. Gary, Raj, and the other partners assimilated information at a furious pace and asked me to leverage their ideas through the options market for incremental performance. I would ask, “What’s your price target and time horizon?” and suggested strategies that maximized reward relative to the assumed risk. We didn’t just trade calls and puts; we crafted complex options strategies such as butterfly spreads and strangles that optimized volatility and captured catalysts.

The more time I spent on the main fund derivative exposure, the less I focused on trading my own account, which was a decision that I came to regret. While there was tangible value to the speculative bets and hedging strategies I implemented, the losses in my personal portfolio piled up as the financial contagion spread. All of a sudden, my job security was in the hands of a select few whom I barely knew. There would be no bonus—in fact, I was told that I was lucky to have a job.

Reality Check

It was Memorial Day 1998 and despite my struggles at Galleon, I was still committed to having fun when I wasn’t trying to make money. I didn’t need a car in NYC, but when the summer rolled around, I wanted transportation to and from my summer rental in the Hamptons. A blue Porsche convertible seemed like a fitting ride given my professional trajectory.

When I arrived in Southampton the first night of the summer, I ducked into a nightclub called The Tavern. I knew the folks who ran the joint and didn’t make eye contact with the hoards of people waiting on line as the bouncer ushered me past the crowd. I didn’t mean any disrespect, but I’m certain it was interpreted as such.

While standing at the inside bar, I felt a “flick” against the back of my right ear and spun around to find one of my closest friends, Joel Pollack, standing there with a goofy grin on his face. Joel and I had met years earlier when we were neighbors in New York City, and we eventually ran a share house in Fire Island before switching to the more upscale Hampton scene. He was what my grandfather called “one of us,” a salt of the earth guy who genuinely cared about everyone and tried to do the right thing.

The first thing Joel said to me was, “Did you get the car?” That was his way, always inquiring about others and genuinely interested in the response. We had had long conversations during the weekday nights when we walked our dogs together. He knew about the Morgan drama, and just about everything else in my life.

“Yes,” I answered. “It’s parked right across the street in front of the pizza shop.” He asked to see the car, but I didn’t want to walk back outside. “I’ll show it to you later,” I said, before losing myself in a conversation with a pretty brunette. It was the start of summer and life was good. There was work to be done; there was fun to be had.

When I left the bar a few hours later, there were police cars and fire engines for as far as the eye could see. “Great,” I thought to myself, “a sobriety checkpoint.” I wasn’t drunk, but I had had a couple of drinks; I wanted to get to my rental, where my friends were waiting to celebrate the beginning of summer. As I pulled out of the parking lot, I asked one of the police officers what happened. “Someone got killed,” he said. “Happy Memorial Day.”

I spent the next day doing the Hampton scene, the “see and be seen” thing. It wasn’t until late Sunday when a friend handed me his phone and a voice on the other end said, “Hey man, I’m sorry about Joel” when I realized what had happened.

One week after his 34th birthday, Joel Pollack was dead. I later learned that a drunk driver struck him as he stood on the side of the road, directly in front of where my new car was parked. There was no way to know if he ventured across the street to see the car or if it was simply a coincidence. All I knew is that one of my “brothers” was gone, and I learned a valuable lesson.

There’s loss, and there’s loss. While Joel was the first of my friends to be taken before his time, he unfortunately would not be the last.

The Beginning of the Bubble

As the world digested the Asian Contagion, former Federal Reserve Chairman Alan Greenspan introduced historic fiscal and monetary stimuli. That set in motion a series of decisions that planted the seeds of the dot.com bubble and would eventually evolve into a multitude of booms and busts the following decade.

David Slaine resigned from Morgan Stanley and joined Galleon as a partner in 1998, and we sat next to each other as Galleon became one of the most powerful funds on Wall Street. I wasn’t privy to the information that flowed through the phone lines, but I saw the positions as they were initiated and had the opportunity to tag along if I chose to do so.

Following the script I wrote at Morgan and Harry’s before that, I did whatever I could to add value. This time, however, it didn’t take the form of a salad—I had experience and a skill-set, and resolved myself to be a productive part of the money-making machine.

I wasn’t a partner, which was a fact that I was reminded of often. In one of our morning meetings, I communicated that Russia was imploding—it had caught the “financial flu” from Thailand—and warned that it could infect US financial markets, a thought initially dismissed by the partners. When I pressed the issue, citing the derivative machination that tied the world together, urging them to pay attention to the systemic risks, I was verbally undressed in front of the entire firm. A few days later, stateside markets were consumed by the contagion, and stocks cascaded lower.

Applied Materials, a semiconductor capital equipment company that was one of Raj’s favorite stocks at the time—and one I had a position in—melted lower along with the rest of the market. It was a stunning experience, billions of dollars in market value evaporated, vanishing into thin air. It was an expensive lesson as well, as unforeseen forces overwhelmed my stylistic approach to risk management. All of a sudden, fundamentals and technical analysis didn’t matter. Supply overwhelmed anything that got in its way, including our Applied Materials position.

After the downdraft—and after I took sizable losses in my trading portfolio—the market rallied in response to a coordinated agenda by central banks around the world as they lowered rates and increased the money supply. Alan Greenspan was lauded as the best Federal Reserve Chairman of all time, although history would teach us that risk wasn’t destroyed, it simply changed shape and was pushed out on the time continuum. A decade later, the imbalances, cumulative still, would challenge the very existence of free market capitalism, but nobody cared at the time—investors around the world were too busy enjoying the feast before the famine.

Back to Life, Back in Reality

The capital base and information flow in that small room on East 57th Street was matched only by the size of the egos. They profited in good times and bad, coining money as I crafted derivative strategies that leveraged their ideas and information. I continued to focus the majority of my attention on the main fund, certain that it was my pathway to bigger and better things, perhaps all the way to a vaunted partnership. I knew that was where the big money was—tens if not hundreds of millions of dollars. As 1998 drew to a close, I was finally going to cash in.

If you told me while I was growing up that I would make multiple six-figures in my twenties, I would have been thrilled, but my sights were set on a bigger benchmark. I wanted to be a millionaire by the time I was 30.

Nothing else mattered: My self-worth was a function of my net worth. There were then six partners at Galleon, including David, and there was more than enough money to go around. I knew how much was up for grabs—more wealth than you can possibly imagine—and I did the math in my head. I could smell it—extreme affluence was right around the corner.

I sat down with Gary, exchanged a few pleasantries and awaited communication of my bonus. The terms of my employment were very clear, he explained. While the partners appreciated the work I did managing the derivative risk for the flagship fund—billions of dollars worth of risk—my compensation was based on the performance of my smaller trading account. That was the deal we agreed to, he said, and I should have been thankful to see the partner’s order flow, so I could tag along and personally profit.

For the second year in the row, I would receive no bonus.

Green with Envy

I’m not proud to admit this, but I began to covet while I worked at Galleon. The partners made insane money, the type of money superstar athletes and famous actors wouldn’t see in a lifetime. They were taking it home each year, facilitating lavish lifestyles with enormous homes, expansive ranches, private jets, and garages full of expensive cars. Money is intoxicating when you’re that age, and $500,000 suddenly seemed like a very small amount of money. I had entered the world of the mega-millionaires, rainmakers that set the new standard on the Street. I set my sights at joining the ranks of the Wall Street elite.

The policies introduced by Alan Greenspan kicked in and the stock market climbed the front end of the technology bubble. Fortunes were made on a daily basis as IPOs climbed hundreds of points in a single session. The eyes of the world were on Wall Street, and Galleon was hitting on all cylinders. The firm paid millions of commission dollars to the Street, and in return, they were given fat allocations on new issues.

ZING! 25,000 shares of an IPO traded $60 higher.

SHAZZAM! 30,000 shares opened $40 higher than where it was priced.

POW! An oh-by-the way “kiss” from a second-tier broker looking to get in Galleon’s good graces netted a nice six-figure sum.

It was my year, I thought. It had to be my year. As we edged toward the end of 1999, my relationship with the partners had never been better. The firm was killing it, and while the performance of my personal portfolio lagged, I had improved on the previous year. The value created by the options bets and hedges in the flagship fund spoke for itself, and my inclusion in their circle of trust was a mere formality.

Gary sat me down and my eyes began to spin like a slot machine. What would it be, a million? Two million? Three million?

“Todd,” he began, “The partners appreciated your efforts this year. You did a good job. We’re going to give you $50,000 as a token of our appreciation.”

In the context of a multibillion dollar fund and hundreds of millions of dollars in cash on hand, 50 grand felt like a slap to the face. I immediately realized that if I was going to make real money on Wall Street, I had to step out from behind the shadows. If I was going to be a serious player, I had to be a partner. I asked Gary if that was in the cards, and he told me flat out that I didn’t have what it took.

I beat myself up pretty badly after that meeting, questioning why I wasn’t good enough, asking myself why I couldn’t take that final step to stardom. It would be years later before I realized that not making partner at Galleon was the single best “failure” of my professional career.

When I left Morgan Stanley, David told me to make it count because you could only leave a firm that reputable once. The same could be said of Galleon; they were one of the top hedge funds in the world and nobody left on their own volition, but I knew what I had to do and understood what was at stake.

Once I left, that door would never be open again.