I took a look around and asked Zvi if he thought Fitty sending Ashley and Marcus to meet with us was comparable to our sending Nu to meet with potential investors. He shot me a dirty look. We’d been down this road before, having recently had a number of heated arguments about it already over drinks at Sutton Place. Zvi was keenly aware of his brother’s weaknesses, but would never publicly acknowledge them. After exchanging names and handshakes, Franzie gave Ashley the two-minute explanation of who, what, and why.
“So, you’re a hedge fund.” Ashley’s tone was perfectly neutral, more of a statement than a question.
“Not technically, Ashley,” I said. “We’re similar to a hedge fund, but we have a different structure. It’s actually a much more advantageous structure for you, the investor. If a hedge fund loses half of your money, they still get their 2 percent. We don’t take any management fee. If we don’t make money, you don’t pay us a dime.”
I let that sink in for a second. At this point, a typical finance guy would zero in on this “free option” and start asking questions. But Ashley was anything but typical Wall Street. When she did not immediately respond, I broke out the Las Vegas analogy: “Think of the proprietary trading shop as being like ‘the house’ in Vegas. We’re like the Bellagio. Would Fitty prefer to bankroll the high roller, or be the Bellagio? Let me answer that for you. He wants to be the Bellagio. The odds are always in the house’s favor, and they also take a piece of every transaction. The ‘rake’ in poker, the ‘vig’ in sports betting, ‘insurance’ in blackjack, and roulette’s ‘zero/double zero’—these are just some of the ways the house takes your money when you gamble. At Incremental, we back our traders using our capital and appropriate leverage, and they generate a daily profit or loss. We carefully monitor their risk, both individually and collectively, and quickly get rid of those who underperform. Most of our traders run what we call a ‘balanced book,’ hedging out long positions with short positions to mitigate risk. Our advantage, or ‘house edge,’ is that we have enormous amounts of research and information flowing through our firm, cultivated from our relationships on the Street—but more importantly, we take a piece of every transaction, or trade. This is called the commission. That’s our buffer, if you will, against a trader’s losses.”
An image of Willi Cicci testifying before the Senate in The Godfather, Part II flashed in my mind: “Right, yeah, a buffer. The Family had a lot of buffers.”
Ashley looked confused, and it felt possible that I was losing her entirely. Marcus’s blank stare reinforced my original view that this meeting was just a favor to Franz. There was no interest. Desperate, I changed directions yet again.
“Listen, Ashley.”
She abruptly cut in, “Please, Mike, call me Ash. Only Fifty and my dad call me Ashley.”
At least she was listening.
“I’m sorry. Ash, we’re fully aware of Fitty’s tremendous talent and incredible brand. The Dubai deal you guys just negotiated. That was beyond brilliant. In my opinion, it was maybe the single most impressive promotion deal ever done.”
Ash was smiling now. I was making progress. And I wasn’t even throwing out total bullshit. Fitty got a $10 million promotion fee for appearing one night at a club in Dubai, and licensing his name on the door. It was shocking, and by my math perhaps the highest per-hour fee ever for an appearance/promotion deal. Clooney or Depp might get $10 million to make a movie, but you’re talking about hundreds of hours of real work. This was simply: hop a private jet to Dubai, party like a rap star for a night, and fly back to New York. Voila, your net worth just increased by $10 million.
Eighteen hour flight; add two hours for transportation and security; so that’s twenty hours each way. Let’s be generous and say ten hours on the ground in Dubai. Fifty hours (there’s that number again), divided by $10 million gives you $200k an hour. Holy shit! Bill Clinton only averages about $250K per speech … and he’s the former President of the United States. Not bad, Fitty. Not bad at all.
“Ash, we want to take that $10 million fee and put it to work.”
Ash was gazing at me now, and I felt like I had her locked in.
“Let me explain the buffer a little more. We hire traders to manage money for us, and charge them a commission for every trade they do. We get a rate for processing and clearing the trades of $1 per 1000 shares from Goldman Sachs. We then take that rate and mark it up to $10 for our traders. This is standard practice on the Street.”
I forced my brain to shut down the part that always wanted to scream: 1000 percent markup? What were we doing? Making meth? Smuggling poppies out of Kandahar? God bless this industry.
“Through commissions alone,” I continued, “we expect to make $700 thousand a month initially, and $1 million a month by the end of this year. That gives us a huge cushion. Our traders have to be down close to 10 percent on their books before we would lose $1 of the money you invest. No hedge fund in the world has that deal. Think about it, Ash. We’re the casino, the house.”
“And the house always wins,” Zvi chipped in on cue. Now there were smiles all around the table. I waited a few seconds.
Ash was still stone faced and silent. I continued to jabber.
“Historically, proprietary trading firm returns have been in the 30 percent range, and we feel that due to the violent and unprecedented financial collapse, the current investment environment is a once-in-a-generation opportunity. In our business, volatility is a trader’s best friend, and the equity markets are as volatile as they’ve ever been. With the talent we’ve assembled, a 40–50 percent return on investment is not unrealistic.”
The lawyer in me knew that this was where you were supposed to explain that past returns were, of course, not guarantees of future performance, and that there were risks associated with this type of investment.
Ash seemed to be right there with me.
“Michael, can you guarantee us that we won’t lose any money?” she asked.
Outsiders only cared about making money all the time, and not how remarkably they might be doing compared to the rest of the market. When it was their money on the line, the last thing they wanted to hear was that the S&P 500 index was down 40 percent, but their portfolio was only down 30 percent. That type of performance might be acceptable in mutual fund land, but in a lot of other places it meant you were out of business and most likely getting sued. In Little Italy, you’d probably end up with a shovel on a Queens waterfront, digging your own grave.
I was honest.
“Just as whales on a hot streak can occasionally hurt a casino, our traders will sometimes lose money. Even the Bellagio has a bad month. But most of the time, it does great. Legally, I can’t say you’d never lose money if we have an off month. Securities laws don’t allow us to make any such guarantees. This is not a Treasury bond.”
“But really that’s just a technicality,” Zvi chimed in, still trying to close the deal. “We may not be legally able to guarantee it, but we can tell you that the absolute return on your investment will be 20 percent, and probably twice that much. Between you and me … that’s what its going to be.”
Well this was pure Zvi doublespeak, I thought with a smile. We can’t guarantee, but we are guaranteeing. In an instant, Zvi had changed a plain-vanilla investment pitch into a tightrope walk. Spew that bullshit in a meeting with real Wall Street financial guys and you’d get laughed out of the room. Zvi thought he knew his audience, and was preying on what he presumed was her naiveté and unfamiliarity with the proprietary trading business. Ash leaned back in her chair and smiled at Marcus. I could see her thinking about what Zvi had promised.
“So it is safe to assume that we would earn at least a 10 percent return on our investment?” Ash asked.
“Yes,” Zvi said, once again without a shadow of doubt.
This may have been my fault. I’d been trying to teach Zvi the virtue of knowing when to stop talking. I’d realized I needed to do this after several disastrous capital raising meetings in w
hich Zvi had talked our way out of deals. (“Don’t fill the void with babble and obvious lies. It’s not so hard, Zvi.”) He was a good study, and with the benefit of my tricks from the legal world, had become a very solid negotiator. But there was more to it with him. Zvi drove a hard bargain because he couldn’t care less if he lost. Whatever happened, it had to be under his terms. That was what he cared about. He cared about dominating and winning. The Wikipedia entry for the expression “My way or the highway” should have a picture of Zvi flipping a double bird.
Zvi’s over-the-top negotiating style did occasionally work. Investors and traders on the Street feared missing out on the next big thing more than they worried about cutting a bad deal for themselves. In the right light, Zvi could prey on this.
I flashed back to a scene in Scorsese’s Casino, where the bank president tells Joe Pesci’s character, “Listen, Nicky, there’s a possibility you might have to take some kind of loss.” Nicky responds with that sinister smile, “Tomorrow morning, I’ll get up nice and early, take a walk down over to the bank, and if you don’t have my money, I’ll crack your fucking head wide open in front of everybody in the bank. And just about the time that I’m coming out of jail, hopefully, you’ll be coming out of your coma … I’ll split your fucking head open again.”
A bloody vision danced in my head, and suddenly it wasn’t Nicky I was worried about. It was the giant by the front door, or some other friend of Fitty’s paying me a late-night visit. Zvi was just lying now. To people who you don’t want to do that to.
When my business deals go bad, I want a pinstriped lawyer coming after me with a Montblanc pen, not a gangster with a Glock 9. Fitty had been shot nine times! 50 Cent divided by 9, that’s almost 5.5 cents per bullet. That’s not the kind of person I wanted to bang it out with. When I was twelve, my brother shot me in the ass with a BB gun and I cried for an hour.
“Let me clarify something here,” I interjected, earning a harsh stare from Zvi.
By this point, Nu looked as if he needed a scorecard to figure who was playing, and Franz was fidgeting with his Hermes tie. I could sense that Franz was having second thoughts, knowing that Fitty and his crew would hold him responsible if they invested with us and lost money.
“Let’s be very clear,” I said. “We are better than a hedge fund because we have a buffer. We’re the house, and we have an edge. But we do have risk, betting on our traders. If our traders lose money, those losses may be in excess of the buffer. As I said, while we expect to generate a 30 percent return on investment this year, we can’t guarantee that. We also can’t guarantee that you won’t lose money. But we can say, based on past returns and realistic internal projections which we are happy to provide you, that we hope to return 30 percent.”
I immediately felt the air come out of the room. Ash sat back in her seat and put her pen in her mouth.
Zvi was livid and tried to kick-save the meeting.
“We’re very confident,” he added. He gave her a knowing smirk that functioned as a wink. I let him get away with that.
“Okay, gentlemen,” said Ash. “Thank you very much. We’ll talk to Fifty and Sha and get back to you.”
We said goodbye and filtered out of the room. The denim giant gave us a serious stare-down as we got in the elevator. I knew we would never get a $10 million investment from 50 Cent, as much as I knew that Zvi would explode the minute we got outside. Sure enough, he went ballistic right as we got out to Fifth Avenue.
“What the fuck was that, dude?” he raged at me.
“Zvi, we don’t want that kind of money. It’s too dangerous. They don’t understand our business. You guarantee something to them and the collateral is your life. You can’t come back in a year and say we lost 20 percent. What do you think they will say? No problem, fellas, thanks for trying? No, they’ll say that we guaranteed them a 10 percent return, and the losses are our problem.”
“Fuck you, pay me,” Nu added, in his best Pesci voice, his first notable contribution of the day.
“Fuck them,” Zvi shot back. “Fitty’s easily worth $500 million. You think he’s gonna sweat us over a few mil? Come on!”
“Remember Casino?” I replayed the familiar Pesci-banker scene for them, and a light went off in Nu’s head. He smiled and nodded in agreement.
“You let me worry about Fitty,” Zvi said.
“It’s not Fitty that I’m worried about. It’s the rest of the G-Unit soldiers that would put a bullet in our heads for around $2 grand and be thankful for the opportunity.”
Zvi shook his head and laughed out loud.
“You’ve seen too many movies, dude.”
It was funny hearing that from him, of all people. Zvi and Nu were gangster movie addicts. There wasn’t a Pesci or DeNiro scene that the Brothers Goffer couldn’t recite verbatim on demand. The Scorsese film library was their King James Bible.
Was I any different? I wondered. We had been inside for barely thirty minutes and my two key points of reference were The Godfather and Casino.
But yes, I quickly realized. I fucking was. Namely, because I realized that movies were entertainment, and this was real life. I was not prepared to do business with people who might kill us if or when we made a single bad trade on their behalf. For Zvi, this was not even an issue. A cold chill went up my spine as we climbed back into the car and headed away from Fitty’s recording bunker. If Zvi would make these kind of promises to a literal gangster, then what else was he capable of?
* Later, all three “legends” would be investigated or prosecuted for insider trading.
CHAPTER TWELVE
THE UNDISCOVERED COUNTRY
______________
“MIKE, IT’S GARRETT,” THE VOICE ON the other end breathed into the receiver with urgency that was only partly concealed.
“To what do I owe the honor?” I asked.
After Remsenberg had blown up, I’d given my friend Garrett Marquis a “temporary” $10,000 loan to “save his marriage” and keep a roof over his head. I found out later he’d hit Nu up for the same amount and God knows who else. This short-term “I owe you my life loan” was now going on three years, and it had survived Garrett’s extravagant wedding, a new condo purchase, and a Mercedes (“it’s only leased, Mike”). He was that kind of guy.
“You know my uncle is at Bear Stearns, right? Well, he says things are so bad over there that he thinks they’ll get bought. Some bank from Sweden or something.”
“I think that’s kind of in the market already,” I said as though Garrett were a small child who had conjectured that man might one day reach the moon. “Everybody knows Bear is in trouble. There was an article in this morning’s Times, for goodness sake.”
After a small pause to calculate why exactly Garrett was telling me this (like maybe “Hey man, you made $10 thousand on that Bear Stearns short, can we net out my debt?”), I asked him: “Do you want me to tell Zvi?”
“Please do. I gotta run.”
I called Zvi.
“Yo, you know the spot where Garrett’s uncle works?” I asked him, careful not to mention the name of the firm as the eyes and ears on the desk were always roving for action.
“Yeah?”
“Well he thinks something really might happen. Apparently it’s a shitshow over there.”
“Can I call Garrett direct and press him?” Zvi asked excitedly.
“Be my guest,” I told him, well aware he’d call irrespective of what I said.
I hung up the phone and started punching up BSC charts on my Bloomie.
Zvi called Garrett, then hung up and dialed Joe Mancuso immediately.
“You know Garrett’s uncle’s company?”
“I think so, what’s the symbol?”
“Brian Smells Clammy,” Zvi whispered.
“What about them?”
“I think they get bought by Swiss. Swiss Cheese.”
“Date and time? Wait, we’ll talk more later face to face.”
“We don’t know anything
. If it dips more you should put some on.”
After calling Drimal and a handful of other contacts, Zvi circled back to his brother.
“Does your whole group have it on?” Zvi asked Nu.
“Yeah. Good size in the common and a smattering of near term calls. Did you tell Mike about this one?”
“Yeah. Joe too and a few others. Alright, if everyone’s got it on. I’m going to walk it into the Big Guy.”
Zvi let Nu know he was referring to Raj.
“Be ready to let some go, you know the Fat Man stampedes in like a fuckin’ elephant.”
“Roger that, Chief,” Nu responded and cued up some more Bear Stearns sell orders.
We were trading in and out of Bear Stearns for a week, only making small coin. The stock was trending downward. Most of us stopped ourselves out when it triggered our initial entry point of $81, and now it was sitting precariously in the mid $50s, having shed the last $10 quicker than Marion Barry in a crackhouse. Then something changed.
“What’s going on with Bear Stearns!?” I shouted, as I noticed it ticking up violently from $55 to $59, leaping dollars like rungs of a ladder. Then it was through $60.
“Anything on the tape?” Paul barked as we checked our news services and fired off instant messages to other traders on the Street that might have some insight into the sudden ramp-up. Futures were gapping up now. Someone apparently knew that a break-the-glass scenario was off the table.
“Maybe it’s a merger,” I theorized. “Or some kind of an outside capital injection? Probably not a merger, but it could be a partnership? Is there anything on the web? Come on. What the fuck is the news? Goddamn Bear Stearns. Goddamn criminals!”
I cursed the buyers out there who were trading on information that the rest of us down the food chain weren’t yet aware of. Somebody clearly knew something but it certainly wasn’t me. The SEC examiners who had been auditing Whitney’s firm for the last three months were seated in the conference room directly next to us. They gingerly stuck their heads out and looked around. I guess hearing me shout was decidedly more interesting than whatever they were parsing in there.
Confessions of a Wall Street Insider Page 16