Frank Partnoy was
a derivatives salesman for First Boston and then Morgan Stanley during the mid
1990s. His career was on a roll when he was transferred to Tokyo, became
disillusioned, and quit. He burned many bridges when he penned this book
chronicling how investment firms foisted complex and overpriced derivatives on pension
plans, insurance companies and other "buy side" organizations.
When the book came
out, Wall Street was aghast. There was quite an effort to dismiss the
book. Partnoy was characterized as a junior employee who didn't really
understand what was going on. All the complaining reminded me of Shakespeare
commenting "Thou doth protest too strongly."
Partnoy's book is
an eye-opener for anyone who has dealings with Wall Street—and especially
any professional who transacts in derivatives or structured products. He delves
into the intricacies of deals, illustrating what they were designed to achieve
and how they achieved it.
Many deals were
about credit rating arbitrage, taking assorted junk, repackaging it into
tranches, several of which received investment grade ratings, and then disposing
of the nuclear waste. Midwestern insurance companies appear to have been convenient
for this purpose. Partnoy illustrates how this might be done:
"Hey, guys, how are things in D___? Not bad?
Well, I've got a one-year bond for you here. It's issued by a highly rated
bank—take your pick, Republic Bank of New York or Deutsche Bank. It pays an
extra fifty basis points, half a percent, more than the London Interbank rate.
That's fifty, count 'em fifty, basis points, all basically for free. Its a
no-brainer. What's the catch? There is no catch. Oh, by the way, if the
government of Mexico restricts foreign currency transactions, you might end up
with Mexican pesos instead of U.S. dollars. What do you think?"
"Did you say something about Mexico?"
"Yeah, Mexico. What do you think."
"Was that Mexican pesos?"
"Yeah. How many bonds do you want?"
"Well, if I am getting an extra fifty basis
points, I guess I'll take $40 million, to start."
Contents
Preface
1. A Better Opportunity
2. The House of Cards
3. Playing Dice
4. A Mexican Bank Fiesta
5. F.I.A.S.C.O.
6. The Queen of RAVs
7. Don't Cry for Me, Argentina
8. The Odd Couple
9. The Tequila Effect
10. MX
11. Sayonara
Epilogue
Postscript
Other structures
were implemented to circumvent regulations, get around investment restrictions,
and generate end-of-year accounting "profits."
Such uses (or
abuses) of structured finance, are old news to experienced practitioners. What
makes Partnoy's book appealing is his depth of detail. There are many
entertaining anecdotes in the spirit of Liars Poker. Also, it is
interesting to observe some historic events—Gibson Greetings, Orange County,
Barings, the Mexican peso devaluation—as perceived by the derivatives traders at
Morgan Stanley. While they often joked about blowing up clients, there were some
white knuckles when disasters did strike.
I have a few
modest criticisms. Some minor facts are misstated here and there. This does not
distract from the narrative. It is, after all, a memoir and not a researched
history. More importantly, Partnoy focuses on big events to the exclusion of
day-to-day experiences. It would have been nice to read about, say, how he found
new clients or how his work impacted the rest of his life. Of this, there is
little mention.
The book is
almost, but not quite, a classic of finance. It is short and very entertaining.
If you haven't read it yet, you should.
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