A Tale of Two Bosses

Distinguished Wall Street options trader and acclaimed author Nassim Nicholas Taleb recalls two of his former bosses, Kenny and Jean-Patrice, and some of the other characters he encountered on Wall Street during the ’90s…

The 1990s witnessed the arrival on Wall Street of people of richer and more interesting backgrounds, which made the trading rooms far more entertaining. I was saved from the conversation of MBAs.

Many scientists, some of them extremely successful in their field, arrived with a desire to make a buck. They, in turn, hired people who resembled them. While most of these people were not Ph.D.s (indeed, the Ph.D. is still a minority), the culture and values suddenly changed, becoming more tolerant of intellectual depth. It caused an increase in the already high demand for scientists on Wall Street, owing to the rapid development of financial instruments.

The dominant specialty was physics, but one could find all manner of quantitative backgrounds among them. Russian, French, Chinese and Indian accents (by order) began dominating in both New York and London. It was said that every plane from Moscow had at least its back row full of Russian mathematical physicists en route to Wall Street (they lacked the street smarts to get good seats). One could hire very cheap labor by going to JFK airport with a (mandatory) translator, randomly interviewing those that fitted the stereotype.

Indeed, by the late 1990s, one could get someone trained by a world-class scientist for almost half the price of an MBA. As they say, marketing is everything; these guys do not know how to sell themselves. I had a strong bias in favor of Russian scientists; many can be put to active use as chess coaches (I also got a piano teacher out of the process). In addition, they are extremely helpful in the interview process. When MBAs apply for trading positions, they frequently boast “advanced” chess skills on their resumés. I recall the MBA career counselor at Wharton recommending our advertising chess skills “because it sounds intelligent and strategic.”

MBAs, typically, can interpret their superficial knowledge of the rules of the game into “expertise.” We used to verify the accuracy of claims of chess expertise (and the character of the applicant) by pulling a chess set out of a drawer and telling the student, now turning pale: “Yuri will have a word with you.” The failure rate of these scientists, though, was better, but only slightly more so than that of MBAs; but their failure came from another reason, linked to their being on average (but only on average) devoid of the smallest bit of practical intelligence.

Some successful scientists had the judgment (and social graces) of a doorknob – but by no means all of them. Many people were capable of the most complex calculations with utmost rigor when it came to equations, but were totally incapable of solving a problem with the smallest connection to reality; it was as if they understood the letter but not the spirit of the math. I am convinced that X, a likeable Russian man of my acquaintance, has two brains: One for math and another, considerably inferior one, for everything else (which included solving problems related to the mathematics of finance).

But on occasion, a fast-thinking, scientific-minded person with street smarts would emerge. Whatever the benefits of such a population shift, it improved our chess skills and provided us with quality conversation during lunchtime – it extended the lunch hour considerably. Consider that in the 1980s, I had to chat with colleagues who had an MBA or tax accounting background and were capable of the heroic feat of discussing FASB standards.

I have to say that their interests were not too contagious. The interesting thing about these physicists did not lie in their ability to discuss fluid dynamics; it is that they were naturally interested in a variety of intellectual subjects and provided pleasant conversation. As the reader may already suspect, my opinions about randomness have not earned me the smoothest of relations with some of my peers during my Wall Street career. But where I had uneven relations was with some of those who had the misfortune of being my bosses. For I had two bosses in my life of contrasting characteristics in about every trait.

The first, whom I will call Kenny, was the epitome of the suburban family man. He would be of the type to coach soccer on Saturday morning and invite his brother-in-law for a Sunday afternoon barbecue.

He gave the appearance of someone I would trust with my savings – indeed, he rose quite rapidly in the institution in spite of his lack of technical competence in financial derivatives (his firm’s claim to fame). But he was too much a no-nonsense person to make out my logic. He once blamed me for not being impressed with the successes of some of his traders who did well during the bull market for European bonds in 1993, whom I openly considered nothing better than random gunslingers.

I tried presenting him with the notion of survivorship bias in vain. His traders have all exited the business since then “to pursue other interests” (including him). But he gave the appearance of being a calm, measured man, who spoke his mind and knew how to put the other person at ease during a conversation.

He was articulate, extremely presentable thanks to his athletic looks, well measured in his speech, and was endowed with the extremely rare quality of being an excellent listener. His personal charm allowed him to win the confidence of the chairman – but I could not conceal my disrespect, particularly as he could not make out the nature of my conversation. In spite of his conservative looks, he was a perfect time bomb, ticking away.

The second, whom I will call Jean-Patrice, in contrast, was a moody Frenchman with an explosive temper and a hyper-aggressive personality. Except for those he truly liked (not that many), he was expert at making his subordinates uncomfortable, putting them in a state of constant anxiety. He greatly contributed to my formation as a risk taker; he is one of the very rare people who have the guts to care only about the generator, entirely oblivious of the results.

He presented the wisdom of Solon, but, while one would expect someone with such personal wisdom and such understanding of randomness to lead a dull life, he lived a colorful one. In contrast with Kenny, who wore conservative dark suits and white shirts (his only indulgence was flashy equestrian Hermes ties), Jean-Patrice dressed like a peacock: Blue shirts, plaid sports coats stuffed with gaudy silk pocket squares.

No family-minded man, he rarely came to work before noon – though I can safely say that he carried his work with him to the most unlikely places. He frequently called me from Regine’s, an upscale nightclub in New York, waking me up at 3 in the morning to discuss some small (and irrelevant) details of my risk exposure.

In spite of his slight corpulence, women seemed to find him irresistible; he frequently disappeared at midday and was unreachable for hours. His advantage might have been in his being a New York Frenchman with steady bathing habits.

Once he invited me to discuss an urgent business issue with him. Characteristically, I found him midafternoon in a strange “club” in Paris that carried no nameplate, where he sat with documents strewn across the table from him. Sipping champagne, he was simultaneously caressed by two scantily dressed young ladies. Strangely, he involved them in the conversation as if they were part of the meeting. He even had one of the ladies pick up his constantly ringing mobile phone as he did not want our conversation to be interrupted. I am still amazed at this flamboyant man’s obsession with risks, which he constantly played in his head – he literally thought of everything that could possibly happen. He forced me to make an alternative plan should a plane crash into the office building (way before the events of September 2001) – and fumed at my answer that the financial condition of his department would be of small interest to me in such circumstances.

He had a horrible reputation as a philanderer, a temperamental boss capable of firing someone at a whim, yet he listened to me and understood every word I had to say, encouraging me to go the extra mile in my study of randomness. He taught me to look for the invisible risks of blowup in any portfolio. Not coincidentally, he has an immense respect for science and an almost fawning deference for scientists; a decade or so after we worked together, he showed up unexpectedly during the defense of my doctoral thesis, smiling from the back of the room.

While Kenny knew how to climb the ladder of an institution, reaching a high level in the organization before being forced out, Jean-Patrice did not have such a happy career, a matter that taught me to beware of mature financial institutions. It can be disturbing for many self-styled “bottom line” oriented people to be questioned about the histories that did not take place rather than the ones that actually happened. Clearly, to a no-nonsense person of the “successful in business” variety, my language (and, I have to reckon, some traits of my personality) appears strange and incomprehensible. To my amusement, the argument appears offensive to many.

The contrast between Kenny and Jean-Patrice is not a mere coincidence that I happened to witness in a protracted career. Beware the spendthrift “businesswise” person; the cemetery of markets is disproportionately well stocked with the self-styled “bottom line” people.

In contrast with their customary Masters of the Universe demeanor, they suddenly look pale, humble and hormone-deprived on the way to the personnel office for the customary discussion of the severance agreement…


Nassim Nicholas Taleb,
for The Daily Reckoning
October 5, 2004

Editor’s Note: Nassim Nicholas Taleb is an essayist principally concerned with the problems of uncertainty and knowledge. Taleb’s interests lie at the intersection of philosophy, mathematics, finance, literature and cognitive science, but he has stayed extremely close to the ground, thanks to an uninterrupted two-decade career as a mathematical trader.

Specializing in the risks of unpredicted rare events (“black swans”), he held senior trading positions in New York and London, before founding Empirica LLC, a trading firm and risk research laboratory. Fooled by Randomness has been published in 14 languages, and the author’s ideas on skeptical empiricism have been covered by hundreds of articles around the world.

“You keep saying that this debt bubble in America is going to end badly,” said Michel at lunch the other day. “But I can’t see why it has to end at all. You focus on the borrowers. You notice that they get more and more in debt. But so what? You should look at the lenders. Why would they want to stop lending?”

There is a dark side to everything. Every sunny mountain pasture has a shady valley on the other side. And for every creditor who counts his wealth in the millions, there are a thousand poor schmucks who can barely make their monthly payments.

It all balances out, of course. And in the end, as Shakespeare tells us, all accounts are settled: “He that dies pays all debts.” But in the time between beginning and end, there are often surprises.

Michel wonders why the trend cannot go on forever – with no final reckoning of the debtor’s tab and the lenders’ miscalculations.

“As long as lenders have money, they’ll lend it,” says he, “and accept whatever interest rate the market offers.”

But lenders do not always lend. Borrowers do not always borrow. The sun does not always shine on the same side of the hill. The mass of credit, in other words, contracts as well as expands. It is hard for us to imagine; credit has been expanding since the first Reagan administration. It is now so huge – 330% of GDP – it can barely get through the door. But, occasionally, something goes wrong. Lenders stop lending. Borrowers make do with what they’ve got.

Today’s lenders, being human, imagine that what worked yesterday will work tomorrow. They lend because lending over the last 25 years has generally been a reasonable thing to do with their money. Interest rates declined, and bonds (the lending instruments) rose in price.

Of course, lenders, being human, might change their minds. If interest rates were to rise – as they probably would if the Chinese and Japanese stopped buying U.S. bonds or if inflation rates rose – the real return on lending would fall. At current interest rates, it could easily fall below zero.

Out of habit or stupidity, lenders would continue letting out their money – for a while, but not forever. The momentum of optimism would slow, then stop, then reverse. Lenders would grow fearful. They’d worry about getting their money back. They’d worry that borrowers wouldn’t be able to keep up with the payments…or that they would go bankrupt and never pay. Holding onto their money wouldn’t make them rich, but it would still be better than lending it out at a loss.

We are not saying when it will happen. We’ve been expecting it for so long, we have no credibility on the subject.

But the long-awaited credit contraction will begin someday. You can count on it.

More news, from Maryland:


Tom Dyson, reporting from Baltimore…

– Crude oil backed away from the $50 level again yesterday, like a coy virgin turning her cheek to a comely suitor. She flirted temporarily with $50 late last week, but Monday brought about a change of heart. She demurred from consummating the relationship. Oil retreated 21 cents yesterday to $49.91 a barrel.

– The retreating oil price emboldened stock market bulls to resume buying richly priced common stocks. The Dow Jones Industrial Average added 24 points, to 10,217, while the Nasdaq Composite advanced for the fifth straight session – up 10 points, to 1,952. Last Friday, the tech-rich index logged its best one-day performance in more than six months.

– The foreign exchange markets hosted the day’s most volatile trading action, as the dollar soared more than 1% against the euro. The resurgent greenback pressured gold, which fell $5.60, to $415.60 an ounce.

– We suspect Miss Crude Oil is merely slowing her romance with $50, rather than cutting it off altogether. And we suspect that the stock market will encounter some stiff resistance later this month. But the month of October has often treated stock market bulls very well…with a couple of notable exceptions.

– “As an English major, graduated from a respectfully liberal college,” our colleagues at the Wave Strength Market Report observe, “I’d have to say that this is one of the worst adages I’ve come across so far: ‘Buy in October and get yourself sober.’ I found it in an article from this month’s Stock Futures & Options Magazine. The adage is supposed to correlate well with the adage ‘Sell in May and go away.’

– “Anyway, the point of the short article in SFO was to study how October-phobia works, a phrase referring to the market drops occurring often in October…Looking back at just last year, the Dow opened in the beginning of October at 9,276.80; its last open of the month occurred at 9,786.75, a whopping increase of 510 points, give or take a quarter cent or two.

– “According to Jeffrey Hirsch and J. Taylor Brown,” the Wave Strength team continues, “Octobers have turned the tide in 11 bear markets since World War II: 1946, 1957, 1960, 1974 and 1987, just to name a few. The phrase October-phobia was originally attributed to crashes in 1929, 1987 and 1997, as well as 1978, 1979 and 1989. The good thing about October recently is that every October in the last six years has skyrocketed to the top of the list of monthly rankings with big increases after terrible summer doldrums. Could this mean the curse is lifted?”

– Don’t count on it…And keep a close eye on Miss Crude Oil [Ed. Note: Kevin Kerr of Resource Trader Alert will be on “First Business” on Wednesday, Oct. 6. Tom Hudson will be grilling him on the ever-rising energy markets.]


Back in London…

*** Lenders and borrowers cross each other on the street from time to time.

They say hello and occasionally stop to chat. What interests them both is the extraordinary rise in the leveraged asset of one and the collateral of the other. In San Francisco, house prices are rising at more than 15% per year. In Los Angeles, the increase is nearly 30%. Out in Palm Springs, houses in the desert rose 33% in a year, and the median new house was being offered at prices more than 50% higher than 12 months before.

“You watch all this with astonishment,” said an analyst with DataQuick.

Over on the other coast, houses in Boston are six times more expensive than they were in 1980. Salaries, meanwhile, have only increased by a factor of three.

“Neither a borrower nor a lender be,” comes the Bard’s advice. But Shakespeare never lived through a real estate bubble. Neither borrowers nor lenders have reason to complain. As long as house prices continue to rise, both do well. The borrower’s leveraged speculation pays off handsomely…almost obscenely. He might have put down only 10% of the purchase price. On a $300,000 house rising at 33% per year, this represents an annual rate of return greater than 300%.

No reasonable investor would expect that to continue. Yet millions of lenders and borrowers all over the nation seem to be counting on it.

For the lender, it is a no-brainer. Rising prices help guarantee he’ll get his money back – with interest. For the borrower, too, it is a no-brainer. He is making a fortune from the housing bubble. But for the fuddy-duddy economist, it is simply brainless. Everyone is getting richer…but no one has any more real wealth than he had before. In year’s time, the lender thinks he has made 6%. The borrower thinks he has made 300%. And the house needs repainting.

In our humble opinion, America’s boomtime real estate lenders and borrowers should not cross each other, but themselves.

*** “Either crude oil is very, very expensive or gold is very, very cheap,” says James Turk. Historically, you could buy a barrel of oil for 2.27 grams of gold. Now it takes 3.54 grams. Turk expects neither gold nor oil to fall. Instead, he looks for oil around $60 and gold near $500.

*** “The problem with conservatism,” says colleague Dan Denning, “is that there is nothing left to conserve.”

Both parties stand for the same things: more spending, more debt, more meddling in people’s lives all over the globe. This agenda used to be called “liberal.” Now, it is “neoconservative.” Neither party disagrees with the basic doctrines of the liberal welfare/warfare state; each candidate merely promises to do a better job of it.

*** Our old friend and former presidential candidate Harry Browne sends some questions that he wished had been asked in the presidential debates:

“Mr. Bush, you said in 2000, and now you’re repeating it, that the difference between you and your opponent is that you believe in smaller, limited government. But government has grown by nearly one-third in just the past four years. You haven’t vetoed a single bill passed by your Republican Congress. Is this what you mean by limited government – limited to whatever YOU want?

“Mr. Kerry, every one of the proposals you’ve made to fix what you perceive as today’s problems has been in the direction of more government. Are you saying that only government can solve problems – that government programs always deliver exactly as was promised – that no government program has made things worse?

“Mr. Bush, you said in 2000 that you wanted a humbler foreign policy than Mr. Clinton had. Then you told the rest of the world, ‘You’re either for us or against us’ – meaning that any nation that didn’t follow your leadership was to be treated as an enemy. And you also said you didn’t believe in nation building, but now you’re telling us you’re going to build democracies in the nations of the Middle East. Can you give us an example of your humbler foreign policy – or explain how your dreams don’t constitute nation building?

“Mr. Kerry, today federal, state and local governments spend well over half of all the health care dollars spent in America. In addition, insurance companies spend another quarter of the health care dollars only because of income tax policies. And yet only very small minorities of the American people are happy in this government-dominated health care system. Doesn’t it seem decidedly not humble to suggest that you can make a situation made bad by government intrusion somehow better by expanding government intrusion?

“Mr. Bush and Mr. Kerry, every relevant poll of the past 15 years indicates that the American people overwhelmingly think that government is way too big. And yet neither of you tonight has proposed reducing the size of government in any way. Two presidential candidates who have proposed reducing government dramatically have been shut out of these debates. Do you think that’s fair to the American people?

“Mr. Bush and Mr. Kerry, for the past 60 years, our government has invaded and bombed foreign countries, propped up unpopular dictators who claimed to support the United States and bribed foreign countries to support a meddling U.S. foreign policy. No terrorists have claimed to hate U.S. democracy, freedom or prosperity, but they have stated unequivocally their hatred of U.S. foreign policy. My question is this: Do you consider the 3,000 lives lost on 9/11 an acceptable price to pay to continue a meddling U.S. foreign policy?

“And finally…

“Mr. Bush and Mr. Kerry, has either of you ever read the Bill of Rights? If so, how do you square the Bill of Rights with your health care and education programs, your support of the Patriot Act, your allowing the government to lock away and forget about people who have never been charged with a crime?”

*** A reader comment:

“I just read your letter tonight about the 75-year bull market in lobster. It may have just turned cycle this year, because all the lobstermen are complaining about the unusual lack of lobsters this summer. One friend of ours said that he has made only a quarter of what he made last year and can’t afford to go back to college in the fall. (He was paying for his own tuition.)

“And yet another friend of ours just ‘had’ to buy a new $250,000 lobster boat this summer. (I guess the old one just doesn’t pull its weight anymore.) All of the lobstermen drive to Little League games in their massive 2005 pickups, and the wives pull up as well in their brand-new white Yukons, Cadillac SUVs and Envoys.

“Oh, and by the way, almost all the lobstermen have cottages on lakes near and far, with many having huge homes on the ocean as well.

“My husband’s Little League assistant coach just bought a new, not used, power boat besides his regular lobster boat. He’s recently single and needs to impress the ladies.

“And last but not least, my son’s 12-year-old lobstering friend boasts about the $900 ring he bought for his mother last Christmas.

“Oh, how sweet it is up here in the frosty waters of Maine. But shhhhhhh, don’t tell anyone that there’s been a limit on new lobster fishing licenses. Don’t want any furriers stirring up our golden waters. Besides, they’ll cut all your lines anyway if you try to set a trap off the friendly coast of Maine.

“Another interesting note: My husband happened to notice once that the charts for the Dow industrials and lobsters have been tracking together for quite a while.”

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