Debbie Horn had done a good job for me at Spear, Leeds & Kellogg, but SLK’s commissions had cost me a fortune. During the first year I traded futures, I’d established myself as one of the biggest players in the S&P pit. I’d done twenty-five thousand “round turns,” in and outs, which was about one-half of 1 percent of all the S&P trades, and that was huge. But in and out was the way I traded; scale bid, scale offer, scalp a little here, scalp a little there, make the cash register ring. SLK was charging me $25 a round turn, which amounted to more than $600,000, or 20 percent of my S&P profits. After the first year, I negotiated a better rate, but eventually SLK couldn’t match the lower commission rates that others were offering, so I decided to make a couple of moves.
The fact that I was able to clear $3 million playing the S&Ps after all the “slippage” and commissions showed just how good my methodology was. The S&Ps were my game and Chicago was where I had to play, so in 1983 I sprung for an Index Options Membership (IOM) membership in the Merc. The Merc charged a tribute of $1 for each contract it traded, but if you were a member, you didn’t have to pay the dollar. A membership went for $53,000, and for me that was a good deal because at a dollar in and a dollar out, I’d make my $53,000 back in a year. But even with the membership, I still had to find a firm that could clear my trades.
Little clearing firms were always calling me, trying to get my business. Basically, all you needed to set up a clearing firm was a membership on the exchange, some phone lines, and a modest amount of working capital. For that reason, a lot of small-time traders on the Merc had their own clearing firms. That way, they could save commissions on their own trades and make some money on other peoples’. I would have preferred to keep my money with a big, well-capitalized New York firm, but in the mideighties, the big New York firms still had just a small presence in futures. They didn’t understand futures. To them, futures were still a game played by farmers out west. But now that I was a farmer, I’d have to start sowing some seeds in Chicago.
In March 1984, I got a call from Debbie Horn, my former clerk with Spear, Leeds & Kellogg. Debbie was from Chicago and had moved back there to work for the Marcucci brothers, a couple of small-time bond traders who’d set up their own clearing firm, Third LaSalle Services, Inc. Third LaSalle Services, Inc. was named after the street that anchors Chicago’s financial district, which in turn was named after Sieur de La Salle, the seventeenth-century French explorer who set the standard for trading in Chicago by being the first to skin the natives out of their beaver pelts.
Third LaSalle was a member of both the CBOT and the Merc and Debbie had known the Marcucci brothers since way back when. She said that they were good guys who’d treat me right, so I talked with Jackie Marcucci, the president. He said that if I went with Third LaSalle, they’d make Debbie my personal clerk on the floor and only charge me $7.50 a round turn. That was the best deal that I’d heard coming out of Chicago. I liked Debbie, knew that she was good, and I couldn’t beat $7.50 a contract.
Despite the boys in Chicago’s clout in Washington, the Commodity Futures Trading Commission (CFTC) knew that Chicago had a stockyard mentality, and after the commission had approved a cash settlement of futures instead of delivery, they were worried that investors might get slaughtered. Most of these mom-and-pop clearing firms were set up on a shoestring and to help guarantee the financial stability of the futures markets, the CFTC required that every investor secure his or her account by posting a performance bond. This performance bond was divided into two parts. One was a cash account that was used to settle the actual trades. This account was unregulated, which meant while the cash in it belonged to the client, the clearing firm could have the use of the money.
One of the best investments clearing firms could make was to lend the cash out in repurchase agreements. A repurchase agreement, or “repos” as they were called, was where an investor lends money by purchasing securities with the understanding that the borrower will buy the securities back at a higher price at the end of the agreement. A lot of banks and savings and loans used repos to meet the reserve requirements imposed by the Fed. The agreements were very short term, usually overnight, but they gave the clearing firms another way to make a buck.
The other part of the performance bond was the regulated account. This account was a security deposit that was held by the clearing firm and could be used if the cash account was not enough to settle at the end of the day and the client failed to meet the margin call. The regulated account was made up of Treasury bills and this part of the performance bond was inviolate. The regulated accounts were the lifeboats of the futures markets. If a market sank, the T-bills would be there to guarantee payment, and according to CFTC rules, the boys in Chicago weren’t allowed to fool with the regulated accounts. The only way they could touch a regulated account was if a client failed to meet a margin call.
In addition to low taxes and lots of leverage, the performance bond was another thing that made trading futures so attractive to me. Because I was a constant winner, I never had to put up any money in the cash account, and in my deal with Third LaSalle, I was able to negotiate the minimum amount required by the Merc for the regulated account, which in my case was $1.2 million. What made it even sweeter was that I got to keep the interest that was being thrown off by the T-bills. With stocks, I had to pay for the stock, which meant that there was a cost of capital. With futures, there was no cost of capital as long as I was profitable. It was a win-win deal for me. I was earning interest on my million two in T-bills while I was making money on my positions.
I’d been trading with Third LaSalle for about a year when we moved to Park Avenue, and I was very pleased with our relationship. I couldn’t have asked for a better clerk than Debbie. She was responsible, efficient, tough, and squarely in my corner. And as she’d promised, the Marcucci brothers took good care of me. Jackie ran the business and was a smooth operator. He had come to New York after I’d started trading with Third LaSalle and taken Audrey and me out to this great Italian restaurant in Little Italy. At Christmas, he’d sent us a case of wine. It wasn’t any of that Lafite-Rothschild juice that the guys from Wall Street liked to send out. This was vintage Italiano, the kind of stuff they drank in Chicago. It was stomped in vats by peasants in the old country and you could taste the sweat from their feet.
While Jackie was great at schmoozing up Third LaSalle’s clients, Johnny took care of them in the pit. Johnny was 6?5?, 280, and whenever Debbie had trouble filling an order, she’d call Johnny to come down and straighten things out. Big guys did well at filling orders, and Johnny had 280 ways of persuading whoever was on the other side of the trade that they’d made a mistake. With Jackie, Johnny, and Debbie working my account, I’d been getting great service.
By Thursday, April 11, we’d been in our new apartment for almost a week and it was time for me to get back to work. After much calling and rescheduling, my machines were finally set up and my phones working, so I picked up my direct line to the floor of the Merc and called Debbie. “Debbie, honey, how ya doing?…Yeah, we’re in, but this place is going to cost me a fortune. Audrey’s got a list of things we gotta do that’s a mile long. I need to make some money.”
“Marty,” Debbie said, “we can’t trade today.”
“What?”
“You’d better talk to Jackie. There’s been some problem with the firm. It has to do with that Bevill, Bresler stuff.”
“Bevill, Bresler? What the hell are you talking about?”
“Bevill, Bresler & Schulman, the government securities firm in New Jersey that just went under. It’s on the front page of today’s Journal. Jackie was doing some business with them.”
“What the hell! Debbie, where’s my money? I want my money!”
“Marty, calm down. Call Jackie. You gotta talk to Jackie, but he says that everybody’s money’s okay.”
“Okay, my ass. I don’t trust anybody in Chicago. I want my money!” I slammed down the direct line, picked up another phone, and pu
nched in the number for Third LaSalle. The receptionist sounded frenzied and nervous, like she was expecting everybody who called to yell at her. She was right. “This is Marty Schwartz. Where the hell’s Jackie?”
“I’m sorry, Mr. Schwartz, Mr. Marcucci’s not here.”
“Then give me Johnny.”
“I’m sorry, he’s not here either. If you’d care to leave a message, I’ll ask them to return your call.”
“Leave a message? You bet I’ll leave a message. You tell those bastards that I don’t know what kind of crap they think they’re pulling, but I want my money wired out immediately!”
I threw down the phone. My hands were trembling. What the hell was going on? I grabbed the latest sheets from my desk. I didn’t have any money in my cash account at Third LaSalle. I’d cleaned out all of my positions before the move and swept the cash into a money market fund so I could get some interest over the long weekend. That was a lucky break. All Third LaSalle was holding was my million two in T-bills, and these were in the regulated account. Thanks to the CFTC, they couldn’t fool with them unless I failed to make a margin call. If Third LaSalle was having a problem, it must have something to do with the unregulated accounts. So, I should be all right, but in Chicago, you were never all right until you had your money in your pocket.
I hopped on the elevator and went down to the lobby to pick up my Wall Street Journal. Debbie said something about Bevill, Bresler being in the Journal. The president of the co-op was there picking up his papers. “Good morning, Mr. Schwartz,” he said. “Everything okay?”
“Yeah, sure, just fine.” Damn, I wondered if he knew something. “Why wouldn’t everything be going okay?”
“Well, moving is always stressful, and with your wife about to have a baby. I was just wondering….”
“Everything’s fine. Couldn’t be better. Thanks for asking.” I grabbed my Journal and jumped back in the elevator. That old garment maker was the last person I wanted to see. I was sure he was just waiting to throw us out.
According to the Journal, Bevill, Bresler & Schulman was a registered broker-dealer handling mainly U.S. government and municipal securities headquartered in Livingston, New Jersey. It and its sister company, Asset Management, had been doing repos with small savings and loans across the country. Asset Management had collapsed on Monday, April 8, when it couldn’t make good on its agreements. Bevill, Bresler & Schulman and its affiliates had gone into receivership on Wednesday the tenth when the SEC charged the companies and their senior officers with fraud, saying that “they obtained control of customers’ securities and used the proceeds to their own benefit.”
I didn’t know how Third LaSalle was tied up with these clowns, but the Marcucci brothers had their own bond business, and they must have been doing repos through Third LaSalle. But with repos, they’d lend cash and get Treasury bills back as security. The only way that I could get hurt was if they’d somehow done a reverse repo where they’d lent out my T-bills, gotten cash, and then lost the cash. But they couldn’t have done that because my T-bills were in a regulated account. Still, this was Chicago, where the tombstones voted and Ubi est Mea reigned.
My mind was spinning with possibilities, all of them bad. I kept calling Jackie and finally got through. “Jackie, what the hell’s going on? I want those T-bills wired out immediately.”
“Marty, Marty, calm down. Everything’s fine. Have a glass of that good wine I sent ya.”
“Fuck the wine, Jackie, I want my money! Those T-bills are in a regulated account. You bastards can’t touch ’em. It’s against the law. You get ’em wired to me now or I’ll come out there and rip your fuckin’ head off!” Talk about posturing. Jackie was almost as big as Johnny.
“Marty, we got a slight technical difficulty here, a computer glitch, but Johnny’s looking into it. Believe me, everything’s gonna be fine.”
“Bullshit! I’m telling you…”
Click. Jackie hung up. Fuck, they’d lost them. I could feel it. They’d done something with my T-bills and they’d lost them. None of these funds were insured. Shit, I couldn’t take a million two hit. Not now. We’d just moved into this big-ass apartment and Audrey was about to have the baby. How was I going to trade? How was I going to make my monthly nut? Once more, I called the legal department at the Merc.
“You registered these guys,” I said, jumping up and down. “They’re your responsibility. I’ve overlooked a lot of crap that’s been going on out there, but I’m a member. You gotta take care of me. You gotta straighten this out. It’s your problem.” Yadda, yadda, yadda! They said that they were aware of the situation and were “looking into it.”
I called my lawyer. “Kornstein! I wanna sue these bastards! I want my money back! I want damages! I want punitive damages!! I WANT THE WHOLE FUCKIN’ WORKS!!! They’re wrecking my business! They’re destroying my livelihood!” My lawyer advised me to wait until I had some facts.
I called Mike Margolis, my broker at Bear Stearns. I knew that Bear Stearns did business in Chicago, and I knew that Jimmy Cayne, one of the top men at Bear Stearns, was buddy buddy with Leo Melamed. “Mike, you gotta help me out. Those bastards in Chicago are trying to fuck me out of a million two. Get Cayne to make some calls. Ya gotta find out what’s going on!” He said he would.
I stayed on the horn, bugging people, trying to find out what was happening, but by the end of the day, I still had no idea if I was ever going to see my million two in T-bills again. I didn’t sleep that night, and the next morning I started making more calls.
“Debbie, what’s happening? You got any news?”
“Jackie and Johnny aren’t talking, but everybody else is. It looks like Third LaSalle’s going under, and all of their accounts are being transferred to other firms. It’s in today’s Journal.”
“But what about my money?”
“Gee, Marty, I don’t know.”
I went to the lobby to get my Journal. There was the old garment man standing right by my mailbox. He was talking with another member of the board. They were looking at the financial pages and shaking their heads. Damn, they must be reading about Bevill, Bresler & Schulman. They knew that I was in trouble, and they were getting ready to throw my ass out. I ducked behind a Chinese silk screen and waited for them to leave.
When they were gone, I grabbed my Journal and ran back upstairs. The piece on Third LaSalle read like a press release from the Chicago Chamber of Commerce. “The Third LaSalle affiliate, Broker’s Capital of Chicago, a small government securities dealer, is believed to have had exposure to losses of $1 to $2 million on repurchase agreements with Bevill Bresler…. At Third LaSalle’s request, its customer accounts were transferred to three other Chicago clearing firms…. The exchanges said the transfer of Third LaSalle’s accounts assures that no customer funds are in jeopardy…. Indications are that customers’ funds ‘are intact and haven’t been compromised,’ said a spokesman for the Commodity Futures Trading Commission….”
I called the legal department of the Merc. “The Journal says that all of Third LaSalle’s accounts have been transferred to other firms and that their customers’ funds are intact and haven’t been compromised. So who’s my new clearing firm and where’s my million two?” They said they didn’t know, but that the CFTC and the Exchange were “looking into it.”
“DON’T FUCK WITH ME!” I screamed into the phone. “That’s a regulated account. It’s inviolate. You know, you guys aren’t the only ones with clout in Washington. If you don’t get me my money by the end of the day, I’m calling the CFTC and I’m telling them about all the crap that goes on out there. I’m on record.” Yadda, yadda, yadda!
I called Kornstein. I called Margolis. I called Debbie. I called Zoellner. I even called Frannie over at the Amex to see if they knew anybody else for me to call. Finally, just before five, somebody called me. It was a representative from Saul Stone & Co., a clearing firm in Chicago. He sounded very upbeat. He said that they’d taken over my account, that they had my mil
lion two in T-bills, and that they were willing to take on Debbie as my clerk. “Marty, we’re pleased to have your business and you can start trading first thing tomorrow.”
I couldn’t believe it. For the first time in two days, I felt the stoppage in the plumbing in my backside loosen up. Somehow, they’d made me whole. I picked up my direct line and called Debbie. “Yeah, Debbie, they found our money. It looks like we’re back in business. You’re working for Saul Stone.”
“Huh?”
“My account’s been moved to Saul Stone, and I told them you were part of the deal, that you went with the money. That OK?”
“Yeah, I guess so, Marty, but what happened?”
“Honey, I don’t know, and you don’t want to know. Somehow everybody was made whole. What’s a million two to them? They’ll get it from the next guy. They just want to keep the game going.”
I never really knew how I was taken care of, but I got my money. I don’t know whether that meant somebody else didn’t get theirs, but my idea was that the boys at the Merc went down to the Merc Club, sat around the bar, and worked things out. They couldn’t afford to have the reputation of the Exchange sullied. If one firm could rat out on a client, then they all could. So, somehow, the money was made good.
I slept like a log that night. When I went down to get my Journal the next morning, there was the old garment man standing in the foyer. “Morning, morning,” I caroled cheerfully. “How’s the dress business today?”
“Good morning, Mr. Schwartz,” he said as I walked up. “All moved in?”
“Yeah, yeah, everything’s fine. I’m back in business.”
As for Jackie and Johnny, they ended up back in business, too. Their clearing firm was gone, but they still traded bond futures on the CBOT. In Chicago, having a little shit on your shoes is all part of the game.
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