how to kick ass on wall street - kessler, andy

How to Kick AssOn Wall Street Andy KesslerAuthor of Wall Street Meat, Running Money and Eat People... Movies like Wall Street don’t help.. Lehman Brothers, beforeheading off to the great

How to Kick Ass

On Wall Street

Andy KesslerAuthor of Wall Street Meat, Running Money and Eat People

Copyright © 2012 by Andy Kessler

All rights reserved, including the right of reproduction in whole

or in part in any form

Escape Velocity Press

www.andykessler.com

OK Not so fast All you got was a ticket to the dance Now what? You’re setfor life, right? Uh, well…not really Actually, f ar from it Since its near-deathexperience in 2008, Wall Street has been mutating into something far differentthan its fabled land of golden dreams

But so what? You got the job And y ou’re going to be overpaid And makingmore than almost every single one of your friends with real jobs But don’t getsmug, not yet anyway T he trick is not landing on Wall Street, it’s staying on WallStreet and excelling on Wall Street and staying overpaid for a long, long time

This is not your father’s Wall Street where any bumbling idiot could (anddid) answer phones all day and pull in six igures I used to work with them Now,it’s nasty out there Harder than it’s ever been It’ll chew you up and spit you outlike nothing you’ve ever experienced That’s OK I assume your tough enough Just

be ready for it

So you should just hunker down and do as you’re told, right? WRONG If yousit on your ass and do all the things your hemorrhoid-annoyed boss tells you to

do, you’ll end up a doormat and stepped on and replaced when the newer,prettier version comes along You’ve got to make a name for yourself Stand out.Become indispensible

Who am I to tell you all this? Well, I spent 20+ years on Wall Street andthough I can’t profess to know everything, I’ve seen a lot And I’ve been involved

in a lot o f crazy things - I was a research analyst, a not very good investmentbanker, a venture capitalist and ran a $1 billion hedge fund And just when I thinkI’ve seen it all, something even more bizarre hits It’s hard to keep a level head.But a strong gut and steady resolve is the trick to making a name and creatinglongevity through boom times and through the disasters

The highs are highs and the lows are face down in the gutter Wall Street isnot a charity and you’re going to prove yourself again and again and again asworthy When you start, you’ll meet a lot of different folks Most will be thesmartest mofos you’ve ever met Scary smart Others will have a last name likeRockefeller or Throckmorton and can’t even tie their shoes Others may look

disheveled and be a secret genius (including a few Rocks and Throcks.) Otherswill just confuse you as in how-the-hell-did-they-get-a job-here, I thought therewere standards (usually a nephew or son-in-law of a client or long retiredmuckity muck.) It doesn’t matter You’re there You got the job (“Give me tenNorton,” etc.) Now you’ve got to execute Not today, not tomorrow, but over thenext number of years.

Lots of unemployed and unemployable protesters lived in smelly parks intents to Occupy Wall Street And for all I know, they probably still do You,because of your job, are part of the 1%, even if you haven’t made a penny yet Theimplication of the 1% label is that you exploit the other 99% Nothing further isfrom the truth

Some of it is envy, some of it is rationalization for the Occupiers’ own failures,and some of it is because groups just need something to protest and what theheck, ripping on a bunch of rich (predominately) white dudes doesn’t violate any

of the unwritten political correctness standards and rules

I’m not here to rationalize why you chose a job on Wall Street vs buildinghuts in Costa Rica That’s you’re doing I’ve put this together to explain how Wall

I look at Wall Street as the lubricant that greases the gears of the economy.Without capital and inances raised by Wall Street, those gears would freeze up.We’re still going through the hangover from the inancial crisis when the greasedid disappear for months on end Wall Street sneezed and the World caughtpneumonia

Wall Street is not a bunch of greedy bastards shaking down Main Street forevery last dime – although there are plenty of those types of ass wipes that dowork on Wall Street Wall Street provides a needed function in the economy I t isreal It provides real economic value You will generate wealth, for yourself ANDfor society Really But believe me, it’s hard, if not outright impossible, for mostothers to see this value

Movies like Wall Street don’t help Nor does Bernie Madoff or any of theother villains And what the heck, Goldman Sachs Lloyd Blankfein and JP Morgan’sJamie Dimon don’t help the cause with their massive compensation I think theydeserve their due, but they should take it all in stock and sell it when they retire

I’m proud of my 20+ years working on Wall Street Maybe I’m justrationalizing its economic purpose to make myself feel good and so I havesomething to talk about at cocktail parties But I don’t think so

You’ll figure this out for yourself

But in the mean time, just understand that no matter how you got there,your job and your payday and your social position are not a gift You have todeserve it

And when you do well, you will

It’s Dog Eat Dog And the dogs are angry Rottweilers It’s sink or swim VanityFair magazine ran a piece recently on the succession plans at Goldman Sachs withthis memorable line in it: “Goldman is a league of gladiators,” according to aformer partner That says it all!

You do a trade and it makes money, then you’re a star (for that moment) anddeserve a bonus You bring in a deal, you get paid big time You lasso more clients’assets under your irm’s roof, and you’re a hitter I once discovered some goodnews on the stocks I followed before the rest of the Street, and mentioned it to thesales force at a morning meeting It moved markets in New York, Tokyo andLondon The next day, I was quoted in the Wall Street Journal and the NikkeiShinbun as having caused the market move (it was the news, not me, but prettycool anyway.) That morning on my way to my of ice, I had the head of globalequities pat my head on the elevator ride up the next morning Pat my head! I wastold he never does that

The lip side, of course, is what makes Wall Street so dangerous You losemoney for the irm and you’re a heel Do it again and you don’t get paid that year

Do it a third time and you’re out of a job Just like that Gone I’ve seen it happen

to friends and acquaintances at just about every irm up and down Wall Street.There is no tenure on Wall Street, no job security, no long term guarantees None.Ten and twenty year careers end in a lash Happens all the time, and everybodywho works in the business knows this

head of domestic derivatives, co-president of east coast technology banking, co-head of janitorial services Wall Street does this for a reason It’s not that the co-heads are best friends and love to work together It’s to create competition One ofthem will end up out or demoted or shipped to the Tokyo of ice It’s how WallStreet implements that gladiator thing

You may notice that you have two bosses or your boss has two bosses: co-That’s one reason why you are paid so well Think of it as combat pay Butthe other reason compensation is many, many multiples of the average wage inthis country is that trading stocks, doing IPOs, merging companies, managingmoney is a very lucrative business Not everyone can do it It looks easy, football

field-sized trading rooms jammed with adrenalin rush maniacs like you sitting infront of huge stacks of LCD screens It might as well be a call center in Mumbai.But it’s hard Really nasty hard Wall Street hires in that top one percentile zone –

as in intelligence

And then they make your life miserable hoping you’ll quit before they breakyou Or hoping they break you before you lose money for the irm It’s notWalMart or General Motors or even P izer or Intel It’s management by ire I youhaven’t been dressed down, yelled at or threatened with extinction, you’reprobably not pushing hard enough

You would think that would make the entire workforce afraid to do anythingfor fear of being tossed out on their can, back into the cruel, cruel averagely-paidworld But a meritocracy works in the opposite way Instead it’s wicked smartpeople like you trying to prove to each other that they are smarter than everyoneelse out there Unlike acing a Chemistry Final or even nailing your ACT tests orscoring the winning goal, here the score is kept with real money - how much yourtrading desk makes for the irm, how big a chunk of the bonus pool you commandfor your do or-die heroics day in and day out

And here is another not-so-secret revealed just for you - it ain’t fun, that’swhat Harry of Hanovers or Ben Benson’s are for after 4 p.m Pour a stiff one andrecall sticking the guy at the First Bank of Neenah for a couple of basis points orbagging the Twitter IPO or whatever the next deal is

Some days it outright sucks You get yelled at You get put in your place bysomeone you thought you knew well at your irm Your clients tell you you’re abag of shit It ain’t fun Just know that going in Other days are peaches and cream

This meritocracy plays out on a large scale as well Lehman Brothers, beforeheading off to the great trading room in the sky, was a classic Wall Street successstory Inside and outside, it was a meritocracy They wanted to one up GoldmanSachs - everyone has Goldman envy Lehman needed to generate as good a return

on equity and earnings growth so they could win the meritocracy game and getpaid in spades How dare the Bear Stearns CEO make more than ours, let aloneGoldman’s! Let’s lever this sucker up with mortgage backeds and create a trilliondollar balance sheet If not us, who? And by the way, very few people at Lehmanreally understood how upper management was playing this meritocracy gamewith the rest of Wall Street with the rank and iles’ careers Look close enough atyour firm and you’ll see signs of this all over the place

Unfortunately for Lehman and the rest of us, when that trade went south,and their creditors pulled their short term inancing, (OK, Jamie Dimon at JPMorgan was particularly egregious pulling a $5 billion plug,) the ugly side of

meritocracy reared its head You lose money, you’re out Goodbye It was niceknowing you Every single person working at Lehman knew this personally, orshould have known That’s the giant sword hanging over everyone’s head, thestench of fear that keeps the game going and going You’ve got to use top 1%percentile smarts and win If you don’t, you’re toast, so you’ll work harder, thinkharder, and of course play harder with your winnings that everyone else Theoutside meritocracy downside became the inside meritocracy homicide.

It’ll happen again Hopefully not at your firm

Lehman and Bear Stearns and an independent Merrill Lynch are gone, sure,but Wall Street and the meritocracy lives on

Use it to your advantage

* * *

One of the biggest concerns you’ll have when you start on Wall Street is how

to deal with the people you work with Are they looking out for your bestinterest? Are they friends? Or are they trying to screw you at every turn, takingcredit for what you do and stabbing you in the back like in the real world ofcorporate politics and pettiness Yes and yes and yes

You have to watch out for yourself, of course, but the nice thing about ameritocracy is that you’ll be rewarded, one way or another

If you have the smarts, you are going to kick ass At irst, others will, er,appropriate your work as their own Don’t let it get to you Put your head downand keep cranking When someone steals your work or your ideas – it happened

to me all the time – eventually will be in a situation where they will have to come

up with something on their own – and they will barf, screw it up, dig a huge holefor themselves

It’s the ongoing process of making money that has value, not the one off.Later I’ll talk about being a hero, but even being a hero means constantly being ahero, not just one day and then go away

Trust me on this one – if you do something well, the folks above you willigure out it is you and reward you handsomely (more about that on the section

on getting paid.)

At irst, someone will make more money off your work than you do That’scapitalism, by the way But over time, you will have to be recognized for yourwork, be rewarded in the meritocracy, else your firm risks losing you

I had a guy that would constantly take my ideas and package them as hisown In conversations, in writing, all over the place It infuriated me but he had

been there 20 years and I was there just one or two I inally couldn’t stand itanymore and complained to someone They just laughed “Don’t worry about it,” Iwas told, “he’s your best marketing guy at the irm Everytime he opens hismouth, everyone knows it’s your ideas He looks like an idiot and you look like ahero Just put your head down.” I see him on CNBC every once in a while Hisideas aren’t as good as they used to be!

What I’m telling you is to igure out the meritocracy, how it works and then

be patient Not decade patient, but a few months or even years patient Thingshappen fast on Wall Street When you igure out how to make money for yourirm, the path above you will clear out rapidly for your ascent Ah, but we’regetting ahead of ourselves

OK, if that doesn’t scare you off, you’re ready for the next step Go get someclothes Women, I can’t help you Men, ind the most middle of the road suits youcan ind Don’t show up in a Canali or Armani suit Bad impression But also don’tshow up in a J Ferrar suit you just picked up at JC Penney Hickey Freeman is safe.You won’t embarrass yourself with Calvin Klein, Joseph Abboud, Perry Ellis,Kenneth Cole Navy Blue Charcoal Gray No taupe, please

Get some white shirts and light blue shirts A couple of red ties Black shoes.Done You can play dress up after you’ve been there a few years Eventuallywangle a trip to Hong Kong and then get itted for a suit made from British wool.It’ll last forever

Like all new jobs, you’re shoes will be slippery on the plush carpets of thereception area Note it Move on

It may take hours to get through human resources They’ll take youringerprints and sent them to the FBI You can’t work on Wall Street if you’ve everbeen arrested for forgery Makes sense, kinda, from the days of handling stockand bond certi icates So they still do it Be ready to explain any old embarrassingarrest records (I had to!) You may also have to take a drug test Stick withSouthern Comfort for the month before you start

Then you’ll get a pep talk in a crowded conference room with some bighoncho, before being placed at a trading desk or table or cubicle No matter what,tell them you need a dual screen set up Maybe even four Don’t explain why, itwill give you a little mystique

You’ll immediately notice that the irst words that everyone says that stops

by to say hello or that you get introduced to is: “Welcome Aboard.” Has a nice ring

to it Feels like a club or family Don’t be misled It’s a way of someone remindingyou that they have been working there long before you arrived On your secondday, everyone that looks new you should greet with a hearty “Welcome Aboard.”

It will put them in their place

Inevitably, you’ll be invited to lunch by someone Make sure on the irst daythat it’s your boss It’s another good tradition so the boss can impart theirexpectations and at least pretend they are in control of your future Nod a lot Asksome good questions And then plot how you are going to be that person’s bosssomeday

You’ll most likely get invited to happy hour De initely go Even if it’s on aMonday Let others buy you drinks It will make them feel important Don’toverdue it We’ll get to keeping your reputation later There’s plenty of time to

My favorite tradition is the irst big dinner Fancy restaurant Ben Bensons

or Smith & Wollensky’s or Palm Too 20 or more co-workers at a big table Severalwaiters fawning over the group Lots of bottles of expensive wine Reallyexpensive wine Everyone is happy and telling you what a great place you’reworking at and they’ll watch over you and we are going to kick some ass sellingdouble secret derivatives of some sort It should be pretty laid back You maythink all the old-timers are sizing you up, but you already have the job Relax.Take the time to size them up Who you might want to work with ? Who you mighttrust?

Most importantly, enjoy your self – because you’re paying This is not somemetaphor You are actually paying All the new folks get stuck splitting the bill.Better hope there are a few others like you at the dinner Your cut will be in thethousands The next day you will discreetly ask around how to write-off the bill.There is no good answer Your boss is not going to accept a $3000 expense receiptfor an unof icial company dinner, even or especially if your boss was at thedinner It took me at least six months of fake taxi rides and client lunches to hackdown my bill for the Big Dinner

And for goodness sake, no matter what you do – happy hour, big dinners,strip clubs – act like you’ve been there before

Not cool to barf at your irst company event Or do laming shots and haveyour pants catch on ire Or hit on the waitress at Le Bernadin A rather famousWall Street economist got lost at Rick’s Cabaret in Houston and called a salesman

at 4 a.m to pick him up and bring him back to the hotel because he was out ofmoney spent on too many lap dances

Your reputation is all you have I’ll get into more about that in a bit But atleast for the irst time you meet your new co-workers, have them come away with

a sense that you are smart and responsible and good to be around Fun can comelater

So what the hell is Wall Street anyway

Thanks CNBC and CNN, most people think of Wall Street as balding greedymen in ugly solid-colored suits yelling at each other and throwing litter on theloor of the New York Stock Exchange Of course, that’s not even close They might

as well be holograms from Disneyland’s Haunted Mansion, just a hangover ofyears gone by Or maybe the better view is that Wall Street is a bunch ofstockbrokers, calling you at dinnertime, trying to put you into a few shares ofsome hot IPO Or some sleek banker, (mostly) guys in the gray Armani suits, blueshirts with white collars and Hermes ties, paying themselves jillions of dollars andthen jetting off to London to close some important deal to lever up a portfolio ofmortgage backed derivatives that end up almost blowing up the world Closer,but not quite

So what is it? I like to use this line:

From 40,000 feet, Wall Street is about providing access to capital (for a modest fee.)

When I get a blank stare back, I try this one:

Money sloshes around the globe seeking its highest return and Wall Street’s job

is to help allocate that capital to where it will do the greatest good (for a modest fee.)

Repeat that often enough and except for the fee part, it almost soundsmagical Like some altruistic utopian dream

Hardly Money sloshing around used to mean gold on steamships, but now itsurfs around in nanoseconds along lightwaves Using fast computers and fastcommunications, the stock and bond markets trade every weekday and,sometimes violently, picks the economy’s winners and losers Actually, it’s not themarket, it’s you and me, our mutual funds and pension plans, the collective ‘we’,that do the picking via our buying and selling It’s nice to be needed You may noteven realize it, but, yes, magically, the value of companies with great prospects go

up, meaning they can raise capital much more cheaply to hire smart programmers

or build another solar panel factory The lip side is that the price of companies indoing all the wrong things, think General Motors and now Kodak, go down,starving them of capital, a punishment for screwing up until they disappear or dosomething to turn themselves around By inding the right price and heapingcapital to those it thinks deserve it and starving those that it thinks suck wind, thestock market does the dirty work of forcing the hiring and iring managers and

On the street level, of course, Wall Street is a lot nastier When I think of WallStreet, I think of alpha dogs generating revenue at all cost, getting deals done,ighting for market share against all the other irms, and then at the end of theyear, the political knives come out trying to carve up the ever growing bonuspool, though often each other

* * *

So let’s go back

It’s been said that a stock exchange can only be as large as a voice can carry

On May 17, 1792 after years of shouting out on the street, a group of 24prominent brokers met under a Buttonwood tree at what is now 68 Wall Street,and decided to move indoors, so to speak They created the New York Stock andExchange Board, copying European exchanges and “pledge ourselves to eachother that we will not buy or sell from this day for any person whatsoever, anykind of Public Stock, at least than one quarter of one percent Commission on theSpecie value and that we will give preference to each other in our Negotiations.”This is classic collusion that, wrapped and hidden in regulatory language, prettymuch exists to this day

Corporations used to only be able to borrow money from banks But smartbankers soon realized that a high stock price meant that companies could sell tothe hungry public some more shares to raise money for expansion The higher thestock price, the less shares that needed to be sold and the cheaper the cost ofcapital This is how that capital allocation game worked Unlike a bank, you didn’thave to pay the money back You just traded a piece of paper (a stock certi icate)

in exchange for cash you could spend But those new owners got a commensurateshare of your profits Hence the trading of shares

All good

Investment banking became a very lucrative business Outside of phones,some computers and printing an IPO prospectus or two, all of Wall Street’s costsare people It’s a knowledge business They’re not buying steel like GeneralMotors or drilling for oil like Exxon Instead, it was always herds of smart peoplelike you inding new ways for corporate America to access markets for growthcapital

When Kraft wanted a new Velveeta factory, they don’t have the time orexpertise to round up the money from pension funds or individuals, let alonetrade their shares, so they pay a few percentage points to Wall Street to do it for

them More so for the next solar cell companies, Wall Street has always lent theirreputation to get complex deals done, again, for a modest fee It almost seemsquaint.

Commissions on trading shares used to be ixed At 75 cents a share WallStreet irms made a fortune, even though the New York Stock Exchange was still apeople intensive exchange In the days of ixed commissions, almost everyonewho worked on Wall Street (and there weren’t that many) rode around in limos.Really

In 1971, Arthur Levitt, who much later became chairman of the SEC, wasNew York state controller and trustee of the state's Common Retirement Fund Tired of paying huge commissions to move in and out of stocks, Levitt demandedmembership in the NYSE so he could, in effect, get a rebate on their onerouscommission rates The NYSE barred the doors So he took his problems toWashington Reform was in their air after the nasty bear market of 1974 TheSecurity Exchange Act of 1975 did away with ixed commissions on trading, theso-called “Big Bang,” but also mandated an electronic National Market Systemlinking listed and over the counter markets NASDAQ had been trading over thecounter stocks in a limited way, since 1971 But the NYSE still held a monopoly

on listed shares

By the 1980’s, commissions were probably 6 cents a share Today they areoften tenths or hundredths of a cent Big Bang indeed It changed everything But

it also democratized the stock market and Wall Street Everyone could be part ofthe fun

From that 1792 Buttonwood Agreement on Wall Street until a bit after theBig Bang, irms retained pro its to build up their capital Partners were often cashpoor but paper wealthy with huge sums built up in irms paid out at retirement.Corporate clients were almost exclusively Fortune 500 and investors were bigbanks Not much risk there Back in the days of private partnerships, White Weld

or Brown Brothers or even Morgan Stanley, that was ine They traded stocks andmade good money They offered M&A advice and got paid handsomely

During the dead years of the mid to late 1970’s, as the nascent mutual fundindustry took market share from sclerotic bank trust departments, Wall Streetneeded more capital to take positions to facilitate big block trades But in August

of 1983, the stock market and the U.S economy took off So did mutual funds AndSilicon Valley And biotech And a massive service economy More capital wasneeded to fund the growth of great companies Think of all the technologycompanies that didn’t even exist in 1980 Funky companies like Intel andMicrosoft and Compaq were going public, requiring roadshows to explain what

they do Bigger deal underwritings meant bigger pro its, but required huge piles

of dough

Wall Street partners had to pay for memberships in Greenwich countryclubs, so partnerships couldn’t retain as much earnings as they needed, so theybegan to tap those same public markets, and went public to raise huge buckets ofcapital to help their clients

The last holdout inally gave in with the Goldman Sachs IPO in 1999 Thiswas the end of the era of private Wall Street partnerships What a great 25 yearrun!

OK, that’s the nice view Here is the cynical view At Wall and Broad, up anddown Sixth Avenue or anywhere, Wall Street is really just and has always been acompensation scheme Firms generate sales, and employees get half the money.Yes, half The rest, after expenses go to shareholders Sweet deal

How did they pull that off? After going public to raise huge amount of capital

to run their investment banks, partners became managing directors (publiccompanies don’t have partners.) But a huge question loomed over this transition:How to get paid? On the assumption that irms could make 20% operatingearnings and similar return on equity, they would set aside 50% of revenues forcompensation – it is now the norm In other words, the business of Wall Streetearns 70% on every dollar of sales Better than Microsoft or Google Even in anawful 2008, over $100 billion in bonuses was been set aside to be paid inDecember Hence the populist rage

Shareholders bought into this compromise and did well as stocks of WallStreet irms boomed Of course, the guys at the top of Wall Street did even better,grabbing a disproportionate chunk of the 50% compensation pool, but everybodydid well up and down Wall Street Reminds me of the old story that when askedwhy he makes more than President Hoover, Babe Ruth famously spoke for allWall Street titans, “What the hell has Hoover got to do with it? Besides, I had abetter year than he did.”

A very subtle change ruined the party The same PC and Internet technologythat was sweeping corporate America and getting rid of tellers and travel agentsand secretaries and typesetters was also invading Wall Street No one needed abroker anymore - you could do it all online Traders at irms were being replaced

by electronic trading systems that were faster, cheaper and don’t show up late forwork hung over after taking clients out to Smith & Wollensky’s Steakhouse

The whole reason Wall Street got into trouble in the irst place is theypromised 20% operating pro its to their shareholders By 2002, Wall Street irms,despite being lush with huge balance sheets of capital to generate returns with,

were no longer making money in their bread and butter business of stock andbond trading, investment banking and money management Too much capitalchased these once lucrative businesses Plus, that nasty transition of electronicand often automated trading lowered pro its and obsoleted traders Good forindividual stock investors, but bad for Wall Street, which found themselvesovercapitalized.

Here’s where it gets interesting, and a bit scary

The one group making money were these weird guys creating exoticsecurities, derivatives, pieces of paper backed by pools of assets, maybe airplaneleases, or home mortgages The neat thing about derivatives is that no one but theperson who created them knows what they’re worth, so you can sell them at hugemarkups Woo-hoo Huge departments were created and staffed up all over WallStreet to securitize anything that moved This is why over half of Princeton’sgraduating classes in the mid 2000’s ended up on Wall Street

With the Fed forcing low interest rates, the higher the yield of these funkynew securities, the better

Sub-prime home mortgages, because of higher risk (ooh, don’t say thatword) had high yields and moved to the top of the list When not enough of theseloans could be bought from banks, irms like Bear Stearns and Lehman set upentire loan origination subsidiaries, and in true Wall Street style, were aggressiveand quickly rose to the top of the market share tables If you want to know whyWall Street CEOs made so much, it wasn’t from trading your 1000 shares ofMcDonalds

Still, those profits weren’t enough

What the heck do you do with $700 billion and still make 70% margins onrevenues (with that 50-20 employee-shareholder split)? Their customers weremaking great money buying Wall Street’s derivatives Why should banks andpension funds and hedge funds have all the fun? What a perfect use for all thatcapital on their huge balance sheets and cheap inancing from low interest rates.Wall Street, en masse, just bought these high yielding derivatives for their ownaccount Ate their own dog food, if you will

This, of course, was a major dumb shit move The sausage maker, whoknows what goes into the sausage, never eats his own sausage

* * *

It was the easy trade Borrow at 3% and make 6%, or 8% or 10% They liked

it so much, they levered up Meaning instead of just borrowing a dollar for every

2 dollar of assets they own, which by the way is the 50% margin requirement, for2:1 leverage for you and me to buy stocks from these irms, they borrowed 20 to

1, 30 to 1 and even 50 to 1 if they could get away with it And man, it was alucrative trade The math isn’t quite perfect, but these “sure thing” mortgagebacked securities each had net margins of 2-2 ½%, and then they used 30:1leverage to get to that same 70% So why not?

I’ll tell you why not Because all of a sudden, Wall Street is no longer abusiness of traders or stock brokers or investment bankers, it’s a giant hedgefund And they have no idea what they were doing None I ran a hedge fund for alot of years and learned rather quickly that if a trade was too good, one thateveryone was doing it, that I should absolutely turn around and run for the hills.But no one on Wall Street did The spreadsheets lashed green Risk was a fourletter word best not said in polite company

Wall Street became hedge fund cowboys and loved the spoils, until a tinylittle downturn in housing made everyone get out of the pool at the same time.Deleveraging a 30 to 1 leveraged balance sheet is not easy, nor pretty wheneveryone is doing it at the same time And turning companies belly up overnight

Bear Stearns gone, WaMu too, into the belly of JP Morgan Wachovia intoWells Fargo Fannie and Freddie are the new U.S Department of Mortgages andare closing their K-Street of ices Lehman is dust in the wind AIG in a penalty box.Merrill Lynch is a subsidiary of Bank of America, which barely survived theirpurchase of Countrywide Mortgages They didn’t change their name to LynchAmerica Countrywide They should have

Now we have Dodd-Frank reform and Volker rules and Occupiers naggingthe 1%ers to give back or give it up

But you don’t have to legislate lower compensation for Wall Street, it’salready in the cards As bank holding companies, leverage is stuck at closer to10% Those trading businesses that didn’t make much money still don’t WallStreet is slowly going back to the future, classic investment banking which willtake a lot less people, half as many as at the peak of 2006-7 Feel lucky to haveyour seat

Deleveraging means smaller balance sheets, a lot less revenue and muchsmaller compensation pools But not to worry Smart people always igure outhow to make money If they can’t at Wall Street irms, they can at hedge funds,private equity and even venture capital It will be logged constantly, but don’tcount out Wall Street Those left standing will help raise growth capital for greatcompanies worldwide, and igure out how to get paid, though perhaps not in thatorder

So now Wall Street consolidates Should you care? Not even for an instant Ispent years on Wall Street, competing against scores and scores of irms, alwayswondering what they all really did E.F Hutton Shearson, Drexel Heck I evenworked for PaineWebber in my early days (daze?) on the Street All gone Andnobody misses them.

And the new Wall Street? There’s only one direction It’s back to basics Notquite back to the old white shoes - blue blood partnerships of the past butcertainly that business model With a lot less capital, sit on the edge of the stockmarket and provide access to capital for the next set of great companies Take ‘empublic, bank ‘em and grow with ‘em It may not be as exciting as the last decade,but it sure beats the real world

At the end of the day, Wall Street is not about the names on the door, it’sabout the people inside Those that have a nose for making money will join otherirms, or hedge funds or start their own shop The true money makers all indjobs elsewhere You want to be one of those The middle ground of worker beessee disruption but some are eventually absorbed into the reconstructed WallStreet The bottom tier go work at Foot Locker

Not wanting to hunt in the back room for size 11 Chuck Taylor All-Stars, youbetter find something you are good at

On Wall Street, there are traders, bankers and salesmen An old adage onWall Street suggests the way to get the best traders is to take a yellow cab intoBrooklyn or Queens and hire the irst three guys you see when the meter reads

$10 Rough, tough and street smart Investment bankers, on the other hand, arerelationship types, and should come from the inest business schools - Harvard,Wharton and maybe Columbia in a pinch And salesmen? Used cars and aluminumsiding are relevant experiences

Ok, it’s an old adage Today, trading on Wall Street requires and intimateknowledge of computer technology, algorithms and a sense for pricingrelationships that play out in 4 or more dimensions Street smarts still count, butonly coupled with tech smarts

Bankers are still over-represented by the Ivy League, but no longerexclusively And salesmen are pushing increasingly complex stories or exoticinstruments that they have to scramble to understand what they are selling just alittle better than the customer buying it

Hopefully, you’ll get a chance to check out all parts of Wall Street beforeiguring out what you are best at People do get pigeon-holed Once a banker,always a banker, but don’t let yourself get stuck in some dead -end role Check outwhat everyone else does

I come from the stock side of the Street The bond and derivative side are notthat much different, in terms of jobs and roles to play, so don’t get fooled by myover reliance on equity references

Traders:

That rough and tough history for traders meant Wall Street loved to hireathletes to work as traders I’ve worked with Olympic hockey players and igureskaters, NFL lineman, championship squash players, basketball coaches and onand on You can imagine the overdose of testosterone on the stress- illed tradingloor Traders desks are littered with Rolaids and a collection of Lucitetombstones from past junk deals

On these large, open trading loors, they would often go after each other andights were common One sales trader from Queens named Dennis was the alpha

male on the trading loor Dennis had a big bulging neck and a massive chest thatlooked out of place poured into a tailored shirt with a tight collar, a yellow powertie, and bright suspenders with football helmets on it If he didn’t like what youwere doing, like ripping his client off on a trade, he would walk over to yourturret, prop his foot and massive leg up on your trading station, maybe kick overyour display and start chanting J-E-T-S JETS JETS JETS JETS Not everyone backeddown, and blood would occasionally spill Seriously All in a day’s work.

This is, uh, discouraged these days But it will happen

How do you become a good or even great trader? By sensing what those onthe other side of the trade are thinking Are they building a huge position so astock is going to keep going up or just tweaking around the edges? Are theydumping a stock because they know something is wrong? Are they panic selling,puking out a position at all costs because of a margin call which means the stock isabout to bottom

Traders are often facilitating a trade for clients That’s their job But evenwith the Volker Rule being implemented, irms trade for their own account Theycall it something else, hedging global risk, but you can make money for the irm.Great way to generate good will and cash bonuses

But even the smartest traders get fooled Maybe the smartest get fooled themost Markets get irrational Every trader worth their salt knows this or learns itquickly The old adage is that the market can stay irrational longer than you canstay solvent This is why irms put trading limits on traders or cumulativelytrading desks There is a irm-wide limit, known as VaR or Value at Risk – themost a irm could lose on any given day The better you get trading, the higheryour personal limit and the bigger chunk of the irm’s capital you get to play withand turn into more money (or end up as a smoking hole in the ground, see NickLeeson and JP Morgan’s London Whale.)

Bond trading is a little different, but not much Again, trading governmentbonds and munis and corporate debt is mostly facilitating trades for clients Butthere is no exchange These are negotiated transactions It’s you against the client,even though you are providing a service for the client Your job is to get the bestprice for your irm Some view this as screwing the client Very confusing foroutsiders

Here is a quote from Bloomberg News:

Unlike equities, ixed-income trades typically are privately negotiated outside exchanges, increasing the fees traders collect by making bids and offers because they’re more difficult to execute.

To make markets in debt securities, banks typically risk their own capital

to buy assets from clients before lining up someone else to sell them to, sometimes making bets on the direction of markets The new [Volker] rules are curbing that, turning traders more into middlemen.

Don’t think about it too much The client knows the deal

Bankers:

Wall Street plays an indispensable role providing access to capital, so U.S.companies can lay waste to competition in world markets And all for that modestfee, (yeah right.)

A little history: at irst, it was white shoe, blue-blooded partnerships thatruled the Street, providing a gateway to the wild and wooly market WhenProctor & Gamble needed to raise $100 million for their new Dr Pepper lavoredtoothpaste, the irm of Arntwe,Bornwell and Howe made some phone calls andplaced shares with a few friends for a $5 million fee But that blue blood ran red

in the Street when the go-go market in the late '60's got out of hand with 30%annual volume increases Settling trades meant literally sending out certi icates.Clerks in back of ices couldn't move paper fast enough to settle trades Customersrefused to pay until they got their certi icates The market would close one day aweek to catch up on paper shuf ling IBM and others solved the trade-clearingproblem, but between 1969 and 1970, a credit squeeze meant 160 partnerships

on Wall Street went belly up

Partnerships combined into big irms, many who went public to be able toafford mainframe computers When Intel went public in 1971, it took more than afew phone calls to raise money for the creator of dynamic random accessmemories, weird stuff back then White shoes gave way to road shows and thehiring of analysts to pick winners and losers from new funky industries Biggerwasn't just better, it was critical Somewhere along the way, though, these bigirms lost their souls and investment banking became a drab commodity By the1980s Wall Street had become its own worst nightmare: undifferentiated men ingray flannel (Armani) suits

Bankers rarely broke the mold and those that did won great success When aFortune 50 irm invited Wall Street irms in to give advice on a deal, all but oneteam of bankers pulled all-nighters for a 200-page pitch book If you’re aninvestment banking analyst or associate, the words ‘pitch book’ are likefingernails on a chalkboard

Robert Greenhill, who eventually became CEO of Smith Barney, lew in byhimself on Morgan Stanley's behalf, pulled a single piece of paper out of his suit

Investment banking is a relationship business Once you have therelationship with the top executives of a irm the CEO and CFO on down, the trick

is to keep in touch and offer ways for them to access the capital markets in cleverways Their employees need to sell shares? Offer a suggestion They need toinance a new division, offer something unique Then you’ll be there when a bigfinancing takes place

Unlike the rest of Wall Street, investment banking requires an MBA.Traditionally, you work at a irm with just a bachelor’s degree in a position calledanalyst (not to be confused with research analysts), then quit for two years to getyour MBA, and then come back (though usually at a different irm) as aninvestment banker –probably as an associate until you get promoted to vicepresident then irst vice president then managing director then senior managingdirector etc The job is the same, the titles just provide a pecking order, thoughmostly based on seniority

For a short part of my career, I pretended to be an investment banker (until Irealized you had to be nice to people) The only thing I was good at waspositioning companies for their initial public offerings, because I igured out thatinvestors needed to be fed three bullet points in 30 seconds That’s right, for allthe complications in telling a story about a company, the portfolio manager atFidelity or T.Rowe Price has a pretty short attention span, the length of a phonecall from a salesman So you have to boil it down – 3 bullet points in under 30seconds It’s kinda like the famous elevator pitch to venture capitalists

do companies get positioned right 3 bullets, 30 seconds I could make a fortunejust positioning companies So let’s keep this between us, shall we?

Sales:

Wall Street employs giant sales forces to ill in the silence There job is to sellsome idea to clients, and hopefully get them to trade with your irm There isequity sales, sales traders, bond sales and all sorts of combinations andpermutations in between Like any real life sales job, the more you sell, the betteryou do It’s also a relationship job But since trading commissions are tiny (andyou have to share them with the actual traders), the real payoff from saleshappens with deals, especially initial public offerings, IPOs Commissions on IPOsare 7% (Facebook and Google were the exception at 1%.) But anytime a companysells equity or bonds or some fancy derivative, the sales force makes mass calls toclients trying to get them to buy the deal

But you can’t just call up with deals, hence the need for salesman to stay ontop of just about everything and keep in constant contact with portolio managersand money managers and analysts on the buy side (and yes, get called assholewhen something goes wrong) so they have that warm and fuzzy relationshipwhen the investment bankers bring the deal of a century for them to sell (theyare all deals of the century!)

If you are in sales, you do a lot of schmoozing Kinda like Mad Men, lots ofgreat lunches and boozy dinners – Broadway shows and concerts, whatever ittakes There are some restrictions because lots of clients expected to beschmoozed so much they would demand great baseball tickets in exchange fordoing a certain amount of business

You don’t ever want to be caught doing credit card sales, meaning that youronly value is in taking clients out and running up the tab on your or yourcompanies credit card You want to be known as someone who ads value, offersunique insight and, what the heck, let’s grab a nice lunch and that nice bottle ofwine because I’m the client and you can expense it an it’s just Uncle Lloyd(Blankfein) or Uncle Jamie (Dimon) who are paying

Syndicate:

When IPOs, like Facebook, are completed, someone has to allocate all theshares to clients, both institutions like Fidelity and to lucky individuals Thatsomeone is a syndicate manager The quali ication is that you have to be good ataddition The Wall Street adage about syndicate managers is that they are too lazy

to sell and too dumb to trade

Analysts:

I could spend pages describing analysts That’s what I did for way too long Iwrote a book Wall Street Meat about it Read it if you want to know more

Here’s the short version: When the bull market hit, in the summer of 1982,the pace of initial public offerings quickened A tech bubble based on the PCplayed out in 1983 and 1984 Analysts were rapidly hired to follow software,CAD/CAM, biotech and a host of new industries like biotech Institutionsincreasingly paid commissions based on analyst coverage, so analysts werecommanded to make 100 phone calls a month As an analyst back then, I learnedquickly that getting ranked in the Institutional Investor magazine polls, which ishow you got paid, was the great leverage for analysts, you helped your own irmsoverall ranking, but other irms who wanted to move up in the rankings thencourted you I once was really impressed when I met the #3 II coal analyst, onlylater to find out that there were only 3 coal analysts

In addition, the higher you ranked in II, the easier it is for your irm to winIPO pitches, what is known as the Bake Off or Beauty Contest And then, in astrange circle, the better companies your irm did banking business with, thehigher you would get ranked in II

Make phone calls, get ranked, do deals Who has time to analyze?

Analysts naturally turn themselves into self-promoting machines Theirincentive is a once a year bonus The formula was simple: Phone calls = Votes = IIRanking = Investment Banking Business = Big Bonus Nowhere are the words