Fool's Gold: How the Bold Dream of a Small Tribe at J.P. Morgan Was Corrupted by Wall Street Greed and Unleashed a Catastrophe Read Online Free Page B
Commerzbank, they spent an entire afternoon tapping out the details on a telex machine, spelling out all the future cash flows to their clients. As the 1980s wore on, though, the pace of business picked up. So did the profits.
The young traders in the group were thrilled with the increasing power and freedom they enjoyed. Few at the bank outside the swaps team itself knew how their trades worked, and the leader of the team, Connie Volstadt, widely recognized as one of the most brilliant minds in the derivatives world, was given great autonomy. Volstadt showed outright disdain for the Morgan Bank senior management and would reveal only the scantiest details about the team’s business. Indeed, the team members loved teasing those in the more hidebound departments. “We had this sense of being special, of being detached from everyone else, a little team that was very tightly bound together,” recalled Stott.
From time to time, the senior management would try to clip the swaps team’s wings. In 1986, Lewis Preston, then the chief executive of J.P. Morgan, flew to London and challenged the manner in which Volstadt was recording the value of deals. At the time, J.P. Morgan, along with every other bank, was unclear how to measure the worth of the swaps trades, as accounting guidelines were still being worked out. “You say your group has made a $400 million profit, but,” Preston challenged Volstadt, “it looks to me as if you have a $400 million loss!” Furious, Volstadt assigned a team of junior analysts and interns to reexamine every single paper ticket recording the deals, and when he proved his case, Preston backed down. The episode was indicative of the way the upper management viewed the swaps traders: as a bunch of unruly teenagers.
As Hancock watched the high-octane business of the swaps group from his humdrum perch in J.P. Morgan’s commercial banking team, he was fascinated and eager to join in. So in 1984, he joined the London bond group, and in 1986 he wangled his way to move across to New York, where the bank was expanding its derivatives operation.The J.P. Morgan managers had realized, to their utter delight, that there was no explicit provision in Glass-Steagall against trading in derivatives products.
Initially, Hancock’s role on the team was rather humble. He managed a small treasury team that used swaps to manage the bank’s on-balance-sheet assets and liabilities. But Hancock was articulate and opportunistic and soon found ways to make himself visible. After the 1987 stock market crash, interest rates fell and the bank suffered sizable unexplained losses in its derivatives books. Hancock was asked to explain to the bank’s senior management what had happened and ended up managing a small desk at headquarters that traded products known as “floors” and “caps.” Then, when the bank rebranded itself as J.P. Morgan in 1988, Hancock, a key sailor, organized a team that sailed round Manhattan with a vast J.P. Morgan logo on its sails. That garnered attention, particularly since Hancock’s team narrowly beat Goldman Sachs’s boat. He learned everything he could about how the derivatives world worked. He also impressed Dennis Weatherstone, CEO of the bank. Weatherstone was a legendary character. He hailed from working-class British stock, first joined the bank at age sixteen as a messenger boy in London, but later became a brilliant foreign exchange trader and eventually rose to the very top.
In 1988, a shock occurred that created Hancock’s opening. Connie Volstadt defected to work at Merrill Lynch, taking half a dozen of his team. It left the bank with a conundrum.
At other banks, the obvious way to fill the huge revenue hole left by Volstadt’s departure would have been to hire a new guru and build a new team from rival banks. But J.P. Morgan rarely hired outsiders into senior positions. The vast majority of its senior staff had come up through the ranks, giving the bank its insular
The young traders in the group were thrilled with the increasing power and freedom they enjoyed. Few at the bank outside the swaps team itself knew how their trades worked, and the leader of the team, Connie Volstadt, widely recognized as one of the most brilliant minds in the derivatives world, was given great autonomy. Volstadt showed outright disdain for the Morgan Bank senior management and would reveal only the scantiest details about the team’s business. Indeed, the team members loved teasing those in the more hidebound departments. “We had this sense of being special, of being detached from everyone else, a little team that was very tightly bound together,” recalled Stott.
From time to time, the senior management would try to clip the swaps team’s wings. In 1986, Lewis Preston, then the chief executive of J.P. Morgan, flew to London and challenged the manner in which Volstadt was recording the value of deals. At the time, J.P. Morgan, along with every other bank, was unclear how to measure the worth of the swaps trades, as accounting guidelines were still being worked out. “You say your group has made a $400 million profit, but,” Preston challenged Volstadt, “it looks to me as if you have a $400 million loss!” Furious, Volstadt assigned a team of junior analysts and interns to reexamine every single paper ticket recording the deals, and when he proved his case, Preston backed down. The episode was indicative of the way the upper management viewed the swaps traders: as a bunch of unruly teenagers.
As Hancock watched the high-octane business of the swaps group from his humdrum perch in J.P. Morgan’s commercial banking team, he was fascinated and eager to join in. So in 1984, he joined the London bond group, and in 1986 he wangled his way to move across to New York, where the bank was expanding its derivatives operation.The J.P. Morgan managers had realized, to their utter delight, that there was no explicit provision in Glass-Steagall against trading in derivatives products.
Initially, Hancock’s role on the team was rather humble. He managed a small treasury team that used swaps to manage the bank’s on-balance-sheet assets and liabilities. But Hancock was articulate and opportunistic and soon found ways to make himself visible. After the 1987 stock market crash, interest rates fell and the bank suffered sizable unexplained losses in its derivatives books. Hancock was asked to explain to the bank’s senior management what had happened and ended up managing a small desk at headquarters that traded products known as “floors” and “caps.” Then, when the bank rebranded itself as J.P. Morgan in 1988, Hancock, a key sailor, organized a team that sailed round Manhattan with a vast J.P. Morgan logo on its sails. That garnered attention, particularly since Hancock’s team narrowly beat Goldman Sachs’s boat. He learned everything he could about how the derivatives world worked. He also impressed Dennis Weatherstone, CEO of the bank. Weatherstone was a legendary character. He hailed from working-class British stock, first joined the bank at age sixteen as a messenger boy in London, but later became a brilliant foreign exchange trader and eventually rose to the very top.
In 1988, a shock occurred that created Hancock’s opening. Connie Volstadt defected to work at Merrill Lynch, taking half a dozen of his team. It left the bank with a conundrum.
At other banks, the obvious way to fill the huge revenue hole left by Volstadt’s departure would have been to hire a new guru and build a new team from rival banks. But J.P. Morgan rarely hired outsiders into senior positions. The vast majority of its senior staff had come up through the ranks, giving the bank its insular
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