Friday, February 6, 2009

The Rapid Rise and Blistering Fall Of Boaz Weinstein

As we wrote two weeks ago in detail, the massive unwind of basis trades in the post-Lehman world was a crushing blow to numerous hedge funds, Merrill Lynch's prop desk, the reason why Citadel has to post a 100% return this year just to be able to pocket any incentive fees, and cost Boaz Weinstein his investing career (contrary to his aspirations to start a new fund). Today the WSJ picks up on the 35 year old's very interesting story, and covers in detail how the card-counter, who in the heyday of Wall Street was getting paid $40 million a year, fell from grace with a counterparty-risk induced thud, after basis trades gone wrong cost his SABA group at Deutsche Bank a $1.8 billion loss. By the way, what is it with these 30 year olds and their hubris: Nick Leeson, Jerome Kerviel, Boaz... Could companies such as Soc Gen and Deutsche Bank not afford some more experienced "risk managers" to run checks and balances on net portfolio risk?

The article presents an interesting picture of the trader in his final days:

Brooding in his office overlooking Wall Street, Mr. Weinstein remained outwardly calm as markets went haywire, traders say. The value of his group's holdings of corporate bonds and loans began to slide as other investors, needing to raise money, sold such securities.

At the same time, trading in credit-default swaps was curtailed because market players were concerned about entering trades with banks that potentially could collapse. This left Mr. Weinstein's group increasingly unprotected against losses in corporate bonds and loans, because it used swaps to hedge those positions.

Mr. Weinstein wasn't alone. Similar positions held by banks and hedge funds across Wall Street fell apart amid the seismic dislocations after the Lehman collapse.

As prices of corporate bonds and loans slumped to new lows and stocks plunged too, Mr. Weinstein wanted to buy more swaps to protect his positions, traders say. He told traders that in such a trading environment, "the primary objective is to get as flat as possible to the market" -- not betting on either a rise or a fall -- according to a person familiar with the conversation.

But in contentious conference calls, risk managers at Deutsche Bank told Mr. Weinstein to scale back positions or sell them entirely, traders say. Mr. Weinstein's stock-trading desk was instructed to sell nearly every holding, effectively shutting it down.
Good reading, and presents some interesting, although not quite correct, perspectives on why the basis trade went from cash cow to guillotine in a span of 24 hours. And, by the way, we are kidding that Boaz will never get a job - Bill Ackman has said he would likely hire him in a heartbeat. Maybe Boaz can go and run the PSIV fund... We are hearing it has some PM openings and doesn't believe in diversification either. After all basis trades and Target calls are pretty much the same thing.
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Unknown said...

Yeah but Boaz Weinstein plays chess so well, let him start another fund.

Anonymous said...

The guy looks about 50. Heart attack in 5 years.

Anonymous said...

I never understood why being good at Chess would indicate great trading potential. Poker, I can see.