by Guy Lawson
Upstairs, Graber was on an amazing winning streak. In the early eighties the so-called fourth wave of mergers had begun. So had the accompanying wave of insider trading scandals. Oil companies were in heavy play, with commodity prices depressed. In rapid succession, the shares of Gulf, Exxon, and Citi Services took o! on speculative runs based on impending takeovers. Miraculously, Freddy Graber managed to be ahead of the news every time. Even the green young Israel could see that it was impossible for Graber’s success to be the result of chance.
“I saw how Freddy built positions in stocks,” Israel recalled. “Then I saw how those companies got bought out. Freddy would make ten, twelve, "fteen points on each deal.
Not a fortune. But put the trades together and Freddy made millions. He had eleven deals in a row in one year. Eleven wasn’t lucky. How can you always be in the right place at the right time? You have to have good information. In that era, the Ma"a was all over the news. You had the "ve families of New York and The Godfather and gangsters strutting around Little Italy. That was supposed to be organized crime. But those guys weren’t organized compared to Wall Street. As big as those gangsters were, they weren’t a pimple on the ass of an elephant compared to what Freddy and his crowd were doing on the stock exchange. And Freddy didn’t have to kill anyone. Freddy didn’t meet up afterwards to whack up a couple of hundreds of thousands with some wiseguys. Freddy whacked up millions and millions with his wiseguys—really the smart guys.”
But there were paradoxes to Graber that he would pass along to his acolyte. He was e!ectively running a con on Wall Street, enriching himself by illegally trading on inside information. But at the same time Graber was himself susceptible to con artists. It was as if all his dissembling and deception made him oblivious to other people’s lies and machinations. Or perhaps it was a measure of his ego that he didn’t believe he could be fooled. Or perhaps it was recklessness. Graber, like Israel in later years, was prone to taking wild gambles, in the market as well as in life. The stakes didn’t matter: Graber was addicted to risk. Everyone on the Street knew Graber had balls, big balls, balls made of steel.
“Freddy was a great trader and he made a lot of money, but he was also the easiest mark in the world,” Phil said. “He was gullible. Like an overgrown child. He got conned all the time. He walked around with wads of cash, spending it left, right, and center. He would bet on anything—two ants walking across the #oor, like they say. His settle point with his bookie was "fty thousand dollars. If Freddy went over or under "fty grand, they would meet to settle up. Worked either way, up or down. When Freddy would get near the "fty thousand point in losses he would start betting like crazy. He was trying to avoid hitting "fty grand in losses. And it worked. But in reverse. His losses would go from forty-eight thousand to a hundred grand in one day. Once he came to work with a brown briefcase "lled with cash. He asked me to count the money. He told me there was a hundred thousand in it. I go to a room and count it and there was $152,000. He had no idea. I could have just taken the difference and he would never have known.”
The lessons Graber taught Sam would take years to fully sink in, as Wall Street’s secrets were gradually revealed in all their sly splendor. Graber called Sam’s education learning by osmosis: over time he would absorb Wall Street’s ethos by watching, listening, developing his own sensibility. As a market insider, Graber operated in what was e!ectively a parallel reality to the market known to the public. To Graber, large institutional investors like pension funds and insurance companies were chumps and patsies. The supposedly sophisticated players had no idea how Graber actually operated, or if they did have an inkling they weren’t able to stop him. The same was true for the government. The ineptitude of the regulators was an open joke. Laws were broken so often and with such impunity, Israel learned, that there were effectively no rules. Trades were done “on the sheets” for legitimate business, but the real action was “o! the sheets,” in side deals done on the phone, on street corners, in bars. These trades were done in cash. The proceeds were spirited out of the country, to Graber’s Swiss bank account (he kept the account number on the back page of his daybook).
One scam Graber introduced Sam to early involved two brothers. One brother worked at a large institutional investor, the other at a brokerage. Graber called them the Smith Brothers, after the cough drop company, because of the amount of money they coughed up. “One of the Smith Brothers would call up every morning and whisper his deal sheet for the day,” Israel remembered. “The sheet said what he was going to buy and what he was going to sell. The fund he worked for was one of the biggest in the market. In those days volume wasn’t very large, and his fund’s trades could move the market. So if he called and said he was selling "ve million IBM, I would load up on shorts for IBM while I was eating my bagel and drinking my "rst co!ee. There was no guarantee that IBM
would go down, but it was a pretty fucking good bet.
“I didn’t know if it was against the law, and I didn’t really care. It wasn’t big-time inside information. It was small-time inside information. But it a!ected the market.
With the Smith Brothers, we were in with the guys who were making the market—the big players like Fidelity and Alliance. So if IBM was at one hundred dollars I would watch it go to ninety-nine, then ninety-eight, then I’d close out my position. It wasn’t a huge amount of money all at once. But it added up over time—and I mean really added up.“The way we paid the Smith Brothers was simple. After I had the information from one brother, I did the trades with the other brother, who was the broker. Because Freddy was such a heavy trader, the volume meant serious money. I didn’t know how the brothers divvied things up. I didn’t care. But the Smiths were right on for Freddy.
They made him a lot of money.”
Israel was enthralled by Graber, the "rst intensely close father substitute relationship of many he would have in the future. It was easy to see why Sam was so attracted. The trader was a large man with a larger-than-life presence. Eccentric and brilliant, Graber was like a mad scientist in his laboratory as he rubbed his forehead and placed mammoth bets in the market. Graber was also beloved by his peers. If a man was down on his luck—going through a divorce, in trouble with the law, on a losing streak—Graber could be counted on to throw business his way. Graber moved in elite social circles, but he didn’t aspire to "t in with the country club set. He liked hanging out with characters, men with stories, a sense of humor, a checkered past. When Graber was arrested for drunk driving and forced to spend a night behind bars, he emerged in the morning friends with many of the men in the drunk tank.
In the beginning, Sam always dressed sharp for work. He’d inherited half a dozen elegant handmade suits from his grandfather. They "t Sam perfectly. He was literally "lling the suit of Samuel Israel Jr., one of the greatest commodity traders of all time. “I wanted to look great when I went to work,” he recalled. “I worked for Freddy Graber, and he was the Man. They called Freddy the King on the #oor. He would walk by and people would literally say, ‘Hey, King.’ Like Freddy was Elvis. Freddy would come into the o$ce in the morning and pick up a magazine and point to a picture of a car in a magazine—a Mercedes sedan. He would say, ‘I’m going to make that today, and we’re going to buy it today.’ And then he would do it. He would buy that Mercedes that afternoon and drive it home. He was like Babe Ruth pointing to the stands saying he was going to knock it out of the park. He would make seventy grand one day. Sixty the next. Then thirty. His losses were always smaller than the gains. He had that kind of feel for the market.
“Freddy was a pure trader. He was one of the guys who really traded. He didn’t buy a stock and fall in love with it. He didn’t invest. He traded. Traders gravitated towards traders. You needed to make sure your alliances were strong. Traders weren’t rivals or enemies with each other, like some people thought. They needed to be friends because they were small compared to the big institutions. Traders like George Soros, Michael Steinhardt, Jimmy Harpel, and Freddy G
raber—guys who were running the important funds—banded together. Once we found out what huge mutual funds like Fidelity were trading, all bets were o!. We would start working as a team, buying stock, shorting stock, fucking with them mercilessly. We were small, fast, nimble. The banks and pension funds were big and slow. Dinosaurs. We were there to guide them to extinction, a nickel and a dime at a time. Freddy traded ahead of the market—front-running—all day long. In and out, in and out. Like a maniac.”
Since he’d begun with Graber, Sam had been dying to make actual trades. But Graber had a strict rule. As a beginner Sam wasn’t permitted to trade with Graber’s money.
Sam was a clerk, taking orders from Graber and Ratner—including fetching lunch or grabbing a pack of smokes. “You’re not going to learn how to shave by practicing on my beard,” Graber told Sam. In other words, to trade, Israel would have to risk his own neck. Israel was making only $16,500 a year, which left him with little discretionary money. But he could see Graber and Phil making money all day, and he wanted in on the action.
“I asked Freddy questions about his trades, but he didn’t like to be bothered explaining things,” Israel recalled. “He told me I had to learn on my own. There was the obvious stu!, like front-running. But when I asked how he knew what to buy and sell he just told me I had to learn for myself. Freddy said I would know after a couple of years if I could read a tape or not—if I had a feel for the market. You could either read a tape or you couldn’t—it couldn’t be taught.”
One day, Graber told Sam, he would have to decide if he had what it took to be a trader, or if he would have to settle for the more mundane life of a broker. On the Street, traders took risks. Traders were the heroes—the men with balls, big balls, balls of steel. As a broker, Sam could make a steady living. He could do well, even very well, executing the orders of traders. Like Phil, he could make a million dollars. But he would always be acting on other people’s ideas. He would be an order taker—a soldier in the wars of Wall Street, not a general. Such a prospect never entered Israel’s head. Sam imagined himself to be a born trader. The surname Israel said it all. Sam was only twenty-two, but he understood that in choosing to become a trader he was competing with his ancestors—and outdoing his father, who didn’t have the mettle to trade, at least in his son’s estimation.
A trader named Chuck Zion took an interest in Sam. Known as Brown Bear, Zion showed Israel how to be a “paper trader.” Following a matrix of three hundred companies, Israel learned to track the price movement of shares so that he could recognize characteristics. “Brown Bear made sure I was doing it every day, not being lazy and wasting his time,” Sam recalled. “He was giving me a gift. Once you know the price range of a share, you get a chart in your head. You know if the stock is streaking.
You know if it is tanking. Each stock has characteristics in the way it trades. Knowing the price of a stock was like dating a girl. How well do you know her? What does she like to do? What’s her mood today?”
In the eighties, Graber shared o$ce space with some of the most cunning traders on Wall Street. The L-shaped suite of cubicles on the thirtieth #oor of 1 New York Plaza was like the 1920s Yankees batting lineup, a Murderers’ Row of heavy hitters. As Graber’s acolyte, Sam was known as “the kid.” The older men took him into their con"dence and started to teach him the tricks of the trade. Byron Wien, for decades one of the most in#uential voices on Wall Street, taught Israel how to understand macroeconomic questions like the di!erence between gross national product and gross domestic product. The government had switched the leading economic indicator from GNP to GDP, Wien explained to Israel, as a way to make it seem that the economy was growing faster—o$cial sleight of hand understood by very few. Charlie Irish, Mark Finkle, Bob Sussman, Peter Peterson, the trader known as the Prince of Darkness who founded the multi-billion-dollar private equity giant Blackstone—many of the best hedge fund traders in the world were arranged along the stretch of corridor Israel was able to travel during the trading day.
“I didn’t study in college, so I had to learn on the job,” Israel remembered. “All of these guys were from Harvard and the Wharton Business School. They were the A-Team. Steven Peck was one of the "rst real chartists. Everyone looks at charts now, but back then no one really did, not like Steven. He had a cool program that let him bring up charts by pushing a button on his IBM computer. I would go into his o$ce for hours and watch him price di!erent blocks of trades. He loved to teach. Same with Jim Harpel, who ran Century Capital and had one hundred million dollars at the time. His style was to buy and hold, or short and hold. Ninety percent of the guys running funds were Jewish. It was like the Jewish Mafia.”
In the evenings Sam regaled his parents with stories of Graber’s triumphs. His father had retired from ACLI with millions from the sale of the family company in the early eighties. Listening to his son’s tales of the money made by the King, Larry Israel decided to take a desk in the bull pit near Graber to trade his own money. Sam’s father and Graber were casual friends, and soon the trio started to ride together to work every day. “My father was there trading right beside Freddy—and right beside me,” Sam recalled. “It was a little weird at "rst. But after a while it didn’t bother me because I didn’t work for him. He was making money. It was a moneymaking environment, to say the least. My father and Freddy became close friends.
“I was known for being around the o$ce a lot. I stayed late. I would never take more than one week’s vacation a year. One day they couldn’t "nd me at work. I just didn’t turn up. Around lunch Freddy was getting worried. He was going to call the cops. My father was getting worried too. Freddy stood up to get his lunch and he saw me lying on the #oor. I got so drunk the night before, I had passed out under my desk, as my place of sanctuary.”
There was a saying in Graber’s o$ce: You can’t be a winner until you learn how to lose. It was a lesson Sam struggled with from the beginning, as Phil noticed when he gradually began to permit Sam to make trades for Graber. “Sam was a good trader when he was winning,” Phil recalled. “But he hated losing. He couldn’t stand it. He didn’t want to face the disgrace. He would hide his losing trades in his desk, in the middle drawer, hoping they wouldn’t get found, hoping the trade would turn around.
He would let the loss go too far. Freddy was the same way. But it was Freddy’s money, so he could do what he wanted. I would "nd Sam’s hidden trades. I tried to teach him. I told him that if you want to trade you have to take your losses. You have to look at them. You have to stare at them. I lost all the time. But I got out quickly. And I didn’t try to forget them. I kept the tickets in front of me to remind me. For years I never had a losing month. The whole thing is discipline. I begged him to listen to me.”
One night, Israel got a taste of the kind of moral quandaries that could confront him at a moment’s notice on Wall Street. He was still only twenty-three years old, but he was already in a position of considerable power as a conduit to the commissions generated by Graber’s trades. “I got my "rst experience of a broker trying to get his hooks into me and reel me in,” Israel recalled. “I was supposed to be going out to dinner with this guy, but I got bamboozled. He said he was going to take me to his private club. It was on Fifty-seventh Street. We walked up to a black door with a camera above it and we were buzzed in. We were shown into a little anteroom with a glass window. I was thinking about how private and exclusive the club was when we were shown into a room "lled with gorgeous women. There were men there too—middle-aged, overweight slobs. The women were unbelievable Penthouse beauties. There was a swimming pool and a spa. The broker told me the girls were three hundred each, plus tip. I had a girlfriend. But I wasn’t going to back down. I knew that I was now supposed to be buddies with that broker. He had done that for me—taking me out whoring. That made you friends on Wall Street.”
Over time, Sam developed his own persona. Inspired by Graber’s idiosyncrasies, Sam imagined himself to be di!erent, an outsider of sorts, the Isra
el who wouldn’t trade on his family name or live by the conventions of Wall Street. Part of his personality was his refusal to take work or himself seriously—an echo of Graber’s devil-may-care attitude.
Israel had come to hate the dress code traders followed, so he rebelled by wearing khakis, short-sleeve shirts, and cartoon character ties—the Road Runner, Bugs Bunny, Yosemite Sam. When he came to work one day with a Fred Flintstone tie, Graber demanded Sam hand it over immediately—so he could wear it.
As a velocity trader, Graber constantly bought and sold the same stocks. He churned stock so much he created a mystique about the companies on his buy/sell list, as if they were his children. Graber called Colgate his “"rstborn.” He talked about the stock he traded with intense passion, passing around made-up gossip, false speculation, and occasionally real news—anything to stir up action. One of Graber’s abilities was to “paint the tape,” the illegal practice of trading with the sole purpose of moving the price of a stock. The agribusiness giant Archer Daniels Midland was one of the stocks Graber fooled with relentlessly. To paint the tape on ADM, Graber and Israel would call eight di!erent brokers and put in buy orders simultaneously to run up the price—at a time when Graber was holding lots of the stock ready to sell into a rising market. It was a racket the Securities and Exchange Commission was hopelessly ill equipped to stop.
“The SEC questioned Freddy all the time,” Phil Ratner recalled. “But they couldn’t catch him. He traded so much that it was impossible to say that he’d traded on inside information. Like the Columbia Pictures takeover. Freddy had started on Wall Street as an analyst in the entertainment business, so he was always trading stocks in movie and music companies. He really knew the industry backwards. So when Coca-Cola bought Columbia, Freddy bought a huge amount of shares just before the deal was announced —because he had the inside information. The SEC called him in. Freddy wasn’t worried.