THE SIAMESE CONNECTION

3 January 2007: DJIA 12474; Thai Baht/USD exchange rate: 35.45

Rule One: Never listen to your broker when he says, ‘I have a great idea’. Brokers are not paid to have great ideas. They are not smart enough to have great ideas. They exist to do what you want them to do, and skim off a healthy slice of commission for the privilege. Look at it logically. When did you last hear a broker saying, ‘That’s a dumb idea’? They don’t try and stop you when you cut some arbitrage deal involving Sudanese muni bonds and Icelandic wind farm debt. ‘Great,’ they say. ‘That’s great.’ In the brokerage world, everything is great, as long as you’re trading – with them.

Take Stanley. Stanley has a view on everything: who’s buying what, where the hot money is headed, who is losing the plot, all that sort of stuff. Now, he is a buddy and he’s my main man at Bear, where we do most of our business, but I value his opinions about as much as the output of a government statistician.

Sure, Stanley fulfils some other vital functions for me. We go fishing for marlin, spend some time at his condo in Cancun, get a private jet to see the Lakers, Superbowl tickets, et cetera et cetera. It’s a very symbiotic relationship: I pay him a ton of bro, and he pays me back with his unique market insights and some discreet excursions. Nothing ostentatious like the eighties, though – all very low key and understated.

Today is no different. Stanley has an idea. He has a friend who works in Bangkok – how do you get that gig? – and he says that the Thai economy is just about to dematerialise. The rice harvest tanked (who said global warming did nobody any good?), the government, military and royal family are all at each other’s throats, and sex tourists are going elsewhere to get their rocks off with lady boys. As Stanley said: Time to sell the hell out of the Thai Baht.

So here’s one of the essential conundrums of the active trader. Do I run off to my analysts, tell them to work up a full-blown report on the Thai economy and the recent history of the Baht, study and refine the document before presenting it to the investment committee and then wait for a green light – or do I take the word of some guy who is a friend of a friend who might, just might, know more about Thailand than the man who washes pots at my neighbourhood restaurant? It’s a constant challenge, balancing these conflicting demands.

I should, of course, follow Rule One (and Rule Two, which is not to pay attention to friends of Stanley’s or any other broker). But life is never that simple. Truth is, I just happen to know that we have a pile of client cash sitting around that isn’t sweating as much as it should, and our performance numbers could do with some fine-tuning – so what could be better than a little leftfield excursion into the Thai currency market?

The investment committee (which I chair) is too busy to be troubled by such minor tactical considerations so, two hundred and fifty million bucks later – ah, the joys of leverage! - we have made a serious dent in the Baht. Caroline, our receptionist, comes up to me and says: “Hey, Larry, I hear you’re selling the hell out of the Thai Baht.” News travels fast. Even Bloomberg doesn’t have the story yet. “Why?” I stall. “Because we’re going on our honeymoon to Thailand and I want to know when to buy the currency.”

Honeymoon? I didn’t even know she was engaged. I think I hide my disappointment well. I was working up the courage to ask her if she was available – clearly no point now. A pity, as she has a good rack and great undercarriage. But a married receptionist? That won’t do our image any good at all. Clients like to think they have a chance.

After I have dealt with that news, it’s back to the desk and more screen-watching. We like big, flat-screen monitors that fold around you like the inside of a hi-tech gun turret. I personally have four screens, all flashing constantly as prices change and old news makes way for new. But there is only so much data a brain can process, and sometimes you need to go and sit somewhere quiet where there isn’t anything more taxing to watch than the firm’s rather impressive tropical fish collection.

Some of those fish have been at the firm since it began – or more likely someone just quietly replaces them when they die so that nobody notices and gets too upset. Some of the women can get a bit emo about stuff like that. Personally, I have managed not to get too attached to any of them.

I, too, have been with Curveball Capital from day one. The fish and I took up residence on the same day, along with my three business partners, a secretary and a guy called Bohdan who looked after all the technology. That was six years ago, when making double-digit returns was as easy as hitting a cow’s rump with a banjo. Clients lined up on the sidewalk to get a piece of the action. We raised a billion dollars in eighteen months. When Goldman Sachs called, we thought we’d died and gone to hedgie heaven. (Typical Goldman: they never did invest. They just wanted to find out what we were up to. No imagination.)

I’ve been doing the same thing for all of those six years – managing the money. Nowadays, of course, I have a few rocket scientists and brain surgeons to help me, as well as a black computer the size of Milwaukee that crouches menacingly on a separate floor all by itself. Bohdan is still with us and, when he isn’t trying to get into the knickers of any woman with a pulse in our office, he looks after these monstrous boxes. He refers to them as ‘Matka’, which apparently means mother ship in Ukrainian.

I shall miss Bohdan – and the fish. We had a board meeting a week ago and formally endorsed our plan to open up in London. It’s where all the action is. Boston, frankly, is on its last legs. Bostonians all look and act as if they have a giant dill pickle stuck up their fundament, and the money management industry is no different. Mention CDOs squared to a Boston investor and they look at you as if you’d just let off gas – and lit it - in front of their grandmother.

London is different. Everything is so cool over there and the financial community is much more sophisticated. They are not going to need educating on the merits of leverage, shorting, and all the other stuff that hurts the brains of our Boston brethren. We have a target –a billion from UK investors by 2010. Personally, I think that’s going to be no stretch at all. I probably won’t even need to work five days a week. I hear there are some pretty good golf courses over there.

AMERICAN DREAM

One of the many things that differentiates me from all the losers in this place is that I am not troubled by notions of guilt or innocence. Most of them have some compelling excuses for their own shortcomings, and spend hours either justifying what they did or denying any wrongdoing. ‘It was all a big misunderstanding,’ is a popular bleat. Yeah right – you just happened to find that wedge of cash in your checking account and decided to spend it rather than return it. Get on the bus, Gus. The jury didn’t believe you, and neither do I.

My case, however, is different. Since when was it a crime to try and make your clients a truckload of money? Because, ultimately, that’s what this is all about. Strip out the problems with documentation, unreported trades, and a little bit of creative accounting, and what you’ve really got here is a genuine effort to make everyone richer than they were when they started. Isn’t that the bedrock of the American dream?

I’m having trouble getting my lawyer to understand this. He figures my best chance is to show remorse, admitting to errors of judgment and a loss of perspective. Excuse me? You look at some of the positions I took, the calls I made, and you will see that I was one of the few winners over 07/08. John Paulson may have got the headlines, but I wasn’t far behind, if only I’d been allowed to keep going.

No mistake, we all followed some cold trails. I was absolutely convinced that the Fed would rescue Lehman (as was Dick Fuld, judging by the look on his face after the firm was allowed to collapse). I also couldn’t believe that a French bank could cause so much mayhem in the US capital markets, as BNP Paribas did when it launched its ‘liquidity evaporation’ Scud missile on August 9, 2007, leading to a near-400 point fall in the Dow. Zut alors!

But we are where we are. I’m stuck in the CC with a bunch of whining losers who have no idea of what it really takes to be a winner. I have a lawyer who is fatally pessimistic, even as he is sucking money out of my account. My former business partners continue to maintain that I was acting alone (something they didn’t complain about when I was booking profits) and have formed a queue to testify about my ‘character flaws’.

Things could be worse. As far as I know, my boats have not been impounded and my wine collection is safe. I wonder if I can say the same about all those tropical fish in the reception area at our offices. I hope they got fed properly and found a good home (not at an investment bank, where they’d probably get eaten alive with chopsticks by uncouth prop traders).

I do need to set the record straight, starting now. Thanks to my buddy Richard Greensted (the finest writer of his generation, he’s told me to say), I have put together assorted jottings, notes, e-mails and diary entries to come up with a journal of what happened to me, the markets and Curveball Capital. I will go back to Day Zero – that fateful day in February 2007 when the market chose to ignore all the signs about sub-prime and merrily went about its business of buying overpriced stocks. O frabjous day! Callooh! Callay!

CHILLING AT THE CC LOUNGE

There’s quite a buzz in the CC Lounge today. Citi trading at under 4 (I shorted C. at 26 at the beginning of May 08 – I wonder if they ever closed that trade?), BofA sucking up more taxpayer dollars after finding something rather nasty in the Merrill woodshed, Bernie Madoff redefining the meaning of alternative investment strategies: it certainly gets the blood flowing.

Up here, away from the action, there are about ten of us who had some connection with the market. You have your typical mortgage broking scammers, loan sharks, a few boiler room refugees, even a corporate treasurer who got a little too personally involved in the company cashflow – we all sit around and talk tactics, swap war stories and generally blow smoke up each other’s fundaments. Of course, I’m the most famous of the lot, and they all tend to look up to me. I made it to the front page of the Journal (twice) and I’m told there was quite an interesting piece about me somewhere in the FT. Plus, I fully expect to beat the rap.

What was more impressive was, when the Madoff story broke, some young cub from the Journal called me. After a bit of chitchat about how I was getting on ‘at the farm’, he asked me about Ponzi schemes and similar scams. Move over Leeson - clearly, I am now the world’s leading expert on financial fraud. Problem is, we both got caught. The real experts are still doing it every day, rather than talking to journalists from the comfort of the communal lounge at one of the Massachusetts Governor’s guest homes.

The CC – correctional center – is surprisingly acceptable. I’m classed as a Level 3 inmate, which means they reckon I’m unlikely to stab anyone to death, or even give them a paper cut. Originally, they thought of sending me to a secure hospital unit, on account of my apparently ‘irrational’ behavior after my arrest, but I’ve clearly become more rational, although they’re not keen on letting me out of the facility. They call me an RTB – restricted to base – although I gather it also stands for ‘real trying bastard’. Charming.

Technically, I’ve done nothing wrong – yet. I am here under preventive detention, which basically means that there is a serious risk of me running away if they let me out before the trial starts. Apparently, when they found an overnight case packed with my clothes and a hundred grand cash, they thought I might be planning a long vacation. The truth is, most hedge fund managers take the same precautions, just in case it all goes FUBAR.

The guys were pretty excited by the Journal call. To be honest, so was I. It means The Street hasn’t forgotten about me just yet. It’ll happen soon enough, the next time some wannabe big-time trader tries to corner the market in pork bellies or goji berries. Ever since the Hunt brothers and Silver Thursday, guys who try to do that get burned. I just wish I’d read the manual.

I haven’t always got on with the press. When we were right in the middle of the so-called ‘butter money’ affair, I was getting swamped with calls from every journalist with even a passing interest in financial markets. They can ask the dumbest questions and then expect an intelligent answer that fills in all the gaps in their knowledge – for free.

I wanted to reach for my revolver every time I was asked the question: So what differentiates an alternative fund manager from a more traditional institutional investor?

Here’s the real answer:

We’re paid more.
We wear better clothes.
Our offices are near to the best restaurants and we can always get a table.
We can charge for country club membership as a necessary business expense.
Our first instinct is to charter a jet.
We make up the rules as we go along.
The word ‘transparency’ has no place in our business model.
We can call our firm something really stupid (e.g. Maverick, Cerberus) and get away with it.
Regulators have absolutely no understanding of what we actually do.
Objective valuation is a contradiction in terms.
Black AmEx cards do not impress us.
Every prop trader on Wall Street dreams of running their own hedge fund.
And, last but certainly not least, all the above means that we are more likely to end up in correctional facilities.

I don’t blame you if you are thinking, ‘Who is that Larry Podolsky? What did he do? The name is vaguely familiar, but…’ So much has happened since I was escorted from the office on September 16, 2008 (just as the Fed was pumping USD85bn into AIG, which I think puts my minor transgressions into perspective), that it would be easy to have forgotten my fifteen minutes of fame.

I always wanted to hit it big, but this was not exactly what I had planned. Butter money – a description I detest, but the media thought it highly amusing – was a great idea, but something got lost in the translation from concept to reality. I still think it could work. But probably not with my involvement…

All that will come out at the trial. We shall have a good debate about the scheme, and what I did and didn’t do, and then I shall probably come back here, maybe even to the same room (it has en suite, which is a nice touch). Because, as you and I, the Journal, the FT, Bloomberg and, just possibly, the SEC, all know, I am as guilty as all get out. The only thing I’m going to be arguing about is how much it matters. OK, a lot of money went missing, but these guys could afford to take the hit. I wasn’t milking little old ladies or skimming the US taxpayer. And, as I shall testify, I was only borrowing the money. I fully intended to pay it all back.





Copyright 2009 Richard Greensted
This is a work of fiction. Even though the posts refer to real events, the story is fictional. All characters in this blog are entirely fictional and no resemblance to living or dead real persons is implied or should be inferred.