DANCING WITH WOLVES

17 July 2007: DJIA 13,971; MER 89.23; C 52.46; BSC 139.91

Thank you Stan. Having bought Merrill stock at the end of 06 at an average of 90, I have been patiently waiting for the trade to get even close to being neutral, let alone positive. And Stan O’Neal – who is so unpopular that even his friends don’t like him – has come up with the goods. A storming second quarter has made my day. Granted, the chairman and CEO of Mother Merrill doesn’t always sound convincing, but these numbers are hard to ignore. The guys have done well, much as it pains me to say it.

Unlike poor old UBS, who finally dumped Wuffli – what kind of a bank hires a CEO with a name like a character out of the Gummi Bears? – and brought in Rohner, his deputy, who I think also has quite a lot of blood on his hands. I would short his stock.

When I told ALCO that I was short financials, I probably overlooked the fact that I hold MER and one other: the Big C, Citi. Don’t ask me why I did it. I bought a lump of stock at a not-very-smart price (55 even) on the day that HSBC announced its 2006 sub-prime problems. I figured that, if the market could take that in its stride, there wasn’t much to worry about with a bank as big as Citi. But I did have one reservation about the trade: Chuck Prince ranks up there with some of the worst, most unconvincing CEOs ever. How he got the job is a mystery – even to him, I suspect. Why do I get the feeling he has problems balancing his checking account?

Well, he just signed his own death warrant. I waited patiently and I have been rewarded. If you want to act like a complete fool, you could do no better than to look at what he said the other day about Citi’s position in the leveraged loans market. ‘As long as the music is playing, you’ve got to get up and dance,’ he said, when asked about the health of the market. ‘We’re still dancing.’

Did I hear that right? Even Ken Lewis at BofA – another one whose IQ I suspect is not much above room temperature – has started to have his doubts about leveraged loans. Not Chuck. He’s still dancing, just like Elton John. I think he’ll be dancing all the way to the exit, making way for someone smart – preferably Jamie Dimon – to come in and rescue the bank, and my investment.

Ideally, I need a few analysts to give him a vote of no confidence, watch the stock dip, lend what I have and buy some more to improve the average cost. Problem is, most analysts are right up the fundaments of the CEOs they’re meant to be covering. Independent analysis is a contradiction in terms. Oh Chuck, we love you and your bank – now can we have that trip down to Hilton Head on the corporate yacht?

Meanwhile, my old buddies at Bear aren’t exactly joining in the mood of celebration and general market euphoria. After pumping more bad money into their terminally sick hedge funds, they’ve had to fess up and say that they are essentially worthless. Anyone here shocked? Of course, there are a few of the living dead who put money in, but who cares about them? If they chose to invest with Bear, rather than my very own Special Opportunities Fund (up 39pct on the year, thank you), they can go hang.

The Dow continues on its inevitable flight path to 14,000. It’s already at record levels, even though there are some serious worries about inflation – oil is up to 74 bucks, and that doesn’t help the cost of living. Looks like my friends at OPEC have done me a favor – if only we could get a bad winter as well.

So things are looking sweet. I’m lending MER, borrowing BSC, nursing a good profit on the old Thai Baht deal and oil is on the rise. All the other transactions that are going on are pretty much run-of-the-mill stuff that keep the clients happy and show that we can behave like responsible citizens and guardians of their assets. But the Curveball Special Opportunities Fund is my very own baby, the only pool of money I still actively manage. It’s certainly a special opportunity for me, as I can pretty much throw anything I want into it. It was the deal I struck with my partners when we formed the company.

My partners. Have I been through a learning experience or what? There have always been just the four of us. We started with Revis LaTrobe as chairman, David Vitale as CEO, and Art Massolo chief administration officer (look Mom, I made CAO!). I was – and am - chief investment officer. We hired a couple of other dudes, like Bohdan and Bengt, and we were in business.

Six years on, and we look like a regular firm. Offices in 111 Huntington Avenue, a receptionist, fish tanks, even a compliance officer (although he may soon be sleeping with the fishes if he doesn’t get off my back). We have so many hangers-on, in the form of auditors, consultants, administrators, vendors and sundry advisors that it feels like we are fueling the New England economy single-handed.

The partners have never been great buddies. That was part of the deal. We didn’t want friendships getting in the way of business. Just as well, as we pretty much hate each other’s guts. Revis has an education and isn’t afraid to flaunt it. He went to school with a lot of the Boston Brahmins and lives near some of them in Hingham. I guess he couldn’t quite pull enough strings to get a partnership at Brown Brothers.

David is very different. He is sharp, analytical, very personable and great with clients. He knows a little bit about money management, which can be dangerous. He tries to engage with me about investment strategy – recently opining that sub-prime was an unpinned hand grenade was one of his notably dumb remarks – but, most of the time, he minds his own business and gets on with schmoozing.

Art is probably the most boring guy I have ever met. He wears a bow tie, which is about as wild as it gets. In our meetings he is always the one who shakes his head, blows out his cheeks and offers a hundred reasons why it can’t be done. It’s in his JD. He deals with all the finance, admin and ops crap that flies at us on a daily basis. He seems to like it, so we consequently have little in common. I suspect he’s behind this relentless pursuit of me by Haresh.

So these are the guys that want to tie my hands, and effectively let our not-so-little ‘Matka’ do all the work. Or rather, wanted to tie my hands. Since reading the file from Brimm, I am much more confident about my standing vis-a-vis these boys. Each of them has little secrets that they probably don’t want aired in the Globe or on Bloomberg, let alone slipped to the regulators or the Feds. Revis, in particular, needs to be very cautious, as I advised him during what was threatening to turn into a showdown a couple of weeks back.

“Revis, old buddy, we should probably kill this discussion right there,” I said, after he’d all but accused me of rigging the performance numbers. “I have my weaknesses and you have yours, but we want to keep the firm afloat, don’t we? Why rock the boat?”

He got it real quick and shut up. He knows I know. I asked Stanley, just for verification, if it was all true. “I thought you must’ve known,” he said. “That’s why I never mentioned it.” Thanks for sharing.

But the real excitement comes in a couple of days’ time, when I am due to meet Brian and Brad, the dynamic duo who have been cooking up this fantastic commodities deal for me. I can’t wait to see the look on Revis’s face when I tell him that Curveball is going to be transformed into one of the world’s largest money managers. Fidelity, State Street, AXA, and all the rest of you bandits, watch out: Curveball is coming.

WHO NEEDS A BACK OFFICE?

28 June 2007: DJIA 13,422

So the Fed took two days to decide to do nothing – pretty much sums them up. At first I thought that no change in the Fed Funds rate was bad, then good, then bad, so after all that I stopped worrying and just got on with real life. Stanley says everyone else is equally confused. It’s a great market. If in doubt, ignore fundamentals and just buy stock. Oil is moving up nicely too. Ideally we need those grease monkeys at OPEC to turn the taps down a little, just to squeeze supply. Bad news for a few people, perhaps, but it would make a hell of a difference to my performance numbers. If it goes the right way, I’m looking at a very serious compensation shot at year-end.

At home today. I live pretty close to the office, in the Carlton House building. The firm rented the apartment for me when I moved up from NYC. It’s neat, although I don’t spend a lot of time there. But I’ve had the maid clean up specially for today, as Martina Brimm is paying a visit. Ms Brimm is a ball-buster of the first order and I am lucky to have her as my lawyer. She doesn’t come cheap and she doesn’t come to the office. What we discuss needs to be taken offsite and offline.

Basically, Brimm and I have to solve a problem. My partners have raised some totally invalid concerns about the way I run the desks. They say that there’s no structure, no controls, no process – all the stuff we wanted to get away from when we quit our jobs to set up this firm. Freedom to act was meant to be part of the deal. You fancy selling some Thai Baht? Hey, Larry, go right ahead. Shorting Bear? Be my guest.

Yet we already have more committees than tropical fish, not to mention that compliance guy whose name temporarily escapes me. What do they want? Bottom line, I’ve delivered for this firm, and that needs to be recognized. All the rest is just so much flute music. Clients don’t care whether we have a hundred committees or none, as long we give them back more money than they started with.

Larry, they say, be reasonable. We have to have some structure. Problem is, I think we already have too much structure. At huge expense, we had a consultant come in and tell us what to do about administration and all the back-office plumbing. As he collected his fees, he told us that we needed independent this, that and the other, all of which eat into the fees pretty dramatically. On top of all the horrendous charges I pay to the prime brokers, I also have to give up more skin to an army of administrators, custodians, valuation agents, revaluation agents, auditors and, on a very regular basis, more consultants.

So, we pay all these people, and what do they do for us? For one, tell us what we can and can’t do. Sorry, Larry, but that trade can’t be settled, because…blah, blah, blah. Who is the money manager here? What’s worse, my partners seem to like this. They like being pussy-whipped by a bunch of guys who are proud to call themselves administrators. I mean, honestly: how could you go home to your folks and say, “Hey, Mom, Pop, I just got a new job as an administrator”? That’s right up there with being an astronaut or a brain surgeon.

That’s where we are. The partners want layers of bureaucracy that will make our firm as turgid and flabby as the Wall Street firms and fat-assed New England money managers we are trying to beat. I am holding out for a bit of flair, entrepreneurship and the general American can-do attitude. If I’d wanted regulation, I’d have moved the operation to France, where you can’t visit the bathroom without triplicated approval from some government fonctionnaire. Funny how entrepreneur is a French word.

Once – only once – they sent a guy from our custodian to see me. He was dressed neck-to-toe in Brooks Brothers. Could’ve come straight out of the store window, and had about as much intelligence. Wanted to know what the hot issues were and what kept me awake at night. Where do they get these guys from? For this, I am paying multiple basis points? Just don’t lose my stock, I told him. That’s what keeps me awake at night. Do you think you could do that?

Anyway, back to Brimm. She could have had a starring role in The Addams Family. The way I figure it, if she scares me this much, and I’m paying her, what will she do to the people I really want scared? As always, she has a plan. It involves being given more equity in the firm, or leaving – or threatening to leave, at the very least. From where I’m sitting, there are a whole bunch of reasons why this isn’t going to fly, but I am not Martina Brimm, and she exudes nothing but total confidence. Plan B is an alien concept to her.

I am not to worry, she says. She pushes a folder across the coffee table between us. “It’s all in here. I didn’t want to e-mail it. Too sensitive.” Holy crap! Do I want to know what’s in the folder? “What’s in the folder?” I ask, nodding at it without looking at it.

“Your insurance.” Beat. “And my bill. Good luck, Larry.”

Ms Brimm sees herself out. I check Bloomberg, briefly look at the BlackBerry – a high-priority mail from Haresh, signed ‘Chief Compliance Officer’, still on about some client trades – then settle down with the folder.