Saturday, October 22, 2005

NEW CODE OF CONDUCT FOR THE HIGH YIELD BOND MARKET

By Corey Anders, Managing Director, high yield bond sales, Glomster & Co., New York, NY

Once upon a time, the high yield bond market was inhabited by gentlemen. I'm talking about the white shoe, blue blood days when decent guys like the bond salesman narrator of The Great Gatsby made bond sales an honorable occupation. But what, my friends, has become of us? How have we ended up here, where business is a kill-or-be-killed, dog-eat-dog, and devil- take-the-hindmost state of affairs? I certainly don't want to turn the clock back to those days when stiff patrician, prissy pricks ran the markets like some genteel tea party; but at the same time, we can not go without some sense of protocol, decorum, rules of civility, if you will. I mean, hell, before you know it the high yield market will have descended to the slimey, dank depths currently occupied by the municipal bond market.

How did we get here, to this state of junlge warfare? Some blame the hedge funds. Before the hedgies came along like hordes of Visigoths banging at the gates, the high yield market was run by insurance companies and mutual funds. These guys, for the most part, were straight arrows who followed the rules, guys who never failed to vote or slow when the traffic light turned yellow. Of course, Mephistopheles Mike Milken had his way with them, corrupted them, but still these old school guys abided by an unspoken code of conduct.

Can we reinstill a code of conduct into our market? Will the twenty-something punk hedge fund trader, who cut his teeth playing video games where you get points by running over pedestrians, ever really "get it."

I am sorry to tell my buy-side buddies that the onus lies on them, as this deterioration of etiquette is mostly their fault. After all, sell-side guys are expected to err on the side of sleaze. Sales guys have always pushed the envelope of propriety. We expect more from the other side of the street, the buy-side. We expect the buy-siders to uphold the standards of conduct. Buy guys used to compensate themselves with a self-sense of dignity and decency that partly, only partly, made up for their inferiority of income vis-a-vis their sell-side brethern. "The sell-side might pick us off on a regular basis," they use to say to themselves, "but at least we can look ourselves in the mirror every morning." Yeah, right....anyway, that noble way of thinking kept a semblence of moral order within the high yield universe. The barbarians were stopped at the gate. So it's up to you, buysiders, to save us.

Herewith is my effort to establish some rules of behaviour in our market:

Rule 1) IDEAS MEAN TRADES: When I give you an idea, Mr. Buy Guy, and you decide to act on it, you trade with me. Not the lazy ass Morgan Stanley salesman, lounging with his feet propped on the desk, waiting for the phone to ring. Nobody throws capital around in this market anymore. The only capital that means anything nowadays is intellectual capital. It's all I gots, homey. So when I tee the Great Idea up for you and you decide to send it down the fairway of alpha returns, how about giving me a call with an order? And I don't mean the usual order that I get from you, namely, "Don't bug me today, Corey."

Rule 2) YOU WANT INFO, YOU GIVE INFO: Don't call me up with sixty-five questions about some situation and, after I have dutifully answered them, then say that you have to hop. I don't mind telling you what kind of a seller I have, if he's a hedgie or mutal fund guy, what his thinking is, whether he's puttingon a short or not, how long he's had this position, does he take cream in his coffee, whatever...I don't mind answering those questions as long as you give me info back. Like, what are you thinking, what do you have in mind. You must have something in mind to ask me all these questions. Just give me a fucking hint, will ya!

Rule 3) NO NEW ISSUE WHINING: When a deal is ten times oversubscribed, don't whine when I tell you that you're getting $1mm instead of the $10mm that you put in for. (And we both know, without saying it, that all you really wanted was $5mm.) Such whining is especially unseemly considering that I can count on one hand the number of trades you've done with me the past three months. You wanna play, you gotta trade. And it doesn't help your case when you put your order in at the fity-ninth minute of the eleventh hour, just before the books close and it's a given that the deal has been done. That's called piling on.

Rule 4) IF YOU ARE GONNA FLIP, GIVE ME A TIP: Hey, if you don't plan to hold the million of new issue paper you got allocated after it breaks, just be upfront with me. Honest, I won't hold it against you if you are a flipper. I just ask that you show the bonds to me when you decide to sell. Dance with who brung you to the shindig.

Rule 5) TRACE SUCKS! And you thought TRACE was going to give you an edge over me. Now you realize that you can't bullshit me anymore the way I used to bullshit you. Transparency doesn't really do either one of us any good. All TRACE does is create trading logjams. So don't come at me all the time with what just traced. Let's just pretend that TRACE doesn't exits. We'll all get along better. You cover your eyes and I'll cover mine. You bullshit me, I'll bullshit you and we'll get more done and have alot more fun besides.

Rule 6) DON'T PUT AN ORDER OUT TO MULTIPLE BROKERS. Listen, dumb ass, you are hurting yourself. I can't tell you the number of times that I've taken your order to buy bonds to an account and the guy on the other end says to me, "Hey Corey, you're the third broker today who's called me to buy this piece of shit credit. Must be something going on. I'm holding onto what I got." It takes me about five minutes of snooping to realize that you've given the same order to two other bucket shops, who are shopping that order around like it's a fifty dollar whore. Just desserts when you get hit on all three orders and you end up buying three times the bonds that you wanted.

Rule 7) DON'T SIZE ME UNLESS YOU ARE READY TO TRADE: When I give you a market or firm bid or ask, and you ask me how many, and I tell you, then I expect a firm bid or offer from you in return. Don't tell me that you'll "be back in a few" or that you'll think about it. When I drop my pants for you and show you what I got, then I want more than a hand job.

Rule 8) I'M NOT ENTERTAINING YOU BECAUSE I THINK YOU ARE A GREAT GUY: Look Buyside Buddy, I do like you, maybe even think of you as a real friend, despite the fact that sometimes you can be a real pain in my ass. But I'm not taking you to the best restaurants in New York, sitting you in courtside seats at the Knicks games, covering your $2,000 ante fee at the montly Texas Hold Em Poker Tourney, all because I think you are so swell. I'm doing it because I expect something in return. DUH....And so what if it's not coming out my wallet but the firm's; it's the thought that counts. Let's just say that there is a gradation of tit for tat. The $1,000 tab at The Four Seasons for you and a few of your research monkeys, for example, should get me a $5mm order the next day. The annual two day golf outing at Shinnecock, well, that should result in your calling me when you want to dump your $25mm position in some crappy auto supplier. And when I take you to the local Korean massage parlor for "a rub and a tug," let's just say that you really owe me. (Certainly implicit in all this is that the greater the degree of illegality in my entertaining you, the more you owe me in directed business. )

Rule 9) DON'T MAKE ME LOOK LIKE A JACKASS: That's easy enough to do, I know. But you see a lot more than I do since you are seeing levels from about two dozen brokers. So don't give me an order that you know is way off the mark, just to see if I can find some clueless dummy out there. It's impossible for one blind man to find another one even more blind. You are wasting both our time and making me look stupid to all my accounts.

Rule 10) DON'T HOLD ME UP FOR A 1/4 OF A POINT WHEN WE ARE TRYING TO TRADE SOME DISTRESSED CREDIT THAT IS EITHER GOING TO ZERO OR PAR. I can't tell you the number of times that a trade on a distressed bond died over a quarter of a point. We can't close the gap on bond trading with a 30's handle? We are going to die 35 1/4 to 35 1/2? Are you kidding me? If you are buying this bond, you have to think it's going tens of points higher. So why are you walking away 1/4 of point from buying it? And, on the other hand, if you are the seller, you probably think the bond is as worthless as wall-paper. Like Nike says, Just do it! and move on to the next one.

I guess ten is enough, for a start. And I'm sure my buy-side buddies have plenty to say as to how the sell-side can improve its behaviour. I'm all ears for that. In short, like that great humanitarian, Rodney King said, "Can't we all just get along?" Sure we can. And we can all still make plenty of dough to boot, without driving each other bananas.

Sunday, October 09, 2005

NEWLY RELEASED AFFLUENCE INDEX SOWS DOUBT AND ANXIETY

What does it mean to be rich? What does it mean to be poor? These are relative terms, as any sociologist will tell you. A person considered poor today might own a car, a house, and in general have a standard of living that was considered middle class thirty years ago. And the rich of today are not your daddy's rich. There was a time when you were considered well off if you owned a new model Buick, had a hi-fi stereo and fondue set.

The Council of Socio-Economic Trend Analysis attempts to answer these questions with the annual release of its Affluence Index. The Council is a government sponsored organization which attempts to ascertain trends affecting--oh, blah blah, really it's just a gaggle of ex-bureaucrat policy wonks who attempt to justify their meager non-profit salaries by issuing silly pronouncements like the Annual Affluence Index. Whatever, the Affluence Index is closely followed within certain circles, particularly the Wall Street crowd, which is, of course, neurotically status conscious. And this year's index is already causing tremors across the high finance landscape.

Evan Farkas, chairman of the Council, had this to say, "The index continues its upward ascent from its initiation in 1995. Starting at 100, the index is now at 3065! Needless to say, a lot of people who once thought of themselves as well-to-do better be prepared to eat some humble pie."

And what constitutes affluence in 2004, according to the index? The component with the largest increase is housing. According to Mr. Farkas, an affluent person today would own a house of no less than 10,000 square feet, have a water view of some sort, a "media theater" with a private screening room, and an indoor recreation facility, e.g. bowling alley, basketball court. A new dimension to the housing component is the second home factor. No one today can seriously call himself affluent without owning at least one second home in a specially designated "high rent" zip code (think Martha's Vineyard or Vail, for example).

Other aspects of the lastest index have sent chills down many an investment banker's spine. For example, the hoity-toity have only one spouse bringing in the bread; nothing today is more bourgeois than an husband and wife both working. And don't think that cute Swedish au pair entitles you to think that you are something special. The affluent have "staff," a cook, a gardener, and a nanny who is indentured long enough to ensure that she will be attending her ward's wedding twenty years from now, just so the parents can show how "egalitarian" they are.

Nina Dildowitz, a psychologist who limits her practice only to those with fat wallets and skinny psyches, is already witnessing reprecussions from this report. One of her clients, a high yield bond trader who earned $2 million last year, called her in a panic after reading the report. "He was hyperventilating, whimpering," Ms. Dildowitz said, "mumbling that he was a failure, a loser because he knew that he had been 'priced out' of The Affluent. He was shocked, for example, to find that having his kids' college educations paid up fifteen years in advance was no big deal. Afterall, the truely affluent have donated enough to the university of their choice to have at least a classroom named after them...The only thing I could do was double up his Lexapro prescription."

Ms. Dildowitz expressed concern that investment banking drones who have sacrificed their hobbies, their families, their health, their equanimity, in short their souls, are now asking themselves, For what? To be lumped into a socio-ecomonic class labeled The Comfortable?

Mr. Farkas expects even more bad news for wannabe's and social climbers next year. "For 06, we're adding a new component to the index, Privately Owned Jet Aircraft." He concludes by saying, "Let's face it, unless you are a senior partner at a hugely successful hedge fund, you ain't rich."