Partnoy - FIASCO: Blood in the Water on Wall Street

For the mouse

First published in Great Britain in 1997 by
Profile Books Ltd
58A Hatton Garden
London EC1N 8LX
www.profilebooks.com

This paperback edition published in 2009

First published in the United States in 1997 by
W. W. Norton & Company, Inc.
500 Fifth Avenue
New York
NY 10110
http://www.wwnorton.com

Frank Partnoy 1997, 1998, 2009

The moral right of the author has been asserted.

All rights reserved. Without limiting the rights under copyright reserved above, no part of this publication may be reproduced, stored or introduced into a retrieval system, or transmitted, in any form or by any means (electronic, mechanical, photocopying, recording or otherwise), without the prior written permission of both the copyright owner and the publisher of this book.

A CIP catalogue record for this book is available from the British Library.

Typeset in Times by MacGuru
info@macguru.org.uk

Printed and bound in Great Britain by
Bookmarque Ltd, Croydon, Surrey

eISBN: 978-1-84765-146-4

Contents

The author thanks: Starling Lawrence, editor in chief at W. W. Norton, and Patricia Chui, his assistant, for their comments and advice; Robert Ducas, literary agent, for his encouragement and insight; the law firm of Covington & Burling for its liberal leave policy; Michele and Denny Partnoy, for agreeing to purchase at least one copy; Laura Adams, Bruce Baird, and Chris Bartolomucci for comments on a draft; and numerous Morgan Stanley employees, named and unnamed, for providing and corroborating the material that became this book.

F rom 1993 to 1995, I sold derivatives on Wall Street. During that time, the seventy or so people I worked with in the derivatives group at Morgan Stanley in New York, London, and Tokyo generated total fees of about $1 billion an average of almost $15 million a person. We were arguably the most profitable group of people in the world.

My group was the biggest moneymaker at the firm by far. Morgan Stanley is the oldest and most prestigious of the top investment banks, and the derivatives group was the engine that drove Morgan Stanley. The $1 billion we made was enough to pay the salaries of most of the firms ten thousand worldwide employees, with plenty left for us. The managers in my group received millions and millions in bonuses; even our lowest level employees had six-figure incomes. And many of us, including me, were still in our twenties.

How did we make so much money? In part, it was because we were smart. I worked with the greatest minds in the derivatives business. We mastered the complexities of modern finance, and it is no coincidence that we were called rocket scientists.

This was not the Morgan Stanley of yore. In the 1920s, the white-shoe investment bank developed a reputation for gentility and was renowned for fresh flowers and fine furniture, an elegant partners dining room, and conservative business practices. The firms credo was: First class business in a first class way.

However, during the banking heyday of the 1980s, the firm faced intense competition from other banks and slipped from its number one spot. In response, Morgan Stanleys partners shifted their focus from prestige to profits and thereby transformed the firm. By the time I arrived in 1994, Morgan Stanley had swapped its fine heritage for a slick sales-and-trading operation and a lot more money.

Other banks including First Boston, where I worked before I joined Morgan Stanley could not match Morgan Stanleys aggressive new sales tactics. By every measure, the firm had been recast. The flowers were gone. The furniture was Formica. Busy managers ingested lunch, if at all, at a crowded donut stand jammed between two hallways along the trading floor. Aggressive business practices inspired a new credo: First class business in a second class way. After decades of politesse, there were savages at Morgan Stanley.

The derivatives group received its marching orders from the firms leader, John Mack. Mack had worked his way up from the depths of the trading floor, where he still was known as Mack the Knife. On his desk, Mack kept a large metal spike, upon which, it was rumored, he would threaten to impale inept employees. For one banking deal, in place of the traditional firm memento a clear rectangular block with a copy of the firms tombstone advertisement Mack had received a smashed phone handset encased in lucite, a legacy from his job working the trading floor phones. With Mack at the helm, the halcyon days of J. P. Morgan obviously were over.

Following Macks lead, my ingenious bosses became feral multimillionaires: half geek, half wolf. When they werent performing complex computer calculations, they were screaming about how they were going to rip someones face off or blow someone up. Outside of work they honed their killer instincts at private skeet-shooting clubs, on safaris and dove hunts in Africa and South America, and at the most important and appropriately named competitive event at Morgan Stanley: the Fixed Income Annual Sporting Clays Outing, F.I.A.S.C.O. for short. This annual skeet-shooting tournament set the mood for the firms barbarous approach to its clients increasing derivatives losses. After April 1994, when these losses began to increase, John Macks inviii structions were clear: Theres blood in the water. Lets go kill someone.

We were prepared to kill someone, and we did. The battlefields of the derivatives world are littered with our victims. As you may have read in the newspapers, at Orange County and Barings Bank and Daiwa Bank and Sumitomo Corporation and perhaps others no one knows about yet, a single person lost more than a billion dollars. At some companies it took more than one person to lose a billion dollars. Dozens of household names, including Procter & Gamble and numerous mutual funds, lost hundreds of millions each, billions total, on derivatives. The $50 billion Mexican currency debacle included its share of derivatives victims, too. As the late Senator Everett Dirksen once said, A billion here and a billion there, and pretty soon youre talking about real money. If you owned stocks or mutual funds during the past few years, a portion of the real money lost on derivatives very likely was yours.