"You'll have to give me a blowjob if you want to make that trade."

My first firm on Wall Street was a bond powerhouse.  As a small broker dealer, unaffiliated with a bank, the FX market was not our forte.  The FX market more so than any other market is a trending market that is driven by flows and deals.  For example a German manufacturer buys an American factory.  The German company will need to pay for the factory in USD, so besides investment banking revenue there may be a large FX trade to do.   This demand for USD will temporarily push the value of the USD up vs. the EUR.  Banks are in a much better position to facilitate these large deals and flows.  Our FX trading desk was decidedly more proprietary, since we lacked most of these type of customer flows.  We did however, have one superstar FX trader, who would go on to be infamous around the street.  Still to this day he is the butt (no pun intended) of several jokes.

Ping Jiang was almost singlehanded responsible for building our firm's Latin American FX desk back up after the Mexican Peso crisis.  He at one point accounted for well over 50% of the firm's FX revenue.  It was therefore a serious blow to the firm when he was poached away by SAC Capital.  The few times I had crossed paths with the man, he struck me as very intellectual and reserved.  He was a man of few words.  My how my opinion would change.

At the end of 2007 a blockbuster lawsuit was announced on both CNBC and www.dealbreaker.com.   Andrew Tong, who was a junior trader in Ping Jiang’s group at SAC, claimed that Ping had forced him to take female sex hormones as well as sexually assaulting him on numerous occasions.  The lawsuit was so salacious that even the EEOC (Equal Employment Opportunity Commission) got in on the act.  Who doesn’t love a good gay sex scandal, complete with forcible sex changes.

Why the female sex hormones you ask?  Tong claimed that Ping forced him to take the drugs in order to feminize him.  He wanted to create the perfect trader.  A man’s intellect combined with a woman’s less aggressive nature.  Sounds like something out of a Frankenstein movie.    He believed that man’s aggressive nature led to poor trading decisions, such as doubling down on losing trades and sticking with losers to long.  Well unfortunately for us that was all the detail that came out at the time.  The court filings were sealed, and in 2008 Ping was actually fired from SAC, but not for the reasons you might think.  He was fired in 2008 for poor performance.  He stopped making enough money.  Then in late 2009, just in time for Christmas, we got the details we all so sorely wanted. 

Apparently the female sex hormones were part of a broader training program, which Ping insisted that Andrew adhere to in order to stay employed at SAC.  Andrew was told that SAC was aware of Ping’s training methods and they approved.  Ping had complete leeway to do as he liked as long as the group made money.  If Andrew were to tell anyone about his training program or trading style of the group, he would be fired immediately.  Andrew reluctantly agreed to the deal.  Ping had personally recruited him from rival hedge fund Stark and he had already quit his job.  What else was Andrew required to do as part of the training program?  I am glad you asked. 

• Ping required Andrew to wear subtly female attire during business hours, which included blouses, slacks, shorts, and open-toed sandals.  After hours Ping ratcheted it up a notch, Andrew was required to wear bras and panties, blouses, skirts, and high heels.

• Ping would often require Andrew to accompany him into an empty conference room after hours and model various outfits for him as well as put on full make-up.  During which time he would comment on his sexiness, or lack thereof.

• Andrew was required to grow his hair long and wear make-up such as lipstick and nail polish.

• Ping would refer to Andrew in the workplace as “miss”, “whore”, “piece of shit”, or “stupid girl”.

• Ping would often pinch Andrew in the buttocks in front of co-workers.

• Andrew’s picture on the SAC intranet was replaced with a picture of him in feminine attire and make-up.  It was later quickly taken down.

• Ping insisted that Andrew perform oral sex on him in order to initiate trades.  Saying, “You’ll have to give me a blow job if you want to make that trade.”

• Ping during one training session tied Andrew to a chair and urinated into his mouth.  (Editor’s note:  This seems consensual to me.  There is no way anyone could pee in my mouth unless I let them.)

• One training session Andrew told Ping that he was no longer going to take the female growth hormone, because his wife wanted a baby and he was having trouble getting an erection.  Ping responded by tying Andrew to a chair, choking him, and inserting a marker from the white board into Andrew’s rectum to show him that he could indeed still get an erection.

• Andrew also alleges on multiple occasions Ping assaulted him.

The purpose of all this abuse was purportedly to break Andrew down before Ping could build him back up into the ideal trader.  Andrew Tong was eventually fired from SAC in 2006 for poor trading.  His firing led to the allegations against Ping surfacing.  Tong alleges that Ping set him up, and that the losses he (Andrew) suffered in CYD stock (which were the grounds for his dismissal) were the results of Ping trying to manipulate the stock and create more profits.  These allegations set off not only an EEOC suit, but claims of insider trading.

For the full unsealed allegations check out http://www.scribd.com/doc/23662651/Andrew-Tong-Filing

I guess it just goes to show that beneath a quiet exterior, a raging pervert may be fighting to get out.  On Wall Street the rule is if you make a firm enough money, they will allow you to let your inner freak flag fly.  Ping Jiang went on to set up Ping Capital, a very successful hedge fund specializing in emerging markets.  He is still widely considered one of the best macro traders in the market.  See this recent interview on Opalesque TV.  Andrew Tong has not resurfaced.

The PATH Runs Every 30 minutes!?!

Every year a fresh new crop of Ivy League graduates descends on Wall Street.  Hired into a pool of analysts, these bright-eyed individuals start out their careers as sales assistants, research assistants, or trading assistants.  They fill out the lowest rungs of the trading floor.  Only a few will succeed and advance to the point where they become a senior sales person, a research analyst, or a trader.  What separates those who succeed from those who fail?  Mostly it’s how well you handle adversity and how well you fit in with your team.  My odyssey on Wall Street began in sales, which I will touch on later, and ended in trading.  In both sales and trading I began at the bottom as an assistant. 

On my first day as a trading assistant my new boss, Lars, told me to show up the next morning at 6:30 a.m.  This seemed exceedingly early to me, (as a sales assistant, I had been showing up each morning around 7:15 and was usually the first person from sales onto the floor) but I wanted to trade with every fiber of my being, so rather than protest I quickly agreed.  Having never taken the train into Manhattan that early before, I assumed that if I arrived at the PATH station in Hoboken 30 minutes before I needed to get to work, I would have no problem making it to The World Financial Center by 6:30. 

So, the next morning I set out for the train and arrived just after 6:00 to see The World Trade Center train pulling away.  No worries I thought, another train will be along in 5-10 minutes.  Wrong!  That early in the morning the PATH trains only run every 30minutes, not the every 5-10 minutes I was used to.  Each moment that passed my anxiety level increased.  By the time the train pulled up, thankfully for me a little early, I was at my wits end.  It was now 6:20a.m.  The trip across the river only takes about 10minutes and I spent the whole time calculating how quickly I was going to be able to race through The World Trade Center, over the bridge to The World Financial Center, and up to the trading floor. 

When I reached my desk at about 6:40, I was out of breath.  Without looking up Lars said, “Traders start the day at 6:30, you’re in sales again today.”  With my shoulders slumped I dragged myself back over to my old desk in sales.  The whole trading floor was in tears.  Thankfully my old sales colleagues were understanding and let me spend another day helping them out.  I never again missed that 6:00 train.  As it turns out Lars also rode the 6:00 train each morning.  It soon became part of our daily ritual to sit in the same car and same seats as he passed on his trading wisdom to me.

Years later Wall Street had changed a lot.  The “Ivy League Pinheads” had started to take over as derivatives became more widely used.  I had moved on to trading my own book and a new crop of analysts came onto the floor.  As luck would have it Lars needed a new trading assistant.  The new trading assistant he hired, Kyle, was from a very different background than me and as Lars would find out was well connected in the firm.

Some things never change, and Lars told Kyle that he needed to be in to work each day at 6:30.  Well just like it had been for me, arriving to work at 6:30 is a hard thing for those who aren’t used to it.  A few days into his new job and after a few beers in a bar, Kyle overslept and didn’t arrive to work until 7:15.  In the way that only Lars could, he told Kyle to go home for the day.  “If you can’t make it in by 6:30, you can’t sit with me.”  Unlike me, Kyle had just started at the firm so he had nowhere to go.  Also being well connected in the firm, Kyle was not going to tolerate this sort of treatment.  He immediately went to HR. 

Rather than being laughed out of the HR office as he would have been years earlier, HR took his complaint very seriously.  Lars was called off the floor to appear in the HR office.  Infuriated by the nerve of his new first year analyst, quite a few names were thrown around as Lars headed off the floor.  Many would stick as nicknames for Kyle, for the rest of his career.  HR demanded that Kyle be treated fairly and be allowed to sit on the trading floor.  An irreparable rift had now formed between Kyle and Lars, and it wasn’t much longer until Kyle left the firm.

The blue collar work ethic and the locker room atmosphere of Wall Street was slowly crumbling.  In its place was emerging a kinder, gentler, more politically correct Wall Street.  Really.

Lars and the Hubcap

If you have ever read Liar's poker by Michael Lewis, you know that trading floors are predominantly a male domain.  Whenever there is a lull in the action, trading floors quickly devolve into testosterone fueled antics.  The crazier the pranks and antics, the better.  No one personifies the locker room atmosphere of the trading floor quite like my first boss as a trader, Lars.  Lars was one of the hardest working guys I have ever met.  He was also one of the craziest. 

As someone that had worked himself up from running tickets for other people, to running his own trading book, he knew just about everyone in the firm.  For that matter he had at one time worked with almost everyone in the firm.  There was one middle office guy in particular, we’ll call him Rico, that brought Lars particular joy.  The function of the middle office is to make sure that everything on the front lines, the trading floor, runs smoothly.  This entails checking out trade details with counterparties, calculating traders daily PnL (profit and loss) statements, and anything else that traders or salepeople may require.

Lars had hired Rico to work for him in the middle office, back when he ran it.  Lars bought Rico’s kids gifts on their birthdays.  He had attended Rico’s wedding.  They were very good friends, and they enjoyed making fun of each other the way only really good friends can.  Each day Lars and Rico would try to one up each other.  Lars would call Rico a spic and Rico would call Lars a dago.  Nothing was out of bounds.  Not wives, not race, nor sexual tendencies escaped them.  Each morning would start the same.  One or the other would pick up the phone (the middle office sat on a different floor) and the game was on.   

“Hi, is the spic in yet?  Please tell him to come up to the trading floor I have something under my desk  that I need him to take care of.”

“Hey is that greasy wop in yet?  Tell him I’m sorry I chipped his wife’s tooth last night.  I’ll be gentler tomorrow.”

“Hey spic, get up here.  There is a C and C party going on. 

What’s a C and C party?

Cock and Cake, but don’t worry we already ate all the cake.”

Lars even went so far as to take vacation photos just for Rico.  Once on a trip to Puerto Rico he saw a sign advertising Spic and Span.  He immediately pulled his car over and made his wife take his photo beneath the sign.  Upon returning to the office he proudly presented a framed photo to Rico, telling him that he really shouldn’t graffiti billboards like that.

For me though, the crème de la crème was Christmas 2000. Christmas on Wall Street before caps on gifts was a sight to behold, but that's a story for another day.   Anyway, it was and is quite common for the trading floor to give gifts to the people who have supported them all year.  Gifts of cash, wine, even iPods were common.  I knew that 2000 was going to be special, because when Lars walked into the office that Christmas Eve he had a big box and a gigantic smile on his face.  Over the intercom he called Rico up to the trading floor.  A few minutes later when he wandered across the floor, Lars presented him with the gift wrapped box and thanked him for all his hard work.  When Rico ripped open the box all that was inside was an old rusty hubcap!  The entire trading floor lost it.  It was one of the most inappropriate things I have ever seen and we loved it.  Rico was never able to top that one, but the antics continued for several more months.

Then the shocker came.  Rico quit the firm shortly after year-end bonuses to take a similar job at another firm.  He told us it was because the firm stiffed all the middle office guys on bonuses.  Rico made everyone believe he was leaving on his own terms and held no ill will towards anyone but the firm.  Well it was only a matter of days later that Rico filed a lawsuit against our firm, and Lars in particular, alleging discrimination.  It seemed that Rico was going to get his bonus out of the firm one way or another.  Lars was obviously quite shaken.  He was called before our legal council to tell his side of the story.  Under oath he had to explain among other things the hub cap and the spic and span photo.  Of course all the witnesses from the trading floor backed Lars’s story that it was a two way thing and was all in good fun, but the damage was done.  The firm settled with Rico out of court for an undisclosed amount.  While Rico was able to extract a small settlement from the firm, he had done real damage to one of his “best friends”.  Lars and Rico to my knowledge have never spoken since the day they sat across from each other, in a top floor conference room, with the rusty hubcap sitting between them.

The Phoenix Fails to Rise From the Ashes

 My odyssey on Wall Street began on the repo desk at a now defunct firm.  Up until the financial crisis and the fall of Lehman Brothers, the world of repo operated under Main Street's radar.  The first mention I ever remember of seeing about the repo market was in regards to Lehman Brothers Repo 105 practices (a story for another time).  But I digress.  No, I was not repossessing automobiles like you see on the popular TLC TV show Repo Men.  I was instead allowing our firm and our customers to create leverage.

Repo is short for repurchase agreement.  Wall Street firms (and hedge funds for that matter) hold billions and billions of fixed income securities.  As we learned in the financial crisis, these securities are not paid for with a firm’s capital.  Instead every dollar of capital in a Wall Street firm is leveraged into several dollars of securities.  How is this possible you ask?  Enter the repurchase agreement. 

A repo is nothing more than a collateralized loan.  On Wall Street this collateral is fixed income securities. (Note the same process goes on in the equity market, but is known as stock loan)  The term of these loans can vary from overnight to 1year, with the most common being overnight.  In its simplest form a real money account, such as a money market mutual fund, lends money to a Wall Street firm.  In return, the Wall Street firm wires them securities.  At the end of the loan, usually the next day, the mutual fund wires back the securities in exchange for their original loan amount plus interest.  The interest rate in normal times is very close to the Fed Funds Target.

Repo desks carryout two functions: 1. Funding the firm’s position (as in the process described above) and 2. Covering the firms short positions.  When a firm or customer is short a security they are still required to deliver said securities to the counterparty they sold these securities to.  This creates distortions in supply and demand based on who holds what securities at any one time.  This is the basis of the “specials market”.  Specials is the borrowing and lending of specific securities.  A general rule of thumb is the more people who are short or looking to short a security, the more in demand this security will be, and the lower the rate of interest required to use this security as collateral in a repo. 

So for example if I am the holder of a current U.S. Treasury 10year note and I need to raise money to pay for this position, I will call a repo desk and ask for their bid on my position.  They will quote me a bid, the rate of interest they are willing to accept for a loan based on using my position as collateral.  This interest rate will be based on whether the firm needs to cover a short in the 10year note or what interest rate they expect they will have to pay if they turn around and relend the position into the market.  It is important to note that in order to mitigate the credit risk of the counterparty that you are lending money to, it is normal to take in $1.02 of collateral for every $1 you lent out against it.  In this way if you lent out $1 vs. a 10year note and the counterparty of the loan went out of business you had $1.02 of 10year notes that you could sell to recoup your loss.  This extra $0.02 in securities is referred to as a haircut.

Now back to my story.  So my first job on Wall Street was as a sales assistant on the repo desk.  Our customers were both real money accounts, that we used to fund our firm’s positions, and hedge funds that were seeking to achieve leverage.  When I first set foot onto the trading floor in the summer of 1999, I was overwhelmed.  I had never heard of a repo or seen a bond trade.  My experience with investing, like most people, was limited to mutual funds and equities.  All that would quickly change.

Over the next 5months I quickly learned the ins and outs of being a sales assistant.  My main responsibilities were helping cover the phones for my sales team, booking tickets, interacting with the traders to find out how we could help them, and occasionally speaking to clients if the rest of the sales team was occupied.  There was one glaring exception.  Under no circumstances was I to answer one Hedge Fund’s direct line.  If the salesperson who covered them was off the desk, I was to let the phone ring and race around the floor to find them.  This account was Phoenix Fixed Income Arbitrage.

In the winter of 1999 Phoenix Fixed Income Arbitrage were the darling of the repo market.  With assets under management of $250 million and huge positions in U.S. treasuries, when they called in to do a trade it could make or break our trader’s day.  The saleperson who covered them was treated like a rock star by the trading desk.  The largest position that we had with them was in the current U.S. 10yr note which at the time was the 6% 8/15/09.  For weeks we had been borrowing from them over $1billion in U.S. 10yr notes on an overnight basis.  Meaning each day we were asked to lend them over $1billion for 1 day.  The overnight loan would be secured by U.S. 10yr notes.  For our head trader, every trading day revolved around setting up to do this trade.  At the time we knew their total position in 10year notes was larger than $1billion, because every day when their trader Stephen Duthie called to roll his position with us it was obvious, based on the price action in the interdealer market, he had just done the same trade with someone else.  So our head trader would vary his strategy between selling as many 10year notes overnight to the shorts as he could before be asking to bid Phoenix’s piece or buying all the 10year notes he could and cornering the market.

The gravy train ended rather abrupty on 1/5/00.  The day started like any other.  I went through my check list of beginning of the day tasks and helped answer phones.  Slowly the morning dragged on until our head trader yelled over to our sales team to try and get Phoenix to lend us their 10year position now while rates were favorable.  Our salesperson rang the direct line.  No answer.  This went on for several minutes.  A few minutes later a back office person from Phoenix called to confirm the maturity of a trade with our salesperson (common practice for large term trades to ensure the correct money amounts were wired ).  The trade was a repo transaction (us lending securities to Phoenix in exchange for cash) from several months ago that was supposedly ending that day for $3billion 10year notes.  We of course knew of no such trade.  Things were starting to get weird and there was still no answer from Stephen when our salesperson rang him.  It wasn’t for another half hour, when a controller at Phoenix called, that the story came to light.

Apparently Phoenix Fixed Income was insolvent and had just realized a rogue trader, Stephen Duthie, who managed a $150million dollar fund, had cost the firm $125 million.  Approximately 3months ago, Duthie, made a large “carry trade”.  He had purchased $3billion 10year notes that had a 6% coupon from our firm in the outright market.  He intended to lend them everyday in the repo market and pay interest rates of between 2-4%, depending on how special (how much demand there was in the repo market) they were trading.  Thus generating “carry” of between 2-4% a year.  Well 10year notes like any security don’t trade at the same price everyday.  The price goes up and down based on market expectations of interest rate.  Duthie was placing a massive bet on lower 10year yields and leveraging up his $150million dollar fund 20:1!

In order to both deceive the risk managers, who would have surely disallowed such a risky transaction, and to mitigate the mark to market swings he would take on such a position, he chose to book his outright purchase of the 10year notes as a 3month reverse repo (Phoenix borrowing $3billion 10year notes and lending us cash).  Then each day he was booking several large repo transactions (Phoenix lending 10year notes and borrowing cash) with firms on The Street to cover his cash needs.  Well sure enough at the end of 1999 the Federal Reserve started hiking interest rates from 4 ¾%  to eventually 6 ½% by the end of 2000.  Along the way 10year note yields skyrocketed in anticipation of permanently higher interest rates, from just below a 6% yield to over 6.60% by 1/5/00.  Duthie’s massive bet was hemorrhaging.

Chart of closing 10year yields.  Note the spike at the end of 1999.

On the morning of 1/5/00, the day his supposed $3billion reverse repo transaction ended,  Stephen Duthie did not show up for work.  He fled.  Rumors flew that he had fled into the woods of Canada and not even his wife knew where he was.  Thankfully we had taken “a haircut” on the trade.  Meaning we had only lent Phoenix $1 for every $1.02 of securities they used as collateral.  Also since each trade had been overnight, the value of the securities had changed each day and we had only lent the appropriate amount based on that day’s market value.  When the fraud became apparent, Phoenix quickly began selling their outright position into the market.  The weight of $3billion in 10year notes hitting the market quickly pushed yields even on higher on 10year notes, which increased the loss.  Fortunately for us and the other repo counterparties on The Street, the 2% haircut had protected us from losses and Phoenix was able to repay all their loans.  According to the U.S. Treasury website on 1/4/00 10year yields had closed at 6.49%.  Due to Phoenix’s selling, the same security closed at 6.62% on 1/5/00. A massive one day move in yields.

For a great treatment of this scandal as it was reported in the press (minus the real details of how the money was lost), check out this article.

Just 5months in to my Wall Street career I witnessed how one man’s hubris could take down an entire firm.  Unfortunately it would not be the last time I would see it.  Interestingly enough, Phoenix ending up liquidating their 10year note position at the peak in yields.  It marked the beginning of one of the longest bull markets in bonds that the market has ever seen.  Duthie’s position had been too big and just a bit too early.  As they say “Timing is Everything.”

Intro

Wall Street culture is both celebrated (in movies such as Wall Street and Boiler Room) and reviled in the mass media (recent congressional hearings on the "bailout" of Wall Street and The Devil's Casino).  On trading floors around the world, billions of dollars of securities change hands everyday creating millions in profits for the top firms.  The lure of riches draws some of the best and brightest to Wall Street.  The compensation that top performers can demand is intoxicating and leads to some bizarre excesses.  Wall Street wasn't always this way though.  Sure the money was always good, but it's ranks used to be made up of blue collar hustlers who were quick on their feet and connected.  I was fortunate to land on Wall Street in 1999 before electronic trading, before caps on gifts, and before talk of caps on pay were around.  My run on Wall Street encompassed some amazing events, but none were more entertaining to watch than the melding of the old school blue collar culture with the new ivy league brainiacs.  This blog will give you the untold story of Wall Street from the trading floor.  The personalities, the scandals, the bets, and of course the excess.  Many of the names of the people and firms will be changed to protect the anonymity of my good friends, but the details of the stories (many of which will seem unbelievable) will be 100% accurate to my recollections.  I hope you find it as entertaining to read as I did living it.