by John LeFevre
It doesn’t take us long to strike up a conversation with a group of six reasonably attractive young, apparently single white girls, a Halley’s Comet–caliber event in Asia. Our luck could not be better. We have just stumbled into a girls’ night out for the cast of the Hong Kong Disneyland production of Sleeping Beauty. Young, bright blue eyes, blond hair, curves. What more could you ask for? Now, these aren’t A-list models, of course; it’s even better. They are struggling B- and C-list models who get shipped out to Asia for short-term gigs. Most of them come from places like Cincinnati or Tulsa. If they have any other stamps on their passports, I’m guessing they say Cancún.
A few rounds of shots and a few exotic tales of our Asian experience, and we’re in. It’s such a layup trade. Would they rather spend their free time in some Disney dormitory budgeting their per diem, or living it up with some bankers on an unlimited budget, jetting off to Bali or Phuket on a whim?
The only foreseeable problem tonight is that we’re so heavily outnumbered, we’ll have to contend with the usual girl pact to stick together and their tendency to look out for their weakest (ugliest or drunkest) link. If the ratio is too far off, you can’t peel any of them away from the herd. Even if I do, there’s too great a risk that, by the numbers, the majority of them will feel left out and pull the rip cord for the entire group before I have time to close.
I decide to wave in another friend of ours to help even things out. I text Andy, “LKF now. Need wingman. Layup.”
Twenty minutes later, he’s there. It doesn’t matter that it’s 10 p.m. on a Sunday night, or that, as someone who manages hundreds of millions of dollars of the bank’s capital, he should probably be falling asleep reading Barron’s. When I remind him of this fact he laughs it off. “Sheeeit, ain’t my money, nigga.”
Our goal is to convince all of them to come back to my apartment and keep the party going. It takes us a couple of hours to get them comfortable, but they finally agree. “You can see the Great Wall of China from my living room.” Just as we’re ready to wrap things up, close out the tab, and head back to my place, the biggest cock block in human history appears before us: the Hong Kong Disneyland cast of The Lion King. Just as these girls personify everything that you think of when you imagine corn-fed beauty pageant runner-ups, these guys are exactly what one would expect from the all-male cast of The Lion King. I thought the NBA was the black ballet; apparently there’s a real one too. And these guys are jacked, even the guy who plays the warthog. I had no idea the rigors of theater could be so physically demanding. It’s also very clear that these guys are already acquainted with our girls and have been waiting for their opportunity to try and score.
The first thing they do is convince the girls to stick around and have a few more drinks with them. Our perfectly executed plan starts to fall apart. Maleficent changes tack (she wouldn’t have a fucking clue what that means): “Let’s just all stay here a bit longer.”
It’s immediately clear that these guys hate us and everything that we represent. They love our bar tab, but they hate us. We try to be cool without being condescending, but that’s nearly impossible on a sober day, let alone when some random guys are using my bar tab to talk to girls that I’ve already teed up.
Not only are they mooches, they’re coming in swinging—huge chips on their shoulders. They know they can’t compete on Hong Kong’s terms (cash and cachet), so they just try to box us out physically, literally putting themselves between the girls and us. Hakuna matata my ass.
After watching Mufasa order round after round of shots on my tab, I glance over at Andy in disgust. He’s also been edged out away from the girl he had been talking to. That’s when he decides to let them have it.
“Hey, guys. Hey, guys.” He speaks up loud enough to get the attention of the core group of girls. “I have a joke for you. What is orange, burgundy, yellow, blue, violet, candy-apple green, magenta, turquoise, fire-engine red, teal, and ivory . . . and tied up in my backyard?” He pauses, and then drops a punch line that is so angry and offensive that even I’m appalled—and that’s hard to do. Sharing and collecting racist and mean-spirited jokes is a long-standing banking tradition.
BANG. POW. BOOM.
The next thing I know, I come to in a taxi sitting next to Charlie. Blood is streaming down my face. “What the fuck happened?”
Charlie’s laughing. “Sorry, dude. I guess you were standing next to the wrong guy. He just sucker punched you. And then the girls broke up the fight and told us to leave.” We’re both so drunk it’s funny. “Man, you got knocked da fuck out.”
Somehow Andy escaped injury, and upon seeing that Charlie and I made it into a cab safely, pulled the trader card. “Dude, I can’t believe you dragged me out of the house for this shit. I need to get some sleep. You got this?”
Several hours and twelve stitches across the bridge of my nose later, we’re finally leaving the hospital. Already after 5 a.m., I head home to get cleaned up for work. And to think all of this started with an innocuous Sunday morning text from Charlie: “Brunch?” What a way for him to start a new job—still drunk and on zero sleep.
As soon as our morning market update call ends, I walk over to the trading desk to confront Andy.
He sees me coming and quickly covers his tracks. “Hey, man. What the fuck happened to your face?”
“Took an elbow playing basketball.” I don’t want to throw him under the bus in front of his boss, so I lean in close. “How does a skinny pretty boy like you learn a fucking joke like that?”
He just laughs. “When I was in college, I dated this chick from Mississippi. Want to hear another one?”
“Fuck you.”
Because They
Are Muppets
“The Duke is coming in for $50 million at reoffer,” Smithers shouts across the trading floor in my general direction. I hold a thumbs-up above my wall of screens to acknowledge the order, without bothering to look up.
The Duke is . He’s an EM (emerging markets) credit portfolio manager at a $2 billion hedge fund. We call him the Duke because he is a pompous, unjustifiably egotistical, high-maintenance, pain-in-the-ass client. Also, he calls everyone “dude” but says it in a way that sounds so retarded, like he’s saying “doo”—which is close enough to “duke” in my book.
It’s June 2007, and I’m doing a $300 million subordinated hybrid perpetual bond for the State Bank of India with UBS as my joint bookrunner. There’s no point in even explaining what this means from a structural point of view, or highlighting the regulatory and strategic accounting implications of issuing subordinated debt, because that’s the entire point—many of the investors who are participating in these deals don’t understand or care to know what they are buying.
The process of selling a deal like this is actually fairly easy, provided that markets will cooperate. The State Bank of India is a well-known name, and there are enough similar bonds out there that the success of this deal is simply a function of price—the premium that the investor will receive on top of where comparable bonds are trading.
Markets have generally been constructive, and when we announce the deal, it looks like we have a clear execution window. However, just after we release the official price guidance, rumors begin to circulate about possible massive subprime CDO-related losses at a couple of Bear Stearns hedge funds (Lehman and BNP are also wrapped up in the rumors). No one’s panicking, but there’s definitely a sense of skittishness. As a result, the market tone turns instantly cautious, credit spreads widen, and risk appetite diminishes, especially for new issues. In the face of rumors and uncertainty, many investors move to the sidelines, put their hands in their pockets, and wait for clarity.
My real concern is that having to postpone or cancel this deal will only further impair investors’ confidence, making it more challenging to execute some of the more lucrative deals in our near-term pipeline. We could revise the price guidance h
igher to reflect the deterioration in market conditions and diminished risk appetite, but there is no chance the client will agree to that.
A $50 million order from the Duke is a welcome respite. But deep down, I know his order doesn’t mean shit. The Duke’s modus operandi is to jump into deals he thinks are going to be hot and then flip them back to some other trading desk a couple of days later, thinking we won’t find out about it. He doesn’t understand credit and is a classic example of the axiom “Don’t confuse brains with a bull market.”
He usually comes into deals early with a grossly inflated order. Then, if he doesn’t get a good allocation, he throws a temper tantrum. “Hey, doo, I came in early to support the deal. I came in size. And now I hear the deal is four times oversubscribed, but I only got $2 million bonds on a $20 million order.”
The response in my head is something like, Listen here, fuckhead. The only reason you gave us the order early is because you don’t even bother opening the prospectus. And I allocated you on the basis of what I thought to be your real demand—which isn’t anything close $20 million. My actual response is more like, “That sucks, bro. I fought for you. But [insert joint bookrunner’s name here] didn’t want to allocate you; they said you flipped their last deal. I’ll try and hook you up next time.”
The Duke tends to let what he hears about the size of the order book dictate how big (and inflated) his order is going to be. For some unknown reason, he must have been told that this is a really hot deal, despite the obviously weaker market backdrop. Part of the reason he might think that the deal is still in good shape is that’s what we’re telling our sales force to say: that the order book is comfortably oversubscribed with key anchor orders and high-quality, real money (buy-and-hold) investors with little price sensitivity.
Smithers yells back across the three rows that separate us. “By the way, you know the Duke is Roo’s client. Can you put the order in for her? She’s not around and I can’t access any of her clients in the system.” I put the order in for Roo and then shoot her a quick email so that she knows to confirm it when we launch final deal terms.
Roo is the head of . I wouldn’t say that she is ugly, but she certainly isn’t hot—a trading-floor 6. She’s a nasty piece of work: insincere, two-faced, and manipulative. Her first husband inadvertently summed her up best during his toast at their wedding reception when he said one of the things he loves most about her is that even when she’s mad or yelling at him, she still has a smile on her face. I gave them two Baccarat wineglasses and a Frette sheet set from their registry, along with a card that said, “I hope you like the glasses and the sheets. So when you’re getting drunk and fucking, you can think of me.” I wasn’t invited to her second wedding.
Given the broader market weakness, some investors are downsizing their orders, setting higher limits, or even pulling their orders altogether. The size and quality of the book is shrinking every time I refresh my screen. We manage to twist a few arms to stay in the deal, essentially calling in favors or giving out markers. “Support me here, and I’ll take care of you the next couple of times you need a favor.”
As I am trying to salvage this deal, I also have to be mindful of my own reputation. There are a few priority accounts, mostly hedge funds, whom I rely on regularly for anchor orders, information about private deals and our competitors’ pipelines, or even for seemingly innocuous favors like taking meetings for me when I need to fill out a roadshow schedule. For the sake of my business going forward, I cannot afford to burn these guys. Beyond that, many of them are my good friends.
I jump into a conference room with my cell phone. “Hey, man. Real quick. You didn’t hear it from me, but you don’t want to be in this deal. Just do me a favor and call your UBS coverage and cancel your order through them. If you still want bonds this time tomorrow, I’ll get them to you at the reoffer price.”
It’s not uncommon for syndicate bankers to do this. I learned it from on the EM syndicate desk in New York. I’m shooting myself in the foot on this deal, but the long-term benefits to me certainly outweigh any short-term pain. Now these people owe me a favor, and I look good compared with my counterpart at UBS, assuming he isn’t doing the same thing.
Following an arduous call with the issuer, we finally have their reluctant approval to launch and price the transaction—a (smaller) $250 million deal at the wider end of the price guidance. On the face of it, it’s a massive failure. But from where I’m sitting, it’s a fucking miracle that we have a deal at all.
The message that we deliver to the market is that, while the book is strong enough to support a larger deal, we’re downsizing because the issuer’s price expectations have not been met, making it appear to be a decision made from a position of strength. This reassuringly implies that this unmet demand will be looking to scoop up loose bonds in the secondary market. This could not be further from the truth.
Now, all we have to do is agree on the final allocations with UBS and price the deal. When we get to the Duke’s order, I ask UBS, “What do you want to do? But before you answer that, know that my salesperson has reassured me that not only is the order good, it’s all real interest, and that we should give him a priority allocation.”
He just starts laughing. “Oh really . . . Well, in that case, I guess we have to fill it, right?”
“Fuck him—full fill. If we don’t, I’m not even sure we can get to 250 without being long ourselves.”
By filling the Duke, and pretty much everyone else in the book, we’re able to allocate $254 million, leaving ourselves with a small $4 million short position. We’re short, not to make money, but to be slightly better positioned to support the deal, by buying back paper in the secondary market. I would have liked to have been even more short, but it is physically impossible to stuff anyone else with any more bonds.
Any time we price a new deal, our trading desk is obligated to make a market and to help us support it, i.e., keep the price at or above reoffer for a reasonable period of time (until we can blame broader market weakness for any sell-off). If we don’t make aggressive markets and show a willingness to buy back bonds, investors aren’t going to want to participate in our deals. In this case, I’ve shown the order book to the trading desk, and they’re scared shitless. We all know as soon as it prices, and investors see that they’ve been allocated in full on a deal we’ve been touting as oversubscribed, they’re going to be calling up asking for firm bids. This is particularly true for accounts who inflated their orders; now, they’re sitting on bonds they never wanted to begin with.
We’ve pounded the pavement for three days; there is not a single person out there who’s still a buyer and isn’t getting at least as many bonds as they want. In other words, the trading desk knows that if they get stuck owning paper, there’s nowhere to go with it, regardless of any bid/offer spread.
The technicals of this deal aside, our trading desk has also taken a very bearish view on credit in general; they don’t want to be long paper trying to help me support a shitty deal. “Dude, do me a favor. Don’t price this now; wait for most guys to go home for the day. And then, when you price, let me know fifteen minutes ahead of time, and we’ll clear out for the day so no one can trade with us until tomorrow. Let fucking UBS make a market in this pig.”
That’s what we do. We spin our wheels, announcing to the Asian sales force and to investors that in order to accommodate important European accounts that need more time to get approvals, pricing will be delayed. Implying that some key European investors are coming into the deal is a confident message to send, and it’s a total lie.
At 7 p.m., we price the deal. Only a handful of salespeople have hung around for their clients’ allocations; thank God. Typically, I’ll stick around for a couple of hours after we price a deal to ensure that everything is smooth, particularly as it relates to the hedges. I also like to make the rounds calling the financial media, talking up the success of the de
al and running through relevant terms, market color, and deal statistics.
Tonight, fifteen minutes after we price, I’m out the door—with just a quick Bloomberg message to the sales force: “Out of pocket, in a client dinner. Any State Bank of India issues to be dealt with tomorrow.”
Walking out, I am joined by Smithers in the elevator bank, one of the few guys who had hung back for the allocations. Even though most of his clients had gone home, he was able to send them a Bloomberg ticket so they’d have it when they get in the next day.
“This is the worst deal I have ever been a part of.” He’s totally deflated and I think genuinely remorseful about having put some of his clients in this deal.
“Fuck them. Do you know how bad we would have looked if we had a failed deal?”
“I think we could look worse tomorrow if this thing trades down two or three points.”
“If this trades down two points tomorrow, it’ll be because the entire market sells off, and then our entire pipeline will be on hold anyway. So who gives a shit?” Besides being amazed that we got the deal done at all, deep down, I do feel a twinge of guilt. At the same time, many of these investors have only themselves, their greed, and their complacency to blame.
It’s a bull market; they jump in every new issue without doing their homework. I once had a hedge fund manager call me up saying, “Hey, I really like this Magnatron story. Can you put me in for $20 million?” My response was simply “No problem, but are you referring to the MagnaChip deal?” Of course, he wants to be in on it after he heard it’s eight times oversubscribed.
Smithers really came through for me this week; without him pounding the phones, there would have been no deal. “Come on, man. Let me buy you a quick beer.”
He gives me this look of total lifelessness. “You know my wife is eight months pregnant, right? And if you had priced this deal when you should have, we would have been out of here two fucking hours ago—which is when I told her I’d be done.”