5. War Stories
If I were to pick a word that characterized 1992, it would be survival. I didn’t scale the learning curve as quickly as I would have liked, but I had a seat at the table and that had to mean something.
At Morgan Stanley, we were measured by four criteria: personal performance, departmental performance, divisional performance, and overall firm performance. If any of those elements were sub-par, it would invariably trickle down; Wall Street firms, despite their out-sized pay packages, had an uncanny knack of dangling a bigger and better carrot in front of their people.
With the recession of 1989-1991 fading in the rearview mirror, the mood on our desk was optimistic. We had a monster year, and I had made considerable progress forging professional inroads and networking with customers. When the holiday season arrived, I confidently walked into the back office. Jack was again waiting for me.
“You know,” he began, “Wall Street isn’t for everyone. You’re a good kid and people like you, but this may not be the business for you.” He paused, choosing his words carefully. “You need to think— really think—if this is something you want to pursue. If it is, you’ve got to show us something and it has to be soon.”
I tried to mask my disappointment while at the same time appear stoic.
“I’m not going to let you down,” I said, never losing eye contact. “This is where I belong, Jack. I’m not going to let you down. I’m not going to let myself down.” I waited, perhaps hoping he would say something, but he didn’t. I again spoke, this time with purpose. “I give you my word.”
He nodded to me and gestured toward the door, confirming what I already knew. For the second straight year, my total annualized compensation at one of the world’s most powerful financial institutions was a grand total of $28,000.
Settling Down and Settling In
If 1991 was the year of the salad and 1992 was my wake-up call, 1993 was when I finally found some rhythm. In addition to taking reports and relaying markets, I traded orders given to our desk by the sales force on behalf of our clients. The process was simple: If a customer wanted to buy or sell something, I executed the order with a third-party and relayed the “fill” to the salesperson who in turn, gave a report to the client. That was called agency business, and it was usually a six-to-eight minute process. If the marketplace didn’t provide liquidity at the right price, Morgan Stanley stepped in and took the other side of the trade. That was called customer facilitation.
The Morgan Stanley derivative portfolio was comprised of the aggregate positions created as a function of customer facilitation. The risk profile was broken down into several “books” and separated by industry. Jack traded the industrials, drugs, and airlines. Tommy Carden and Mark Neuberger traded technology. Various other traders, about ten in total, covered the other sectors. Two industries that weren’t covered on the desk were the financials and biotechnology. We didn’t have positions in those stocks, and I fielded that order flow and executed it on an agency basis, which is to say that I didn’t position the risk on behalf of the firm.
One afternoon, several months into 1993, the floor “fell down” on an order; they didn’t stand up to what was originally communicated and reflected to the customer. I alerted Tommy, and he told me to “put the customer up.” In other words, he told me to position the risk.
I told my broker on the floor to take the other side of the trade and listened as he slapped it on the tape. Once I got the report, our sales representative told the customer that he was “done” on his order. Tommy told me to watch the position, which effectively meant that I had my first—albeit meager—trading position at Morgan Stanley. When I traded out of it for a profit, he gave me the green light to facilitate another order. That, too, was traded for a profit.
It wasn’t much risk—50 and 100 lot orders, which, given options have a multiplier of 100, equated to 5,000 or 10,000 shares of stock, but I traded them with discipline. As the year progressed, the cumulative profits I generated for the firm grew in kind. I worked harder than I ever had before, bouncing out of bed at 5:00 a.m. each day and racing across town to my office. I wouldn’t say that I had cracked the code, but at least I knew where to look for the combination.
When 1993 came to a close, I again sat with Jack in the back room. This time he had a smile on his face as he told me my total compensation rose to $75,000. At 24 years old, I had made more money than I knew what to do with.
Changes in Latitude, Changes in Attitude
While there was still much to learn, I had secured my spot on the desk. I didn’t produce the revenue the other traders did, but I consistently contributed to the bottom line and did what I could to further our collective mission. I still made Jack salads every day, and I was more than happy to do so.
David Slaine, “Slaino,” was my big brother, Jack my father figure, and Tommy took me under his wing with increased frequency, which included taking me to see a number of Grateful Dead shows. I can’t tell you exactly how many times he and I left on the closing bell and swapped our ties for tie-dyes, but it happened on multiple occasions for a number of years. The rest of the department warmed up as well and seemed to enjoy the stories I shared on Monday mornings following a weekend full of fun. I was young then and didn’t have the responsibility of a family or mortgage payments. My priorities were making money and getting laid, in that order.
There were several regime changes while I was in the derivatives department. Chuck retired after my third year and handed the leadership baton to a younger, more quantitative risk manager. I didn’t understand the politics behind that decision, but it didn’t concern me. While Chuck gave me my shot and I remain grateful to this day, I was more concerned with self-preservation and the next rung on the money ladder.
My compensation paled in comparison to the other traders and perhaps that’s why I felt somewhat secure. In terms of bang for the buck, I was the best deal on the desk.
With time and experience, my performance gained steam, and I produced in a more meaningful manner. Every day was like an ever-changing jigsaw puzzle that fit together to form a bottom line shaped by world events and investor perception. When a customer traded one of my “names,” the order was dropped directly on my desk. I no longer had to check with Jack or Tommy; I had discretion to determine what I wanted to position on behalf of the firm and what I wanted to pass to the street. Autonomy is the ultimate sign of respect on Wall Street, and once that arrived the money wasn’t far behind.
At the end of 1994, management pulled me in back and informed me my total compensation was $150,000. Drinks were on me.
The Moment of Truth
Things had really started to come together. I built the bank’s pad into one of the biggest on the Street, and word quickly spread about the kid from Morgan with steely nerves and a penchant for making aggressive markets. If someone had something to do in the banking sector, I was the call. I traded huge positions, took care of my customers, and plunked money into Mother Morgan’s till on a consistent basis.
Keefe Bruyette was the biggest player in the financial sector and the crown jewel of the customer base that trafficked in banking stocks. I worked hard to impress their head trader and before long, secured a nice chunk of their order flow. Nationsbank, Chemical Bank, Chase Manhattan Bank—you name it, we traded it. I was only 26 years old, and I had already established myself as a customer-friendly producer. If you wanted to trade a bank, you came to Morgan and knew you would get taken care of.
The First Interstate position began like any other. The stock was trading around $70 when Keefe’s head trader asked Kim Dispigna, his Morgan Stanley institutional salesperson, for a market in the Jan par leaps (January 100 call options that gave the owner the right, but not the obligation, to buy First Interstate at $70 until the third Friday of the following January). I checked the floor market and found that the options were three dollars wide and 50 up, meaning the customer could buy or sell 50 contracts (5,000 shares of common stock) on either side of an illiquid market.
“What odd-lots,” I seethed to myself as I tightened the market and increased the size tenfold, meaning that I would allow the customer the option to buy or sell 500 options—the equivalent of 50,000 shares of stock—at a better price than the floor market. “Whatever he needs,” I told Kim. “Just get the order.”
Keefe took me on my offer, and then continued to buy upside exposure over the course of a few days. Before long, we had both accumulated a large position; I was short the call options (which gave my customer the right to purchase stock), and I had bought common stock and other call options to hedge that risk. The customer became increasingly aggressive, wanting to buy more and more call options, and I had trouble keeping up. Other traders on the floor wouldn’t sell any more calls, and I was the only source of liquidity.
Finally, after several weeks of that daily dance, the customer asked what the position limit was.
“8,500 contracts,” I replied. “That’s as many contracts as he’s allowed to buy, according to the exchange.” We were almost there; 8,500 call options gave the customer the right, but not the obligation, to purchase 850,000 shares of common stock at the strike price, which was $70, until they expired the following January. Given the stock was trading well above $100, those calls, some $30 “in the money,” might as well have been straight stock.
To say that I was involved in First Interstate is like saying that Google is involved in the Internet. If anyone on Wall Street had something to do in the name, they knew Morgan Stanley was the call. I had a massive position—short the long-term calls to my customer and long everything under the sun, including near-term calls and a boatload of stock, against them. I assumed the customer knew something—there was persistent chatter in the marketplace that First Interstate was a takeover candidate—and I intended to go along for the ride.
I traded that monster for months. When I liked the broader market, I pressed my upside bet and bought more stock against my position; at times, I carried upward of 150,000 shares of net long exposure in the position, which was sizable given the underlying value of the stock. When I turned cautious on the market, I shorted other banks against my position, but I never wavered from carrying a considerable upside bet in First Interstate.
Everyone in the room knew the story, and I was sitting on top of The Takeover Express, waiting for it to pull into the Promised Land. The position carried with it incredible stress, but I had a razor sharp edge and the support of management, who had signed off on the risk. I was in the proverbial zone.
Cuts Like a Knife
It was a slow afternoon when Kim’s voice sliced through the quiet room.
I assumed she was kidding, as she was apt to do. For all the pressure we dealt with each day, for the billions of dollars in risk on our balance sheet at any given time, there was a collegiate atmosphere on the trading floor. That too would change, as would the mainstream perception of the industry.
I looked at my screen, not bothering to call my floor broker to see what the market was. “There’s 50 offered at 23 1/2, I’ll make it 500 (50,000 shares of stock). Whadaya wanna do?” I said, calling her bluff.
“He needs a two-sided market,” she shot back, looking for a bid to see where her customer could sell his call options; the look on her face told me she wasn’t joking.
“Really?”
“Yeah.”
I measured her; I was no longer smiling. “21 1/2-23 1/2 500 up,” I offered with a slight crack in my voice.
“He’ll sell ya 500 at 1/2, and he’s got more behind it.”
I’m not sure I breathed for the next several minutes. I slapped 500 contracts on the tape and called my floor broker to sell some of my underlying exposure. Unfortunately, every option trader on the floor knew the size of my customer’s position, and the stock was a dollar lower before I could blink. The closing bell was an hour away, and an uneventful session suddenly became the most important day of my career.
“Keep reflecting bids,” Kim said. “I think he wants to get done today.”
I needed to make sales to adjust my exposure and asked Kim to ask Keefe if I could “get in shape.” That’s how business was done; I took risk on behalf of my customer to facilitate his order flow, and with no “working order” in hand, I could sell as much stock as I wanted. I assumed that he wanted to unload the rest of his exposure, and I began to sell stock in anticipation of that trade. If he was going to sell 8,000 call options—which represented 800,000 shares—I knew I would have to buy most of them.
With 15 minutes left in the session, after a furious series of transactions, I yelled, “Figure bid for 8,000!”
I needed Keefe to sell me the rest of his position so I could unwind the remainder of my risk. I watched Kim as she spoke to their head trader, clenching my jaw as I pressed the phone tightly against my ear. My floor broker was at the ready; the order began to form at my lips.
“Great bid,” she said. “He’s gonna hold tight and finish up in the morning.”
Sleepless in Manhattan
I was the first person on the trading floor the next day for no other reason than I hadn’t been able to sleep. At 6:00 a.m., the bank trader from the listed stock desk walked over with a big grin on his face and said, “You’re still involved in Letter I, right?”
“Yeah…?”
“You’re…you’re still long it, right? Please tell me you’re still long it?”
My mouth opened but nothing came out, and he turned and walked away without saying a word. I grabbed the Journal, headed to the men’s room and stepped into the far stall. Three minutes later, the entire trading floor erupted with a boisterous cheer. I’m not sure how long I sat there but it didn’t matter. I desperately wanted to stay. My eyes were glued to the paper, but I couldn’t tell you a thing that it said.
Shit.
I took several deep, labored breaths, left the Journal on the floor and stepped out of the bathroom. You would have thought that I hit a walk-off homerun in the bottom of the ninth inning and my teammates were surrounding home plate at Yankee Stadium. Salesmen patted me on the back, traders gave me the thumbs up, and friends from around the Street left messages to congratulate me. The head of my department walked up with a sparkle in his eye and almost hugged me.
“Way to go, Toddo! Way to stick it out!”
There was only one problem; after selling the majority of my stock in anticipation of buying back the remaining 8,000 calls from the customer, I was short—very short—betting the stock would decline and I would be able to cover the rest of my position for a profit. I was screwed—massively, totally, and completely screwed. The stock was trading 35 points higher, and what would have been a sizable seven-figure win quickly morphed into a multiple-seven figure loss.
Wells Fargo was in talks with First Interstate and the deal evidently fell apart, which may have been the reason Keefe tried to sell his position. I didn’t know and it didn’t matter; Wells Fargo made a hostile bid, which at the time was unheard of in the banking sector, and the stock was on a moon shot. To make matters worse, Morgan Stanley was the banker on the deal, and I was restricted from trading either stock. My position was taken from me on the opening print; not only was I screwed—I didn’t have the opportunity to unscrew myself.
I didn’t move from my seat all day. I didn’t go to the bathroom. I didn’t eat lunch. I didn’t make outgoing calls. I didn’t do anything but stare at the flickering “I” that continued to wink and blink and taunt me. I was so flummoxed that when a salesman gave me an order in First Interstate—I was allowed to execute, I just couldn’t position—I made a $100,000 error that the firm had to eat. It was a disaster spiraling out of control, and somewhere deep within me, I remember feeling a peculiar twinge, like I had somehow snuck into Morgan Stanley and reality finally caught up to me.
Around 7:00 p.m., Ralph Reynolds, the head of my department, called me into his office. Here we go, I thought, the end of my world as I knew it. Someone had once told me that on Wall Street, you’re only as good as your last trade. I assumed that spoke to the general direction of performance, not the literal interpretation that suddenly sank in.
I was so close to the cash register, yet after a single trade, my career was over. I would have banked millions of dollars if the deal was announced a day earlier. Instead, after what may have been an eight-figure overnight swing, I was going to be a sacrificial lamb. My self-esteem was shattered as I prepared myself for the inevitable news.
I explained the sequence of events to Ralph as he stared deep into my eyes. My trading account was still substantially higher for the year—despite the loss, I was firmly in the black—but I was certain it wouldn’t matter. He measured me as if he was judging my soul, and after a long pause, he spoke.
“Go home, get some rest, and come ready to play tomorrow.”
He wasn’t happy about the loss, but he wasn’t going to spike my career over it. The mechanics of my swing, he decided, outweighed the results of that particular at-bat. It’s a hell of a thing to have your livelihood hang in the balance of one man’s mood.
I walked out of his office, took the elevator downstairs, exited Morgan Stanley’s corporate headquarters, and turned the corner. There, as I leaned against the building across the street, surrounded by the denizens of tourists in Times Square who made their way to the theater, I began to laugh. Within a few seconds, tears streamed down the sides of my cheeks.
The immense pressure, the monstrous swings, the incredible stakes, the thin line between success and failure….
Welcome to Wall Street, I thought to myself; welcome to the machine.