A cautionary tale for our times: The fictional account of one hedge fund manager’s decline and fall from grace – as recorded by his faithful amanuensis, Richard Greensted
Chilling at the CC lounge 1/16/09
Theres quite a buzz in the CC Lounge today. Citi trading at under 4 (I shorted C. at 26 at the beginning of May 08 I wonder if they ever closed that trade?), BofA sucking up more taxpayer dollars after finding something rather nasty in the Merrill woodshed, Bernie Madoff redefining the meaning of alternative investment strategies: it certainly gets the blood flowing.
Up here, away from the action, there are about ten of us who had some connection with the market. You have your typical mortgage broking scammers, loan sharks, a few boiler room refugees, even a corporate treasurer who got a little too personally involved in the company cashflow we all sit around and talk tactics, swap war stories and generally blow smoke up each others fundaments. Of course, Im the most famous of the lot, and they all tend to look up to me. I made it to the front page of the Journal (twice) and Im told there was quite an interesting piece about me somewhere in the FT. Plus, I fully expect to beat the rap.
What was more impressive was, when the Madoff story broke, some young cub from the Journal called me. After a bit of chitchat about how I was getting on at the farm, he asked me about Ponzi schemes and similar scams. Move over Leeson – clearly, I am now the worlds leading expert on financial fraud. Problem is, we both got caught. The real experts are still doing it every day, rather than talking to journalists from the comfort of the communal lounge at one of the Massachusetts Governors guest homes.
The CC correctional center is surprisingly acceptable. Im classed as a Level 3 inmate, which means they reckon Im unlikely to stab anyone to death, or even give them a paper cut. Originally, they thought of sending me to a secure hospital unit, on account of my apparently irrational behavior after my arrest, but Ive clearly become more rational, although theyre not keen on letting me out of the facility. They call me an RTB restricted to base although I gather it also stands for real trying bastard. Charming.
Technically, Ive done nothing wrong yet. I am here under preventive detention, which basically means that there is a serious risk of me running away if they let me out before the trial starts. Apparently, when they found an overnight case packed with my clothes and a hundred grand cash, they thought I might be planning a long vacation. The truth is, most hedge fund managers take the same precautions, just in case it all goes FUBAR.
The guys were pretty excited by the Journal call. To be honest, so was I. It means The Street hasnt forgotten about me just yet. Itll happen soon enough, the next time some wannabe big-time trader tries to corner the market in pork bellies or goji berries. Ever since the Hunt brothers and Silver Thursday, guys who try to do that get burned. I just wish Id read the manual.
I havent always got on with the press. When we were right in the middle of the so-called butter money affair, I was getting swamped with calls from every journalist with even a passing interest in financial markets. They can ask the dumbest questions and then expect an intelligent answer that fills in all the gaps in their knowledge for free.
I wanted to reach for my revolver every time I was asked the question: So what differentiates an alternative fund manager from a more traditional institutional investor?
Heres the real answer:
Were paid more.
We wear better clothes.
Our offices are near to the best restaurants and we can always get a table.
We can charge for country club membership as a necessary business expense.
Our first instinct is to charter a jet.
We make up the rules as we go along.
The word transparency has no place in our business model.
We can call our firm something really stupid (e.g. Maverick, Cerberus) and get away with it.
Regulators have absolutely no understanding of what we actually do.
Objective valuation is a contradiction in terms.
Black AmEx cards do not impress us.
Every prop trader on Wall Street dreams of running their own hedge fund.
And, last but certainly not least, all the above means that we are more likely to end up in correctional facilities.
I dont blame you if you are thinking, Who is that Larry Podolsky? What did he do? The name is vaguely familiar, but So much has happened since I was escorted from the office on September 16, 2008 (just as the Fed was pumping USD85bn into AIG, which I think puts my minor transgressions into perspective), that it would be easy to have forgotten my fifteen minutes of fame.
I always wanted to hit it big, but this was not exactly what I had planned. Butter money a description I detest, but the media thought it highly amusing was a great idea, but something got lost in the translation from concept to reality. I still think it could work. But probably not with my involvement
All that will come out at the trial. We shall have a good debate about the scheme, and what I did and didnt do, and then I shall probably come back here, maybe even to the same room (it has en suite, which is a nice touch). Because, as you and I, the Journal, the FT, Bloomberg and, just possibly, the SEC, all know, I am as guilty as all get out. The only thing Im going to be arguing about is how much it matters. OK, a lot of money went missing, but these guys could afford to take the hit. I wasnt milking little old ladies or skimming the US taxpayer. And, as I shall testify, I was only borrowing the money. I fully intended to pay it all back.
American Dream 1/19/09
One of the many things that differentiates me from all the losers in this place is that I am not troubled by notions of guilt or innocence. Most of them have some compelling excuses for their own shortcomings, and spend hours either justifying what they did or denying any wrongdoing. It was all a big misunderstanding, is a popular bleat. Yeah right you just happened to find that wedge of cash in your checking account and decided to spend it rather than return it. Get on the bus, Gus. The jury didnt believe you, and neither do I.
My case, however, is different. Since when was it a crime to try and make your clients a truckload of money? Because, ultimately, thats what this is all about. Strip out the problems with documentation, unreported trades, and a little bit of creative accounting, and what youve really got here is a genuine effort to make everyone richer than they were when they started. Isnt that the bedrock of the American dream?
Im having trouble getting my lawyer to understand this. He figures my best chance is to show remorse, admitting to errors of judgment and a loss of perspective. Excuse me? You look at some of the positions I took, the calls I made, and you will see that I was one of the few winners over 07/08. John Paulson may have got the headlines, but I wasnt far behind, if only Id been allowed to keep going.
No mistake, we all followed some cold trails. I was absolutely convinced that the Fed would rescue Lehman (as was Dick Fuld, judging by the look on his face after the firm was allowed to collapse). I also couldnt believe that a French bank could cause so much mayhem in the US capital markets, as BNP Paribas did when it launched its liquidity evaporation Scud missile on August 9, 2007, leading to a near-400 point fall in the Dow. Zut alors!
But we are where we are. Im stuck in the CC with a bunch of whining losers who have no idea of what it really takes to be a winner. I have a lawyer who is fatally pessimistic, even as he is sucking money out of my account. My former business partners continue to maintain that I was acting alone (something they didnt complain about when I was booking profits) and have formed a queue to testify about my character flaws.
Things could be worse. As far as I know, my boats have not been impounded and my wine collection is safe. I wonder if I can say the same about all those tropical fish in the reception area at our offices. I hope they got fed properly and found a good home (not at an investment bank, where theyd probably get eaten alive with chopsticks by uncouth prop traders).
I do need to set the record straight, starting now. Thanks to my buddy Richard Greensted (the finest writer of his generation, hes told me to say), I have put together assorted jottings, notes, e-mails and diary entries to come up with a journal of what happened to me, the markets and Curveball Capital. I will go back to Day Zero that fateful day in February 2007 when the market chose to ignore all the signs about sub-prime and merrily went about its business of buying overpriced stocks. O frabjous day! Callooh! Callay!
The Siamese Connection 1/30/09
3 January 2007: DJIA 12474; Thai Baht/USD exchange rate: 35.45
Rule One: Never listen to your broker when he says, I have a great idea. Brokers are not paid to have great ideas. They are not smart enough to have great ideas. They exist to do what you want them to do, and skim off a healthy slice of commission for the privilege. Look at it logically. When did you last hear a broker saying, Thats a dumb idea? They dont try and stop you when you cut some arbitrage deal involving Sudanese muni bonds and Icelandic wind farm debt. Great, they say. Thats great. In the brokerage world, everything is great, as long as youre trading with them.
Take Stanley. Stanley has a view on everything: whos buying what, where the hot money is headed, who is losing the plot, all that sort of stuff. Now, he is a buddy and hes my main man at Bear, where we do most of our business, but I value his opinions about as much as the output of a government statistician.
Sure, Stanley fulfils some other vital functions for me. We go fishing for marlin, spend some time at his condo in Cancun, get a private jet to see the Lakers, Superbowl tickets, et cetera et cetera. Its a very symbiotic relationship: I pay him a ton of bro, and he pays me back with his unique market insights and some discreet excursions. Nothing ostentatious like the eighties, though all very low key and understated.
Today is no different. Stanley has an idea. He has a friend who works in Bangkok how do you get that gig? and he says that the Thai economy is just about to dematerialise. The rice harvest tanked (who said global warming did nobody any good?), the government, military and royal family are all at each others throats, and sex tourists are going elsewhere to get their rocks off with lady boys. As Stanley said: Time to sell the hell out of the Thai Baht.
So heres one of the essential conundrums of the active trader. Do I run off to my analysts, tell them to work up a full-blown report on the Thai economy and the recent history of the Baht, study and refine the document before presenting it to the investment committee and then wait for a green light or do I take the word of some guy who is a friend of a friend who might, just might, know more about Thailand than the man who washes pots at my neighbourhood restaurant? Its a constant challenge, balancing these conflicting demands.
I should, of course, follow Rule One (and Rule Two, which is not to pay attention to friends of Stanleys or any other broker). But life is never that simple. Truth is, I just happen to know that we have a pile of client cash sitting around that isnt sweating as much as it should, and our performance numbers could do with some fine-tuning so what could be better than a little leftfield excursion into the Thai currency market?
The investment committee (which I chair) is too busy to be troubled by such minor tactical considerations so, two hundred and fifty million bucks later ah, the joys of leverage! – we have made a serious dent in the Baht. Caroline, our receptionist, comes up to me and says: Hey, Larry, I hear youre selling the hell out of the Thai Baht. News travels fast. Even Bloomberg doesnt have the story yet. Why? I stall. Because were going on our honeymoon to Thailand and I want to know when to buy the currency.
Honeymoon? I didnt even know she was engaged. I think I hide my disappointment well. I was working up the courage to ask her if she was available clearly no point now. A pity, as she has a good rack and great undercarriage. But a married receptionist? That wont do our image any good at all. Clients like to think they have a chance.
After I have dealt with that news, its back to the desk and more screen-watching. We like big, flat-screen monitors that fold around you like the inside of a hi-tech gun turret. I personally have four screens, all flashing constantly as prices change and old news makes way for new. But there is only so much data a brain can process, and sometimes you need to go and sit somewhere quiet where there isnt anything more taxing to watch than the firms rather impressive tropical fish collection.
Some of those fish have been at the firm since it began or more likely someone just quietly replaces them when they die so that nobody notices and gets too upset. Some of the women can get a bit emo about stuff like that. Personally, I have managed not to get too attached to any of them.
I, too, have been with Curveball Capital from day one. The fish and I took up residence on the same day, along with my three business partners, a secretary and a guy called Bohdan who looked after all the technology. That was six years ago, when making double-digit returns was as easy as hitting a cows rump with a banjo. Clients lined up on the sidewalk to get a piece of the action. We raised a billion dollars in eighteen months. When Goldman Sachs called, we thought wed died and gone to hedgie heaven. (Typical Goldman: they never did invest. They just wanted to find out what we were up to. No imagination.)
Ive been doing the same thing for all of those six years managing the money. Nowadays, of course, I have a few rocket scientists and brain surgeons to help me, as well as a black computer the size of Milwaukee that crouches menacingly on a separate floor all by itself. Bohdan is still with us and, when he isnt trying to get into the knickers of any woman with a pulse in our office, he looks after these monstrous boxes. He refers to them as Matka, which apparently means mother ship in Ukrainian.
I shall miss Bohdan and the fish. We had a board meeting a week ago and formally endorsed our plan to open up in London. Its where all the action is. Boston, frankly, is on its last legs. Bostonians all look and act as if they have a giant dill pickle stuck up their fundament, and the money management industry is no different. Mention CDOs squared to a Boston investor and they look at you as if youd just let off gas and lit it – in front of their grandmother.
London is different. Everything is so cool over there and the financial community is much more sophisticated. They are not going to need educating on the merits of leverage, shorting, and all the other stuff that hurts the brains of our Boston brethren. We have a target a billion from UK investors by 2010. Personally, I think thats going to be no stretch at all. I probably wont even need to work five days a week. I hear there are some pretty good golf courses over there.
Trailer Park Troubles 2/6/09
6 February 2007: HSBC GBP9.31; DJIA Close: 12,207
I couldnt take Stanleys call this morning. I was in a meeting, trying to explain what we actually do to a potential client a big West Coast pension plan that I thought I heard looked after retired zookeepers. We have these bizarre conversations with clients and their advisors, where they always ask us about our strategy. What about portable alpha, they ask? What about it, I want to say: the strategy is to make everybody a truckload of money, but apparently thats not good form. So we talk instead about global macro, short extension strategies, and a load of other BS that they seem to like and, once theyve signed the contract and theyre out of the door, we get back to the serious business of ending the day with more money than we started it. Did I miss something?
All the time Stanley was leaving messages on my private cell phone. I buy a new one every week, just for our conversations, and then toss it into the river when Im done. What were doing probably isnt illegal, but you cant be too careful with regulators, especially near election time.
Its about the only time they actually give out vital signs.
This is big, Stanley says when I get back to him.
Arent they all? Rule Three: It doesnt pay to get too excited. You lose control and before you know it youve bought the entire external debt of some African country youve never heard of, collateralized nine times over by a coffee crop that was never planted, let alone harvested.HSBC.
Slightly interested now. Is this a conversation we should take offline? I ask. We have had plenty of profitable discussions in Starbucks.
No time buddy. Listen, theyre going down big time. Oh-six results are going to stink. My man says they have finally struck out on trailer park loans, and there are big provisions in the numbers.
Pause. Stanley is good at this. Build up, pause. I knew a girl like that once, but I didnt pay her as much as I pay old Stan. I know what he is thinking, and he knows I know, and I know he knows I know, et cetera.
Do you have access to any inventory? I ask, taking the bait. If I decide to short HSBC, I would need to borrow the stock from somewhere Stanley is hoping to oblige, no doubt.
Yards and yards. Give me the word and its yours.
And heres the thing, the unbelievable thing. I have an inside line from a good source. I have access to stock that I can short. I have no principles, scruples, morals or any of those other disabilities that stop otherwise talented traders from fulfilling their potential. But something says no. And when that happens, theres only one thing to do play it by the book.
Ill have to take it to Bengt, I say. Its the kiss of death to any deal. Bengt Hammar is our very own Doctor No. Apart from being so anally retentive he needs weekly colonic irrigation, hes a damn fine credit and risk man. We thought it would be good to have him on board. Six years on, he still has his uses.
Stanley gets it. Call me if you change your mind, he says, then cancels the call.
If we had a compliance officer, hed be proud of me.
Compliance With What? 2/16/09
07 February 2007: DJIA Close: 12192; HSBC GBP9.34
Turns out we do have a compliance officer.
Im sitting in the turret, watching a screen that is telling me the news that, despite HSBC taking a modest USD6.8bn hit on its sub-prime business in the US in 2006, the share price is actually going up. The market likes it. Strangely, Stanley hasnt called this morning.
I am eventually aware of some little guy who looks like a bad virus hovering just to one side of me, but still in my field of vision. Larry? he says, as if that might not be my name. Yeah? Larry, my name is Haresh. Im head of compliance.
Talk about having the worst job title in the world. Then I remembered: wed hired a compliance guy this years must-have fashion accessory but nobody told me that he might actually come and bother me. Compliance with what? I had asked at the time the partners first discussed the role. Were not regulated how I love Republican politicians so what did we have to comply with?
I was overruled. Haresh was the unfortunate result. Probably a great guy and all that, but compliance just gets in the way of making money. And?
Larry, we need to discuss certain transactions that have gone across client accounts. Could we set up a time to meet?
Why? Is there a problem?
He is about to launch into something when the Stanleyphone vibrates into life on my desk. I dont say anything, but make a face that is meant to show that, whilst Id like to do nothing better than chew the fat with old Haresh about compliance issues, a client call would sadly have to take precedence. Haresh is obviously not up to speed with traders body language, standing dead still.
Hey, buddy, just hold one mo, I say into the phone. Sotto voce, to Haresh: Ill call you later, and we can talk. OK? He doesnt look thrilled, but leaves.
Stanley doesnt want to talk about HSBC. Instead, he wants to talk boats. As always, there is an angle. We chat a little about how I am getting on with the Sunseeker I have a Portofino 53 before he mentions that a client of his is thinking about selling his 1967 Riva Super Aquarama.
Am I interested?
One day Ill write a book about Riva boats. I could probably even write a book about my feelings towards them. Yeah, women can be good in short doses, but a Riva boat is something else. Every man should have the opportunity to stand at the wheel of one, fire up the twin Crusader engines and motor round the bay at some fantastically tony location in the south of France or Italy, preferably with a bikini-clad Charlize Theron as your passenger.
Stanley burbles on a bit about the guy says that the market has peaked, valuations are way out of line, sub-prime is going to kill us all and he is getting out and selling everything but Im not really listening. I am thinking of Charlize and me, the Riva moored in the harbour as we drink Bellinis and enjoy the sunset before heading to my hotel room for an intimate dinner deux.
Half a million would secure it. I tell Stanley I am seriously interested.