Archive for July, 2010
I was quoted in an ABC News article Chocolate King Anthony Ward Cuckoo for Cocoa, Magnet for Controversy.Read More
Here’s the scene. You’re in the interior of a large, and loud institutional brokerage firm. It’s utter mayhem and organized chaos, with paper flying and Institutional salespeople shouting over one another and at each other. One of the Administrative Assistants picks up a call and shouts…
“Call for you Buddy. Pickup line 2…”
“Bud Fox,” the young man says matter-of-factly, but hopeful.
“OK Bud Fox, I want you to buy 20,000 Bluestar at 15 1/8 – 3/8 tops,” the man says spinning in his chair, coming face-to-face with the audience. “Think you can handle that?”
“Yes sir Mr. Gekko, you won’t regret this!”
And with that Buy order for Bluestar, Bud Fox sold his integrity to Gordon Gekko and with it any hope he’d have for a solid career – all for a measly ticket into the arena of 10-figure clients. He had great parents and a solid upbringing. So how can something like this happen?
Somewhere in the late 80s there was a young man from the outer boroughs. His father was a laborer and worked for the company for his entire career, and he had a mentor and folks who helped him along the way. He’d almost gone in another direction career-wise, but was ultimately drawn to the excitement of Wall Street. He took a job at one of the largest and most successful firms on Wall Street hoping to “bag the elephant.”
You know the story, but…
…the firm wasn’t Jackson Steinem, it was Goldman Sachs. The company where he cut his teeth was not Bluestar Airlines, it was Ghost Motorcycles. The solid advice wasn’t from Lou Mannheim, it was from Sol Gittleman. And the young man wasn’t Bud Fox, he was and still is Anthony Scaramucci, Founder and Managing Partner of SkyBridge Capital.
To set the record straight, Scaramucci doesn’t think greed serves anyone, and he’s so disgusted with it and what’s happening on Wall Street that he’s written a book called Goodbye Gordon Gekko: How to Find Your Fortune Without Losing Your Soul.
“We need to be done with Gekko,” he said. “It’s been 25 years since we’ve met this guy and it’s time to put Gekko behind us.”
Scaramucci knows a bit about Gekko and the type – he’s been trying to avoid the Gekko’s all his life. Oliver Stone and his team hired him as a technical advisor to Money Never Sleeps, the follow up of the 1987 classic original Wall Street. Michael Douglas won the Academy Award for Best Actor for his depiction of the corporate dealmaker.
Goodbye Gordon Gekko contains several characteristics that Scaramucci has condensed into what and how he thinks you can make it without having to compromise your integrity or character, among others are Ambition, Success and Failure, Vocation and Meaning, and Knowledge. To the last point he delineates an uncharacteristic book list for further reading in this atypical Wall St. book…and Market Wizards is not on the list, but A Peace to End All Peace, The Odyssey, and Lincoln at Gettysburg are.
Scaramucci can relate to the class-jumping ability that Wall Street provides those who are ethically motivated to work hard. After graduating Tufts, he made his way to Harvard Law, where he “was destined not to become an attorney.” He bailed on law as a profession and, inspired by some friends he made at Harvard Business School, he joined the training class at Goldman Sachs in their Real Estate division.
Although Gekko is widely known for his “Greed is good” line, the renown line was originally uttered by Ivan Boesky at a Berkeley commencement. “Greed didn’t serve Boesky,” he said. “And it didn’t serve the bankers from the subprime morass either.”
It bothered him that he didn’t see the law degree through, and he announced to his Goldman bosses (and colleagues) that he was going to take the bar exam. They encouraged him and expressed admiration in that he was going to finish something he started. He failed the exam, however, and there was no way to save face. “Everyone knew I was taking the exam.” Not to be undone, he sat a second time after only half-assing (his words) through the prep and he failed the bar a second time.
But that was before the fun started. He then got fired from Goldman – but not because of failing the bar exam, but because he was not a good fit for the department. He was given his walking papers and an $11,000 severance check. He did have the good fortune to get introduced to the Private Client Group before he left, but he had to apply and go through the grueling interviews. (He didn’t have to re-submit his resume.)
After several years working for the Private Client Group at Goldman, he left and founded his first firm, which he eventually sold. Throughout his journey up to this point, he took notice of those who were successful, but he also took better notes on the cost for that achievement.
There were some big trade-offs, most that were detrimental in the long-term. Poor health, no friends, no relationship with your kids, and no marriage to speak of. This was not going to be his career path, and Goodbye Gordon Gekko is full of such tales of how Scaramucci cut his teeth on the street.
Refreshingly, both Scaramucci and his book speak of failures and lessons learned with great candor. I found that with Maria Bartiromo as well. There is no facade with Scaramucci, and that is rare for an absolute insider who has reached the highest echelons of Wall Street.
Because his failure is the vehicle by which Scaramucci learns the most about himself over the course of his ongoing career on Wall St., Goodbye Gordon Gekko will make a great Ethics textbook for undergrads and B-Schoolers alike. Such students, although highly educated, are still insecure in that they haven’t proven themselves yet and the sheepskin is all they can fall back on.
Wall St., especially trading, does not necessarily build character – it reveals it. Once you land on The Street, you quickly find out that, at least for traders, your P&L becomes the only credential that matters. Ivy League-this, MBA-that, pretty much go out the window.
Although his current firm SkyBridge Capital sits atop $7.5 billion in assets, to get there Scaramucci had to learn to be book smart and street smart. This includes a “family lesson” he was taught at the age of 17. It was Friday, January 9, 1981, 9 pm, 130th St. and Park Avenue. Central Harlem. Scaramucci’s uncle put all his family through a ritual of delivering a motorcycle in Harlem to teach all the Scaramucci boys a lesson.
As Scaramucci puts it, “there wasn’t really anything to worry about, although my mind got the best of me on the way there. They were just normal people who were living in a tough neighborhood.” The man was $30 short. Anthony, along with his doberman who made the trip, stood his ground and waited for the gentleman to return with “$30 in change and coins” to pay for the motorcycle in full. “It was the best education I could have gotten.”
With his free time, Scaramucci and SkyBrige host the annual SALT Conference in Las Vegas, which this year featured Bill Clinton as the main Key Note speaker. “President Obama was saying now is not the time to be going to Vegas. So what did we do? We went against the grain and did what we thought was best. We went to Vegas and we had over 500 people there.”
Goodbye Gordon Gekko is full of advice and hard-won wisdom. He’s reached the pinnacle, but also had to “look into the abyss” as Hal Holbrook’s Wall Street character Lou Mannheim said to Bud just before he was arrested. Scaramucci hasn’t had to look into the abyss though, and he absolutely doesn’t believe you have to for a great career – Wall Street or not.
Although SkyBridge is ranked about 22nd in size for a Fund of Funds, he is all character and very humble. “Michael, make no mistake about it. I FAILED – TWICE. I WAS FIRED from Goldman,” he said deliberately slowly to emphasize the point. “Yeah, you can say that I was re-allocated upstairs to Equities from Real Estate, but I was FIRED and that was all there was to it.”
Scaramucci obviously has made quite a comeback, and he didn’t have to sell his soul a la Bud Fox to do it.
Goodbye Gordon Gekko: How to Find Your Fortune Without Losing Your Soul is out on Wiley on Hardcover and Kindle.Read More
Sebastian Mallaby spent 3 years and conducted over 250 interviews to complete this book. Among them are George Soros, Stan Druckenmiller, Paul Tudor Jones, Bruce Kovner, Julian Robertson and Michael Steinhardt. I am lucky enough to know many of the managers he’s interviewed and although I’m a voracious reader, Mallaby has dug deep into the history of many stories that have been told before, yet has shed new, and informative light.
This is a long interview (53 minute podcast), but it’s not every day that you can speak with someone of the order of Sebastian Mallaby. He’s been a bureau chief for The Economist and he’s been a columnist of the Washington Post for the past 11 years.
Mallaby is the Director of the Maurice R. Greenberg Center for Geoeconomic Studies and Paul A. Volcker Senior Fellow for International Economics at the Council for Foreign Relations. He’s just written an amazing book on the history of hedge funds called More Money Than God: Hedge Funds and the Making of a New Elite.
I highly recommend this book. It’s long no doubt at 400 pages, but that includes the 60 pages of notes in the back of the book that are worth it alone.
During our discussion, Mallaby spoke with great candor both about the people he encountered, interviewed, and the events he’s delineated in his book: he didn’t play it safe and that’s made for a wonderful dialog. Below are a few excerpts from our discussion.
MM: Do you think that the block trading success for someone like Michael Steinhardt is permissible and ethical before and after SEC Rule 19c-3 had gone into effect since his risk taking had benefits society?
SM: That’s a great and a tough question. On the one hand his success owes a lot to being in this charmed circle of managers who began in the 1970s that could meet the needs of the big institutions who could absorb large blocks of stock outside the specialists. They needed someone on the buy-side to take on inventory.
[If Goldman Sachs has a 1 million share order of IBM for sale, and they call Steinhardt, he's in the driver's seat b/c he knows there is a big seller in the crowd. In order to incent Steinhardt, Goldman Sachs would give him a sizable discount of perhaps $1 share to take the stock from Goldman's client onto his books.]
But Steinhardt would also walk away with more information that was not available to others on the floor. Was it a liquidity-driven sale for a pension that needed the liquidity or was it an information-driven sale by a hedge fund. Goldman, Oppenheimer, and Salomon Brothers were the big block traders of the time.
The liquidity provided by the big buy-side block traders (such as Steinhardt) was a benefit to the market. The crash of 1987 was a sharp reminder of what could happen when their buying power was relegated to the sidelines. So despite Steinhardt getting information that could be construed as “highly personalized” ultimately, it was good for the market b/c of the role that he played. There is a social benefit too. We want entrepreneurs to take risk. To persuade people to buy equities you have to have the provision of liquidity at a moments notice. Who’s going to provide that? It makes a fundamental difference to the price if there’s liquidity.
MM: Were Soros and Rogers lucky having taken on the massive leverage they did in running the Double Eagle Fund for ten years and exacting over 4,200 % RoR over that time period?
SM: I think they were good. (you’ll have to listen to the podcast to hear the rest of the answer).
MM: Do you think the hedge fund structure leads one to shoot for the moon (since they effectively have a free Call option) and they’ll either make 9 figures or go bust?
SM: I think that the Mutual fund model is one that encourages the company to gather assets only. The manager is not being directly compensated for performance. There is more emphasis on the marketing, rather than performance.
[MM: IMO, it's easier to gather an additional 10% in net NEW assets, than to grow assets by 10% organically via performance. I think John Bogle is FOS. Enough is right John.]
Q: Do you think it is incumbent for a manager to short a currency and accelerate the inevitable…in other words…the way Stan And George set the UK free of the ERM b/c the champagne Socialists would not make the courageous decision politically?
A: Yes, I think so. They suffered massive humiliation. The Exchange rate was too high. Once the Sterling was kicked out, we (Mallaby is from the UK) went to higher employment and by one year later they had jobs thanks to George and Stan. I do think that trading can force myopic governments to do the right thing and force the right shifts needed. Just like some traders don’t want to recognize their losers and get out. When Politicians brought the GBP into the ERM, they had a “pride” in that decision and they stuck with their loser well beyond the point where they should have gotten out of it, and it wasn’t until they were forced to get out of it that they recognized it.
MM: What can the retail investor learn from your book?
SM: Traders are obsessive and compulsive about the markets. Retail investors don’t share that level of 24/7 focus.Read More
You might not have heard of him, but you might have heard about someone locking up 7% of the annual Cocoa production recently. He’s the man behind the trade. His firm is known as Armajaro and they are huge players in the physical commodity space, procuring soft commodities around the world for their clients.
The Financial Times ran a story on the delivery called Hedge fund develops taste for chocolate assets.
Excerpt from The FT:
A London hedge fund has swept up a large chunk of the world’s stocks of cocoa beans, helping to drive prices of the basic ingredient of chocolate to their highest level in 33 years.
Traders said that Armajaro, which runs several commodities funds, took delivery on Friday of 240,100 tonnes of cocoa, the biggest delivery from London’s Liffe exchange since 1996 and equal to about 7 per cent of annual global production.
Now, back to the facts…
The title “Hedge fund develops taste for chocolate assets” is a bit misleading, but it sounds a lot sexier than “Cocoa Wholesaler Accepts Delivery For It’s Clients.” The spreads in Cocoa are very narrow, so IMO Armajaro is not employing a “cash and carry” trade right now, and they are probably parceling out their inventory or engaging in swaps.
The day the delivery was announced, ICE Cocoa in the US sold off. Furthermore, taking delivery of cocoa today has absolutely no effect on what happened several months ago. Taking delivery today may be due to higher prices, but it does not cause them.
Ward, who traded for Philipp Brothers (Phibro) has traded Cocoa and Coffee for over 27 years and at one time was the Chairman of European Cocoa Association.
Here is a video of that “jammy dodger” wholesaler…
I love cocoa. I admit it’s one of my favorite commodities to trade too. I own a copy of Helmut Weymar’s Ph.D on Cocoa from MIT from the 1960s.
If you’re a systems guy, that probably sounds like blasphemy b/c you’re supposed to look at everything “as a 1% risk unit” so you become indifferent to any particular commodity. But that’s bullsh*t. Anyone who believes that is just parroting Seykota or something else they’ve read in Market Wizards. I find it hard to believe that anyone actually “lives” that. I don’t and I didn’t when I traded 100% systematically.
Martin’s first rule: “Think for yourself. Feel for yourself.”
The contract had an enormous sell-off the day the delivery was announced. However, this is the ICE contract which is priced in USD, not the LIFFE/Euronext contract that was discussed in the news and is quoted in GBP. Here is that chart:
I’ve written extensively about Cocoa here at the famous MartinKronicle, including How To Marry Fundamental And Technical Analysis In Cocoa and How To Trade The Cocoa Trend Reversal.Read More
Yago Moderated a fantastic panel called Do Our Financial Models Still Work? that featured Aaron Brown of AQR, Stacy-Marie Ishmael of FT, Myron Scholes, Colin Camerer of Cal Tech, and Bruce Tuckman of the Center for Financial Stability.
Here is the full two-part interview which I had to break up because of its size.Read More