Thursday, February 09, 2006

A window on Wall St. deals

Less than a week into my new job as FX trader at Chase Manhattan Bank I found myself accepting a beer from one of my brokers in a South St. Seaport Bar on a Thursday afternoon. "Thanks," I told this man I had just met face to face. He told the bartender to get me whatever I wanted on his tab and then told me, "no problem." I proceeded to have a very fun night.

The next morning I crept quietly into the dealing room on the 35th floor, nursing a hangover. I hadn't even taken my suit jacket off when I heard the voice of my new friend through one of the little speakers or "broker boxes" on my desk, "can I get some help with a switch?"

I didn't then know what a switch was so he informed me that his desk had done a deal with two clients who didn't have credit lines with each other. As Chase had large credit lines with everyone, I could help him complete the deal by acting as intermediary and as a side benefit to him, double his brokerage as 1 ticket became 2.

So began my career on the Wall St. favor circuit. Beers at a bar became dinners at expensive restaurants with cocktails at a club after and limo rides in between. Good seats to virtually any sporting event or concert were mine for the asking, especially as I started to trade in larger volumes. The amounts they spent to keep me happy were small in comparison to the brokerage fees they earned from Chase through me. It was good to be a parasite.

When I moved to the buy side of the market at a major Hedge Fund I didn't have any more brokers as I now dealt through the banks (the sell side). But the deal was the same and the amounts were larger.

At times when we traded aggressively, driving the market sufficiently such that our bank counter parties made losses, meetings would be set up to discuss this "unfair" arrangement. Almost invariably we would do a few "open fill" orders, instructing the banks to buy or sell $100M of whatever currency at their discretion, which meant that we would allow them to make a few "pips" on the order. A pip on $100M $/DEM is roughly $10,000.

The point I'm trying to make here is that the amounts being traded were so big, (this was more than a decade ago) and the profits to be earned so large that the money spent generating the "good will" was almost always very well spent. Of course, from the perspective of the end user, those who provided the funds to be intermediated, or needed the funds to put to use, this was a tax, or vig, if you will.

So when you read that Lehman paid Mr. Greenspan $250K to speak at a dinner of hedge fund guys don't worry about them. I'm sure as the NYPost relates, It is very safe to say that [Lehman] will have its strongest week of the year based on this meeting. Equally, don't worry about the Hedge Funds giving up a few pips, I imagine the managers thereof made their trades and waited for "news" of the dinner to leak.

Looking back, I'm embarrassed to realize that I refused to grasp what I was doing, taking solace in numbers - "everyone's doing it." As I've reported on in the past, one of the major trends during the Greenspan Fed has been the shift of profits from manufacturing firms to financial firms. I guess easy Al has been champing at the bit to get a slice of the pie he helped bake.

In 1987, less than 19% of total domestic corporate profits were earned by financial firms, while just under 27% were earned by manufacturing firms. In 2004, 33% of total domestic corporate profits were earned by financial firms while just over 12% were earned by manufacturing firms. In 1987, the US had a slightly positive net international investment position. In 2004, the net international investment position was -$2.5T, which is to say that under Greenspan's Chairmanship, the US sold the family jewels to keep up appearances and the guys who served as middlemen in the process, the owners of the financial sector, got rich doing it. (all data: BEA)