Saturday, January 24, 2009

Lesson 4: Watch your back…

A difficult lesson for me to learn was that the financial world is disturbingly competitive and doesn't always adhere to the same ethics as, say, central Utah. I will attribute this lesson to Brett Gr.

As a relatively new person at Bear Stearns I began to realize that I had to distinguish myself in some unique way. Success and big bonus checks were not doled out simply because you showed up to work.

My initial strategy was to develop niche areas of expertise on issues relevant to trading and valuing mortgages. This would make me indispensable to the sales force and I would facilitate a lot of mortgage trades. To demonstrate my expertise, I reasoned, I would write interesting research reports and circulate them to the sales force to help them stimulate interest with their customers. As an academician I felt comfortable with my ability to write and I had already had a few papers published in refereed academic journals.

The first paper that I wrote was on a recent statement by the Financial Accounting Stand.ards Board, FASB 91. (I remember this because I recently found a copy of this report.) As intended, this paper was circulated among the sales staff and it did, indeed, generate a bit of interest and helped increase my profile among my colleagues. (As I have stated elsewhere, increased profile means that you are selected to be on more ad hoc transaction teams.)

I can remember feeling a bit proud the day that my report was first circulated. It prominently featured my name at the top, as author, and a copy of the paper was placed on the desk of every trader and sales person on the trading floor along with the other daily handouts. Although the paper was on a fairly obscure topic, it immediately generated some buzz and for the first time, traders and sales people from the floor came and looked for me and asked me questions. This helped to position me as credible on certain aspects of FASB 91 issues and afterwards I was occasionally called on to explain to customers what the various income effects could be as prepayment assumptions changed about mortgage prepayments.

I felt that this was a moderately successful start, so I began another paper. I worked on it for about six weeks, as I recall, in my “spare time” when not doing little chores for Anthony Zioudas. I created some financial models, ran several iterations of different bonds, and had organized my thoughts into a second draft – ready to polish off and send out to the printer.

At this point I want to digress a bit and explain how things worked there at Bear. You see, in my mind I was a very valuable guy; I had a PhD, I had really good quantitative skills and I was creative. I carried in my mind the esteem that is bestowed by grateful students to their learned professors for granting them enlightenment. My ego led me to believe that I was now just on the cusp of conquering the financial world and I was sure that every one of my colleagues respected me and, yes, they admired me because of my abilities (albeit unproven as yet, but that was merely a technical matter).

As a contrast, I saw around me several young, almost childish “kids” right out of school, some not even having any graduate training. In my academic snobbery I thought of them as inconsequential, lower in rank than even teaching assistants you have help you grade papers. They were of little real concern to me in my pursuit of “serious” matters.

One such clique of “kids,” right out of their undergraduate studies, was typified by a young guy named Brett and a young girl named Jody. Jody, it seemed, enjoyed a “special” relationship with Blaine Roberts (who was the head of our financial analytics and structured transactions group). Jody and Brett and their little clique would chat and giggle through much of the day. They would give each other little back-rubs and just behaved, you know, like college kids. They would go out and party at night (with Blaine I supposed) and generally took life much less seriously than I did. I would have barely been aware of their existence, but Brett was given the seat just to the right of mine on the trading desk. Their giggling and chatting would sometimes spill over into my space at the desk, but I learned to tolerate the disruptions.

I had often wondered how Brett had landed a job in this financial analytics group at Bear Stearns. Brett, you see, had no quantitative expertise, no graduate training in business or accounting. He was a journalism major. But, I reasoned, he was a friend of Jody’s, and Jody had that “relationship” with Blaine… It somehow didn’t really matter that much to me, but I thought of the bonus pool being diluted by these kids that largely wasted their time - and how that Blaine had his own personal reasons for keeping all of them happy, especially Jody.

Since I reasoned that their relationship with Blaine made them “untouchable” I simply tolerated their childishness and did my best to ignore them. It was best for me to just concentrate on my “serious” business.

So, returning to my narrative, I had completed the second draft of my second paper at Bear, and I was looking for a bit of free time to polish it off and get it printed. I kept a hard copy of the document in my desk drawer (about the only personal space that one has on a trading desk).

To my surprise one day I came into work, and there on my desk, along with the other materials distributed through the night, was a published version of my paper. However, at the top of the paper my name was completely absent. Instead it said that the author was the person sitting next to me. I was incredulous – absolutely dumbfounded. How could this be?

When that person came in and sat at his desk that day, I looked at him with complete incomprehension.

“What did you do?” I asked. “This is my paper…”

“Oh,” he said, “I’m a journalism major. I saw you working on the paper and thought that it needed to get out. I’ve been hired to make sure that the writing of our research reports is of a professional quality, so I went through and edited your grammar and sentence structure.”

When I pressed hem for why my name was totally absent from the byline, he simply shrugged and said, “Oh, don’t worry about it. We both work for Bear Stearns.”

I have often wondered since if I handled this the right way. I realized that I had left myself completely vulnerable to this act. I had simply trusted my things to be undisturbed in an unlocked desk. What was I thinking? This was New York, man, not Provo, Utah. I felt so naïve, so embarrassingly naïve.

I never said anything to Blaine about the paper. In fact, I changed my entire strategy for distinguishing myself. Writing was too easy. I went for technology.

Sunday, March 16, 2008

Leson 3: Make friends

Today I received an e-mail from a friend of mine named Steve. He was, of course, commenting on the demise of Bear. [To bring those of you who didn't know, today, March 16, 2008, Bear Stearns accepted an offer from JPMorgan to buy it at $2 per share - a rescue, really, from imminent bankruptcy due to its lack of liquidity.]

Steve worked "upstairs" at 245 Park. He was one of the really talented (read "smart") people that Bear hired to help them develop the technology, etc. that kept them competitive and gave them an edge in the market. There was a whole group of guys that worked upstairs - and every one of them was really smart.

Anyhow, Steve and I developed a friendship while we were there at Bear. Steve was not an "insider" at Bear - at the time, there was a lot of political maneuverings going on and steve just liked to do his job and didn't try to endear himself to the more Machiavellian players. He was liberal in sharing what he knew of finance with others - unlike many of the other people who guarded everything they knew as if the calculations of finance were their proprietary knowledge and their guarantees of success. Steve worked at Bear maybe two years, at most, but during that time we struck up a friendship that has lasted nearly 20 years.

During either the winter of 1988 or 1989 I remember inviting Steve over to my home in New Jersey. We were going to celebrate the Christmas holidays, etc. and since Steve wasn't married, I thought that I would share my expansive family with him.

I knew it would be an interesting visit because Steve is Jewish... at the time he was not extraordinarily religious, but he was still very much Jewish. I (as some of you might know) have been Mormon all of my life, and fairly active for most of it (and for those who don't recognize this, Mormon = member of The Church of Jesus Christ of Latter-day Saints).

So Steve came for Christmas... and we had a great time. Steve met my wife, my kids, and we just began to converse about a broader range of topics. I, in turn, started visiting Steve in New York. I met some of his family, had the priviledge of meeting his uncle, etc. We did some things together in the City - like that Concert in the Park series - and generally became good friends. Steve had the uncanny ability to quote virtually anything that Robert De Niro ever said in a movie - and I have always treasured my memories of him excitedly introducing me to the 1986 movie, "The Mission." I still love that movie.

Now, some 20 years later, I am happy to get an e-mail, or to chat online with Steve. He was kind enough to have me into his home to eat with his family. He keeps a kosher home, so I nearly ruined his dishes one time when I tried to help by clearing the table. He and his wife and kids have always been of interest to me.

What is really curious, is that I don't look at my friendship with Steve as something that will ever result in additional business or somehow make me rich. He and I probably will not have the opportunity to work together again - or, if we do, it won't be for anything that will pay off in money. He went on into the doctoral program at NYU in finance. He has modest needs and he isn't going to go out and take over the world. But, Steve is a good guy; my life has been better because I made friends with him. Friendships are, after all is said and done, one of the few things that you really treasure.

So, one of the best things you can do, not for personal gain in a monetary sense, but for real personal gain in a people-to-people sense, is to get to know some your co-workers. Stay in touch with them, make friends. Become rich in friends - that is what is really valuable.

Those that you work with, especially in a competitive market like the New York financial markets, are often among the highest quality people you will ever meet. They make great friends.

Monday, January 7, 2008

Lesson 2: Where your bread is buttered...

The second lesson that I learned at Bear Stearns came from an unlikely source – and I’ll attribute it to Anthony Zioudas.

When I first started at Bear, Blaine Roberts introduced me to his right-hand guy, Peter Cherasia, and it was actually Peter that introduced me around and showed me where to sit that first day. I don't think that I had 30 minutes of interaction with Blaine within the next 3 months.

Peter was the head programmer of the FAST (Financial Analytics and Structured Transactions) group at the time. He had made himself indispensable in pulling together the technical team and resources required for the implementation of Bear Stearns’ mortgage analytics systems. Chuck Ramsey had built a great niche in the market around “specified pools” of mortgages, and selling these specified pools required a lot of database information and the ability to model mortgages based on the specific prepayment expectations of each individual mortgage pool – which all required knowing the location of the loan originator and looking at the composition of actual loans in the pool. Peter was Blaine’s implementation guy – the guy who could make everything work.

Anyhow, Peter showed me where I sat, gave me a brief introduction to what was going on, and basically left me alone to get started. I began to figure out the position I had been hired for mostly by asking questions of people around me and by generally finding out what others were working on – hoping that I would soon see exactly where I could contribute most.

I think that it was that first day on the job, or maybe it was the second day, but a very impressive looking guy with dark hair and meticulous grooming came up to me and introduced himself as Anthony Zioudas. He explained that he was working on some presentations for the Kingdom of Sweden, and that he needed me to help him put together an analysis. This was great, I thought, I’m already contributing.

I did all of the work I could to support Anthony as quickly as possible and in just a day or so had a great presentation that I proudly gave to Anthony. I worked long nights (my family was still in Texas, and there didn’t seem to be much need for me to go to my lonely apartment any earlier than 10:00pm) and started early. Anthony was often traveling to Europe to meet with clients and I was able to provide him with all sorts of analytical help and quite a bit of support. Before and after each trip, Anthony would come by and make sure that I had plenty to do – using our Asset-Liability Model (ALM) or coming up with new analytical tools to measure the “efficient frontier” of certain debt instruments, etc. Anthony kept feeding me project after project to do, and I gladly produced anything I could to help out.

A few weeks into my work with Anthony I started listening to what people were saying. Anthony was spending a lot of money on his travel, he stayed in nice hotels and some said his deals just didn’t close. This, of course, made me start worrying a bit. I had come to realize that the only way you made money at Bear Stearns was to work on deals that closed and that were profitable. I also came to the realization that despite what I had assumed, I didn’t work for Anthony. In fact, I didn’t really work for any specific person (other than Blaine, who hired me).

The organization of the FAST group at Bear Stearns (at least at that time) was really informal, you were hired as a resource, and just thrown into a pit. You were expected to find some way of making yourself valuable. You were expected to form little teams to do deals. You could find a deal team yourself (meaning that you could find a corporate finance person or a trader that knew of some assets for sale, you could add value by creating a profitable deal, find a trader that would give you pricing and that would hold those assets in inventory, and find a sales team that would sell your deal), or you could join someone else’s deal team – and basically work for them.

It was these deal teams that fought over the spoils won through doing deals. Each part of the team would argue how much of the profit that they deserved, and then the leader of that part of the team would divide up their part with the critical pieces of the team. It was about as organized as a pack of dogs tearing at a carcass. But this is how things worked at the time.

Here, I had spent several weeks thinking that I worked for Anthony, when in reality, I didn’t really work for anyone… I was like a free agent looking to hook up with other people to do deals. Once I had that liberating realization, I was able to break free of the tasks that Anthony would come to me to do. I could tell him that I had other things that I was working on and that I didn’t have time to do his work.

Fortunately for me, I was able to find some really productive areas and was able to get involved in putting some really nice deals together. Even that first bonus, earned at the beginning of 1988, was big enough for me to pay off most of my remaining Texas real estate loans and move my family to New Jersey.

Unfortunately for Anthony, he really hadn’t been that successful in bringing home mandates – and he had run up quite a lot of expenses. Whether he was asked to go, or whether the paltry bonus he picked up for the work of 1997 was the message, it didn’t matter. He left Bear at the beginning of 1988.

For me, I was just extraordinarily happy that I had realized that I didn’t work for Anthony. He was a nice guy, but he wasn’t going to get things closed. My bread was going to be buttered elsewhere.

The lesson I summarize from all of this? It is learn to recognize quickly who can help you get where you need to be. Even if the projects are fun and interesting – drop them quick if they aren’t going to pay off. You need to focus your time and your energy working with the small team that is going to make things happen. People that can’t contribute are distractions and should be avoided. You’ve got to figure out where your bread is going to be buttered.

Tuesday, December 18, 2007

Wall Street Career: Lesson 1 - Get A Job

UPDATE: 1/7/2008 - Gary Heuschkel & Andy Eudaly have pointed out that I had the address wrong for the old Bear Stearns location. It was 55 Water, not 45 Water as I previously posted. I'm not sure if the 45 was a typo that I made when I wrote the post, or if it was a subconscious mixing of the address we moved to at 245 Park. But fortunately I did pull up a photo of 55 Water - so some part of me was thinking corrrectly!

At the encouragement of someone whose counsel I value highly, I am beginning a blog about my life. I hope that it will be a help to someone, perhaps to someone young, and struggling as they develop their career. I’m not too sure of what the format will settle into, but for now I see it as a "lessons learned" sort of column. In each post I will try to address some lesson that I have learned about life or perhaps a lesson that affected my career, and discuss it in a way that helps to transfer some knowledge to someone just embarking on their career.

Lesson 1: Get A Job

I got my first Wall Street job with Bear Stearns & Co., back when they were at 55 Water Street. It was 1987 and the market was in chaos (does that sound like today?). Remember Black Monday – that was my first day on the Street.

So, how do you get a job with a Wall Street firm? The short answer to that question is, “Do anything it takes.” In my case, it took desperation.

The year 1987 started badly for me. I was a young (33/34 yr old) father of six children, living in Plano, Texas, married at 21 to my 18 year old sweetheart. I had gone to Texas just after I finished my Ph.D. to work at the Callier Center, part of the University of Texas at Dallas, at the Parkland Hospital campus. I worked there for several years, doing some speech and hearing research with some great guys, and teaching some of the statistics and decision science courses. I left that university job to start my own business in about 1985, and ended up doing some real estate and mortgage related businesses. I thought that I was on the fast track to success as an independent entrepreneur – but I was wrong.
It started in January of 1987 when I blew up the engine in my Jaguar – and it only got worse from there.

When the real estate world was finally rocked by the tax law changes of 1985, the real estate businesses we were involved in started to melt down. Real estate prices had plummeted; there was an oil crisis that killed off much of the Texas real estate market (especially in the “Oil Patch” parts of Texas). The things that were going to “make me rich” evaporated into thin air.

I also had a small mortgage company, and the March – April period of 1987 saw a huge change in mortgage rates. I had been a bit naïve in my mortgage business and had not hedged my pipeline at all – so the losses I suffered from the rate changes sucked up all of the remaining liquidity that I had and killed off what was left of any business I was doing. Everything that could go wrong did go wrong that year.

The short story is that by May, 1987 I was broke, I was working out of my garage and selling off whatever assets I could to keep ahead of the bill collector, and I still owed big-time on busted real estate deals. Life was pretty black, and finally, just as the fall weather became frigid, my dear wife came out to my little desk in the cold garage, put her arm around me and said, "Honey, I think it’s time to get a job." I couldn’t argue.

The desperation of that moment made me work both hard and smart. First, I knew that I was so far into the red ink that it would take a huge income for me to ever get solvent again. I couldn’t go back to academia – the paltry salary I could earn there would never let me pay off my real estate loans on my undeveloped residential lots, let alone support my family (remember, six kids…) and attempt to get ahead. The only thing that I could think of was to head to New York and work for a big Wall Street firm. I had heard that those guys made big salaries, and I needed a big salary.
The trouble was, I had never taken a business course in my life, I knew nothing of finance, and didn’t even know what I could do to contribute. Why would they even interview me? But I needed the big payouts that I had heard were available on Wall Street.

My preparation started by me buying a book, The Money Market, by Marcia Stigum. I found an old used copy of this book and devoured it. I tried to figure the equations out for every calculation mentioned in the book. I took the U.S. government yield curve, published in the newspaper, and made sure that I could calculate every price for every yield on every bill or bond issued. I tracked things for weeks, following the daily changes in the yield curve. I built spreadsheet models of every security I could find anything about using Lotus 123. I created mortgage and auto loan calculators in Pascal, in “C,” in Fortran and in Basic. In short, I gave myself a crash course in bond analytics, and I threw every quantitative and technical skill I could muster at the project.

Now I must admit that my previous real estate and mortgage businesses had already forced me to learn a bit about fixed-income calculations. Remember, I had already lost a lot of money with an un-hedged mortgage pipeline and I had made a couple of secondary market trades – but to be honest, I really had very little idea what I was doing. Like most young entrepreneurs I was mostly out of control – and that’s why I suffered so badly at the start of 1987. The only things I had going for me were that I was “energetic” and a risk-taking entrepreneur, I was well grounded quantitatively, and I was really, really good at programming a computer. All I had to do was to turn this into a Wall Street career… No problem!

When I finally felt that I could at least speak the language, I started making cold calls. For every firm I contacted - I started local. I called anyone I could think of, and asked if they knew anyone at one of the Wall Street firms or if they knew someone else that knew someone at a Wall Street firm. I got names, I got phone numbers. I said that I was interested in “the secondary markets” for mortgage and automobile loans and asked if they could put me in contact with someone from one of the New York firms. I’m not sure why I chose to ask about those markets, but I suppose I had picked up the buzz from my research and my calling around. Well, I got several names, and I got their phone numbers, but what was best, is I got the names of people that referred me to them.

I called every one of the people I could, and the phrase that got me through to them was, “______ ______ told me to call you.” I found that by using the name of someone they knew in the first line of my pitch, most everyone would talk to me.

I told them that I was going to be in New York on such and such a date, and wondered if they could visit with me. I told them what I was interested in (which I had refined from listening carefully to those I spoke with that were closer and closer to the New York markets). I set dates and set times, and actually scheduled four or five interviews, as I recall.

I ended up selling off personal items to finance a trip to New York. My family wasn’t quite starving, but we were getting pretty desperate. I arranged to stay with an old graduate student of mine in Murray Hill, New Jersey. H.S. Gopal had taken several statistics courses from me and had generally bonded with me while working on his Ph.D. at the Callier Center. I was pleased to see him again – but more importantly, he provided me with an inexpensive base camp to work the New York interviews.

I interviewed with most of the big firms (not, however, with Goldman Sachs – as even in my naïve state I knew that I was unwashed and unworthy to do so). I learned in my first interview with someone at First Boston (as I recall), that my two months of self-study on the money markets was worth absolutely nothing. That first interview and some painful self-reflection on the train ride back to Gopal’s house helped me to identify exactly what I knew (very little) and what I didn’t know (a lot). In my subsequent interviews I made certain that I could distinguish between areas in which I had real expertise and the areas in which I was just beginning to learn. The interviews seemed to get better through the week, but I had a limited number of opportunities, and even more limited resources. I didn’t have the luxury of making a second trip to New York, so this trip seemed to be one on which I was betting all of my marbles. Finally, the last interview of the week was the one that went best. That interview was with Blaine Roberts of Bear Stearns & Co. Since that was the interview that led to a job, I remember it most vividly.

Blaine had, like me, been an academic (Ph.D. from Iowa State, faculty at Univ. of Florida and Univ. of South Carolina). He probed very deeply in the interview, and like everyone else that week generally did his best to totally beat me up. Since I knew that he knew economics, there was absolutely no way that I could even attempt to bluff my way through anything that had to do with market analytics. So my strategy with him was to focus on my broader quantitative skills and my modeling ability. I did bring out my experience with my little mortgage company and my real estate dealings – but these were pitifully tiny things and I knew that they wouldn’t mean a thing to Blaine. However, I did have a demonstrable history of working with time-series data (because of my work in speech and hearing) so I focused on that. Since I knew this area cold, and could speak meaningfully about everything from Fourier analysis to linear predictive coding algorithms, I kept dragging these things out onto the table. I kept thinking that economists just have to love time-series data, don’t they?

I also knew the decision sciences really, really well, so I brought these up. I knew linear algebra and I knew all of the search-theory literature used in neural networks (a hot topic at the time). My dissertation had involved search strategy in some pretty unusual types of metric and non-metric spaces. I pulled these things into the conversation. I even started reaching for other areas that I knew well, but had no idea how they might apply – like non-parametric statistics, and non-metric multi-dimensional scaling. I tried very hard to trace out those things that I really did know very well, regardless of how weird they seemed at the moment.
At this one point in my academic rambling, Blaine had obviously heard enough. He turned to me and asked, rather point blank, “You know we can find some really talented people, just about anyone we want for these jobs; so why should we even consider you?”

Having been all wound up from my previous long-winded discourse, I took this as my unique opportunity. “Because I’m different,” I said. “You know exactly what you get if you hire another one of the MBAs from Harvard or MIT. But me, I’m totally different. I am going to bring a completely new perspective and a new set of skills that you just can’t get anywhere else.” And that was it.

To punctuate the end of the conversation, Blaine asked in a perfunctory manner, “So, if we did offer you a job, what would your salary requirements be?”

I thought I had last more chance to try to sway the conversation my way, so I did the only thing that I could think of – I tried bluster. With as much bravado as I could muster, in part to hide my desperation, I said, “I’ll work for peanuts. I’ll take what I earn on the come. Pay me $50,000 and I will prove my worth by the first bonus date. I’ll take my real compensation from what I produce.”

Blaine stopped the interview, he thanked me and as he stood up to show me out of his office he said, “I’ll call you in a couple of days.” I walked out of his office somewhat dazed at the abrupt end. I really did think that I had wound up to a crescendo at the end, and just as I was really letting go, the interview ended.

I slowly walked to the train station and thought long and hard about my week interviewing for a job in one of the most competitive markets in the world. I had no idea if anyone was even interested in me, or if I really had anything to offer. I honestly had no idea how things had gone. I just hoped that I could maintain a good attitude for my wife and six children who were counting on me to come up with something.

I got up in the morning and left from Newark airport to fly back to Dallas. It was great to get back to my family, and I spoke of all of the positive things that happened during my week in New York. I had all of the outward signs of a positive attitude, but inwardly I had this sick feeling in my stomach that absolutely nothing would come from the week I spent chasing after this hair-brained idea that someone like me could get a job on Wall Street.

On Monday or Tuesday of that next week, I got a phone call from Blaine. He asked me when I could start and he put me in contact with the people at the personnel office of Bear Stearns.

[On a very personal note, R. Blaine Roberts passed away this month on December 4, 2007, leaving his wife Jeannette and five children. Despite the differences that developed later in our careers, I have always appreciated the start that Blaine gave me in the business. I’m sorry that I wasn’t able to express that gratitude to him personally. - CMA]