Posting slow-down

Alright so a bunch of people have noticed that I've slowed down my posting significantly and have become quite erratic in my timing. Unfortunately I've gotten ridiculously busy over the past month or so. This blog ended up taking a back-seat. I plan to start posting on a regular basis again (it's one my new-year's resolutions. . .no not really, but it would be if I did new year's resolutions). Expect a post at least once a week.

I've also included some helpful links for those of you who don't feel like clicking back here every time (if I'm bookmarked, I thank you). You can now subscribe to this blog in a reader, via e-mail and on technorati. All these services are available on the right side of this page.

Thanks for your patience and readership.

Turn of Year

A lot has been said about the turn of year premium this year. I'm probably writing this post a bit later than I should have. This would have been a more timely post a month ago or even three months ago. Alas.

First off, what is the turn of year premium? Well, in fixed-income-land, the turn of year premium represents the extra interest one charges to lend money over new year's eve. Generally this year-end rate is significantly higher, say 8% when libor is 5%. Sounds kinda silly right? It's just an artifact of financial regulations and having to shore up captial at the end of year when regulatory numbers are checked. A similar event happens at the end of every month.

Why is this important? It represents financial institutions willingness to lend to each other at the year/month end. This is a proxy for the financial institution's confidence in it's capital ratios. If a financial institution is under-capitalized it can mean all sorts of bad things for them from a regulatory perspective (not to mention a investor-base's perspective).

In the 1999-2000 turn of year, this overnight rate had been predicted to be ridiculously high. 3 month libor (the rate at which banks were willing to lend to each other for three months) starting in september started sky-rocketing due to the rate that would be charged for that one night. The overnight rate had spiked to over 200% annualized. Why? Y2K. People were afraid everything was going to fall apart when computers broke down due to the Y2K issue, so they were un-willing to lend over that evening (if everything falls apart, they may never get their money back). Well, the Fed made sure to flood the monetary system with loads of free cash and the turn of year disaster was averted (in fact the turn of year was quite cheap that year). The entry into the year 2000 passed with no disaster.

This year we had a similar spike in libor year-end rates. Not a computer bug that frightens the world this year though, something much scarier (at least from my perspective). Everyone's heard of the credit crunch occuring from sub-prime mortgages by now. Sub prime mortgage defaults and resets on stupid mortgages made for the past decade are catching up to banks and other lenders. Capital is at a premium because all the banks are having to write down so many of their assets (loans are assets to banks, if people are defaulting they're not worth as much). In fact banks are scared shitless that the sub-prime issue is going to spread to all credit products, and for good reason. As balance sheet capital becomes more dear to banks, our year end premium starts flying. Of course in the past couple weeks the Fed has pumped the economy full of cash again and it looks like we'll have another smooth transition into the new year.

These year end and month end spikes are a big deal in the fixed income world, especially in fixed income derivatives. The ramifications of interest rates ripple into all other markets though, as discount rates for futures (in equity, commodities, forex, etc) all depend on how the fixed income market is setting rates.

Fucking up

It's a matter of fact. You will fuck up at some point. It will probably cost your firm money. The scary thing in finance is that when you fuck something up, it costs the firm a very tangible amount of money. One of my favorite quotes is a manager I knew who once said:
"Just promise me you'll make a small mistake."
Most people who survive in this business make one very memorable mistake and become paranoid to the point of never really making a mistake again. Among my friends, the average first mistake size was somewhere close to $400k. That's not too bad. My first mistake was worth about $1.5m. Yea, that hurt. So what do you do when you make a mistake?

1) Fess up. Let your boss know you made a mistake and make it clear you're about to fix it.
2) Fix it. That doesn't necessarily mean make back the money you lost--that may be impossible--but make sure you've made your clients whole and you've made yourself good with your business partners.
3) Think it through. Figure out what went wrong and address the problem. Was it communication? Was it just the fact that you never double-checked your work? Was it systematic?
4) Don't let it get to you. Everyone's made a mistake. People may yell at you as if it's never happened to them, but it probably has. You need to keep doing your job and doing it well. If an error rattles you to the point that you become useless at your job, then you may well be fired.
4) Don't do it again. Enough said.

Keep a clear head and navigate your mistakes. It is those who weather the hard times that will eventually make it to the top.

Small World

The world of banking is tiny, although it will seem large at first. No matter what field you are in, there are really only maybe a hundred people around the world who specialize in the same area. Are you a healthcare i-banker? You'll probably see the same 20 people at pitches and conferences over the next few years, over and over and over again. Are you a consumer discretionary analyst? You'll be on calls and conferences with the same 30 people every month. You trade the long bond? You'll know all 20 bond dealers intimately over the phone and on the screens.

I'm usually the last one to care about politics and relations, but for those who are like me, don't piss these people off! You need to keep good relations with the street. Especially if you plan to make a career out of this. It's like rival teams in a sport. You play hard when you're against each other, but you hang out together afterwards. When it comes down to it, when you're looking for that next job, it's usually one of those competitors that will pull you into their firm.

Another thing to think about is how lucky you are to have that position and that there are hundreds of people lined up outside the gates ready to take that position from you. Don't give them a reason to take it! You have a coveted seat as one of about 20 people who do your job (hopefully well). Count your lucky stars and don't give any reason to be replaced. As soon as you get complacent and take your place for granted, that next guy will eat you alive.

Let Loose!

What's the difference between a bond and a bond trader? Old joke. The bond matures. It seems true. People in the finance industry don't mature in the same way people in other industries do. The old timers will still party hard with the newbies.

Ever wonder why that is? Well, I think it's because this industry will eat you alive if you don't learn to let loose your pent up energies once in a while. Stress in other industries is simply not the same as stress in this industry. One off moment, one slip of the tongue, one day-dream and you can find yourself several million dollars in the hole with way of reconciling (I've seen people quote the bid-side when asked for an offer in size and had a huge hole to work out of. . . it happens in less than two seconds). That's a lot of pressure to hold yourself to every day. Then, for those who survive, there's the added pressure of never letting the young folks catch up. Those who really excel also work when no one else is looking. Things stack up, and you've got to let loose once in a while to not let it get to you.

It's Saturday night. 10:30pm. I just finished some research and for next week. Keeping myself ahead of the curve so I can start Monday ready to take on the world. There's hardly a moment I don't feel the pressure of those coming up behind me to take my seat, so I need to keep myself ahead and more ready than any of my competitors to take the next big seat that opens. The pressure is always on. You know what though? For a few hours tonight, when I meet up with my friends at the bar/club, it'll all be out of my head.

We all have different ways of escaping, but "a good book" just won't cut it for an escape from our world. If you're in it for the long haul, you'll probably need to find a way to get it all out of your head once in a while. Don't be afraid to let loose. Then again, I probably didn't need to tell you that.

Stay Aggressive

More than anything, you'll find this industry is about being aggressive. Maybe it's the same in every industry, but I think it is especially true in this one. It is up to you to step up and take what could/should be yours. Responsibilities don't just get handed out. They're usually given to the first person who steps up and says "I'll do that." In fact, even if it is outside of your current description, the guy who steps up and takes ownership will be th person who gets the assignment. There can be downside in being too aggressive--being labeled as a cut-throat bastard, being seen as not knowing your place, being labeled as immature, etc. But in the cases I have seen, senior people are willing to give you a shot on most things. If you can prove you can do something, then it's yours.

The skys the limits if you can convince people that you can handle the responsibilities that are available. Once you have responsibilities, you can ask for the commensurate promotion, more pay, etc with impunity.

Tracking Markets

I was recently asked how to track markets when you are not yet a market participant.  Those of us connected to the markets pay tens of thousands of dollars a month for up-to-date news and user-friendly interfaces.  If you can't spend a few hundred thousand dollars a year for data feeds, are you toast?  Well, yes, if you're actually trying to day trade off that crap data then you're screwed.  If you're a student just trying to track markets and maybe doing a bit of personal trading on a day-over-day basis, then there are lots of good free sources.

My personal favorite datasource when I was a student was yahoo finance (finance.yahoo.com).  They actually have a very good database of historical prices, historical financials, current financials and slightly delayed prices.  You can track all sorts of market from here.  Their news may not be the most timely, but there are better places to find news.  There are lots of free stock tickers out there you can download to set up a personal set of tickers to track daily.  Beyond whatever equities you decide to track, I would suggest tracking the following on a day to day basis:

• 2y notes
• 10y notes
• S&P 500
• FTSE
• Nikkei
• 30y mortgage rates
• 3m libor
• fed funds rate
• EUR
• JPY
• GBP

This should be enough to get you started.  There are some more obscure things to track, but these will give you a general idea of how the US markets are moving and a peripheral view of the rest of the world.  

For news I'd use www.cnn.com, www.bloomberg.com and www.wsj.com.  The most timely of these sources may be cnn and bloomberg, but if you're checking once a day the wsj actually does a great job of synthesizing the important parts.  Generally speaking, you really don't start caring about the daily specific moves of securities until you have some skin in the game (i.e. you're actually involved in the market and are dependent upon it for your livelihood).  One way to get involved is to have a small (SMALL) speculative account to keep yourself in the game.  You can do this as a stock portfolio or as a futures portfolio (I tend to like the latter, but that's because I'm a derivatives guy who does this stuff professionally--don't do this unless you really understand futures.  Taking delivery by mistake can be a bitch).  For most people I'd recommend just having some stocks in a small spec account (couple thousand) and tracking them daily.  I would tell anyone who isn't a professional trader NOT to be day trading and NOT to be leaving limit orders in the market.  

As a student, I tried to get myself involved in markets, and I think it helped a bit.  One of the old-fashioned things I used to do (and still do in a modified form) is writing down the closing levels of the various indicies and securities I tracked every day.  Then you have a personal record that you are forced to look at daily.  The physical act of writing them down makes you reflect on them.  You start to notice patterns and you notice trends in the market as well as stories that the market reacted to.  

Good luck.

Your Bonus and Your Future

There's a lot of talk amongst people about how they will be spending their bonuses this year. One thing that raises a red flag in my mind is the number of people who are looking to buy things with significant leverage. Be it a condo, a vacation house, a car, etc. I am the first to say you should be living your life to its fullest. Nothing wrong with spending fairly lavishly while you're making the big bucks. In fact, I'd recommend it--there's nothing like spending while you're young.

Here's the catch though, you can't be spending a lot on credit. As someone in the finance industry, one of the most volatile in the world, you simply need to play a little bit defensive in the debt game. A lot of places in NYC won't let you buy with high leverage because of the number of finance folks who commit to a lot of debt and then can't pay off in the future. I've known too many people blown out of the industry and have seen the devastating effects of high debt with no income. If you use leverage, make sure you're investing in something with a reasonable upkeep cost or positive cashflow. Keep in mind that you could be out of a job tomorrow, even if you think you have a relatively protected job. I've seen highly profitable people and extremely cheap labor blown out the door with little to no warning.

Enjoy your bonuses, you've earned them. Spend lavishly, you can. Heads up on that debt though, you haven't made a living of it yet.

Big Losses and Big Excuses

I'm kinda annoyed by how many excuses are being made for these people heading up big firms. Particularly the CEOs of Merril and Citi have come under fire. People are asking if they were taking excessive risk in order to get short terms gains. Others are asking if the right risk management controls were in place. Others yet are wondering if they were trying to hard to catch up to Goldman. Fact is, the answer is NONE OF THE ABOVE.

The single reason these staggering losses are coming out is STUPIDITY. Anybody else wonder why Goldman was ranked 13th on CDO distribution? Anybody wonder why they didn't hold any? Same goes for Deutsche. Anyone wonder why they didn't hold any part of the CDOs they originated? The truth of the matter is these folks at Merril, UBS, Citi HAD NO IDEA what they were getting into. You can bet on the fact that Goldman had a conscious decision not to enter into that market aggressively because they decided the tail events were too painful, and we all know they are not a firm to avoid risk. Let's all quit making excuses for these companies and just realize that it was a LACK OF UNDERSTANDING and perhaps more specifically A LACK OF GOOD MODELING that fell them. I had done a little bit of work with CDOs, and it was annoying to see how so many firms were using the same mediocre model. You can be sure Deutsche and Goldman had some development time to create some specific models and then realized they didn't want to be a part of the imminent collapse.

That being said, you can be sure there are some opportunities out there. I'd be willing to bet that Goldman will start accumulating some of this subprime mortgage and CDO stuff. Just like when they collected CDO equity tranches in 2005 during the autos crisis, they'll swoop in to pick up a lot of this stuff cheap too. In fact, they may even buy a whole company to manage the specific operational issues with these products.

Whitespace

Various people have always complained about how unfair it may be to ask a fresh college grad not to have whitespace on their resume. I'm not sure if this is necessarily an unfair thing to ask. Many college grads have full resumes filled with competitions, clubs, sports and jobs they participated in (yes, they're participating in jobs, quit bitching) during college. I don't think it's unfair to ask a student to have participated in two reasonable commitments during college. I think two is enough to fill up a resume. People are often in fraternities/sororities, sports teams, maybe a part-time job, maybe an internship, and a competition here or there. The key is to put the right amount of detail into your resume. Don't rehash the same thing over and over again (as some people I've seen have done) and don't write down meaningless bullet points like "assured continuity of business as usual" (yes, I've seen that as a bullet point).

So what sort of detail should you give? Remember in grade school when they told you that the key to a good expository is to give the "who, what, when, where and why?" That's pretty much it. In particular, "who, what, where" are usually the most important. You should make sure you always discuss the "who" in each line you state. Were you addressing clients? Management? New hires? Students? The what should be detailed. Was it a $10M account or a $10Bn account? Was the PnL +25M or -15M? Was the audience 8 people or 500 people? Were you serving 10 customers a day or 1000? As to where, did you do this at your firm? Did you travel at all? Were you at an off-site? When and why can be a bit redundant. Most of us won't care why. And the answer to why is often "because my boss told me." If you took the initiative to do it yourself, you should probably mention that. Initiative is often associated with risk--taking initiative means you're willing to take some career risk, which is good. As for when, it's usually during business hours, so no one cares. You might mention the when if it's past normal hours or something, but don't get too cocky with this. No one likes the asshole who stays late just to stay late. One thing not mentioned above is HOW. You can include HOW you did things to strengthen a resume. So you were a waitress? HOW did you make customers happy? HOW did you gain more tips? HOW did you decrease the wait time at the restaurant?

The details you include in your resume are important and can show a lot about how you dealt with various trials. In particular they can show how you are different from someone else who may have taken the same task, and that is the key. You need to differentiate yourself in the particular role you may have had. If the next guy would have done your job just as well, then you're basically a commodity. If you added special value in that role, then you're a valuable asset.

Good luck.

Ups and Downs

Every industry has it's business cycle, but none are as volatile or trying as the cycles in finance. I'm seeing more and more people come in who are simply not fit to be in finance. One kid I know almost cried when he found out how many people were being axed this year. He got even more emotional when he found who exactly got dropped. It happens, people get fired, they find new jobs, we move on. If you're the type to cry over a couple co-workers going to a new job, you probably shouldn't be in finance. In fact, you pretty much need to be able to take all sorts of shit from your boss and/or clients without getting emotional. I've also seen guys and girls take days off because their significant other broke up with them (actually I've only seen one guy and one girl do this). No forgiveness there either. If a family member dies, fine take a few days off and come back. No whining and no crying at work. Breaking up with a girlfriend of one or two years? No, not good enough. This may seem cold, but it's part of the industry. Missing one day can means millions of dollars on a trading floor on the wrong day. Missing a day in investment banking. . . probably won't make as stark or immediate an impact, but it may delay a key deadline.

Finance isn't really a friendly industry when it comes to your personal life. Make sure that's the sort of enviornment you want to be in before applying.

Stupid Interviewees

Learn my example. Here's what not to do:

Interviewer: Tell me an example about a time when you had to perceive where you had to assess the risks in a situation and communicate the risks to others.
Interviewee: I play online poker. So I am familiar with having to take risks.
(Silence)
Interviewer: Can you explain to me how this relates to my question?
Interviewee: You said give an example about a time when I had to assess risk.

Moral: Listen carefully to the question and don't give stupid canned responses.

Interviewer: Let's say a duck is sitting in the middle of a circular pond with radius R. The duck can swim velocity V. There's a wolf on the circumfrence of the pond that can run velocity 3V. The wolf can't leave the circumfrence of the pond. Can the duck escape?
Interviewee (immediately): No.
Interviewer: Do you want to explain your thought process?
(silence)
Interviewer: What makes you think the duck can't escape?
(silence)
Interviewer: How far does the duck have to travel?
Interviewee: I don't know.

Moral: Okay so this one was just an idiot. Generally speaking though, when giving a brain-teaser they're more interested in your thought process than your answer. Brain-teasers are inherently slightly unfair, so we look for people who think methodically/systematically and creatively.

Interveiwer: Why didn't you stay with (some firm on their resume).
Interviewee: I didn't really get along with my boss or my coworkers. I also found my job really boring. You wouldn't believe what a slob he was when he was eating at the desk. He farted a lot too. In fact, I don't know why I went there in the first place. Then I got fired.
Interviewer: That was candid. . .

Moral: Never talk shit about former employers. In this industry there's a good chance they know your old boss. Also it reflects poorly on you to say bad things about others. It's even worse if you elaborate and spread gossip. Never say "I got fired" if you can't give good reason for it (market downturn, scapegoat, etc). Try to spin your last job in a positive light and highlight what you learned from the experience.

Interviewer: What makes you think you're right for this job?
Interviewee: Well, I am extremely interested in finance. I've taken managerial accounting, corporate finance and introduction to private equity at the business school.
Interviewer: But this is a trading position. You understand what foreign exchange traders don't really look at corporations.
Interviewee: I feel like it's all the same.
Interviewer: Uh. . . no. . .

Moral: College kids love to give their canned responses and talk about what they've done. You really need to pay attention to each job description and not give canned responses. The more creative and personal a given response the better. We can tell when you're being genuine or just spouting shit (even when it's not this obvious). I hate it when kids spew crap about playing poker showing how they're not risk averse in a trading interview. Everyone fucking plays poker these days. Just because you play your $5 game with your buddies doesn't make you a risk taker. Maybe if you were playing $500 games while a student that'd be a different story. . .

Interviewer: What other positions are you interviewing for?
Interviewee: I am also looking at investment banking jobs at (firm A, B and C). I am looking at private wealth management at (firm D and E). I am considering consulting at (firm F, J and K).
Interviewer: That's quite a lot of different areas. Why would you want to do sales and trading over any of those?
Interviewee: I'm not sure yet. I am trying to keep my options open. Actually I'm currently leaning toward consulting.

Moral: Always sell yourself as most interested in the role you're currently interviewing for. Yes, you need to LIE. The current role is always the shit. Even if you're also entertaining the idea of being a prop guy at Goldman, when you're interviewing for consulting at some bumble-fuck nowhere company that's your dream job. You give some bullshit answer like "I don't think trading is for me. I'd much rather analyze individual companies and help managers make specific decisions. Big companies aren't really for me either. I feel like we get much more personal attention and responsibility at a smaller firm." Practice these before your interview.

That's all I have time for right now. Good luck folks.

Stupid Interviewers and Stupid Interviewees

I hate seeing stupid interviewers as much as I hate seeing stupid interviewees. Stupid interviewers turn away excellent candidates and ask completely irrelevant questions. Stupid interviewees just waste my time. At least the latter doesn't hurt my firm.



You can tell an interviewer is stupid if he obviously has some canned questions to ask you. The obvious ones are that stupid light-bulb problem (brain-teaser having to do with figuring out how three light bulbs relate to three light switches in another room, it's a stupid problem because you either get it or you don't and you usually get very little about how they think from the problem) or "how do you value a call option?" A good interviewer will focus on your resume and be able to pick out details that seem interesting that they can quiz you about. When it comes down to it, an interviewer for a junior position should be looking for aptitude not knowledge or experience. We should be looking for the smartest people who can pick the most up in the shortest period of time, not the kid who happened to have an internship last year. Some of the best people I've met have had no background in finance (art major anyone?) but rocked the brain teasers and critical thinking problems. Granted you should still be able to do some good math, even if you're an art history major. No dice if you're mathematically illiterate. Most of the moron I see interviewing are just looking for finance knowledge. Those guys are clearly going to get mediocre talent who already had internships or studied finance in school. Not necessarily the best and the brightest.



I'll do another post one day for interviewing tips, but for the most part you can't help a stupid interviewee. It's like asking a snail to contemplate calculus.

Resume Pet Peeves

There are some really stupid things people put on resumes. I know some of the things I'll list here are sometime touted by career counselors. They're stupid. Here's the list:

1) Objectives. Your objective with your resume is to land the specific job for which the resume holder is hiring. Nothing else. Stop putting that touchy feely shit on your resume. It just makes it more generic. Technically your resume should be changed for each job you apply. That way it's customized for the role. Objectives are stupid. There is only one objective the recruiter cares about.

2) High school. Unless you went to some elite prep school, no one care what high school you went to or what you achieved in high school. Elite prep schools are those big shot ones in NYC and the boarding schools famous for churning out preppies (Phillips Andover Academy and Choate Rosemary Hall come to mind).

3) Hobbies. While hobbies make for great conversation fodder when I'm not interested in the candidate any more, they certainly won't get you hired. Maybe they'll get you a date (if you're female, hot and have a cool hobby). If you're looking for people to join you in your hobby, go post a personal on yahoo. If you're looking for a job, don't waste precious real estate.

4) 14 point font / white space. As mentioned above, the real estate on your resume is precious. It's probably confined to one page, maybe two. Don't waste it with huge font, superfluous white space (both on the margins and in between lines). It should look nice and legible, but it should not have lots of white space like the menu to a nice french restaurant.

5) Stupid mistakes. Don't be a moron. If you can't get a fucking resume right, why would I trust you with my money?

It also annoys me when the GPA isn't listed (probably means it was low). It also annoys me when relevant classwork is listed, but I don't mind that as much (it instantly gives me something to grill you on). Note that everything on your resume needs to be known cold. If I were your interviewer, I'd take specifics on your resume and delve deep into the details. If you can't explain it thoroughly then you're toast. "I forgot because it was a long time ago" is a lame idiot's excuse. I had a guy tell me he couldn't do some chemistry problem I gave him because it was over two years ago. It was a lot longer than that for me, bud, and I haven't touched chemistry since. To me that says you didn't learn it completely the first time. You're out.

Resume Drop!

It's that time of year again when eager youngsters are dropping their resumes into these anonymous black-holes (actually, I think most are posting their resumes online, but everyone knows these might as well be black-holes too). Then people like me get a mass of papers (or more likely a giant pdf file) to sort through and pick out who sucks and who doesn't. I might be a bit late in this because I assume most people have already dropped their resumes if I'm already receiving them, but perhaps it will help next time.

First hint, it's more about who sucks than who's good. Don't spell words incorrectly. Don't forget pieces of information (e-mail address, phone number, address, etc). Don't have shitty formatting of your resume. Don't have too much white-space. Don't have it be more than one page (unless you hold a PhD or you've worked for several years full-time--hell, I've seen lots of good PhD and experienced folks with great one-page resumes too).

Second hint, while experience is important, a few summers is going to mean nothing a year from now. Having an internship doesn't necessarily mean you are the most gifted in the crowd. It does, however, often mean that the person had the drive to land an internship last year. That drive matters. So even if you didn't have an internship, what did you do last summer? Did you do something that showed drive, determination and a passion for something? Or did you take the summer to be a beach-bum?

Third hint, don't close any doors. It doesn't matter whether you want to be in private wealth, trading, banking, a big firm or a small firm. It doesn't hurt to apply and act as if you really want the job. A lot of people will disagree with this because they would rather you not waste their time, but from your perspective it's every man (or woman) for himself. If you get a job you don't want, great. Now you have the option (and satisfaction) of turning them down. The worst situation to be in is the unemployed schmuck after graduation. You might as well be doing something and gaining some experience as you work toward that dream job (and having cash makes life a lot nicer too).

Good luck.

Not High School

It often annoys me when new analysts and associates are still at the psychological level of a high-school kid. Look kiddies, high school ended four or more years ago. Get over it. You're no longer in the "cool crowd" and it's no longer cool to be hazing the nerds. I see this most commonly from the greased up European guys and "high maintenance" girls (no offense to anyone who believes they fall into one of those two stereotypes). The sad thing is it's most commonly those nerds who get ahead these days. Wouldn't you want to be friends rather than enemies with the guy who's going to be climbing that corporate ladder fastest? I dunno, I think I would.

Seriously though, analyst training and associate training can be stressful enough with out going back to the cliques that develop in high school. Most people get over themselves during college, I think, but a select few groups still feel the need to create the hostile environment that comes with the cliques. There's nothing wrong with finding a group of friends (yes, friends tend to be of similar demeanor and have similar interests), but the silly high school style antics need to be extinguished. I know when I have a new analyst that seems to have not gotten over the high school mentality I tick him down one notch in my mind. I'm certainly not going to have someone that immateur promoted closer to managing people. That would be a disaster.

Learn the Lingo - SIV what?

Alright so the recent crisis is all about SIVs, ABCP and the like. Let's talk about this for a bit.

SIV - Structured Investment Vehicle. So most people don't really understand how these work (I didn't really know how they worked until I did some research a couple months ago when this fiasco started to come up). SIVs are similar to conduits or SPVs used for other structured products like MBS and CDOs. They are a legal entity that holds a bunch of securities. SIVs in particular are like mini-banks. They borrow short term and lend long term and make money off the spread--just like a bank. Usually SIVs stick to ABS and high grade bonds, mostly ABS.

ABS - Asset Backed Securities. These are securities created by pooling things like car loans, credit cards, student loans, airplane loans, etc. Generally they are tranched up to various credit ratings. Most of it is pretty high-grade since they are backed by an actual asset that could be sold off if necessary.

CP - Commercial Paper. Commercial paper refers to the world of super-short term borrowing.
Companies often issue commercial paper as a cheap way to borrow very short term. This financing is often used a bridge financing to keep their cash-flow timing balanced (say you receive money en-masse in the winter, but tend to have to borrow extra during the summer because your working cashflow isn't as good in teh summer).

ABCP - Asset Backed Commercial Paper. ABCP usually refers to the commercial paper issued by an SIV. They are considered asset backed because the SIV acts as a intermediary taking cashflows from the ABS and turning it into shorter term lending via the CP market. If anything should happen, the SIV could theoretically liquidate the ABS and pay off its debts.

Money Markets - The CP market is often considered the money market. You know those money market savings accounts at banks? Yea, they invest in CP. There are also treasury money market accounts which invest in treasury bills as opposed to CP. CP tends to yield more. Generally bills and CP are considered minimal risk, but as our current crisis shows CP is not risk free.

So hopefully this helps clear up why our financial world is in chaos. First off, if SIVs really started to go illiquid, billions of dollars of money market holders would feel the pain. That's consumers with money market accounts earning negative savings. That could be an issue. Next if the ABCP market dries up, so goes the ABS market as well. Since SIVs provide the liquidity needed in the market to pull these ABS off bank/dealer balance sheets and into the general public, this market drying up would stop ABS issuance to a large extent. That could be an issue to all sorts of consumers who need to take out credit in the form of car loans, student loans, credit cards, etc. Now you see why this SIV thing can have such an impact on our consumer.

My Apologies

I just checked the e-mail address attached to this blog and I have something of a backlog it seems. I'd had a hectic couple of months and had all but forgotten about it. I've decided to take a few minutes every morning to reply to e-mails and post here, so I'll eventually get to your e-mail. Hopefully I'll be posting more regularly as well.

Cheers,
QT

What's the Difference Between a Bond and a Bond Trader?

Old joke. What's the difference between a bond and a bond trader? The bond matures.

Last night I was once again reminded of this old joke and how oddly true it seems to be. Our industry keeps people young. Where in other industries guys with families would go home to their family every night, people in our industry go out well in to their 40s (actually I think one of the guys who was out drinking with us last night was at least 50). One of them went home once and attended his daughter's softball game and then came out to drink. He apparently kept his daughter's backpack in his car though, so she kept calling to complain she couldn't do her homework. I thought that was entertaining.

If you're planning a night out with the co-workers, don't be afraid to ask some of the older guys too. They may turn you down, but they'll appreciate the invite. There's a pretty good chance they'll come out though, which is fun in itself (seeing your boss piss drunk can be pretty amusing).

Friends and Allies

Wall Street is a very very small world. Yesterday I met the head traders for two desks at one of the i-banks (I'm a client). Turns out one of them was my last boss's good friend as they had worked together on a swaps desk for over five years. They worked out together and generally created havoc together in NYC. Not only that, but they were the same analyst class as my current sales coverage at another bank. Yes, everyone knows everyone. And now they're all in high powered positions.

This happens especially frequently at the top six-seven banks (DB, JPM, GS, CS, BoA, Citi, MS). The exchange of talent between these banks (except maybe GS) is rapid and often occurs due to lots of friends moving together. It's pretty scary if you think about it. Basically, the friends you make now will effect your career growth in the future. That is unless you're the top dog, in which case the friends you make will probably end up much in your debt. Even in that case though, it's important to be friends with the best people so that you can take them with you. Being a former quant (and nerd and geek), I would normally be the last person to advocate all this touchy feely shit, but knowing the right people can mean the difference between being a VP for ten years and making MD before 30. Of course you still need to have the pnl, sales credits, etc, but it doesn't hurt to also have someone in a high place pulling for you.

_____-Size Envy

One thing that never helps anyone is envy. Envying your buddy's promotions and bonus-size never helped anyone. In fact the resentment that usually builds usually detracts from performance. Now there's nothing wrong with some friendly (or unfriendly) competition. You should certainly be looking to compete with everyone you know to make the most, do the most, be the best. Just don't let it degenerate to stupid jealousy. What you should be doing is look at what they might have done right that you did not. Are they taking good risk? Did they do better in their classes/training? Are they making the right connections/friends? Life's not necessarily fair (they may have family connections, they may just be smarter and better looking, who knows), but that doesn't prevent you from making the best of your situation. Lever up on what you have and take your shot at catching up and surpassing them.

This extends to firm-size envy, reputation envy, title envy, stack-size envy (for the poker players), and the more vulgar boob-size envy (girls), dick-size envy (guys), height envy (short people). None of this is really productive. Jealousy is stupid, as is gloating. Use your facilities to the best of your ability. Keep your wins quiet, but take the recognition you deserve. And, perhaps more than anything, count your blessings. You've got more going for you than you probably think.

Keep your head high and your view positive. The confidence in itself will help you along.

Step Up or Step Behind

One thing I see consistently in top performers in the industry is the desire and ability to grab additional responsiblity. A lot of people shed responsibility like a nympho sheds her skirt. Sooner or later upper management realizes if you're adding value to the firm and how you're doing it. If they look at your profile and realize that you don't actually have any real responsibilities, you'll be the first to go in an industry downturn. Those who do well grab all sorts of odd responsibilities (from organizing club/recreational events, to recruiting and training new employees, to managing others' work when they're on vacation) eventually get noticed as the ones holding the train together and get promoted.


There are two reasons why you should be taking as much responsibility as you can. The first reason, as outlined above, works as insurance against being fired and as a way to stand out. The second reason is that you will learn more and gain new skills by taking on additional responsibilities. You can learn management skills, presentation skills, even risk management skills from various random jobs you may take on to better the firm. Those skills will eventually come in handy, no matter how you may have acquired them.

That being said, this post was labeled "step up or step behind" for a reason. It is unreasonable to take ALL responsibilty for everything. Eventually this labels you as a nuisance and/or a micro-manager. The key is to take responsibility for new things that add new value to the firm and teach you new skills. Then you have to learn to give responsibilities to the next eligible character. Eventually you will be viewed as a leader who takes on new tasks and teaches/delagates other tasks to junior people. Being labeled as a leader, teacher and mentor will take you far. Part of being a leader is being able to train people to replace you.

Weaker folks might be trying to horde their work to themselves as a way to guard their jobs, but this approach is outdated. In the new rough-and-tumble world of finance it's up or out. If you're not being promoted, you're being fired. Keep yourself moving up by taking on the next job and making sure others know how to take over your old job. One of my mottos I tell people who work for me is "if I'm not teaching you to take my job, then I'm failing at my job." Implied is "if I'm not learning to take my superior's job, then I'm failing at my job."

Weekends

The most interesting thing about the weekend is the options it allows people. The chunk of free time available to individuals and how they use it really distinguishes one from another. At work everyone may seem equally determined and intelligible, but how they choose to spend their free time separates people into distinct individuals.

Many of the most successful people I know live breathe and die their work. It envelopes every aspect of their life. On weekends they inevitably end up in the office to do work of some sort. Usually they go voluntarily to fix something up to be better/faster/smarter on Monday. Top traders have their second workstation set up at home so they can trade from home. This makes it even easier for those folks to continue to improve their work at home. I'm afraid I tend to separate most i-bankers out of this category because they are forced to work weekends, as opposed to doing it out of the desire to make their models more robust (I'm sure there are a few bankers out there that research better ways to model and value companies, but I just haven't met many).

This drive is what puts people ahead--taking their own time to gain more knowledge, make models better, optimize their machines. Often the same people start looking at the rest of their life in a similar fashion. Every interaction is a deal, a structure, a trade. Every person is a counterparty.

Is it worth it? Many bankers, traders, salespeople become drones at work and try to live their life outside work separately. Others allow finance to consume them and start thinking of everything as if it were a transaction. Which has become more consumed by their occupation?

Where are you going to fall? Are you a two year "see what it's like" person? Are you a life-long financier? Are you just doing it for the money and fund your outside lifestyle? Whatever you may be, wear your title with pride and do not judge others. Two-year trials are made fun of as "quitters" or "weak." Lifers are known as "losers" or "souless." Those doing it for the money only are known as "sellouts" or "whores."

None of these motives for being in finance are "right' or "wrong" in themselves. Really every occupation has their array of motives. Clearly I've made my choice. I spent my free time writing, reading and thinking about trading. My passion is the markets and my personality is competitive. I know this makes me happy. I know plenty of people who aren't happy in their current role and have plenty of choices that would make them happier. Don't let finance be your default. Make it a choice.

Making the Leap

So there was a question about my new job and what prompted me to move. Well, it's actually not as different as it sounds. I still trade prop, primarily, but I have a few other functions as well. I do a hedging function for the bank on a global portfolio basis. So if the firm as a whole seems to have certain risks on, my boss has the mandate to hedge these large risks. We do quite a bit of volume in this sense, as at times the risks skew one direction in many different areas. These hedges tend not to be too frequent, so we trade prop in our "free" time (i.e. when we're not creating new analytics to view the global portfolio risk).

There wasn't much thought involved in this. I'm still at the same firm and still trading prop. I get a cooler title and more pay. Plus a big name in the firm called me personally to put me in the role. No-brainer, they say.

So what should you think of when making a change? Here are some bullet points:

Growth
* Does the role have more responsibility?
* Will it give me more firm-wide visibility?
* Will the job put me in a position to succeed?
* Is there growth potential from the new post?
* Who will mentor me? To whom will I be reporting?

Finances
* Does the role put me in a position to get paid now?
* Does the role put me in position to get paid a lot more in the future?

Role
* Will the work be engaging to me?
* Have I become redundant or stale in my current role?
* Will I have fun?
* Are the people in the group the types with whom I want to work?
* Will I be happy?

Absolutely the most important are the role being engaging, the role giving growth prospects, the position being a role in which you are set up to succeed, and the prospects of high pay in the near future. Don't be blinded by the prospects of an immediate bump in pay or a title. The important pieces are being able to grow into someone important in the firm and on the street. Pay comes to anyone who survives long enough on the street. Yes, pay comes quicker to some, but try to look at your lifelong earnings not just your next two years. Being a trader, it's sometimes hard for me to take the long view too, but it's definitely paid off.

New Analysts

The flood of new analysts have been unleashed onto Wall Street. Various training programs have been over for a while and many have started to get acclimated to their new life. Some things I've noticed over the years that I'd like to comment on:

1) You may think you're hot stuff, but you're not. Don't go bragging about how good you are to your co-workers, it will just annoy them. That goes double when you're out with friends. Triple if your friends aren't in banking.

2) Spend wisely. Just because you're now in banking doesn't guarantee anything. Things change, people get fired. Tread lightly. That doesn't mean you shouldn't enjoy yourself (definitely enjoy yourself), but always have an out in case things don't work out. I've seen too many lives devastated by this mistake.

3) Be nice to those who support you! Being an asshole to you middle office, back office, trading assitants, publication people, admins, etc. won't get you anywhere. In fact, it's the support of these people that you'll need to get things done most efficiently. Your work is only as good as those who support it. Remember that they can make your life more difficult, why incite it?

4) Remember the traits of others that train you and that you admire. You will want to shape your career and work persona toward those whom you admire.

5) Have fun! Don't just work all the time. I've seen too many bankers (not to be racist, but this is especially true of the Asian nerd variety) who don't have some fun once in a while.

6) Take risk! You'll never get noticed if you don't put yourself out there. Sometimes you'll get stuff wrong. That's okay, at least you tried.

7) Meet people. Get your name out there. Make sure that the senior people in your area know who you are. You won't regret it.

8) Band together. Make friends with people in your class and a few classes above and below you. Eventually you and your friends will be running Wall Street (it's a small small world, and everyone knows everyone, trust me). It'll pay to know as many desk-heads as possible.

9) Have patience. You won't know everything at once, and you won't be doing everything you want right from the start. It's good that you want to, but trust that it will come when you're ready.

As a newbie on Wall Street your chances of survival are fairly slim. Those who make it to be the big-shots on the Street are few and far between. We're always looking for that new guy who can come and take our place. As I always say, I'm not doing my job if I don't train you to take my post when I take the next job up. Come and get it.

Market Timing the Job Market

For anyone following the industry, it is clear that Wall Street has had some tough times. Unfortunately for those looking for jobs right now, it may be the worst time ever to be looking for that new job. A lot of layoffs are occurring in the structured credit and mortgage markets. Even some investment banking / M&A areas are slowing their hiring in anticipation of a downturn. That means less hiring in equity capital markets as well. So what are you to do if you find yourself in the unfortunate position of looking for a job now?

I think it would be tougher than usual, but all the same tricks apply. Find a good headhunter, leverage connections and be persistent. All the same, you may find a lot of places have hiring freezes on right now. What do you do then? Get relevant experience. If it's an option, go get a masters degree for a year or something (I'm sure the job market will pick back up soon enough, it always does). Get work experience at a smaller boutique firm. Try working for an analytics company or even a consulting company. There are lots of options if you are willing to use a detour as a way of keeping your career moving forward.

Have patience. Even if things look bleak now, the bonus cycle comes up in 3-6 months. There's always a frenzy at that time. After that the summer comes again for new hires. For those without the luxury of just waiting, get a job in a somewhat relevant field. In your future interviews you can always state that you found your job because Wall Street was in the credit debacle of 2007 when you were first looking. Once the cycle reverses, you can find a job and seem like you were at least keeping with the times in the market, despite the fact that your unfortunate timing kept you from getting that first analyst or associate gig.

Good luck.

Values and Happiness

Speaking with some people I know, there was a good bit of resentment going around about career choices. Some people look down on people who aren't doing what they deem to be the "correct" choice. That's something really gets on my nerves.

Everyone has their own sense of what they want their life to be. Whether another person goes into finance, health care, non-profit, tech--it is not upon you to judge. No job is necessarily inferior or superior to any other. That is not to say you can't make a bad choice. Choosing a profession solely due to the money it brings (unless you are in really dire circumstances) or because of some third party pressure is a mistake. Choosing to go into consumer banking, health care or non-profit work because that's what one finds interesting/fulfilling is surely a path to happiness.

When it comes down to it, life is not about making as much money as you can, but it's about making yourself as happy as you can. Or depending on your value set it may be about making as many people as happy as possible, leaving your mark on the world, what have you. It is not, however, on you to impose your value set on others. Live your life how you want to live it. Don't live your life according to values that other people try to impose. At the same time don't push your values onto others. People like me thrive on competition, making/spending money and other things that get my adrenaline pumping. That does not mean I look down upon my friend who chose to live a 9-5 life in the countryside and get married at 22--while I may never understand it, he often seems happier than I am and I'm grateful that he is.

Don't get me wrong. I'll judge like none other if I sense that someone is choosing their career path just for a short term money gain (you see a lot of these people who want to do a couple years in banking just to stash some cash), especially if they have no interest in the job itself at all. I think that's a terrible choice because it leaves them further from where they want to be in the medium/long term.

Don't judge others' values. While they may not make sense to you, people usually choose the path that will make them happiest. It is not for you to judge what will make them happy.

It's been a while

Sorry my posts have become a bit sparse. I've taken a new role, and I've had to deal with quite a bit of change in the past few weeks. I'm still at the same company, and I still trade prop. I have a somewhat wider mandate though, so I've been taking some time to get used to my new environment. I'll try to start posting more regularly again though.

Speak Up

People often complain about how they "knew" something beforehand. For those of you who don't know the first friday of every month is "payroll day." It's the day when the Non-Farm Payrolls number and unemployment figures come out. Days like this a lot of people complain about how they "knew" something (like the payroll number coming out low) but didn't act on it.

Here's some advice--quit whining. If you have something to say, fucking say it. In fact, even better, act on it. If you have a book you can trade on, buy something. If you don't, at least start a betting pool for "closest to the pin." I made my name as a junior guy by winning betting pools. I won enough betting pools on economic numbers that people decided I might make a pretty good macro trader. At one point I had a bunch of people together making a daily pool on which way the markets would go that day. It's the next best thing to trading a book.

This doesn't only hold to market related folks. If you're in banking and you "know" something. Speak up! Let your manger or senior folks know. Yes, you're sticking your head out there, but as we always say, "no risk, no reward." Stick your head out there and prove that you've got what it takes to be a decision-maker. Show that you're not some idiot whose only useful role is punching numbers into a spreadsheet and drafting power point presentations. You only seem like a douche-bag if you whine about knowing it afterwards.

Some of you might say that you've got no upside because your manager or seniors won't give you credit anyway. Well, if that's the case you're both working for the wrong people and probably not seeing the long term view. If you keep getting these calls right people can't help but listen to you in the long run. Just get it right and get it out there. Your credibility will build.

Nothing is more annoying than someone who whines about how they should have done something because they "knew" it beforehand. Quit whining and start acting.

Motivation - Love it or Hate it

A common trait I've seen among those who fall under the rather large umbrella of mediocrity is the lack of motivation.

Let's face it, while face-time may be a worthless measure, hard workers still find themselves working a lot. Not all of them work from the office, mind you. A great many of the hard-driving folks on wall street find themselves working everywhere-from home, in the car, at the gym, etc. If you're wondering how you work from these places, I'll tell you that a cell phone with an ear bud or an i-pod with the WSJ loaded can do you wonders for time efficiency.

There's nothing wrong with being in the game for the money. In fact, money is probably the strongest motivator, but it's coupled with the competitive spirit. For most, it is not about making a lot of money. It is certainly not about making "enough" money. It's about making more money than your friends, your competition, the guy next to you. Wall Streeters are compelled by "keeping up with the Joneses" to the extreme. The next big motivator is intellectual challenge. People like doing things that challenge them (well, most do) and capital markets can be the ultimate challenge as your put yourself up against millions of others in the global economic game.

If you don't see yourself as motivated by any of the above, Wall Street may not be the best place for you. I know a few people who just joined i-banks who are really only there "to learn for a few years and move on" or "to make a living." Well, these people will never make it big. Clearly they don't really want to, so that's okay. But when those same people complain about not getting ahead, not getting promoted, or not being comped properly--that aggravates me.

You can't have it both ways. Either you love the work and immerse yourself in it, or you're just not going to be the top of the food chain here. I'm fine with people who don't want to let their work take over their life, but if you don't love your work that much, you can't complain about not making it big either.

The Woman's Dilemma

I've talked to a ridiculous number of young women lately who are wanting to get into trading. Many of them are in analyst classes in "sales and trading" and are finding that they aren't being given a chance to try trading. Some of them are in rotational programs, others are assigned to a desk but not necessarily on the sales or trading side of that desk. In both cases young women complain that they are only given a chance to see the sales side and nobody will take them seriously on the trading side.

First of all, it is a mistake to think that anybody will ever "GIVE" you anything. You're not given a chance to be a trader, you have to take it. Whining about how your desk or HR won't give you a chance to be on the trading desk is exactly why you aren't on the trading desk. Generally it is perceived that those who will excel at trading are the types who will aggressively pursue goals.

I won't argue that there isn't some bias against women in trading. A lot of trading desks still adhere to the "old boy's club." That can be a hard game to break into. That being said, I have been looking for a well qualified woman to join my desk for a while, but none have risen to the task.

There is a natural bias against women in trading. Now obviously this isn't true of all women (and I know some damn good woman traders), but the majority of women simply aren't cut out for trading. Women tend to be more emotional, more talkative and less aggressive than men. More emotional and less aggressive are minuses for traders and more talkative makes them happier as sales people. Yes, that is sexist, but it's also statistically true. If you're offended by this statement, you shouldn't be a trader--you'll here a lot worse and less founded sexism on the floor.

I don't know a single trader who wouldn't like to work next to an attractive trader woman. In fact, I know many who envy those who do. Women who have gotten into trading tend to be few and far between. They fought to take those positions and have shown themselves to be able to not only weather the markets but also weather the machism that tends to dominate the trading desks.

End of the Internship

For those of you who may be interns, congratulations to the end of your internship. I think most programs are finished by now (if not they're certainly finishing up).

Some comments on how the end of the internship process is/was handled.

Hopefully you will keep in touch with many/most of your fellow interns. They are the beginning of your Wall Street peer network.

If you got an offer, be careful about telling others--they may or may not have gotten theirs--but don't lie about it. I'll leave it up to you to find a clever way around that problem. Certainly don't boast about it.

Some firms tell the interns on their last day whether or not they get an offer. If you don't get the offer, that's not an invitation to leave immediately. The people you met there can still provide valuable advice and references in the future. Leaving early makes you seem like a cop-out and/or a sell-out (even if you already are a sell out by going into finance).

Collect business cards, if you hadn't already. You may want to contact these people later in your career. I had contacted people from my first internship two years later. They not only still remembered me, but they provided advice I could not have received elsewhere.

Even if you didn't get an offer, smile--you still went through a Wall Street internship, which puts you one step ahead of half the people who will be applying for a full-time job in the fall.

Go have some fun. You just made a good chunk of money in your internship. You should get your intern friends together and go out for a night. Celebrate your success!

Look forward to seeing a bunch of you around next summer.

Ah For Good Advice

Love this guy's blog. He gives some good advice here:

http://www.informationarbitrage.com/2007/08/making-your-mar.html

I'd write more about this on my own, but markets are crazy these days. All in due time.

Mix and Match

So rumors abound these days about various companies (e.g. Countrywide) nearing default. Suddenly it came to mind for me to use some of my past training as a credit quant. I'm sure you know by now, I trade primarily fixed income and currencies with some dabbling in commodities. Why am I looking at credit? Well, the credit problem is clearly driving all markets right now, but there's more to it than that. I was looking at specific credits (specifically an old model I once looked at on ABCP default rates). Stuff I can't trade at all.

So why spend time on this? Well, when it comes down to it more information helps everyone. As part of the team, if I can help anyone in the company, that's money in the bank (quite literally. . .unfortunately not money in my pocket though). Eventually I wouldn't be surprised to find myself trading a bit of credit as well. You can never foresee your career path, so there's no reason to limit your view at any time. If you're working in one area but you've found something interesting somewhere else, take some time to pursue it. Even if it's on your own time (as if often will be), that knowledge and that curiosity will serve you well in some role in the future. Who knows, it might even let you make a cross-division connection, which is how these large institutions justify their existence. People who can mix and match information and resources from across an organization are the ones who become leaders of organizations.

"Big picture, mate."

I, Quant

Goldman's Global Alpha fund reported it was down some 26% ytd today. Everyone's making a big deal these days that quant funds are losing lots of money in the current environment because of the inherent instability of the time (quants would say we are having a regime shift). I'm going to give you two competing takes on this chatter.

Some quants would say that this is an opportunity for these quant funds. They will trust their model and return ridiculous amounts when the world returns to normal--when the panic is over the quant funds will prevail. Models can't make money every single day, and there will be statistical anomaly days here and there. The strength of a quant model is that they can avoid the fear inherent in humans and trade into these days to come out victorious on the other end when efficient markets rule.

Others will say that every quant model must have a trader with good market sense there to override the model. When tumulus times like this come around, it is the prerogative of the trader to stop the model and trade the fundamentals. Quant models are meant for calm times to tick away the market discrepancies, but when thing are really moving is when the experienced trader prevails.

I was brought into this world as a quant. I tend to adhere to the "stick to the model" school of thought, but I tend to also make models that have resilience to market shifts like the one we are experiencing now (a couple of my models have been extremely profitable as of late and are covering the losses in some other models easily). I believe Goldman's fund will have a banner year next year or even come roaring back later this year. I do, however, also keep an account for pure macro-economic bets. That also has been very profitable lately. It's all a matter of scaling the right things at the right time. My main indicator in my trades is actually a model that tells me how to weight my risk between tactics.

The age-old adage goes: "Bulls get rich, bears get rich, pigs get slaughtered." Perhaps in this new world we can say "Quants get rich, fundamentalists get rich, pigs get slaughtered." Okay, so you don't get the animal theme, but you get the idea.

Short Wings

Short wings will not get you far. Long wings will fly you when the winds pick up.

Vol traders are well aware of the volatility skew. Prices on far out-of-the-money options are often "over-priced" according to the traditional Black-Scholes model. The B-S model assumes constant volatility, so the idea of a vol surface is kinda backwards anyway. Assuming market prices, you can back out the B-S vol. B-S vol is usually higher on far out-of-the-money stuff.

The good academic might say these are over-priced and ought to be sold. Then kurtosis comes into play. Fat-tails make selling the wings quite dangerous. But a good simulation model that takes into account the fat-tails might still tell you the options are over-priced. Do you sell them?

Here's the trader's perspective. Being long the wings means once in a very long while you'll make a shit-load of money. Being short the wings means once in a very long while you'll be out of a job. Even if most of the time you're making a little bit of money by selling the wings, is it really worth betting your career? Sorta. . . not really. That being said, selling options is not necessarily a bad thing. In fact, selling options is quite profitable. It's the selling options for no real profit that seems dangerous.

A lot of non-trading circumstances are analogous. Don't be an ass-hole to random people you meet, you never know which might be your next boss--or be packing a gun and have rage issues (don't get me wrong, being an ass-hole in general is fine if you can pull it off. Just don't be an ass-hole randomly). Don't play hookey from work. Don't have unsafe sex with a hooker. Don't take chances unless you're getting the just reward for it.

The Rumor Mill

Spreading of rumors on Wall Street is fast and furious. They appear in all sorts of shapes and sizes. Here are three from which you might learn.

1) A "bitch"-in party
A couple years ago some girl who was interning at a major i-bank decided to throw herself a party at a ritzy hotel. I don't know the girl, but I did see the invite for the party. This girl sent this party invite out to a set of friends (probably around 40). The invite included an assigned arrival time so as to stagger the arrivals of friends, suggested gift prices, dress code, and all sorts of other unnecessary details. It was quite amusing reading the obsessive nature of this girl and how obviously the party's details were going to fail (and be ridiculed). This invite note ended up being forwarded to everyone on the street (yes, EVERYONE). I don't know if too many people went, but it became quite a famous fiasco. It even got a mention in a newspaper (I believe the newspaper was in Hong Kong). So if you're throwing a party, try not to make the invite ridiculous. You could end up with street infamy.

2) Moving Markets
Just today a broker called me to tell me about a rumor going around about Goldman making an announcement after the close that they expect a negative Q3 earnings. Right around that time the bond market skyrocketed and the equity market tanked. One minute later Maria Bartiromo mentioned on CNBC that she heard from a trader that one of the big banks would be making an earnings comment after the close. Yet one minute after that she announces that Goldman is denying the rumor that they would make such a comment. Bond markets tank again and the equity markets fly back to their highs. It's amazing how a rumor like that moved markets so quickly in both directions.

3) Top Recruit
Some guy with a Russian sounding last name who went to Yale sent out the most ridiculous paper and video resume to the street. The resume circulated the entire street. He ended up on MSNBC and some newspapers due to the ridiculous nature of the claims. On the resume he had cited a non-profit that he supposedly founded and runs (no one could find it, although it did have a defunct website). He taught several celebrities tennis. He was some sort of hitman or something (don't remember the details on that one). He claimed more ridiculous stunts than any sane person would bother. In the end, everyone knew he was a fraud. In fact there were articles on msn.com, a couple newspapers and other semi-mainstream forms of media about him. I have a feeling this guy never got a job on the street (let me know if you know him and I'm wrong).

Fed Day

Big move post-Fed today. Market had priced in some Fed help, perhaps with a more neutral stance on monetary policy, but received full Fed hawkishness. Pretty quiet trading day going into the meeting, although the 7bp flatter curve was weird. Then the Fed hits, yield curve steepens 7bps, then goes right back to the flats.

One lesson the market will teach over and over again is that getting the forecast right does not necessarily mean you will be able to out-guess the market. After the initial Fed announcement, the fixed income market dropped, as did equities. Then the fixed income market flew up as equities continued to tank. Finally the fixed income drops like a rock while equities start flying up. Weird volatility. Certainly nothing I can explain.

A day as exciting as today, I was surprised how un-engaged a lot of the interns and new analyst/associates were. This is exactly the sort of day you can learn a ton about market dynamics and ask questions about why things are moving as they are. I'd be willing to guess that at least a couple of them didn't even know why today was such a big day. If you're new or interning, get engaged. Watch markets intraday every day. Get your mind into it and try to figure out WHY everything is happening (as opposed to staring at it mind-numbingly like your favorite sit-com).

"Engage, Maverick, engage!"

Analyst/Associate Training

I've been hearing a lot of negativity about training, not only from my own bank but from people in other banks as well. I find this to be quite a misfortune. Training ought to be a real treat for hungry analysts and associates.

The two most common complaints I hear are "they try to go through so much material I can't possibly learn it all" and "I'm never going to use this anyway, so I don't care." These are both shitty ways to look at training. First of all, if there's too much material, look over it at night instead of partying every night. I know training's all about partying while life is good (I did it too, but trust me, life gets better), but if that's the case you can't complain about the information overload. Second, there is no such thing as useless information.

The key to taking advantage of training is paying full attention during class (stop playing those sudoku puzzles during class, quit checking your e-mail or facebook accounts, don't read your favorite magazine during class) and just soak up everything you can. You might not remember everything five years later, but you might remember a lot of it. I know the only time I've ever learned accounting is from training, but I can still identify cashflow statements, balance sheets and income statements as well as produce one from a combination of the others. Do I use this in my day job? No. Do I think it's useful information? YES! If I ever start a company I'll certainly need to know my accounting, and when I talk to the credit folks it helps to be able to speak their language. I even sometimes help the credit analysts with their analysis when the new folks don't remember some of the details. You don't necessarily have to study every detail if it's not going to be terribly important for your job, but you should certainly learn what you can.

That being said, as a new analyst or associate you never know where you career will take you. You might be going into M&A, but five years down the line you might transfer to a credit structuring desk where it'll suddenly be real important that you know what a reverse repo is. You might be going into trading, but you may well end up at a PE firm having to deal with the operations and accounting of a firm. The skys the limit for a smart person who is open to learning everything.

Of course I've heard a good bit of support for training as well. I give kudos to the usual firms, Training the Street and Adkins, Matchett and Toy, for their good work again this year. I hear the TTS record for that formatting exercise was broken again this year (while I mock the formatting exercise because I believe good information is good information no matter how it is formatted, I have to admit aesthetics are a large part of the human experience and thus it is important to a good many respectable professions.). For those of you engaged in these trainings and topping the class, hats off to you.

The Fed

Fed meeting this coming Tuesday. Looks to be a fairly important one. Let's talk a bit about what the Fed does and why they're so important to our economy.

The Fed is the United State's central bank. They control monetary policy, which is to say they try to control the money supply. There are three main ways in which they control monetary policy: The Fed Funds Rate, the Discount Rate, and reserve requirements.

The Fed Funds Rate is the interest rate banks charge each other for overnight loans. The market determines this rate, so the Fed can not use regulations to enforce this (well, maybe they could but that would screw with market dynamics). Instead of regulation the Fed conducts open market transactions to buy/sell treasuries from the open market to increase/decrease the amount of money available to the public. When there is less money circulating, the interest rate for borrowing it must increase. The Fed Funds Rate is what the market watches the most closely because it is the Fed's primary means of affecting the market.

The Discount Rate is the interest rate that the Fed charges for overnight loans. Most banks go to other banks to borrow at the Fed Funds Rate before going to the Fed for their loans. Clearly the Fed can choose its Discount Rate at will.

The reserve requirement refers to the amount of reserves banks have to keep as a percentage of their deposits. If banks have to keep more money in reserve (as opposed to lending it out or buying illiquid assets), then the demand for money is higher and interest rates go up. The Fed hasn't actually messed with the reserve requirement for along time, but if they did it'd be a really big deal. The reserve requirement is the Fed's sledgehammer when it comes to monetary policy.

Alright, so now we know what the Fed does. Now how does this effect the economy? Well all of the above change the supply and demand for money and thus interest rates. The Fed's mandate, however, involves inflation (go wikipedia inflation if you don't know what it is) and economic growth. This is slightly different from most central banks who are only mandated to control inflation. Too much money floating about invokes high inflation, which is disastrous on an economy (well, some theory says it doesn't matter, but in practice inflation has been the devil). So the Fed has to maintain a delicate balance between wanting to raise interest rates to control inflation and wanting to lower rates for growth. Most people think if the rates are high that's bad for the economy, if rates are low that helps stimulate the economy.

A "hawkish" Fed means they are primarily focused on the inflation rate (e.g. watching inflation like a hawk). A "dovish" Fed means they are kind on the economy and worry as much about economic growth as inflation. Most people agree that the primary target of the Fed should be inflation. A hawkish Fed tends to demand more respect and can more easily control inflation and the markets without having to mess with the interest rates.

When the Fed Funds Rate is high, banks have to fund at a somewhat higher interest rate, so they have to charge others a higher rate as well (for those of you familiar with LIBOR funding, LIBOR tends to trade at a spread to Fed Funds, we'll talk about this more later). When interest rates are high, however, companies can not borrow as much money, so domestic companies tend to suffer a bit and aren't able to invest in as many capital intensive projects. New bonds tend to come out at a higher interest rate. When interest rates are high foreigners are more likely to buy US dollar denominated assets, so the dollar would appreciate.

When the Fed Funds Rate is low, borrowing is cheap so liquidity is plentiful. Thus companies can invest a lot in projects with the thought that funding these projects is nice and cheap. Another way people talk about this is to say credit is plentiful, which seems to be a problem with the economy right now.

Alright, so now you know the basics of the Fed. Why does this seem like a timely post? Markets are really moving these days, and the markets just priced in a Fed "ease" (lowering of the interest rate) via the Eurodollar futures. Eurodollar futures basically point to LIBOR. Future LIBOR being lower basically means the Fed has cut rates. In fact a lot of what I saw on the ticker on Friday was a lot of banks buying Eurodollar future calls, which means people were buying protection against a Fed cut (if the fed cuts rates, then the eurodollars go up in value a lot and the calls are in the money). A lot of the hype is around the policy statement that the Fed gives after the FOMC meeting on Tuesday. As much as policy effects the markets, the statement tends to have just a large an effect because it points to future policy. A lot of the move in markets seems to be pricing in what the Fed will "say" about the state of the economy (and whether a cut will be necessary in the future.

The Next Job

Very few people stay in finance their entire life. Those that do very rarely stay at the same firm their entire life. The days of firm loyalty are sadly long gone, and even more distant a memory are the days when firms strongly valued their longtime employees. So what do we make of the rough and tumble, "hardly civil" world of today? The best safety net you will ever have is your network.

As much as your skills matter, your skills don't do anything for landing you an interview. In fact, your skills might have little to do with landing you a job at all. Your skills will be what you use to prove your worth after you find that job. Until then, it's the network you have to lean on.

Who make the best nodes of your network? Find the guys (and girls) who like to mentor people. These people tend to enjoy helping others develop their career and try to connect good opportunities with good people they know. They also make for great people to go to for advice when the time to find a job comes. Keep track of the people you find to be helpful and keep track of your friends who start moving around. You'll want to contact them eventually.

Why is the network your best safety net? Well, it turns out that a lot of jobs available are never posted or farmed out to headhunters. When a job opening appears, it's often the internal referral that gets it. Even more compelling, with a good reference some people are even willing to create a spot. You get the best of both world via this entry point.

You know you won't be in one spot forever. Start building that network because when people start shuffling around, you want to be on top of the game and in the know.

Learn the Lingo (Units of Meaure)

All these units of measure in markets. It's ridiculous. Of course in equity markets it's relatively easy. Everything trades in dollars and cents. What about all these other things though?

Pip - FX pips are the smallest unit of measure in FX. If we're quoting yen at 129.52 and it moves 0.22 yen, that's 22 pips. If we're quoting New Zealand dollars at .7805 and it moves 0.0025 that's 25 pips.

Big Figure - A "big figure" in FX is a hundred pips. So if we're quoting yen at 129.53 and it moves 1 yen, that's one big figure. If we're quoting New Zealand dollars at .7805 and it moves .01, that's a big figure.

Tick - ticks are more flexible. They are the general term for a basic move. A tick in bonds is one 32nd. A tick in commodities is usually a .01 move in the contract. It's worth noting that a lot of these aren't straight dollar values though. A silver contract that moves .01 (one tick) is not worth the same as an oil contract that moves .01 (one tick). The best way to look these up is via Bloomberg. The DES page will tell you the value of a one tick move. For US government bonds, for example, a one tick move is worth $312.50.

Par - 100, face value of a bond

plus - a plus is bond-speak for half a 32nd. So 98-24+ means 98 and twenty-four and a half thirty seconds. Some bonds trade in eighths of a tick (so eighths of a thirty-second. . .yes, that's a 256th, but don't think about it that way).

the figure - The figure refers to the exact amount. So "ninety-four the figure" means 94-00. In FX the figure means 00 pips.

cab - cab is a fourth (much like a plus is a half). Used in bonds sometimes as well as other derivatives.

even - even can mean zero or the figure. A switch being quoted at even means the front tenor and back tenor are the same rate (in a rate switch for instance, see "Learn the Lingo (Rates)" if this is confusing) so there is zero slope.

There are many more, but this will do for now.

Mark-to-Market

So what is a mark-to-market book? Well, that simply means the book is "marked" or re-valued to the market prices every day. That gives a pretty good sense of where the book can be liquidated on any given day. Accrual, in contrast, is an accounting thing that pretty much means you get to book it at transaction value plus cash-flows. Thus the daily price moves do not matter as much as the daily cash-flows.

Alright, great, so what's this mean in practice?

Well, a mark-to-market book will always be changing value. Usually trading books and hedge funds are marked-to-market. All liquid products and futures are marked-to-market. It usually means you have to fund the positions via some funding rate because you're probably not just putting cash up directly. You may have margin calls on the marked positions. For exchange traded securities the exchange closes are used as daily marks. For illiquid assets (i.e. those illiquid sub-prime mortgage securities that everyone's whining about), you often mark to market as well (by getting dealer prices on a daily basis, for example). While you usually have a good idea of liquidation value through this method, during a fire-sale of a portfolio the actual liquidation value may be considerably lower, especially for the less liquid stuff.

An accrual book does not need to worry about a lot of the above. The assumption is that the assets being held are not held for risky reasons, they are being held for accounting reasons. Thus it is less likely the assets will need to be quickly liquidated. Most of these types of accounts are "real money" accounts such as bank portfolios and insurance portfolios where people are likely just trying to match their liabilities (i.e. interest payments and insurance payments) with their assets (whatever they're buying in the market). These accounts tend to hold stuff longer, make bigger moves and not be as concerned about the daily PnL of the book.

Looking at a more micro perspective, what does this mean for the people who work there? A mark-to-market book must be sensitive to the daily changes in risk and PnL. The traders and portfolio managers will obsessively mark to the exact market closes and track their PnL and daily variation. On an accrual book, the long term view is the most important. Traders and portfolio managers will make sure their macro view is correct and their liabilities are hedged for the long term. The mark-to-market sensitivity can take many good trades out due to "stop-losses." Then again, mark-to-market sensitivity can make one more "in-tune" to the market as well.

The ability and necessity for different institutions to account for their securities as accrual or mark-to-market greatly effects how they trade as well as how they enter into positions. Sometimes what might be best for the institution will not be best for the accounting (and sadly, the accounting often wins). Accounting, while irrelevant to a wholly owned private company, can mean the world to public companies or hedge funds.

A Messy Market

I'm sure many of you heard of the huge fall in the equity markets yesterday. A few might have even seen (or at least anticipated) the huge rally in fixed income yesterday. We see another 97th percentile event, and one of the days that makes or breaks many trading desks. Credit spreads are out, rates rallied, stocks tanked and foreign exchange markets whipsawed. As we navigated through the mess (quite profitably, in fact) something popped out at me in a much more vivid manner than usual.

A lot of people fall into one of two camps. Either they specialize so much that the only movement they see (or care about) is the movement int heir own market, or they see correlation in everything and mistake correlation for causation. In the first camp many people don't see the economy as a whole and often miss the macro opportunities. In the second camp large generalizations such as "oh, bond markets are up because equity markets are down" add to the confusion created by big market moves.

No matter what field you are in, you should not isolate yourself from your general marketplace. It always helps to have a macro view of the world and see the big picture. For example, bankers should keep an eye on the markets so that they know why their deals might be falling through. Retail people should keep track of consumer trends and competitors. I have to say, traders generally are pretty good at keeping a pulse on everything, which is an excellent characteristics. In all other fields, it is usually the people who understand the big picture who get promoted for the big jobs. In trading, people who don't keep a pulse on everything tend to get weeded out.

Confusing correlation and causality is extremely common. Just because two things happened to move together does not mean one caused the other. Most likely there is a third thing that caused both to happen. Just as importantly, seeing two things move together once or twice does not necessarily mean they are correlated (it's called a coincidence, for any who care). Looking at the big picture, it is often easy to see why two things that are "correlated" are actually just something caused by a third party. Even more interestingly, you might be able to predict the next effect this cause will have.

Come out of your holes people. There's nothing wrong with simply not knowing why things are happening, but don't settle for some mediocre reasoning from an easy to spot coincidence.

Being Great

I find this to be a speech I give fairly frequently in one form or another, so I thought I'd post it:

What do you want to become? Are you here to make a comfortable living and live your life? Yea, there are quite of few of you aren't there? You know who you are. Most people, actually, are the type I just described. You want to do well, but you just want to be comfortable.

A great many of you probably think "pfft, that's not me. I'm destined for greatness." You think you are aggressive and ready to take the world by storm. You know what? I love it. That's exactly the attitude I want. It is, however, an unfortunate reality that a great many of you are wrong. You really fall into the former crowd, just looking to make a comfortable living. Now there's nothing wrong with that, most people are happier that way. In fact, most of you who think you're really destined for greatness would be miserable trying to be truly great.

I think of the following questions when I assess people for traits of greatness. Are you willing to put up your opinion even when everyone you work with thinks you're wrong? Are you going to push your project through, even if it's unapproved? Are you willing to be the least popular person just to prove you're right? Would you be happy being unpopular as long as you were right? If you answered yes to all of these, you're lying. If you answered no to most of these you're going to be comfortable. If you said yes to most but weren't sure about some, then you might have a chance to be great. Let me assure you, you won't be comfortable though.

Let's talk about greatness--let's talk about the people who really will be legend. These are the people who are willing to push a correct idea to it's limits. The types of people who will act on an idea if they know it to be right. You need to know that what you do matters. And every decision you make actually can resonate through the culture of the company no matter how small you think you might be. You have to be willing to take on the most senior of people if you believe your idea to be right. Those who are great face risks and take action. Taking action is what makes one great.

Yea, sometimes you'll be wrong. And you should feel like shit that you were wrong. Sometimes there'll be really shitty consequences too. You should feel like shit that you were wrong, but you still did something great. You should feel great that you did something great. You should feel like shit that you did something wrong. Don't be afraid to make mistakes because even mistakes can be a sign of greatness.

Any institution that is not willing to listen to voices of dissent will not survive, especially when those voices of dissent are correct and well formulated. Many institutions are like this. They ignore great ideas because they do not "follow protocol" or come from "senior management." These institutions will fail.

There is no such thing as a great institution. Every institution will fail without its people. It is the people who are great. Is is the leaders who inspire greatness. How do great leaders build lasting and reputable institutions? They do so by collecting people who are great. They collect those who have the conviction to act and the willingness to take risks on their beliefs. It is the conference room full of strong minded people ready to dissent about any topic they feel is incorrect that will come to the best conclusions and float the best ideas. Decisions should be built on debate, not on consensus.

So why are the majority of you not great? You are not great because you are afraid of the consequences. You would rather follow the route everyone else takes. Are you willing to step up and argue with your manager's manager? Are you willing to say "that's just dumb, I will not conform?" Most of you are not. You either wouldn't risk it, or you are uncomfortable with direct confrontation.

There's nothing wrong with taking the most accepted path. Thousands of very wealthy doctors, lawyers and bankers all did so with much success. No parent is every ashamed of their very comfortable son or daughter.

You know what, though? Those people are not great. They're comfortable.

You know who was great? Jack Welch, Reg Jones, Steve Jobs, Bill Gates, Warren Buffet, Bill Allen, Henry Ford, A.P. Giannini. Not one of these people settled for "comfortable." They pushed the envelope, took a highly criticized path and rose to the top. Not one of these people was generally popular. Not one of these people took the typical path to the top. Not one of these people had many people who thought they would succeed. But they acted even when everyone thought they were wrong.

Yes, it's risky. Yes, it's unpopular. But you know what? It's greatness. They are legends.

Do you have the conviction to get there?

Teamwork

I found this article inspiring:
http://money.cnn.com/2006/05/31/magazines/fortune/marines_greatteams_fortune/index.htm

I copied it below in the case that the site disappears (which it undoubtedly will at some point). I think every group manager should read this as the ideal form of teamwork. It may not always be possible, but everyone should strive for it. Whenever I sense myself seeming selfish at the desk, I now think to myself -- two sheets and a blanket:

From Wharton To War

While working in consulting and private equity, Jim Vesterman thought he was a good team player. Then he joined the Marine Corps.

By Jim Vesterman

June 1, 2006: 3:34 PM EDT

(FORTUNE Magazine) - Going to war wasn't a textbook career move. In 2002, Jim Vesterman, an Amherst grad who had spent several years in the business world, was scheduled to begin the MBA program at Wharton.

For some time, however, he had considered joining the military - both out of a sense duty and because he felt that it would challenge him like nothing in the civilian world could. Then 31, he wondered if this was his last shot.

Wharton let him defer admission, so Vesterman set his sights on the elite Marine Corps' Special Ops unit called Force Recon, whose members are drawn from enlisted men rather than the officer ranks. He was able to sign on for two years of active duty and two years in the Reserves, rather than the normal four to six years of active duty. The catch: If he didn't make it into Recon, he was headed for a long tour, starting as a private.

Vesterman knew that he'd learn to jump from airplanes and survive behind enemy lines. But he had no idea he'd learn so much about what it meant to be part of a team. He agreed to share his experiences--from his first day at boot camp through his tour in Iraq--with FORTUNE.

"I can't breathe! I can't breathe!" yelled a fellow Marine Corps recruit during our early boot camp training in the tear-gas chamber. The drill instructor's response: "I! I! I! What does 'I' have to do with anything?"

From the first day in boot camp, we were told we weren't allowed to use the word "I."

This was completely different from my experience in the business world, where I'd spent the past seven years. Throughout my career "I" had to do with almost everything. Though I considered myself a pretty good team player, personal success and achievement were my real benchmarks. Yet everything I thought I knew about working with other people was about to change. It started on April 22, 2002, the first day of boot camp on Parris Island - when we learned to make our beds.

It's called "two sheets and a blanket." When the drill instructor begins counting, you've got three minutes to make the bed - hospital corners and the proverbial quarter bounce. When you're done, you're told to get back in a line. The goal is to have every bed in the platoon made. So I made my bed, then I stood on the line. I was pretty proud, because when three minutes were up, there weren't more than ten men who had finished.

"Ahead of the pack," I thought. But the drill instructors weren't congratulating us. Everyone's bed had to be made. So rip off the sheets and do it again.

I ripped off the sheets, made the bed, and stood on the line. "We've got all day to get this right," the drill instructors were saying, looking at all the unfinished beds. "Two sheets and a blanket!"

I ripped off the sheets again, and again, and again. Finally one of the drill instructors looked me in the eye. "Your bunkmate isn't done. What are you doing?" I thought, "What am I doing?" Standing on line, thinking I'd accomplished something, while my bunkmate struggled.

Together my bunkmate and I made our beds about twice as fast as we did alone. Still, not everyone was finishing. Finally we realized, "Okay, when we're done, we've got to go help the bed next to us, and the bed down from that," and so on.

I went from thinking, "I'll hand my bunkmate a pillow, but I'm not going to make the bed for him" to making beds for anyone who needed help. That first lesson was an epiphany for me: You can't survive in the Marine Corps without helping the guy next to you.

Recon school

After 13 weeks of boot camp, Vesterman graduated first in his platoon of about 50 recruits. He then spent eight weeks at Infantry School, where he passed a Marine Special Ops physical qualifying test called the Recon Indoc, and was sent to RIP (Reconnaissance Indoctrination Platoon), then to Amphibious Reconnaissance School (Recon School), considered one of the most challenging schools in the U.S. military. On average, 40 percent of those who have already passed all previous screenings will quit Recon School within the first week.

In Recon School, everything gets more intense. Recon Marines are trained to conduct missions behind enemy lines in small teams, usually comprising six men. As the physical and mental challenges get more extreme, you become ever more reliant on your team - both to accomplish missions and simply to survive.

We'd go for six or seven days without sleep, and in the middle of some chaotic exercise, the instructor would say, "The guy next to you is down. You get him to that ravine." I'm 5-foot-7, and it took more than I thought I had to put some 230-pound guy on top of the pack on my back and run. Until Recon School, I don't think I ever really let anyone carry my weight. I don't think I was man enough to say, "Hey, I can't do this" or "You're stronger than I am at this. I need help." Then came the telephone pole.

Running five miles while carrying a telephone pole is a grueling task - made more so when it's a race between your six-man team and several others. The only instructions: move our telephone pole along the route, don't let it touch the ground, come in first. "It pays to be a winner," shouted the instructor, a phrase in Recon-speak that let us know there was a reward for coming in first.

The race began immediately, so we had to come up with the best technique on the fly. There was no time to discuss a strategy or organize our process. My team struggled at first, but our approach evolved quickly. We had four guys carrying the pole and two resting by jogging alongside. When we switched off, we decided, it should be the two guys hurting the most - not necessarily the two who had been carrying the longest - who got to rest.

Nobody, especially a type A Recon Marine, wants to be the person who's "not carrying his weight." But some of these guys were simply workhorses - they could run forever with this thing - and some of us could not. We were learning to put team success ahead of our own egos. That was the only way we could move the fastest as a team and win the race. This was a huge change.

Back at Wharton

Vesterman was the Honor Grad in Recon School - graduating first in his class of around 50 Marines. He went on to complete Airborne Jump School, Marine Combat Dive School, and finally SERE School (Search, Evasion, Resistance, and Escape), where Marines learn to survive as POWs. He was moved to reserve status and two weeks later, in August 2003, began his MBA courses at the Wharton School.

Back in Philadelphia, I quickly became enmeshed in Wharton's own team structure, including my first-year 60-student MBA cohort and my learning team of six peers. In your first year, the majority of projects are done in these peer groups. You're thrown together, graded together, and have to keep up with a flood of assignments, so it's an intense experience. I felt I had made a strong commitment to this new team.

At the end of my first semester, I learned that my unit, 3rd Force Reconnaissance Company, was being called up to serve in Iraq. That same week Peter Pace, vice chairman of the Joint Chiefs (and now chairman), came to Wharton and spoke to my class. When it came around to question time, I raised my hand. "Sir, it looks like I'm being called to serve in Iraq. Do you have any advice for me?"

At that point I hadn't even told my classmates yet, and I had very mixed feelings about going to combat and leaving my Wharton team midyear. General Pace, a Marine, didn't reply for three or four seconds. Then he looked at me and the first thing he said was simply, "Congratulations." Immediately, everything became clear to me. The Marine Corps' highest purpose is to serve the nation in time of war, and it was my once-in-a-lifetime opportunity to serve.

To Iraq

The Marine Corps and the Army had entered Iraq in March 2003. Once a war is over it falls to the Army to keep the peace, but when the insurgency surfaced, and then continued, the Marines were sent back in. After several weeks at Camp Pendleton, Calif., in February 2004, Vesterman and his platoon were among the first Marines to be redeployed to the Anbar province in western Iraq.

The youngest guy on our six-man team was 24; the oldest was 38. Our backgrounds ranged from a plant manager to a SWAT cop. Some of us had known each other for a few months, others for nearly a decade. Six totally different lives. But very quickly it felt like we were moving as one - instinctively.

We didn't do a lot of speaking. When you need something like binoculars from your pack, you don't stop, put the pack down, and open it, because if you're attacked, the group can't respond immediately. You just say to the guy behind you "I need binos," and you hold security for both of you while he gets them and reseals your pack. When he hits your pack, it means "ready."

There's a tremendous level of trust required between Marines. But since boot camp it's been drilled into all of us to do the right thing. Whether it's good for you or not. Whether it's easy or hard. Whether someone is watching or you're alone.

Our specialty was to enter a town unseen and set up shop there for days at a time in order to do reconnaissance and launch raids. Everyone on a Recon team has a different role, but each person needs to be able to move into any job.

I learned in the Marine Corps that the strongest teams have members who transition easily between roles. On one mission in a violent town along the border with Syria, we took up a clandestine position in an abandoned building that provided a good view of an intersection where many roadside bombs had been detonated. Our surveillance began to focus on a group of men who were meeting repeatedly on a nearby corner. The man who appeared to be the leader was wearing purple pants, so that's what we called him.

Suddenly we spotted these men retrieving objects in burlap bags from a nearby ravine and moving them in a pushcart toward the corner. They needed to move only 200 meters before they were out of our sights. While we thought the objects were bombs, we weren't sure, so we couldn't engage from our sniper position.

We had only seconds to confer. Then our team leader made the call: "Four men go and intercept." The other two would stay behind and maintain watch from an elevated and defensible position. What followed was the sort of chaotic scene our team was trained for. We exited our position and covered 500 meters at a dead sprint. A local lookout had warned the men, however, and as we turned the corner, the only thing visible was the pushcart.

We instinctively split into buddy teams - you never work alone - and my buddy and I began searching the area while the other team moved toward the pushcart. We recognized one of the men moving away from the scene and intercepted him. While I flex-cuffed the man, my partner moved to hold security.

The same coordination was happening with the other buddy team: One held security while the other opened the abandoned pushcart. As we suspected, there were two Saddam-era artillery shells inside, rigged as bombs. We immediately called this back to our team leader, who was then able to take a shot on "purple pants" when he momentarily reappeared at the original corner. "Purple pants" ended up escaping that day with only a shot to the arm, but we captured him a few weeks later.

We didn't react as six individuals that day. We were one team. Our platoon commander would often quote Kipling to describe the Marines: "The strength of the pack is the wolf, and the strength of the wolf is the pack." The Marine Corps recruits wolves. But its strength comes from training them to fight as a pack.

Home again

For his actions that day, Vesterman was awarded the Navy and Marine Corps Achievement Medal. After finishing a seven-month tour, he and his team turned in their gear. Six weeks later, in November 2004, he returned to Wharton.

Elasticity of demand. That's what they talked about in my first class back at Wharton. That culture shock was more jarring than going to Iraq. I slowly came to. In many ways there's probably no better preparation I could have had for the business world than joining the Marine Corps. The Marines teach you how to be both a leader and a follower.

I don't have to lead in every situation - but I've come to enjoy stepping up in a time of chaos. When I'm working with a group now, I can honestly say that I think about the team first. The "I first" approach has been drilled out of me.

I'm certainly not the only veteran at Wharton, and for the past several years, the veterans' club has organized a field trip to the Marine Corps Officer Candidate School in Quantico, Va. Students with no military experience are suddenly crawling through mud and under barbed wire while drill instructors shout orders. Two months before I graduated, we made the trip again.

The first drill was familiar: two sheets and a blanket.