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Surtando Em Wall Street: Memórias De Um Operador Do Lehman Brothers (2014)

by Jared Dillian(Favorite Author)

3.9 of 5 Votes: 2

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English

genre

History & Biography

publisher

Zahar

review 1: Most books about the collapse of the world financial system in 2008 suffer from the writer's desire to maintain an appearance of respectability in describing what was a stupid and sordid debacle. Dillian has no auctorial image to preserve and so is not hobbled by that constraint and it makes his book stand out. Even if the financial system hadn't been brought to its knees, his book would still have been worth reading as a study of greed on steroids.
review 2: Jared Dillian is a lunatic. Literally. He was diagnosed as bipolar and obsessive compulsive for the first time in his life around the age of 31. How did he survive and thrive in his crazy stew for 31 years without knowing it? By working in the military and on Wall Street, of course.Street Freak is a less... moreer version of Liar’s Poker. We follow Dillian’s career from his start at Lehman Brothers in 2001 through its collapse in 2008. Since the topic of resumes is ceaselessly brought up in Street Freak and Liar’s Poker, here is Dillian’s. Dillian grew up working class. He graduated from the United States Coast Guard Academy with a B.S. in math and computer science. After that, he guarded the coast, or whatever they do, for a few years. Then he got an MBA from the University of San Francisco while working two jobs. Lehman Brothers hired him in 2001 because he explained to his interviewers that he was “fucking insane.” He was consciously referring to the fact he was willing to work hours no one else would work. Perhaps unconsciously he was on to something more. His undiagnosed mental illness generated severe mood swings; he swam in euphoria one minute over a $650,000 bonus, and smashed phones and keyboards with bloody hands the next because a trade went the wrong direction on him. After one failed suicide attempt and an acute case of paranoia in which he was convinced the FBI was tracking him for illegal trades, he finally checked himself into a psych ward. There he remained for 2.5 weeks while his doctor administered lithium, which presumably he still takes.The Wall Street world is the most interesting part of the book for me simply because it is so vastly different from my own life experiences. The numbers speak for themselves. Dillian’s salary was $135,000 in 2001, rising to $850,000 by 2008. Even more impressive, during that time he made about $100 million for Lehman Brothers, which arguably meant he was underpaid. How did Dillian make $100 million? Well, if you can answer that, you can make a similar salary. Dillian doesn’t do a fantastic job explaining the mechanics of his trading activities. Perhaps he thought people would already know what he was talking about, in which case they would be bored by the redundancy. Or maybe he didn’t want to give away any of his strategies that he may still be using. Alternatively, he may have thought trying to explain it to non-Wall Street people would be tedious and they wouldn’t be interested. I was very interested, but he left me in limbo, much like Leo left that Asian dude in limbo in the movie Inception.Here’s what I think I know. Dillian was a trader at Lehman Brothers. He had two functions: 1. make markets for the firm’s clients, and 2. make money any way he could. The first function is easier to understand. Part of Lehman Brothers is a brokerage that earns commissions when large institutions, hedge funds, and wealthy individuals want to buy and sell many shares of stock. The client can use Lehman to complete all these transactions instead of attempting to buy on the market from many different people or institutions at different prices. Lehman may only earn a few pennies per share by placing these buy and sell orders; but when orders are on the magnitude of 500,000 shares, even three cents per share is $15,000. With many such trades a day, real money is made off the commissions. The sales guys bring in the clients, and the traders execute the trades the clients want. Thus, there is frequently tension between sales and traders because sales is a volume business, and traders want to make profitable trades. Frequently, traders are asked to make unprofitable trades because the firm as a whole can still make more money off commissions than it loses on bad trades. Traders execute the trades of clients by making markets for the clients. Lehman Brothers traders will offer bid and ask prices on a variety of securities. The bid is the price at which a client can sell, and the ask is the price at which the client can buy. Typically, the bid is a few pennies below the ask. The difference, the margin or spread, is additional profit Lehman would make on the trades. Occasionally, the margin will disappear or be “locked,” which means the bid and ask are the same price. In this scenario, Lehman is only making money off commissions. Lehman may create locked markets to please their clients and gain new business or retain old business. In this function, Dillian’s role was to constantly monitor the firm’s position and minimize losses incurred in their client’s trading. He would do this by trading stock himself and hedging positions.The second function was for Dillian to make money any way he could. Here’s where it gets murky for me. He started off in index arbitrage. Arbitrage is riskless profiting from price differences in two or more different markets. This was profitable for a while until computer programs began instantaneously evaporating arbitrage opportunities. The market is already efficient, meaning outsized profits from arbitrage are difficult to achieve, and its efficiency grows over time with improved trading technology. When arbitrage slowed, Dillian then took advantage of index rebalancing. Indices are simply collections of stock that have similar characteristics. Common examples include the Dow Jones, the S&P 500, the Russell 2000, etc. Exchange Traded Funds, or ETFs, mimic popular indices. For example, SPYs are an ETF that track the same stocks comprising the S&P 500. Stocks are constantly being added to or removed from indices as some stocks grow and others wither. The ETFs are legally required to hold a proportionate share of the stocks comprising their underlying index, and they achieve these proportions through a yearly rebalancing. This means there is a lot of selling of stocks that are about to be delisted from an index and a lot of buying of stocks that are about to be added to an index. Dillian researched the small cap stocks in the Russell 2000 before the yearly rebalancing and made money buying stocks he thought would be added and shorting stocks he thought would be removed. Others adopted this strategy too. Dillian finally moved on to proprietary trading, which is evidently a catchall for doing whatever trades you want. If you know (or have a good guess) as to whether a market or interest rate is going up, down, or staying the same, there are an infinite combination of trades you can execute to make money. That’s what Dillian did.Throughout the book, Dillian refers to a guy named Jay Knight. He was a badass prop trader who made so much money for Lehman that he could pretty much do whatever he wanted. He wanted to trade out of Miami instead of NYC. Lehman let him. He wanted to retain 10 or 15% of the money he made trading. Lehman let him. Dillian idolized Jay Knight, whom he never met, because he was smart, made tens of millions of dollars per year, and the rules didn’t apply to him. It’s unclear to me whether Jay Knight is a real person or merely a MacGuffin. Either way, there are people like Jay Knight. Part of me is impressed by their Excel knowledge, math skills, and courage in risking huge sums of money. Part of me realizes how insecure people who constantly reference their SAT scores well into their 20’s and 30’s must be. Part of me is jealous they’re playing a game I can’t even see.Memorable quotes:“There’s so much to know and you can spend a lifetime learning. What happens in the Nikkei affects what happens in the DAX. What happens in the DAX affects what happens here. Then there are currencies. Then there are interest rates. It is all connected; it is one massive linear programming problem that nobody is smart enough to figure out.”“I felt like a man who knows that he is in the right job, at the right place, at the right time in history; a man who is doing exactly what he was put here on earth to be doing.”“Dealing with risk is like ass stretching. If you shove an object in your rectum, it is painful, but the more you do it, the bigger the object you can fit up there, until one day you are comfortable with, say, a peanut butter jar.”“[A call option] is how a Wall Street career works. It is rational to take more and more risk because if you lose money, all you lose is your job. The firm eats the loss—it doesn’t take it out of your paycheck. Meanwhile, you can make tens of millions in upside. Most people don’t actually behave this way, because they have some sense of responsibility and judgment that prevents them from taking stupid risks with other people’s money. Most people are careful, even when it is irrational to be careful. But with Lehman Brothers, you had a scenario where a group of employees [i.e., the real estate traders] had option-like returns and took excessive risk, while ignoring liquidity (the ability to get out of the trade). Management too had option-like returns. In the past, Wall Street firms were partnerships, meaning that partners had to share in losses. The shareholders of a publicly traded corporation that goes bankrupt have no such recourse. Meanwhile, if management fails to understand kurtosis, power-law distributions, and what are known as ‘fat tails’—and the concept that the market moves in cycles—you have the perfect storm: a blinding display of incompetence. You have people who call themselves professionals but lack even a basic understanding of risk.” less

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