Confessions of a Wall Street Insider

by Michael Kimelman

  It was hard to convey to other people how absurd it was to work there. These were the true barbarians, the savage hordes plundering. For fifty years, the big banks had operated as a virtual oligopoly, with an iron-clad lock on the markets. Goldman, Merrill, Morgan, Lehman—functionally, they were little different than the Gambinos, the Genovese, and the Bonnanos, comprising and operating a ruthless cartel colluding toward a single end—fleecing the common man.

  It wasn’t until the mid-90s that technology allowed the day-trading firms like Datek to challenge these established powers. As a securities lawyer, I was intimately familiar with the SEC. Or thought I was. To the outside world, and according to its own press team, the SEC was the regulator of the markets—enforcing the rules and ensuring fairness. But at Datek, I received an eye-popping crash-course in the real role of the SEC.

  It quickly became bracingly clear that they were the defenders of the established cartel—nothing more, nothing less. They were running a protection racket that smashed any upstart firms that in any way challenged the old banks’ dominance. On occasion, an established banker or broker would fleece a retail client so egregiously, so sloppily, that the SEC would be forced to come in and slap a wrist, just to maintain the appearance that they were there to protect the public. But those cases were few and far between. The SEC existed, first and foremost, to protect the traditional Wall Street powerhouse banks from the public, and not the other way around. The overwhelming majority of the agency was staffed by mediocre, bottom-of-their-class bureaucrats who hadn’t been able to cut it in the private sector. And for those few at the SEC who were competent, their allegiance was co-opted through the portal of corruption known as the Revolving Door, which ensured a future payoff in the form of a lucrative gig with the very banks they were supposed to be regulating. Perfect Capture.

  In 1997, some of my buddies at Sullivan & Cromwell worked on a big class action settlement from a suit against the banks filed by the National Association of Securities Dealers, or NASD, and the SEC. Banker’s Trust was our client, and their numerous derivatives blowups were keeping the firm’s billables high. The talk of the firm was a $4 billion NASD settlement, the largest by the banks in history for artificially keeping spreads wide (in our parlance, “raping retail”). Here’s how it worked. Traders would quote a stock, for instance, Microsoft (MSFT) at $25 by $25 1/2. If one of the banks on the offer decided to narrow the quote and make it $25 by $25 1/4, the rest of the banks would call that trader and raise bloody hell. Why did this matter? Simple: Because banks make markets, and by keeping the spread at 1/2, that meant that a retail client would pay a spread of fifty cents every time they wanted to buy or sell that stock. So 1,000 shares would mean an extra $500 profit for the banks right out of the retail client’s pocket. Not bad, right? That’s what happens when competition is artificially suppressed with the implicit blessing of the SEC. If there had been a real market, Microsoft might really have been trading at $25 by $25 1/16. That’s a $62 profit, instead of $500—a savings of $438 to the retail client. When the original day-trading firms began impacting the artificially wide spreads maintained by the boys at the top of food chain, what do you think happened? I think you already know the answer. Rather than going after the big banks for illegally colluding to keep the spreads artificially high, the SEC targeted the day-trading firms any way they could.

  Once we learned that the SEC were not, in fact, the good guys—but crooked cops protecting bankers—it was hard not to lose respect for them altogether. When the SEC gave the big banks a free pass on something like spread fixing, but then came after Datek for canceling orders,* it was hard to feel like you were working for a firm doing anything fundamentally wrong.

  This all might sound like the Wild West, but it’s important to understand day-trading firms like Datek were also a far cry from the seedier, mafia-infused boiler rooms that were operating at that time on Staten Island, Long Island, and even Manhattan, under the leadership of such “wolves” as Jordan Belfort. These firms—Belfort’s babies, as we called them—weren’t trading. They were stealing. How? They were selling stock that didn’t exist. (Or if the stock did exist, it was manipulated penny stock garbage, artificially inflated.) Datek wasn’t that kind of boiler room. We were a bare-bones trading floor, stacked with bright aggressive kids fresh out of the top colleges and universities—a generation of video gamers that had found the ultimate video game. Sure the people running the firms might have had some questionable backgrounds, but they were still light years from the boiler-room grifters.

  Having said that, Datek was still the closest thing to an insane asylum I’ve ever been a part of. There was an “anything and everything goes” mentality that was hard to grasp until you saw it firsthand. But why not? It was the late ’90s, Internet millionaires cropped up overnight, bank analysts were peddling profitless Internet stocks, IPOs were through the roof, and the president was too busy with his cigar and intern to care. All looked right with America.

  On a weekly basis, we ran wild, taking our cue from the stellar moral leadership. When the original group of senior trading management departed to start a firm called Tradescape*, the management duties fell to the two managers, Scrappy and Anthony … and that’s where the real frat boy degeneracy began. They’d host contests revolving around downing a whole gallon of milk, or eating two dozen saltine crackers in under five minutes, all for ridiculous stakes that would make jaws drop in flyover country.

  My second week there, in the spring of ’98, one of the traders sent me a link on AOL IM. (I’d quickly learned that email and phone were secondary, petty methods of communications—IM, instant message, was our go-to principal.) I clicked it and up opened a picture of a naked young woman on all fours, winking, which I quickly clicked off and looked around, hoping no one had noticed. The trader next to me had a huge shit-eating grin and offered a loud.

  “Noiiiice! Bring that back up.”

  I gave him a rushed finger against my lips and shush.

  “What?” he barked, laughing loudly.

  I started to panic. At Sullivan & Cromwell, there were strict rules on Internet use. The Internet was still in its infancy, and in a law firm as stodgy as that, even a trip to harmless sites like ESPN or CNN was strictly verboten. Viewing dainty, Bob Guccione porn back then was the present-day equivalent of child porn: an immediate, no questions asked/no explanations accepted, 100 percent terminable offense, never encountered or discussed. Even a snapshot of Maria Bartiromo showing a little too much cleavage could get you a nasty drumming down from the folks at HR. I didn’t know what the rule was at Datek, but I figured discretion was the better part of valor.

  Shows how much I knew.

  Suddenly another trader, Kwan Soo, piped in: “Come on, let’s see that, or send it my way if you’re gay.”

  “What’s the deal here with … with this … stuff?” I asked with genuine innocence.

  Kwan answered, “As long as it’s not hardcore, it’s fine. Just no hardcore.”

  “As long as it’s not … hardcore? That’s a real rule?”

  It was.

  Kwan pursed his lips and arched his eyebrows, as if this was the first time anyone had presented this question. “You know … fisting, anal, money shots, gang bangs … I guess anything with penetration. Or cocks. Definitely no cocks.”

  “No cocks is an actual rule?” I marveled.

  “I mean, it’s not like it’s in the employee handbook, but ask Scrappy. He told me when I first started working here. Playboy, Maxim, that stuff is always safe.”

  There was a lot of nonsense working at Datek, and a lot of details that seemed unbelievable to outsiders, but the real unbelievable action was always in the work. The last three months of 1999 were just about the sickest thing I’d ever seen. It was an orgy, but I simply couldn’t bring myself to buy a stock that was up $10, hoping it would go up $15, even though it was overvalued by $100. But by choosing to sit out most of the ramp, determined to wait for the inevitable implosio
n, I was the Greatest Fool of All, as those around me made mind-numbing profits, day after day. YHOO, AMZN and CMGI would gap $10 a day, immune to gravity as the Nazz, aka NASDAQ, ripped right past 3000 and didn’t even blink rocketing past 4000. At the end of the year, the Nazz was up 83 percent, a far cry from the 5–7 percent stocks had returned historically. People were too busy celebrating and shouting “It’s different this time” to realize such an adjustment was unsustainable. It’s like a guy who averages five home runs a year suddenly hitting fifty. Something is not right in Mudville.

  The end of the year at Datek meant big paychecks, fat bonuses, and off-the-charts celebrations, all capped off by the granddaddy of them all, the savage Christmas party, aka the Full Employment Act for Sex Workers and Unlicensed Pharmaceutical Dealers. That year’s party was like nothing I’d ever seen in a corporate environment. Erik had rented out the main room in the Waldorf-Astoria Hotel and invited traders and their significant others to come and indulge. In keeping with our barbarians at the gate reputation, we ransacked the Waldorf like the Huns under Attila. Erik had negotiated a per person all you can drink/eat rate from the hotel, and whatever the Waldorf people may have budgeted for alcohol, you can be damn sure they underestimated. This was a crew where each of us could polish off a dozen shots, almost as many cocktails, and a twelve-pack of beer over the course of a night and still be emotionally devastated by those two loneliest words in the English language, “Last call.” Additionally, many of the wives or significant others were good for a bottle of wine and a line or two each. The year before, Lisa and I had been at the Pierre for the Sullivan & Cromwell snoozefest. In 1999, we were present for a true balls-out blast.

  The Monday morning post-Xmas party was always good for a laugh. There was a decadent roll-call, as Erik read a list of the party’s highlights and passed out the gifts to the workers in the firm. He didn’t even have to prepare a sheet, the Waldorf having done it for him.

  “’We regret to inform that due to the following list of documented damages, management will be unable to return your security deposit from the night of December 15, 1999,’” he said to smiles and budding laughter.

  “Seventeen broken glasses,” he began, just warming up. “A cracked mirror in the Northwest powder room. A broken bathroom stall door in the men’s room opposite the ballroom. Numerous complaints registered from the staff and other guests including rampant drug use, and several lewd and public acts performed in the balcony and throughout other public places in the hotel. If you have any questions, you may contact Donald Fortunato at the number above.”

  “I’ve got a question for you, Donald,” Erik shouted as the crowd of traders roared with laughter and applause, “haven’t you ever heard of a par-tay? And what does some chick showing her ass out on the balcony have to do with my security deposit? Care to put a number on that?”

  “Put a number on, Donald!” someone yelled out, and Erik responded in kind. “Donald? Let’s say $65K a year, if he’s lucky! WITH BENEFITS TOO!” he shouted maliciously, the rest of the room erupting in laughter like drunken hyenas, even the ones still hungover from Saturday night.

  Erik and his managers/minions would then soften the two-day hangovers by passing out our Christmas gifts. My first year, it was a high-end wood-grain humidor and a bottle of Johnnie Walker Blue Label scotch. The gifts, like the party the weekend before, seemed like a very big deal. But for Erik, who had probably made $250 million that past year, spending $500,000 for a party was certainly no big deal. The same was true for our gifts. He might have spent $1,000 total on each of us. With about seventy traders at the firm, he’d spent less than $100,000. To the traders, it was probably the nicest gift they’d ever been given and engendered tremendous loyalty. Meanwhile, Erik was raping us on tickets at $15 a trade (which eventually went up to $25, until the Tradescape rebellion—and to prevent much of the firm from walking out en masse, Erik had offered “deals” on tickets and payouts). I was spending $1,500 every day in commissions, or more than the cost of my “generous” holiday gift. But give me a beautiful wooden humidor stocked with a few contraband Cuban cigars and a bottle of Blue Label, and I was ready to give him a hug and apologize for calling him a “greedy troll” on at least a dozen distinct occasions.

  It shouldn’t have worked, but it did. Boy, did it ever.

  * Traders could put in a large buy order in order to fool the robots or other traders into trying to front run the order and get them to pay the offer (where the trader might have stock for sale), and then cancel the same buy order before it was executed.

  * Tradescape was eventually sold to ETrade for $200 million, in a deal that made AOL’s $182 billion purchase of Time Warner look savvy.

  CHAPTER SEVEN

  A STAR IS BORN: THE ADVENT OF ZVI

  ______________

  I LASTED ANOTHER YEAR AT DATEK. A lot happened: The tech bubble burst, 9/11, my wedding day. Of these, 9/11 might have been the most impactful. The finance community was hit particularly hard. Everybody knew somebody. If it wasn’t our immediate friends and family murdered (though for many of us, it was), it was at least someone we knew casually. In the weeks right after, baseball caps and flip flops at Datek were replaced by suits pulled from the back of our closets, as we attended the funerals of friends and colleagues who had done nothing more than kiss their kids and spouses goodbye one Tuesday morning and show up for work.

  While several I knew were lost, I did have two close friends spared by what I can only describe as the hand of God. The first, my friend George, was on a golf trip with clients in New Jersey, instead of at his desk on the 102nd floor for Aon Insurance. Though 192 Aon employees perished that morning, it could have been 193. The other, my first cousin Brian, was taking a cigarette break outside on his perch at Morgan Stanley in the South Tower when the first plane hit. Security instructed him to go back upstairs until it could be sorted out, an order so preposterous in hindsight he luckily disobeyed it. Plane number two hit eighteen minutes later.

  For me personally, 9/11 was emotionally devastating. Rather than seek professional help—as I would years later, after my arrest—I tried to chase the anger and sadness by smothering it with vodka. The emotional maelstrom and difficulty of that period wasn’t helped by Lisa’s work situation, either. She had been laid off the week before by Food Network. It turned out that while I was at work numb from grief and watching men in Hazmat suits scour our office’s ledges and terraces for missing body parts, Lisa was dealing with things in her own way. I would come home, still in a state of mild shock, and find her and her Food Network friends carousing on the stoop of our West Village apartment, polishing off bottles of wine by the case and cooking up ornate hors d’oeuvres. Perhaps they were smothering sorrows in the best ways they knew how, but I couldn’t relate on even the smallest level. I’d just trudge upstairs past them, barely able to say hello. Looking back, it feels like this was the first real gap of weirdness and disconnection that opened between my wife and me. Rather than address it, I chose to drown it—drinking for nights on end, occasionally with friends from work, but mostly alone in my living room.

  In 2002, I moved from Datek to Schoenfeld Securities, where I lasted almost three years. By the spring of 2005, I was feeling antsy. I hadn’t learned a goddamned thing in most of my time at Schoenfeld. The talent at the firm was thin. I was just grinding out a living day-to-day, not getting significantly better as a trader or improving my skillset. The stagnation allowed me to spend a lot of time with Lisa and Sylvie, who had just turned two, while finishing up my Chartered Financial Analyst degree. The CFA is a three-year degree. Candidates are required to pass one test each year to move on to the next level. I had just passed Level 3, the final stage of the degree, making me an official Chartered Financial Analyst, a member of a select group of individuals that had passed a mostly meaningless series of tests and obstacles for little more than bragging rights. And I knew that. Thousands of brilliant analysts weren’t CFAs and, likewise, thousands of current CF
As couldn’t make money armed with tomorrow’s Wall Street Journal.

  Even so, I still think Level 2 of the CFA exam just might be the hardest standardized test in existence. The fabled NY State Bar Exam, the bane of most new law school graduates and a four-time victor over JFK Jr., feels like third grade addition and subtraction by comparison. About 60 percent pass the NY Bar at their first go. The pass rate the year I took Level 2 of the CFA was less than 30 percent. Whatever the worth of the CFA, people who knew trading knew I had done something very hard. I wanted to use that to move up in the world. By the summer of 2005, I was trying to network my way into a new and better gig.

  Every Wednesday night that summer, I played softball in Central Park. It was a real collection of misfits. Bryan Roth, my trading “partner” on the Schoenfeld desk, had recruited me to play for a slow pitch team composed mostly of former Datek traders. The only three guys I didn’t know on the team were Yoon—my friend Kwan Soo Lee’s K-town buddy—and two former Datek traders from a different floor. One was Joe Mancuso … and the other, this guy named Zvi.

  Zvi’s brother Nu was also on the team and worked at Datek back in the day, but I actually remembered him, since he sat near me for a couple of weeks just before I left for Schoenfeld. Nu offered a nearly flawless imitation of Andrew “Dice” Clay upon command. It took a little while, but I eventually realized this wasn’t an imitation. Nu was actually a Dice Clay doppelgänger, who looked and sounded remarkably like the Brooklyn-born comic, so a dead-on impression wasn’t a challenge at all; it was second nature. On Datek’s trading floor, Nu was green, but showed potential. He was both fearless and disciplined, two of the toughest traits in the trader’s arsenal to acquire, and two of the most essential to succeed. It may come as a surprise to most amateurs, but discipline can be learned a lot easier than fearlessness. The ability to step out of your comfort zone and size up a trade appropriately is one of the most difficult things to learn as a trader and almost impossible to teach. Nu showed early promise at both. Nu’s compass pointed to softball, drinking, eating, and trading. I didn’t know him well enough yet to discern what else made him tick, but clearly these were the staples. It was only after years of being friends with the guy that I realized that I had solved the enigma of Nu in the first few weeks: there really was nothing else. He was blessed with a disposition and mental capacity that enjoyed life and didn’t ask too many questions. He operated at two distinct speeds, drunk and business, with the volume knob stuck on eleven for both of them. Whether it was a softball field, trading floor, or bar, within seconds Nu made his presence known. With an unmistakable permanent “outdoor voice” peppered by booming belly guffaws and an ever-present beer super-glued to his hand, Nu walked the earth like a tenth-century Viking reincarnated in the body of a twenty-first-century elephantine Jewish simpleton from Brooklyn. To this day, I’d be surprised if Nu had made a single adult decision in his entire life without first consulting his brother, including his eventual decision to get married and have two children.