Revenge Is A Dish Best Served After The Check Is Paid!

Dinner with a broker in NYC is a sight to behold.  The events are bacchanalian delights!  They are usually at the most expensive restaurants in the city and the amount of food and drink ordered would make Ralphie May blush!

Want to try something, order two.  Never heard of a dish, order a few for the table.  Pretty soon you can't even see the table with the amount of food and beverage on display.  Client entertainment is the life blood of the NYC restaurant scene and getting a big Wall Street table is a waiter or waitresses dream.  20-30% tips on $1000 tabs can make their day, but occasionally they have to take some abuse from a few drunken suits.

One night I met my good friend and broker Anthony out at a steak house in midtown.  Myself and a few colleagues had already had a few cocktails by the time we sat down to order.  Our waiter was an elderly Italian gentleman (Anthony our borker is also Italian) and suggested a ton of food for us.  5 kinds of potatoes, filet mignons all around, creamed spinach, and a seafood tower for the table.  As the dinner progressed Anthony was a little over served and was jokingly bossing around the waiter in Italian and I believe calling him a guinea.  It was all in good fun as the waiter lobbed abuse back at him.  When it came time for the check, Anthony Caccamise pulled out his credit card and gave it to our waiter. 

When the waiter returned he had one last dig to fire at Anthony.  He asked Anthony if he knew what his last name meant in Italian.  Anthony responded that he did not.  The elderly Italian guy without blinking said "Cacca means shit and Mise is the Italian verb to move.  Your family must have been a bunch of shit movers in the old country."  Anthony's face collapsed as the rest of us fell on the floor laughing.  The waiter had made one fatal error in timing though.  Anthony had not yet filled in a tip or signed the check!

The Treasury Auctions That Nearly Failed

The financial crisis was a truly strange and stressful time to be a trader on Wall Street.  For one thing every firm's stock price was seesawing around like crazy and you never knew for sure how stable your job was.  The other thing was liquidity in the markets shut down.  If you got caught in a bad trade it was nearly impossible to get out of it.  Bid/Ask spreads (the difference between where a market maker was willing to buy and sell a security) were the widest anyone had seen since the advent of electronic trading.  In the midst of all this chaos, the Treasury department was issuing tons of securities to pay for all the bailouts and programs they were unveiling on a near daily basis.  Two of these auctions nearly failed.


The 4 Week Bill Auction That Saved The Street

On Monday September 15, 2008 Lehman Brothers declared bankruptcy after last minute negotiations to sell the firm broke down.  This set off a chain events.  The very next day The Reserve Primary Fund the oldest and one of the most respected money funds in the world announced that it had "broken the buck".  After writing off investments in both Lehman Brothers commercial paper and Lehman Brothers asset backed paper, the fund was now worth 97cents on the dollar.

While not guaranteed, money funds were considered a very safe place to put excess cash.  Corporations and individuals counted on them to generate safe returns.  What many investors didn't realize was, that over the years money funds had become one of the biggest drivers of the subprime bubble.  banks and other investment managers set up conduits to buy low rated mortgage backed securities.  These conduits then issued highly rated asset backed commercial paper to pay for these investments.  The conduits were taking advantage of the large spread between subprime mortgage bonds and where they could issue commercial paper.  Money funds were buying  this asset backed commercial paper to generate higher returns.  It was a vicious cycle that was about to come to a crushing halt.

As investors panicked and dumped their holdings in money funds, money funds were forced to liquidate their investments.  Soon money funds were preemptively selling assets and investing only in treasury bills.  This allowed them to stay ahead of redemptions and be invested only in low yielding liquid securities.  As a result 4 week treasury bill yields plummeted.  Take a look at the auction results for the 2 weeks prior to Lehman Brothers bankruptcy and the 2 weeks afterwards.

9/2/08           1.54%
9/9/08           1.575%
9/16/08         0.30%
9/23/08         0.35%

Besides shocking treasury bill yields lower, this reallocation by the money funds caused huge distortions in the other major money markets (agency discount notes and commercial paper) that I'll talk about at another time.

On 9/30/08 the Treasury department was again set to auction 4 week bills.  The week pior they had auctioned off $28billion at a discount rate of 0.35%.  The week of 9/30/08 they were set to auction $25billion 4 week bills off.  All morning dealers and customers had been trading the WI (when issued security) at yields between 0.30% and 0.40%.  There was every reason to expect that the auction would come at a similar yield as the week before.  I remember selling a customer a few hundred million at about 0.35% and joking with him that he had just cost me my month's pnl on that trade.  Everyone was very punchy and trading was lackluster to say the least.  Myself and most of the street were short the WI security and looking to cover our position in the auction.

On 9/30/08 the Fed Funds Rate, the target rate for where banks would lend each other excess reserves was still at 2%.  There was really no reason for anyone to be excited about a 4 week bill yielding 0.35%.  Yet given the recent auction history, no one expected a very different result.  This is in part due to the primary dealer system that the Federal Reserve has set up.  In order to become a primary dealer and be able to bid on securities in auctions and to use the federal reserve facilities dealers must ensure that no treasury auction fails.  They do this by always bidding in each auction and for large amounts above and beyond what they require to cover any short positions.

The 9/30/08 4 week bill auction arrived at 1.01%.  This was a tail of roughly 61bps.  The largest on record.  The DV01 (dollar value of a bps) on a 4 week bill is roughly $8/million.  So for every million dollars of the 4 week bill that a dealer had sold prior to the auction and then covered at the auction they had generate $488.  This may not sound like a lot, but on a couple $100million short position this quickly adds up to hundreds of thousands of dollars.  On the entire auction the Treasury had just gifted the market $12,200,000.  Dealers having made up 14billion of the 25billion in awarded bids did very well.  For banks and dealers who had been getting kicked around much of the week by the money fund volatility it was a much needed shot in the arm.

The Treasury Learns  A Lesson in Turn Around Time

The closest auction to ever come to a fail was the reopening of 4 1/4% of 5/15/2015.  On October 8, 2008 at 10:30 a.m. the Treasury announced that to help mitigate the fail problems associated with several off the run 10year note securities they would be reopening $10billion of 4 securities  (3.5% of February 15, 2018, 4.25% of August 15, 2015, 4.125% of May 15 2015, and 4.0% of February 15, 2015).  The first security, the 4 1/4% of 5/15/2015 would in fact be auctioned off later that same day.  This was a huge change in Treasury policy.  In the past the Federal Reserve had relied on the markets to cleanup fail problems.  They would often call for a large position report to try and ascertain what the cause of the problem was, but never before had the Treasury been convinced to do a snap reopening of a security.  As it would turn out it was also a huge gamble.

The 2015 sector of the bond curve was trading extremely rich (all in anticipation of the Treasury announcing they would start auctioning off 7 year securities possibly) as much as 10bps rich to fair value and sometimes even more.  On announcement those lucky enough to still be short these securities and not to have capitulated had already made a paper windfall.  What followed in that days auction made them more money than they could have imagined.

As we traders sat around joking about how much money we had made or lost based on this random reopening of the 2015 sector, our head trader received a very strange call.  The Federal Reserve rang him on the desk and berated him for not helping to underwrite the auction.  They reminded our trader that he had an obligation to bid for this auction.  Our trader began frantically writing us notes to sell more 5year and 10year notes into the screens.  This auction was going to be messy.  We upped our bids slightly for the auction at levels we felt were far back from where the auction would stop and we waited.

At 1p.m. when the auctioned closed, there were just $12billion in bids for the $10billion in securities.  The market had been expecting something on the order of a 2.95% yield on the reopening.  Instead it tailed 36bps to 3.31%.  A 7 year note with a DV01 (dollar value of a bps) of roughly $690 translates into a lot more money gifted to the street.  Over $24,800 per million dollars of the security you had been short.  For the entire auction this 36bps tail had cost the Treasury roughly $248,400,000.  The banks and dealers had made a fortune as they were awarded $8billion of the $10billion in securities.  The Treasury had learned a valuable lesson on how quickly they could announce and then auction securities.  Despite incredible demand for this particular security, the 2 1/2 hour turnaround time was insufficient to alert everyone that might have wanted to bid in the auction.  The dealer community had learned to always put in a large bid well back of the expected auction rate just in case.  The rest of the reopenings went off with minor tails.

The Devine Chronicles

Gerry Devine was one of the true characters on Wall Street.  What follows are a few of the short stories about the man who ended every conversation with "To Err is Human. To Forgive is Devine." (sic)  And believe me there were a lot of errors.

The Great Hair Piece-E-O
A man has a very unique relationship with his hair, because deep within his DNA could be a chromosome waiting to strike him bald.  Gerry Devine was one of these people.  For several years Gerry had been bald and never once mentioned it bothered him.  Then one day in his 60s he invited a bunch of his clients out to dinner.  Holding court with Gerry was a unique pleasure and no one wanted to miss it. 
Gerry being Gerry was late, so we all bellied up to the bar and talked about the day.  A few beers in, in walked Gerry in a brand new toupee.  We were hysterical.   Some of those at the dinner had known Gerry as a bald man for 20+ years and no one expected to see Gerry with hair.  It was my boss who chirped up first and said, “Introducing the Great Hair Piece-E-O!”  It was a nickname that lasted for the next 10years.

The War Department
Devine International survived completely on the charisma of its founder Gerry Devine.  It was not unusual on a slow day for me to call in and chat with Gerry at length about the good ole days.  Being a younger guy on the desk it was great hearing about the history of the market and the people around me.  It was much like talking to your grandfather.  Well one day in the midst of our conversation Gerry got a ring on another line.  This was common as customers would call him to do business.  When Gerry clicked back on the line he apologized and said he had to go the War Department was calling.  Baffled, I hung up the phone and asked the guy next to me why on earth the War Department would be calling a man that never served a day in his life.  To my friends great amusement he explained that Mrs. Devine (his wife) was the War Department.  It was several years later when I met the woman that I couldn’t help but laugh to myself at this memory.  She was a slight woman and one of the most forgiving ladies I have ever known.

Red Whips
Gerry loved to throw down a few cocktails and we used to joke that his other office was the bar down the road from Devine International.  On more than one occasion we had to call him there to sort out a trade problem.  When Gerry was enjoying a cocktail he drank one thing, Red Whips.  A Red Whip is a vodka and cranberry juice, but the way Gerry drank them it might as well have just been vodka.  Gerry always ordered the same way, “I’ll have a red whip with just a splash of cranberry juice for color.”  He was never shy about sending them back if it had too much cranberry juice either.
One of my favorite Red Whip stories was at a steak house in NYC.  My colleague and I had taken Gerry out to dinner for his birthday.  As the dinner wound down, Gerry decided he needed one more cocktail before the ride home.  When the waiter approached he ordered another round of Red Whips with just a splash and he shouted at the waiter “And this one is on you!”  Apparently the cocktails had been too weak for his liking.  The waiter staring at the angry, nearly 70 year old Gerry quickly complied.  We were hysterical with laughter.

Lawn Bowling
Gerry was notorious for driving everywhere he went (even in his 60s), despite having offices in White Plains and all his customers being in NYC.  After a few Red Whips with a splash, and before car services became common place, this was a very dangerous combination.  On more than one occasion Gerry made it home, but not before some “lawn bowling”. 
One evening after a late night out with customers Gerry awoke in his car in his front lawn.  There were tire tracks across his lawn and his neighbors.  Gerry being Gerry, he simply drove into his driveway, went upstairs, and went to sleep.  The next morning when my boss called him at the office to make sure he made it home alright, Gerry responded that he had done a little lawn bowling (off road driving) last night but had made it home safe.  “Lawn bowling” quickly became part of our lexicon.

Devine International

When I first started trading government bonds, the intra-dealer market was traded entirely over the telephone.  Bids and offers were communicated on green screens and through open telephone lines to intra-dealer brokers.  If you needed to buy 2year notes you had to telephone a broker and see where the offer was from other dealers.  (Today Brokertec and ESpeed by Cantor Fitzgerald have completely automated this market.)  In this golden era for voice brokers, there were a ton of characters on the other end of the line, but none was more colorful than the legendary Gerry Devine.

Gerry Devine by the time I began dealing with him was already in his 60s and was a legend on Wall Street.  He had once been a repo trader, but quickly discovered his gift was more for gab than for trading, so he set up his own firm Devine International in Westchester, NY and began brokering repo trades between dealers.  With high level contacts at all the major dealers he was able to succeed and survive for 40 odd years.

There were several odd things about Devine International.  First they were a voice only broker, meaning they didn't transmit price information on green screens.  Two when you did a transaction with them they had no clearing facilities so you wound up trading directly with the trader on the other side of your trade.  For example if I called Garban and hit a bid on 2year notes, I would be selling 2year notes to Garban.  If I called Gerry up to trade with Devine International and hit a bid on 2year notes, I would be selling 2year notes directly to Salomon Brothers, or UBS, or whoever had given him the bid.  Devine International relied entirely on relationships. 

However, the truly interesting thing about Devine International was its origins.  Now it’s true that Gerry had set up the company because he preferred chatting with his friends to taking risk, but the real motivation lies with his father, the famous Christopher J Devine.  In 1919 the public debt reached $25,000,000,000 (a rounding error today) and trading in government bonds became a lucrative field.  Christopher J Devine started working for the first legend in government bond trading Charles Frederick Fields.  After cutting his teeth on trading through the great depression, Christopher J Devine opened his own firm in 1933, the aptly named C J Devine & Co.  His firm grew from the original 8 employees to nearly 200 at his time of death.   C J Devine & Co. was the undisputed king of the Treasury Market.  In 1964 after Christopher’s death the remaining partners of C J Devine & Co. approached Merrill Lynch, Pierce, Finner & Smith about a possible takeover.  Merrill Lynch, having no experience to that point in government bonds, seized on this opportunity. 

When Christopher passed away he was a millionaire several times over.  In fact $18million of C J Devine’s capital was left to his estate.  This made the deal with Merrill a necessity.  As for his estate, his will he set up a trust for his children.  In order to encourage them to be successful and make their own way in life he set up several incentives.  His children would receive more money for the higher the position they had at work.  So  a vice president of a Wall Street firm would get X each month from the trust, where a CEO of a Wall Street firm would get 3X each month.  So Christopher’s son Gerry after working several years at Merrill Lynch as a repo trader decided that it would be much smarter to start his own small intra-dealer broker and make himself CEO.  Devine International was born.

For more information on C J Devine & Co as well as their namesake check out these two Time Articles:
http://www.time.com/time/magazine/article/0,9171,931752,00.html

http://www.time.com/time/magazine/article/0,9171,871138-1,00.html

Pet The Rabbit

My first boss as a trader was Lars.  He was quite the character and very personable, which led salespeople to introduce their clients to him whenever they were in the office.  He was also just a touch insane, which sometimes led to awkward situations.

One day a sales guy, Tim, from Chicago was in our office.  Salespeople from the branches usually drop in to the trading floor a few times a year to schmooze with the traders and on occasion they bring customers with them.  Tim stopped by to joke around with Lars and me for a while, and also to mention that he had just been assigned Banc One, which at the time was one of the largest banks in the Midwest.   He told Lars to be on his best behavior, because his new client was going to be in the office later that day.  Lars laughed and said I’m a professional I know how to talk to clients.  The sales guy and I both cracked up and he walked away.

Later that afternoon Tim returned to our desk with his new client.  Larry was on top of his game and quickly had the client talking about his kids, hobbies, and wife.  All was going well until the client mentioned he loves hunting.  No big deal a lot of people hunt, but for some reason this became the focal point of the conversation.  Lars asked him what he liked to hunt.  Deer and pheasant.  Lars asked him if he ever brought his kids hunting.  No, they are too young still.  Did he ever hunt rabbits?  No, the client replied they are not very tasty and my kids have a pet rabbit.  Without blinking Larry stood up, pulled his pockets out of his pants and asked the client if he wanted to pet his rabbit. 

Tim and I were flabbergasted.  Luckily the client started cracking up and said he had never heard that one before.  For the next 20 minutes Lars and the client were cracking each other up with dirty jokes.  I guess it just goes to show that the slightly insane can spot their own kind.

The Fastest Man In The NFL Is Trading T-Bills! Wait, What?

The frost is melting finally and spring is in the air, which can only mean one thing.  It’s time for the NFL combine.  Each year all the prospective draft picks for the upcoming NFL draft get together and have their vertical leaps measured, their bench press maxed out, and most importantly for this story they all run a 40yard dash.  Now I have heard a lot of crazy statements on the trading floor, but one outlandish statement stands out above all others. 

Several years ago my good friend Jim, who traded T-Bills for another firm, was talking about his glory days as a high school and college baseball star when we were out to dinner.  As he drank more and continued to embellish on his athletic prowess, his stolen base record came up.  Now, Jim was a very good athlete, and did in fact set the stolen base record for Staten Island, but he may have gotten a bit carried away.  He claimed that he ran a 4.30 40yard dash.  We immediately pounced on this fact.  The entire table called bullshit on his time, but Jim being a Wall Street trader would not back down.  We gave him every conceivable out.  It was suggested that maybe he meant a 4.43 or a 4.53.  Maybe he had a coach that started the watch a touch late, but he was adamant that he had run a legit 4.30 40yard dash in high school.   

In 1960, Gil Brandt, the director of scouting for the Cowboys came up with the 40/20/10 measurement to evaluate players at all positions.  The 20 yard split time of the 40 was used to evaluate linemen since the thought was that they rarely run 40 yards in a game.  The 10 yard split was used to measure the burst off of the line of scrimmage for wide receivers.  The 40yard dash and the related splits became the center piece of info on a prospective high school, college or professional football player.  Now any player that is drafted has three pieces of information attached to their name; position, college, and 40yard dash speed.  How does a 4.30 40yard dash time measure up then?

Deion Sanders, who was considered by many the fastest man in the NFL, ran a 4.21 40yard dash at the 1989 NFL combine.  Jim’s time means that he would have lost to Deion Sanders in a photo finish.  This year just one player cracked a 4.30 40yard dash.  DeMarcus Van Dyke from Miami ran a 4.28.  Every year when the NFL combine begins, Jim gets to relive his 4.30 40yard dash claim.  For 8 years running, as the 40yard dash times for running backs, wide receivers, and defensive backs begins to hit the press, one of the many people who were either at the infamous dinner or have heard this story will invariably begin sending around the NFL Combine’s fastest times with Jim’s name inserted with a blazing 4.30 40yard dash.  To his credit, Jim still will not back down off his time.

Competitive Eating

Trading floors on Wall Street are some of the most competitive places on Earth.  Traders often refer to the trading floor as the trenches and competitors as the enemy.  Every day as a trader you are trying to make money off of all of those around you.  Despite the markets not being a zero sum game, i.e. if someone is winning, then someone is losing, you spend all day trying to not let people “pick you off” or “steal your trade”.  Traders compete over everything; women, money, cars, kids, and even food.  The very competitive nature of trading tends to attract a lot of college athletes and a lot of oversized egos.  When there is a lull in the action bravado and bragging, or even a loose word, can lead to a crazy bet.  Once the money starts flying around it is almost impossible for someone to back down.  Here are a few of my favorite food bets.

The Chipwich Challenge

At the first firm I worked at we had something I have since only seen at amusement parks, an ice cream vending machine.  The machine dispensed popsicles, Snickers ice cream bars, and the holy grail of ice cream, The Chipwich.  A Chipwich, for those who don’t know, is two oversized chocolate chip cookies with vanilla ice cream in between.  It’s an ice cream sandwich, but with chocolate chip cookies as the “bread”.  God only knows how many calories those delectable treats contain.

One day our 10year note trader made an off-hand comment about Chipwiches being better than sex and that he could probably eat every single one in the machine for lunch.  That was all it took.  Soon several hundred dollars were being wagered on whether or not he could eat all the Chipwiches in the machine in under 1 hour.  How many were in the machine you ask?  Seven, was the answer as the junior traders emptied the machine out.  Once someone agreed to stake him with $100 bucks he couldn’t back down.  He did manage to eat the 7 Chipwiches in way under 1 hour, but he spent the rest of the day making frequent bathroom trips to heave his guts out. 

The Vending Machine Eat Off

In a variation of The Chipwich Challenge, one day a friend of mine from a competitor called me up on a slow day to tell me about a bet that was going on at his firm.  One of the junior traders had been goaded into eating one of every item in the floor’s vending machine in 1 hour.  The junior trader had been staked with almost $1000 by the senior traders on the floor.  When I responded that didn’t seem that tough.  A few candy bars, some chips, big deal, right?  He reminded me that besides all the chips and candy, that most vending machines have several packs of gum and several types of mints.  The kid was going to have to eat 5 packs of gum and 4 tubes of lifesavers along with the smorgasbord of chips and candy.  Now it just got interesting.  Well in this case the kid got through all the chips and candy, but the gum and mints did him in.  For his trouble he got $0 and severe indigestion.

The Appetizer Boat

Every firm has their own hole in the wall drinking spot that traders and salesmen congregate to after a long day.  Usually proximity to the office is the main draw.  At my first firm that place was Moran’s in the World Financial Center.  Almost every day we’d all stop off for a few cold ones on the way home.  Moran’s was great because besides happy hour draft prices, they also had an appetizer affectionately known as “The Boat”.  It was the largest sampling of cheese sticks, Buffalo wings, fried calamari, and chicken fingers I have ever seen.  It was meant to feed 6-8 normal human beings and maybe 4 or 5 Wall Streeters.  As these things always start, one of my fellow traders who had heard about “The Boat”, but never seen it, ordered one to split with a few of us.  Upon its arrival, he said that’s “The Boat” everyone has been talking about.  That’s it!  I could eat that whole thing myself.  He soon got his wish.  The next day for lunch we had “The Boat” delivered to his desk at noon, and we had scraped together about $500 to get him to eat it.  In one of the worst displays of competitive eating ever witnessed he barely made it through the chicken fingers before quitting.  At least we got to finish eating “The Boat” when he failed.

White Castle Sliders

Once a month or so, the head of our floor used to have hundreds and hundreds of White Castle sliders brought to the floor.  They came in these giant suitcase shaped cardboard boxes that held something like 100 burgers a piece.  I have no idea where he used to get them from, because even the White Castle website makes no mention of anything over the 30 burger crave case.  Anyway, as competitive people surrounded by hundreds and hundreds of steamed burgers are wont to do, an eating contest soon broke out between two junior traders.  One probably weighed 150lbs soaking wet and the other was a mountain of a man.  You’re probably thinking this is going to be a David and Goliath tale where the smaller man wins.    You couldn’t be more wrong.  The 150lbs kid forced down about 15 burgers before retching into his trashcan.  Just for sport the mountain took down 30 burgers and then polished off some fries.  He was still hungry, but didn’t want to overdo it.  This episode would stick with the 150lbs kid until the day he quit.  His nickname became “Puke In The Can”.