Wall $t + the Credit Crisis - One Trader's perspective

From left, bank chiefs Lloyd Blankfein, James Dimon, John Mack and Brian Moynihan are sworn in on Capitol Hill earlier this month to testify before the Congressional Financial Crisis Inquiry Commission, which is investigating the causes of the financial crisis.

Thursday's events in the markets in which the financial stocks plummeted (on the back of Congress calling for yet tighter regulation of banks) got me feeling nostalgic about my old job and the roller coaster it was, especially at the end of my time there.  By now, most of you have probably read articles/books, seen a movie or TV special about the Financial crisis.  In some instances, told by someone who worked within the industry. I think about it a lot as it was my life for 7.5 years.

For those that don't know, there actually was a time when I had a full time job.  I used to wake up every morning around 7am (hard to believe I know) and make a short commute to work.  I was hired as a junior trader out of grad school back in March of 2001 and while my title changed slightly over the years as did the securities I traded, my primary function remained the same: Quantifying and analyzing the risk of any trade that could make the bank $$$.  I don't like discussing the particulars my job much because it wasn't easily explainable even to people that worked in finance in a sentence or two.  It did, however, provide for an excellent front row seat to the tumultuous events of two years ago.

One of the things that immediately struck me my first few weeks on the job was how smart and enthusiastic everyone around me was.  I was lucky enough to go to schools throughout my life where I was surrounded by intelligent and in some cases brilliant minds. Wall st, however, possessed something more.  These people were also incredibly driven which makes for a dangerous combo.  Everyone was extremely competitive (think Nadal in a suit or Michael Jordan only a lot smarter).  Sure there was some goofing off on slow days, but when things heated up, everyone was razor sharp.  The other thing I struggled with initially were the long hours.  In school, aside from going to class, you have the flexibility to manage the rest of your day wherever your interests lie.  You can take breaks, mental or physical (naps I mean) for sometimes hours at a time.  Going from that to a high level of intensity for most of a 10-12 hour day definitely took some getting used to. 

I quickly learned that most of my coworkers were the Type "A" people of the world.  Those that possess that aforementioned lethal combination of smarts and drive.  I remember thinking it was something of a shame that they were working in banking because they were the sorts that would excel in any job they applied themselves to.  They would be excellent teachers, policeman, doctors, etc.  Instead they were devoting all their God give energies + focus to making more money for a bank and thereby making more cash for themselves.  They could be contributing to society and make a real difference in the world.  It seemed a bit selfish and materialistic to me (of course I was sitting right there next to them).  Over time I softened on this stance, as many of them had families and wanted to provide comfortable living for themselves and their children.  I also witnessed a large amount of bankers/traders contribute to numerous charities throughout their careers.  Even though they couldn't give their time (a few still did), many gave back with their wallets.  Which is better?

There are 3 ways to get a job in the front office of a Wall Street firm.  The first is by going to a top notch undergrad or graduate school (a.k.a the "front door").   The second is by knowing someone senior in the industry (the "back door").  When you didn't go to Harvard or have a rich uncle at Goldman Sachs the last way is by working your butt of starting as a clerk or in the back/middle office.  This last way is the toughest as you can work long hours for years before you see any rewards and there are no guarantees.  The benefit however is that one can get their foot in the door and get paid as opposed to shelling out money to a grad school while networking and learning about the business.  In this respect, Wall St is like an exclusive annoying club with velvet ropes.  It's a pain to get in, but once you are inside you feel fortunate and share a small sense of camaraderie with the folks that are also inside. 

One unspoken thought among most experienced traders is that, while you are told by your boss/manager to put on trades that are low risk (and therefore low return usually) you are actually incentivized to do the opposite.  One of three things will happen when you put on a risky trade with or without your manager knowing (there are ways to mask things if you know the systems).

1. The trade does well, making the firm money and you look like a superstar.  You get a big bonus, promoted and can probably retire in 4-5 years.

2. The trade blows up, losing lots of the firms cash (not your own).  You get reprimanded or fired sometimes with severance (so you get paid more for putting on a bad trade).  You find another bank or hedge fund showing them your glowing resume but not that trade and do it all over again. 

3.  The trade goes sideways so you are neither fired nor paid a bunch.  You can take it off and find another one.

Obviously, the key here is that you are trading with someone else's money so if you incur a big loss it will not hit your personal wallet.  As long as you are not being fradulent or breaking the law (another conversation entirely), chances are if you got a job at one bank, you can get one at another.  This was the line of thinking when times were good and had a hand in what caused markets to start to collapse in 2008.

Riskier trades were put on and new structures invented where the risk was not fully understood or quantified.  (CDOs for example).  Once a few negative events started, it turned out much of these assets were more correlated than thought, and the whole thing came crashing down like a house of cards.   Of course the entire system didn't fail otherwise we'd have no banks and would be living in chaos but for a little while it looked like we weren't too far away from that.  There were so many events in 2008 that if they had happened in any other year they would have been the single major financial story of that year (Freddy and Fannie collapse, AIG, Bear Stearns sold for almost nothing to JPM, Lehman bankruptcy, death of pure investment bank, etc).  It really did feel like a roller coaster.

Now that the dust has settled, it's still amazing how quickly everything unraveled.  My old desk barely exists anymore, the head of my desk and CEO have left and the rest were let go.  It's possible the whole NY office won't be around 6 months from now.  The trading floor used to be such a energetic, loud, dynamic and exciting place to be + now it sounds like a library.  It's funny to watch the Office, because my ex job couldn't have been more opposite (I guess nobody's office is exactly like that one)...