Ask me about working with derivatives for 'retail' clients

[Lothario]

What did u major in college? And what would would an aspiring investment banker major in?

[KLLions]

1) read all quarterly reports and filings, this must be disclosed.
2) Work there. Have a friend that works there.
3) Read all the pertinent convert bond docs on the issuer.

n.b. This goes beyond the scope of this thread. Any issuances/filings can be found on EDGAR. Also, it is impossible to 'know' exactly when insiders will cash out.

[KLLions]

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How do people get that job? What did you do before you worked there?

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I worked in I-banking, and am 'quick[thinking] on my feet' was the reason given why they thought I would be good at the job, and am a markets junkie. E.g. when I worked on one desk, I started with zero knowledge of that market, but they thought I could learn quick. So I did.
It's certainly possible to get an analyst gig fresh out of school on a sales/trading desk. I can't give you better advice than anything you can read elsewhere or ask fellow alums, etc, for interviewing for these jobs. GPA is less important than many think [good trader <> 4.0 gpa necessarily], make personal contact with the recruiter [i.e. in person or phone, NOT email, unless they explicitly say otherwise], some will ask you about SATs, give you logic puzzles. Make your resume perfect and tailored to you, versus a generic one that looks like 10 others. For sales, there would be some expectation you are an extroverted person as opposed to a library rat.

If you are able to talk about things like past direction of Libor, or the Ted spread, or the MOB, or your view on GBP/JPY or direction of volatility or trades you would propose, or etc, you will stand out in a crowd, no matter where you went to school [use examples relevant to Divsion you are interviewing for]. Persistence also pays off when trying to get in the door, but not being annoying.

[KLLions]

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What did u major in college? And what would would an aspiring investment banker major in?

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Econ/Fin.

Anything - my analyst class had majors in math, French Lit, sociology, biology, etc.

I-banking is very, very, very dull and repetitive work, 90-hour weeks are the norm, yeah you get to do deals and get paid okay, but have no time to enjoy it, and don't use your brain, and don't meet anyone outside the 4-10 people you work with the most.
It's like majoring in Powerpoint and Word and Excel, basically. And if you make a mistake many bankers will want to crucify you, so it's very high-stress. Lots of people think they want this job, 95% of them are wrong and can't handle it, or wouldn't want to after 3 weeks. Working 100-hr weeks and having no life and missing every game, event, friends' weddings, bachelor-parties, anything social = teh suck.

I'd say it's better to do something else, go to grad school, and then interview for I-banking and start as an Associate where you get some responsibility and client contact versus none, and at a much higher wage. 95% of people going into banking had no I-banking experience prior. Maybe more.

[Aloysius]

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-banking is very, very, very dull and repetitive work, 90-hour weeks are the norm, yeah you get to do deals and get paid okay, but have no time to enjoy it, and don't use your brain, and don't meet anyone outside the 4-10 people you work with the most.

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Basically true - I worked for 3 years as an Analyst at a major bulge-bracket. I learned a ton of stuff on the transactional side, and some the analyses we did was very itneresting. But for the most part it's a grind.

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I'd say it's better to do something else, go to grad school, and then interview for I-banking and start as an Associate where you get some responsibility and client contact versus none, and at a much higher wage. 95% of people going into banking had no I-banking experience prior. Maybe more.

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Not sure if I agree with that for the following reasons:
-Analysts (at least at GS where I worked) got promoted up to Associate without having to waste 2 years in b-school
-Associates with no prior banking experience have a steep learning curve and very minimal client exposure
-Better to find out something sucks earlier, rather than getting an MBA and tracking your careeer in i-banking [img]/images/graemlins/smile.gif[/img]

That being said, I don't think being a banking analyst is a bad option at all for people coming out of undergrad. Although, if you want a more well-rounded "business" experinece, management consulting might be a better fit.

Oh - and paging The DaveR to mention somethign abotu how he konws that [insert name of bulge bracket] is really strong in trading derivatives in [insert derivative type / asset class].

-Al

[KLLions]

let's not hijack the thread all, thanks. If you have questions about derivatives or answers/thoughts if you work in the industry, ask away or share.

[Sniper]

This thread has been bounced around from OOT to Making Money, and is now in Finance... if anyone has questions for KLLions, I'll let him know the post is here.

[DesertCat]

Have you read "Fiasco" by Frank Partnoy? He's a former derivatives trader, and expresses the opinion that derivitive's greatest attribute is they can gussy up old products in new complicated ways, so they can be sold with outrageously high hidden commission levels, and clients can take fantastic new risks without realizing it.

Also, what do you think about Buffett and others contention that we are in for a large derivatives melt-down, because current derivative users can't really know their counterparties true derivative exposures and whether their counterparties can even pay up during a "fat tail" event.

[KLLions]

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Have you read "Fiasco" by Frank Partnoy?

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Yes, not only that, we crossed paths on Wall St. The Queen of RAVs was still running the desk after he left.

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and clients can take fantastic new risks without realizing it.


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No retail client lacks understanding for our trades, as I said, these are mostly plain-vanilla stuff compared to what companies do. Hedging fx or IR risk, collars, etc. I spend several weeks if not months walking them through ALL the economic ramifications of hedging/not hedging/speculating based on what their goals are.

A fixed-to-floating swap is risk-reducing 95% of the time.
Structuring a call option, for example, on an exotic security, that the client purchases, they have 100% downside risk, same as any stock or non-UST bond.

Virtually no clients would be allowed to sell such items short, however. Like maybe 3-4 in the whole firm, people who are more sophisticated than I and worth $Billions.
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Also, what do you think about Buffett and others contention that we are in for a large derivatives melt-down,

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1) I think it's crap.
2) While no derivatives shop has 'melted down' due to this risk, several banks have over the years from their inherent interest rate risk. And insurers. And re-insurers.
Options and derivatives have been around for THOUSANDS of years, probably prior to the Phoenicians, at least concurrent with them. Funny how the world economy has not been brought low by their use. Of course, if you sell a Libor-cubed swap to receive fixed, you are asking for a lot of trouble. Most derivs blowups have stemmed from outright fraud, a la Barings and Sumitomo and AIB.

3) I thought it was hilarious when WEB wrote in the BRK annual report 'We had $104mm in derivative losses last year at Gen Re...$404mm since we began,...'
but then goes on to say how derivatives must be a bad business for everyone due to the risk involved, without mentioning that his counterparties on the above trades *must* have made $404mm in profit since derivatives are a zero-sum game.

Let me think, do trades with Gen Re, it gets bought by BRK, and traders make $404mm in a few years. Yeah, clearly too risky, but not for the trader on the other side! Am I the only one spotting the irony in this?

"Both Charlie and I knew at the time of the Gen Re purchase that it was a problem and told its management that we wanted to exit the business. It was my responsibility to make sure that happened. Rather than address the situation head on, however, I wasted several years while we attempted to sell the operation...So I failed in my attempt to exit painlessly, and in the meantime more trades were put on the
books. Fault me for dithering. (Charlie calls it thumb-sucking.)"

So, WEB is telling us he purposefully kept the risk on the books, and then added MORE risk while he attempted to sell the whole operation. Finding no takers, he is shutting it down piecemeal, because he does not like the pre-existing 'policies' that GenRE Securities wrote.

He should have used the quote about not being able to spot the sucker [Gen Re] at the poker table, rather than the one about carrying a cat by the tail.
WEB is one of the few CEOs who accept blame for his screwups, and is to be commended for that.

But why did he allow more trades to be done if he was so worried? 'Do as I say, not as I do!'

[DesertCat]

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2) While no derivatives shop has 'melted down' due to this risk, several banks have over the years from their inherent interest rate risk. And insurers. And re-insurers.


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Let's not forget Orange County.

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3) I thought it was hilarious when WEB wrote in the BRK annual report 'We had $104mm in derivative losses last year at Gen Re...$404mm since we began,...'
but then goes on to say how derivatives must be a bad business for everyone due to the risk involved, without mentioning that his counterparties on the above trades *must* have made $404mm in profit since derivatives are a zero-sum game.

Let me think, do trades with Gen Re, it gets bought by BRK, and traders make $404mm in a few years. Yeah, clearly too risky, but not for the trader on the other side! Am I the only one spotting the irony in this?


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WEB's trying to say that the vast majority of clients don't know what they are getting into with derivatives, and end up getting skinned, like Gen Re did. Of course the smarter/luckier guys on the other end of the trade did the skinning.

There hasn't been a large counterparty failure to pay problem that I'm aware of, it's the standard prediction from Buffett, et. al. But with some counterparties on the hook for trillions, it's reasonable to be nervous. Will there be some event (asia crisis, russian crisis) that will cause a bunch of events that previously weren't able to be forseen as interlinked, and send one large counterparty down Refco lane to bankruptcy?

It was impossible for LTCM to fail at one time, and Merton Scholes called anyone who questioned their strategy "idiots". Of course hindsight is 20-20. We've also been hearing about the derivatives meltdown prediction for at least a decade and nothing has happened.

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So, WEB is telling us he purposefully kept the risk on the books, and then added MORE risk while he attempted to sell the whole operation. Finding no takers, he is shutting it down piecemeal, because he does not like the pre-existing 'policies' that GenRE Securities wrote.

...

But why did he allow more trades to be done if he was so worried? 'Do as I say, not as I do!'

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Did you ever read "influence" by cialdini? It's a good psychological influence book for investors/traders. Explains a lot why we all make bad decisions occasionally. I highly recommend it.

If I had to take a stab at how Buffett screwed this one up, my guess is it's because he's so predisposed to delegate to his mgmt teams and give them wide latitude to run their businesses. He probably recommended to GenRe they fix things, the managers said, we will, and still let their subordinates write new contracts as part of their unwinding strategy. By the time Buffett realized what was going on, a small problem turned into a medium problem.

Of course in the end it wasn't just derivatives. Buffett's basically had to blow out the entire management team at Gen Re, and even after doing that had the AIG scandal. The Gen Re purchase won't go down in history as one of his triumphs, even if Gen Re looks like a solid profit contributer.