Memoirs of a Minyan: Trading Places
The purpose of the journey is the journey itself.
Chapter 6: Trading Places
I would love to say it was easy sailing as I reached for the rudder at Galleon.
The truth is that I navigated directly toward the perfect storm.
A global financial contagion began brewing after Thailand cut the peg between the Thai Baht and the U.S. Dollar. That began a domino effect that spread throughout Asia and crippled the capital market system
I wasn't thinking about the Thai Baht nor was I focused on a powerful hedge fund called Long Term Capital Management. I was unaware that a butterfly flapping its wings in Asia could create a hurricane on East 57th Street in New York City.
I managed the derivative exposure for the overall portfolio and traded my own, smaller book where I would be paid a percentage of the profits. It sounded easy but I quickly discovered that the skills I learned at Morgan Stanley (MS) weren't helpful on the buy-side.
I enjoyed life as a customer. Morgan, Goldman (GS), First Boston, Deutsche Bank (DB) and other top-tier firms all vied for our business. As the trader responsible for executing the orders, I often chose which firms were paid with our commissions.
I was surrounded by tremendous talent but struggled with the reality that hedge fund traders eat what they kill. There wasn't customer flow to lean against or a franchise to tap into; it was an entirely different process
There were about eight of us sitting in a room armed with nothing but acumen and information. As financial contagion consumed the world, finding a life vest was the last thing on my mind.
I toggled between my two roles, focusing primarily on the derivative portfolio of the flagship fund, as I was certain that was my meal ticket.
Gary, Raj and three other partners slapped on positions at a furious pace and I looked for ways to leverage their ideas into performance.
The more time I spent on the overall exposure, the less I focused on my own trading. By the time the end of the year arrived, losses piled up on my pad and my job security was at the mercy of a select few I barely knew.
There would be no bonus.
In fact, given the performance in my trading account, I was told I was lucky to have a job.
The Beginning of the Bubble
As the world markets digested the global imbalances, Alan Greenspan slammed his foot on the gas with historic fiscal and monetary stimuli. That planted the seeds of the dot.com bubble that would eventually create the real estate, commodity and debt bubbles behind it.
David Slaine resigned from Morgan Stanley to join Galleon as a partner in 1998. Assets under management swelled into the billions and the firm's stature grew in kind.
Slaino and I sat next to each other as Galleon grew into one of the most powerful funds on Wall Street. I sharpened my skills and kept my eyes wide open.
Following the script I wrote at Morgan, I did whatever I could to add value. This time, however, I had a skill-set to execute upon. I introduced options that leveraged in-house strategies and offered intricate ways to maximize reward relative to risk.
I wasn't a partner, however, a fact I was reminded of often. In one of our morning meetings, I noted that Russia imploded and offered that it could pollute the U.S., a thought dismissed by the partners.
A few days later, global markets were infected and stocks began to cascade lower. It was an expensive lesson as unforeseen systemic forces overwhelmed my stylistic approach to risk management.
After the downdraft, the market rallied in response to the coordinated agenda by central banks around the world. That won the battle for Alan Greenspan and he was lauded as the best Federal Reserve Chairman of all-time.
History would teach us that his policies forever changed the DNA of the marketplace and laid the seeds of sorrow that eventually collapsed the system.
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 intelligence and information in that small room on East 57th Street was matched only by the size of the egos. They profited in good times and bad as I crafted derivative strategies that maximized gains and stemmed losses..
I focused more and more of my attention on the big fund, certain that it was my meal ticket to bigger and better things. 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 six-figures in my twenties, I would have been thrilled but my sights were set on a new benchmark. I wanted to be a millionaire by the time I was thirty.
There were six partners at Galleon and more than enough profits to go around. I couldn't help do the math in my head.
I could smell it-extreme affluence was right around the corner. I sat down with Gary, exchanged pleasantries and awaited communication of my reward.
The terms of my employment were very clear, he explained. While they appreciated the work I did managing the overall derivative risk for the flagship fund, my compensation was based on my smaller trading account. That was my deal, take it or leave it.
My bonus was a big, fat zero.
Green With Envy
I'm not proud to admit this but I began to covet while at Galleon.
The partners made insane money, the type of money that superstar athletes and famous actors won't see in a lifetime. They were taking it home each year, facilitating lavish lifestyles, enormous homes, private jets and a garage full of expensive cars.
Money is tremendous motivation when you're that young and I've seen it make good people do bad things. $500,000 suddenly seemed like a very small sum. I entered the world of the mega-millions, rainmakers that would make Gordon Gecko blush. 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 furiously climbed the front end of the technology bubble. Fortunes were made on a daily basis as IPO's climbed hundreds of points in a single session.
The eyes of the world were on Wall Street and Galleon was humming. The firm paid millions of commission dollars to the Street and they were given fat allocations on new issues.
ZING! 25,000 shares of an IPO up $60.
SHAZZAM! 30,000 shares opening $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.
This was my year. It had to be my year.
As we edged toward the end of 1999, my relationship with the partners couldn't be better. The firm was killing it, which is to say there was more money than you could shake a stick at.
The performance of my smaller portfolio lagged but I made up for it in spades. The P&L on the large option bets for the flagship fund spoke for itself and my inclusion in the circle of trust was a mere formality.
Gary sat me down to let me know that I would finally be getting a bonus and my eyes began to spin like a slot machine.
What would it be, a million?
"Todd," he began, "The partners appreciate your efforts this year. We're going to reward you with $50,000."
It hit me like a ton of bricks.
If I was ever going to make real money on Wall Street, I had to step 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 that it wasn't.
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 and nobody left on their own volition. I knew what I had to do and understood what was at stake.
Once I left, that door would never be open to me again.
Click here for the next chapter of memoirs, "Whaddya Say Y2K?"
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Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at email@example.com.
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