Principal A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers

A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers

One of the biggest questions of the financial crisis has not been answered until now. What happened at Lehman Brothers and why was it allowed to fail, with aftershocks that rocked the global economy? In this news-making, often astonishing book, a former Lehman Brothers Vice President gives us the straight answers—right from the belly of the beast. In A Colossal Failure of Common Sense, Larry McDonald, a Wall Street insider, reveals the culture and unspoken rules of the game like no book has ever done. The book is couched in the very human story of Larry McDonald’s Horatio Alger-like rise from a Massachusetts “gateway to nowhere” housing project to the New York headquarters of Lehman Brothers, home of one of the world’s toughest trading floors. We get a close-up view of the participants in the Lehman collapse, especially those who saw it coming with a helpless, angry certainty. We meet the Brahmins at the top, whose reckless, pedal-to-the-floor addiction to growth finally demolished the nation’s oldest investment bank. The Wall Street we encounter here is a ruthless place, where brilliance, arrogance, ambition, greed, capacity for relentless toil, and other human traits combine in a potent mix that sometimes fuels prosperity but occasionally destroys it. The full significance of the dissolution of Lehman Brothers remains to be measured. But this much is certain: it was a devastating blow to America’s—and the world’s—financial system. And it need not have happened. This is the story of why it did.
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It was James Robinson who led me to this book. In the first place, he felt I had an untold story that I was bursting to unleash on the world. Second, his father is the renowned New York Times number one bestselling author Patrick Robinson, the man who wrote Lone Survivor for the heroic U.S. Navy SEAL Marcus Luttrell.

I never thought he would even consider it—not the vast jumble of thoughts cascading unchecked and undisciplined through my mind. But James talked him into it, and all through the winter of 2008–09 I commuted between New York and the Robinson family home in Ireland.

James held the project together, handling the mountainous volumes of research, preparing material for his father, who was obliged to spend all day on the writing, every day. Including Christmas.

I thank James for his unflagging support, both as my co-researcher and “interpreter” for his father. But above all I thank him as my friend.

Patrick Robinson has written many bestselling techno-thriller novels and, including this, has five times ghosted for other people. All of the other four made it to number one on a bestseller list. Believe me, I now understand why. I could never have done it without him, and he has my sincere thanks for everything.

I thank also Patrick’s droll and urbane London literary agent, Andrew Nurnberg, who seized upon this book within five minutes of hearing we planned to write it. He never doubted its merit, never once saw it as anything but a potentially huge success. He instantly appointed a New York agent to share the responsibility, Larry Kirshbaum, who took us to one of the greatest publishing houses in the world. And I thank them both.

And equally I thank our editor, John Mahaney of Crown Publishers, who read it once and made up his mind immediately to acquire the work, no matter the opposition. His wise and thoughtful preparation of the manuscript evokes my complete admiration. And my thanks to Rik Sen, a doctoral student at New York University’s Stern School of Business, for his h; ard work and dedication in reviewing and checking financial data.

Most important, I would like to thank my beloved Anabela, who was there for me every step of the way. Her friendship, patience, dedication, and positive reinforcement were crucial in my completing this book. Anabela, I’ll always remember—and be forever grateful for—the way you helped me through this unique experience.

As with any book as complex and detailed as this, there are more people to thank than I could possibly record, particularly as most of them would wish to remain anonymous, well clear of the firing line. But they know who they are, my colleagues from all over Lehman’s countless corporate departments. Patrick and I thank them for the endless time they spent, filling me in on those events I did not see firsthand, making certain that this story, whatever else, is as accurate as any Wall Street thriller could ever be.

L. McD.


[image: ]
A Rocky Road to Wall Street

Right here, in a haze of tobacco smoke and cheap hamburger fumes, I was on the skid row of finance … places like this specialize in the walking dead of failing corporations.

AT THE AGE of ten, I resided in some kind of a marital no-man’s-land, a beautiful but loveless gabled house in the leafy little township of Bolton, Massachusetts, some twenty miles west of downtown Boston. My father, Lawrence G. McDonald, had accepted the end of his marriage and had left my stunning fashion-model mother to bring up their five children all on her own. I was the oldest.

The general drift of the breakup was rooted in my dad’s hard-driving business career. Owner and chief executive of a chemical engineering company, he might have stepped straight out of a suburban cocktail party staged on the set of The Graduate: “Plastics, son. That’s the future.”

And I guess in a way it was the future. At least it was his future, because plastics made him a stack of money, enough to start his own brokerage firm, and it only took him about twenty-nine hours a day, seven days a week, to do it. He was obsessed with business.

So far as my mom was concerned, that was the upside. The downside was his devotion to the game of golf, which took care of his entire quota of spare time. For all of my formative years he played to scratch or better. As the club champion of Woods Hole Golf Club, down on the shores of Nantucket Sound, he had a swing that was pure poetry, relaxed, precise, and elegant, the clubhead describing a perfect arc through the soft sea air as it approached the ball. Also, he could hit the son of a bitch a country mile.

Mom never really saw him, since she never landed a job as a greenskeeper. And he saw her principally in magazines and on giant billboards around Boston, where dozens of images showed her modeling various high-fashion accessories.

When I referred to the marital home being loveless, I was not quite accurate. There was a burgeoning love in that house, but it did not involve Dad. He’d moved out, and many months later, a new suitor for my mother appeared on the horizon. Years later they were married, but even at my young age I realized he must have been some kind of latter-day saint, taking on this very beautiful lady with the staggering encumbrance of five kids and a kind of rogue husband prowling around the outskirts of her life, keeping an iron grasp on every nickel of her finances.

The name of the new man, who would one day become my stepfather, was Ed O’Brien. He was an extremely eminent lawyer and a grandson of a former governor of New Hampshire. Ed was a very classy guy, and he adored Mom and helped her in every way. He was not so big and tough as Dad, who had a touch of John Wayne about him, a kind of western swagger and a suggestion of unmistakable attitude, which often goes with entirely self-made men.

Anyway, right now I want to get to the point. Remember, Dad did not live with us anymore, and Ed occasionally stayed the night. Well, on this particular morning I was standing in the living room staring out of the window at Ed’s brand-new Mercedes-Benz convertible, a $100,000 car even way back then in the late seventies. Suddenly I saw a car pull up outside the front gates.

Into the expansive front yard strode Lawrence G. McDonald, wielding what looked to me like a seven-iron. He came striding up to Ed’s automobile and took an easy backswing, left arm straight, and completely obliterated the windshield in a shower of splintered glass. The clubhead struck right above the wipers, a little low. I thought Dad might have raised his head just a tad on impact.

Never breaking stride, he walked resolutely to the front of the car, took aim, and smashed the right-side headlight. Moving left, he ripped the club back fast. I thought I detected a slightly tighter swing, hands a little farther down the club. Anyhow, he did precisely the same to the headlight on the left.

By this time there was glass all over the place, and still I just stood there, gaping, wide-eyed. I watched Dad stride around to the back of the car, and for a moment I thought he was planning to survey his handiwork. You know, like standing back after you’ve dropped a ten-footer.

I was wrong. Once more he took his stance, swung the club back, and fired it straight into the taillight on the left side, shooting red glass all over the lot. Then he moved two paces right and with precisely the same shot, slightly wristy with a lot of backspin, punched out the other one. If either taillight had been a golf ball, it would have flown high and dug in on landing, probably pin high. There was a lot of precision about Dad’s play that morning.

I mention this because the incident is branded into my memory. It took me ten years to ask him about it, and he replied as only he, or perhaps John Wayne, could—real slow. “It wasn’t a seven-iron, son. Didn’t need any more than a pitching wedge.”

It would be another thirty years before I would witness at very close quarters another such act of wanton, willful destruction. And that took place on the trading floor of a Wall Street investment bank.

I begin my story with that brief insight into the character of my father because he had, even after the divorce, a profound influence on me. By nature he was a bear. That’s not a straightforward grizzly, seeing world disaster in every downward swing of the Dow. Dad was a perma-bear, seeing potential catastrophe every hour from the opening bell to the close of business.

For some investors the floor of the New York Stock Exchange is the last refuge of the Prince of Darkness, a place where demons of ill fortune lurked behind every flickering screen. Dad was not that bad, because he was an instinctively shrewd investor, often a wizard at stock selection, spotting the corporation that was about to tank. But his attitude almost caused him to miss the two greatest bull market rallies in history, because to Dad, cash was king, and he might need to prepare for the end of the world. He was the ultimate value investor. In outlook he was a cautious, somewhat skeptical pessimist. In personality he made Howard Hughes look like an extrovert.

In his own business Dad was extremely successful. He earned his bachelor of science degree in chemical engineering at Notre Dame, where he was number one on the golf team. Then he went to work as a salesman at General Electric’s plastics division, the Google and Microsoft of its day. He ended up a multimillionaire, owning his own plastics manufacturing plant in Massachusetts.

When he told me to beware, that history, without fail, repeats itself, he was not thinking of the sunlit uplands of triumph and achievement. He had in mind events like the eruption of Krakatoa, World War II, the fall of the Roman Empire, the collapse of the Soviet Union, and above all the crash of 1929. Always the crash.

With a worldview like his, it was scarcely surprising that the peace and quiet of the golf course was his principal escape. And he was one hell of a player. He held the course record of 65 at Woods Hole for more than twenty years, and on one near-legendary occasion he nailed the three par-fives in birdie, eagle, and double eagle. He played the great golf courses in serious competition, once losing on the last green at Winged Foot Country Club to one of the best Massachusetts amateurs of all time, Joe Keller—and even Joe had to sink a forty-footer to beat him.

Dad had already set me on the road to becoming a scratch golfer when my world caved in. He and Mom split, leaving Mom with us kids in the big house without the means to support either it or us. Ed had a law practice in Worcester, and to that tough Massachusetts city we upped and transplanted ourselves, mostly because Mom needed a friend, just someone to be there, in the absence of Dad and his weighty bank balance.

Bolton, where we had always lived, was a little gem of a town, an upper-middle-class haven set in green rolling country with the families of well-to-do business guys in residence. From there, my mom, now in desperate financial straits, my three brothers and one sister, and I ended up in a housing project in the worst part of a distinctly suspect city—the absurdly named Lincoln Village Apartments, gateway to nowhere. I was too young to go into culture shock, but hell, even I realized that somehow the roof had fallen in on my life.

With five children to care for, my mom, the hugely admired Debbie Towle, could not possibly go back to work. She was still, by all accounts, spectacularly beautiful, and would once again have been in demand as a fashion model, but that was impossible. We were not so much hard-up as bereft.

The apartment was in a nightmarish neighborhood, run-down and dirty, with a slightly sinister atmosphere, as if at any moment some shocking crime might be committed. Mom was always in tears. I could tell she hated the place, hated living at the wrong end of this urban version of Death Valley.

As you can imagine, the people were an absolute treat, many of them shifty-eyed, leering, unkempt, and full of resentment: some really shaky kids, white trash, drug dealers. There were also gangs of trainee criminals staging shoplifting raids and nighttime burglaries all over the city. They kept trying to recruit me, but I knew enough to stay well out of it. I refused to join them, and one night their leader came to the door of our apartment, dragged me out onto the front steps, and punched me right in the face.

Mom nearly had a heart attack, and Ed O’Brien came to the rescue, trying to help with money. Dad? He pretty much disappeared. In my first eighteen months in Worcester I went to three different schools, each one a bigger disaster than the last. This was life as I had never imagined it. Academically I was slipping behind; mostly I was afraid to go outside the door because of the sheer danger of the place. It’s hard to explain every vestige of the change in our lives. But the difference was total. There were no more trips to the Cape, no more golf, no more elegant dinners at our home. We were prisoners of the cells of Lincoln Village.

My dad did pull one masterstroke on my behalf. He arranged for me to report to tranquil, green Worcester Golf Club, where I spent time caddying. I was too young to understand I was hauling a huge bag around for one of the immortals—Bob Cousy the six-foot-one point guard for the great Celtics teams of the fifties and sixties, and an excellent golfer. The sweet-swinging point guard called me “kid;” I called him “Mr. Bob.”

But those trips around the course were only a tiny respite from my real world. I earned $100 caddying, all of which I gave to my mom. As a family, we were sinking into depression. I remember it all so well—no laughter, no joy, and the unmistakable feeling that we never should have been anywhere near Lincoln Village. Finally, the entire family got together, both Mom’s people and Dad’s, and decided, “We have to get those kids the hell out of there.”

So one bright morning in the spring of 1979 we all moved to Cape Cod, where Dad had always had a home. We went back into the sunlight, back to life as we had once known it in Bolton, away from the glum recesses of Worcester.

When I began at my high school in Falmouth, I was at a huge disadvantage, way behind in my work in all subjects. I fought an academic war to become a C student, struggling to catch up. During my junior and senior years, when it was time to make a decision about college, I most definitely was not regarded as a candidate for a top university. So you can imagine my surprise one day when Dad showed up and told me he was taking me out to his alma mater in South Bend, Indiana: Notre Dame, the hallowed campus of the Fighting Irish, which also houses one of the greatest libraries in North America under the watchful eye of the Touchdown Jesus, set in massive mosaic glory on the eastern wall of Memorial Library.

He took me to all the sacred places: the Grotto, the library, the Rockne Memorial, the Sacred Heart Church, the palatial South Dining Hall, and of course the stadium. I thought then, as I think now, it must be one of the most fabulous university campuses on earth.

Plaintively, I asked my dad, “But why now? Why bring me here so late? I obviously could never make it, not after the years in Worcester. If you wanted me to come here, I should have stayed at my school in Bolton.”

He was a man of few words at the best of times, and he greeted my comments with even fewer words than usual. There was no explanation of his intentions. And we traveled home to the Cape with hardly any further discussion about my lack of academic future. I think Dad knew I was doing everything I could to regain lost ground at school, but there was no possibility whatsoever that I could ever aspire to a place like Notre Dame.

When we reached the house, Dad took me by the shoulders, turned me around to face him, and said in that rich baritone voice of his, “Son, remember this—it’s not where you start, it’s where you finish.” Spoken, I have often thought, like a true hard-driving son of a mailman—and for that matter, a bit like John Wayne. A student’s gotta do what a student’s gotta do.

What I had to do was scramble my way into a university of some description. Any description. In the end I made it to the University of Massachusetts at Dartmouth, a small seaside town that sits in the southernmost corner of the state, where the Atlantic washes through the trailing headland of Cuttyhunk, the last of the Elizabeth Islands.

Before I reported to UMass for my economics courses, I spent a summer working in Falmouth pumping gas. I swiftly developed a deadly rivalry with the gas station next door, which was manned by one of my local buddies, Larry McCarthy.

He was a whip-smart kid, built like a jockey, 120 pounds wet through, and about five foot five. He got a pretty hard time at school partly because he was so small and partly because he was frequently seen reading the Wall Street Journal when he was in seventh grade. But he was a feisty little devil, and he fought like a tiger, ever ready to swing a roundhouse right at any perceived slight. Just how feisty he was would be demonstrated to me in Technicolor when we both had our backs to the wall at Lehman Brothers twenty years later.

His dad was a bank president, and he sent his son to the expensive Sacred Heart School. Right from the get-go Larry was being groomed for a Wall Street career. He sailed into Providence College to study economics and business administration.

Even as a teenager, I should have known he’d go far, because he was hell as a business rival. One week things were a little quiet, so I cut a cent off the gas price at my station, guessing the notoriously parsimonious New Englanders would go for that with enthusiasm. I was right, and for a couple of days I was doing real well. Then it all went south and I was back in the doldrums.

It did not take me long to find out why. Across the street Larry had slashed his price by more than two cents and mopped up almost all of the town’s regular business at the pumps. The summer drew to a close leaving us still best friends, but with the business pecking order established.

As a freshman, I lived in Falmouth with my dad and made the hour journey to school each day. That had the advantage of being free except for gas, and the disadvantage of my being watched beadily by a very advanced financier as I toiled my way through the demanding curriculum. Dad was making a big effort, seeming to want to make amends for things in the past, and we got closer. I guess I started to like him more, as I have done ever since.

By the time I moved into junior year, I had become a top student, straight As, while majoring in economics, with probably the best grades in my class. Dad regarded all this with a watchful gunslinger’s gaze. Never said anything. Probably figured there wasn’t any need. But I bet he secretly knew I could have made Notre Dame if I’d had a shot.

When we talked, it was usually about business. Sometimes about our other shared interest, golf, but mostly Dad let his short irons do the talking. Although I do remember he once told me he’d dropped a sixty-footer on the fifth green of the exclusive International Club out in Bolton. This was reputed to be the largest green in the game, a 120-yard-wide upside-down apple pie generally regarded as impossible from all angles. Dad, who was the best player in the entire membership, recounted that putt with a paucity of words. But he told it like it was, straight and true, the upholding of good over evil, like a scene from the back lot of High Noon.

Those were the terms in which he saw the world, and he looked at the financial markets with a mixture of suspicion and cynicism, watching, waiting for the chink in the armor of the mighty that would allow him to cash in. Like all bears, he was intuitively drawn to the art form of shorting stocks—acquiring shares in a corporation in anticipation of a downward spiral. In the broadest possible terms, if one thousand shares are acquired at $100 each and the price then falls to $50 per share, the bear tucks away a succulent $50,000 profit. It’s a bit complicated, because the original $100 shares are not actually purchased by the bear. They’re borrowed through a broker and immediately sold. All the old bruin needs to do is buy them back at the cheaper price and pocket the difference. And so, while all around him the stockholders are licking their wounds, losing their cars, selling their houses, and watching their portfolios blow up, men like my father bask in the sheer scale of the disaster, counting their cash and staring balefully around for the next potential casualty.

No doubt in my mind: Dad was a bear’s bear.

And all the while he stressed to me that no matter how bad things were, they could always be that bad again, or worse. In his view, “it couldn’t happen again” rates as just about the stupidest comment ever uttered. Yes, it could, son. Yes, it could. History invariably repeats itself. The mantras of my father. Forever in my mind.

By the time I graduated from college in 1989, I had learned enough about Wall Street to understand that was the place I wanted to be, right out there in New York with the big dogs, playing in the major leagues of finance. The trouble was, my chances of getting in were zilch. Those big finance firms recruit from the best colleges in the United States. They ransack the top business schools, scoop up the outstanding talent from Harvard, Princeton, Yale, and Penn. And they land them early, often bringing kids into the firms for work experience before they even graduate. UMass Dartmouth was not one of the regular stops on their recruitment drives. They wanted the best, and their recruiters headed straight for the institutions where they were most likely to find it.

I understood that big finance in the United States was probably the toughest of all careers. It was such a ferocious learning curve that young people were quite often burned out at forty, unable to take it anymore—the endless hours, the pressure, the fear of missing a chance. And yet I still knew that it was for me, even though it would be a long, hard road, mostly uphill. I didn’t broach the subject with anyone. Instead I decided to tackle it alone, armed only with my economics degree from a relatively obscure university. Whichever way you cut it, I was at some disadvantage against a kid from Choate and Harvard with about seventeen relations in the boardrooms of the great finance houses. Still, as Dad had said, it’s not where you start, it’s where you finish.

So there I stood in search of my personal holy grail, metaphorically staring at the north face of the Eiger, wondering which way was up. I was long on ideas but destitute when it came to contacts and connections. I had no clue where to start. While a hell of a long way from Worcester, I was still light-years away from Wall Street. And I was braced for rejection on a mammoth scale, but I believed that every no brings you closer to a yes. See that? A psychologist, even at that young age!

In my secret thoughts I set myself a five-year target to make Wall Street—not some plush carpeted office, but right down there in the Colosseum of the trading floor, where the rubber meets the road, where the toughest characters in the game stand guard over the firm’s capital. I was holding on to a dream that my dad had instilled in me, the lure of finance on the grandest scale, illuminated by another of his mantras: that someone somewhere is going to screw up big-time every trading month of the year … the anthem of the bears.

I can’t say why, given that I had witnessed my dad stepping gingerly through those big bull markets, but I have always been sympathetic toward the bears, even though I understood that the real big hitters of the investment world traditionally have been men who seek stocks in corporations that are on the rise, the ones on the verge of a breakthrough with a new idea or discovery.

In any event, that summer of 1989 I set about establishing a career for myself. I would begin with a mass attack on the financial institutions of the Northeast, buoyed up by yet another of Dad’s mantras: even a blind pig will occasionally find an acorn. I bombarded the industry with letters of application, probably a thousand of them, accompanied by a resume that was light on substance but long on ambition. I spent hours in the Falmouth library researching chief executives of New England brokerage houses, chief financial officers, marketing directors, human resource guys, and God knows who else.

When I hit them, I hit them big, dozens of letters at a time which I personally fired into the Falmouth Post Office, armloads. The rejection slips came back like a machine gun fusillade. But I never went down. I just kept mailing: Boston, Hyannis, Quincy Plymouth, Buzzards Bay, and points west all the way down to Newport. Result: zero.

The fact was, I could not even gain entry for an interview, never mind receive a job offer. So if I wasn’t invited, I thought, I’d get in some other way. Armed with my list of addresses, I went on a kind of brokerage house patrol. I just turned up with the name of the guy I wanted to see, trying to wheedle my way past the advance guard of receptionists and secretaries—all of whom, of course, tried to get rid of me, since I had no appointment.

As each one of these sieges was repelled, resulting only in ignominious defeat, I slowly came to understand I needed to be a great deal more cunning. So I evolved a new strategy. I would sneak in, barge in, lie my way in, or make my entry in disguise. From that point on I was a changed person, a new specialist in low cunning, deviousness, and subterfuge. Some of my tactics were so preposterous it was all I could do to prevent myself from falling over with laughter.

There was the out-of-breath, well-dressed young exec who was simply so late for an appointment there was no time to argue at the desk. At some of these brokerage houses I just charged straight in, as if I owned the place, and headed for the boss’s door. (That was in the more innocent days of the early 1990s; today I’d probably be shot.) Other times I’d simply say I had an appointment, no ifs, ands, or buts, and I’d traveled two hundred miles to keep it. Other times I researched my target and turned up on his birthday or anniversary with chocolates or flowers that had to be delivered personally. I had to invest in a couple of blue tradesman’s work coats for these forays into the enemy camp. Ed O’Brien, by now my stepfather, funded this operation right down to the flowers.

My most successful deception at the New England offices of Merrill Lynch, Lehman, Morgan Stanley, or Smith Barney was the role of pizza deliveryman. Ed stood me a long white coat that hid my business suit for that one and even offered to finance the pizzas. But since the boxes were always empty, I explained, that would not be necessary.

There’s something magnificently ordinary about a pizza, something delightfully mundane. It’s a word that can soften the stoniest heart. “Pizza for Mr. Matthews” was not the way. You needed the jargon of the pro: “Sausage, mushrooms, and extra cheese, Mr. Matthews, right away while it’s hot.” Or “Linguisa, peppers, and tomato, Rick Matthews, gotta be hot.” Or “Rick Matthews wants it real hot—extra cheese and sausage. Let’s go, let’s go!” For that last one, I hit the reception desk with my best Italian accent and barged straight in, quivering with urgency, as if any delay would cost the receptionist her job, not to mention mine. Once I was past the receptionist I was able to ditch the white coat and the pizza boxes.

Of course, having stormed the first line of defense armed only with a pizza box, I was still one hell of a long way from my final objective, a job on the trading desk of one of the big Wall Street–based finance houses. But I was in the door, in the most literal sense, and I was seeing a few branch managers—mostly for about four and a half seconds before they had me escorted from the building.

A few, however, doubtless amused by my chutzpah, let me stay for a chat. Some of them were really good guys and seemed sympathetic that I wanted a job in the finance business so badly that I was ready to risk arrest for illegal entry. Strangely, I noted many of them saying the very same thing: aside from the fact that I needed to pass the Series 7 exam before I could earn employment as any kind of broker, every one of them told me I needed sales experience. It could be selling door-to-door or cold calling, but experience was absolutely vital. They all said they’d consider giving me a shot, but not until I had a genuine sales track record.

“Kid,” one of them told me, “you’re going to kick off as a retail broker, and before you get out there, selling stocks, bonds, and securities, you must know how to approach people, the buzzwords that will hold their interest, how to tempt them, how to warn them. I don’t care what you sell for your first experience, but for Christ’s sake get out there and sell ’em something, rather than wasting my time!”

I think he was the director of one of the Merrill Lynch branches, but he was really decent to me, and I remember he sent for a couple of cups of coffee while we were chatting. In the end he said we might as well get into one of the pizzas he thought I had. So I just made the excuse of another appointment and left his office under a cloak of dishonesty similar to the one I’d used when I entered. Wow, I thought, this finance game will be the death of me.

It was true the last guy had understood some of my desires. Deep within me there burned an ambition so powerful I sometimes thought it might burn me up with it. I was prepared to walk through fire to get where I was going. The words of one of my heroes, the author Napoleon Hill, were welded to my soul: Winners never quit. Quitters never win.

Almost immediately I switched tacks and went in search of a salesman’s job, giving due thought to the advice I’d received. I went to about five interviews and settled for a sales rep’s job with American Frozen Foods of Milford, Connecticut. My home office was in Sagamore, right on the Cape Cod Canal, hard by the high bridge that separates the Cape from the Massachusetts mainland.

My territory was the Cape and islands plus southeastern Massachusetts. The great wide canal that cleaves its way along the western coast of the narrow land defined my theater of operations. My specialty was pork chops, though I made significant headway with our pork roast. And I may as well reveal that the culture shock involved in going from dreams of becoming a billion-dollar Wall Street bond trader to the reality of being a novice pork chop salesman was much like the Bolton–Lincoln Village saga.

But I was determined to give it the old college try—UMass, that is, not Harvard. And I set about it in a scientific manner. I called about seven hundred million people, all along the banks of the Cape Cod Canal. I hit ’em by phone, I hit ’em by road, I even hit ’em by bus when my car was in for service.

My creed was that no pork, in all the colorful history of pig farming, had ever tasted even one-hundredth as good as this particular set of chops. I sold them to young ladies, young marrieds, and divorcées, to the rich, the lonely, and the dispossessed. I sold them to the up-and-coming, the has-beens, and the still-striving. The sharp young newly-weds were tough, unlike the pork, because of a reluctance to shift from their planned budgets.

But when I saw an old lady my heart sang. They weren’t normally hungry, but many of them had a lot of grandchildren. My sudden appearance on their doorstep—a six-foot-three charmer, a bit of a Jack the lad, scratch golfer, future Master of the Universe, et cetera—saw me invited in for a cup of coffee so often I probably could have switched to being a coffee salesman, and the hell with the pork chops.

Anyway, given the amount of time I spent in deep conversation with these female senior citizens, I needed to sell hard, stressing the joy and convenience of having a fridge full of pork chops, a meal for all occasions. I studied recipe books, learning about fifty thousand ways to prepare the chops for the table. These formed my selling phrases—pork chops, perfect for every dinner.

I realized there was a heavy commitment involved in a delicious pork roast, since you need three or four people to eat one. So as soon as I detected that a lady was widowed or lived on her own, I instantly switched my pitch toward the chops, highlighting the ever-useful four-pack, perfect for the single-chop dinner.

There was one wealthy couple from Cohasset with whom I was so successful they must have purchased about 470 pork chops, creating so much storage pressure that I sold them a new freezer. In the end I was one of the top salesmen in the entire American Frozen Foods northeast region. And I was out in the lead midway through the second year when I called it quits: The winner, and still the pork chop champion of the world, from Woods Hole, Massachusetts, Larry “Lean Man” McDonald!

Meanwhile, my buddy Larry McCarthy had moved smoothly into finance. He made it to the majors while I was still trying to get into single-A. A Wall Street investment firm, Donaldson, Lufkin and Jenrette, gave him his chance, and his career immediately flourished, exploding upward. While I was selling the four-packs he was learning to specialize in bank debt and distressed bonds.

At that point our careers were so far apart it would have been laughable if it hadn’t been semitragic. There was Larry marching around lower Manhattan like J. P. Morgan incarnate, while I was working the banks of the Cape Cod Canal with a vanload of pork.

At that time, I could not gain a foothold even close to where Larry worked, but still I hung on to my dream: that one day I would make it to the top table in the world’s biggest business. Nothing could cloud my vision of the holy grail, and I vowed to keep chasing it, no matter how difficult that proved to be.

American Frozen Foods did their level best to keep me in their organization. After presenting me with the award for being best salesman—number one in pork—they asked me to move down to their corporate headquarters in Connecticut, where glittering prizes would await me: high-level management, head of marketing, czar of the sales force. And it darned nearly turned my head—but then I thought, Whoa! This is not my objective. I don’t plan to become the world’s number one meat salesman.

But the offer focused my mind. Suddenly I knew I had to get into finance somewhere, in some capacity. So with a single item added to my resume—“a top salesman with American Frozen Foods”—I blasted out my letters of application once more. Dozens of them. Response: zero.

I was rapidly losing hope when, from out of the wide blue yonder, there came a chance—not much of one, but a glimmer. A pal from Falmouth High, Steve Seefeld, who had been not only the smartest boy in the school but also the richest, called me one weekend and spoke to me as if he had read my mind. Commensurate with his status as the Einstein of Falmouth High, Steve possessed an elegant turn of phrase. “Listen, Larry,” he said, “screw this pork chop bullshit. It’s time you got the hell out of the fucking freezer.”

Normally I might have dismissed this, but Steve was a very special character—special enough to have earned his sea captain’s license before the age of sixteen, which made him a legend in the oceanside bars of Falmouth. Jesus, this kid thought he was qualified to drive a packed Martha’s Vineyard car ferry when he was still in tenth grade—docking, navigation, tidal currents, the lot. Not only that, but Steve was now fluent in Java, C++, and Visual Basic, the most advanced new languages of computer programming. And that wasn’t all. Steve had also gotten the highest possible score on the mathematics section of the SAT. He was studying at the world-renowned Wharton School of the University of Pennsylvania. He lived with a group of fellow business students close to the school, and suggested I break away from the Cape, get down there, and move in with him and his guys.

We agreed that I needed to get into finance right now. He said I should enroll at a nearby Philadelphia business school and start studying right away for the Series 7 exam, without which, he said, “a future bond trader would be like a butcher without a meat cleaver.” Steve added that although he knew I had stacked away ten grand in what he called “porkbucks,” I should still take a day job and maybe even find some bucket shop to sponsor me in the exam—not an uncommon maneuver.

And so I left American Frozen Foods. I think they were sorry to see me go, but my immediate boss, Dan Nectow, knew in his heart that my personal guiding light did not illuminate a path back into the freezer. I left with his good wishes, heading south to Philadelphia into uncharted territory. It was only 330 miles, but to me it was like a journey to Patagonia.

I gassed up my old Volkswagen Golf and stuffed into it my worldly possessions, which added up to a suitcase full of clothes, two or three coat hangers, some literature of doubtful merit, and about eighty prime pork chops, packed into a cooler as a gift for my new roommates. (Dan let me have them wholesale, prepacked.)

I enrolled in the Securities Training Corporation, a financial school that operated on the Wharton campus. From our house on Powelton Avenue, not far from Wharton, I began a new assault on brokerage houses, phoning and writing.

Philadelphia is a rougher, tougher business environment than the greater Boston area. I found out how just how tough on my fourth day in the city. I had secured an interview with the branch manager of a sleazy bucket shop in the downtown area, just off Chestnut Street. His offices bore about as much relationship to a Wall Street investment house as Soweto does to Beacon Hill.

About twelve guys, used-car-dealer types, were selling stocks, mostly penny stocks. All of them were fat, and half of them were eating hamburgers. All of them were smoking—every ashtray was brimming full. And every single one of the salesmen was shouting, some of them stamping on the floor. One guy was standing on his desk, yelling at some hapless customer, “You have to be long on this! People are stampeding for this … it’s going … it’s going!” The impression was of frenzied dealing, a veritable stock exchange uproar for these plainly fraudulent equities being offered on the pure pretense that the action was nothing short of huge.

Even I could see this was the wrong end of the business. I was never going in there. I’d starve before I set foot in their rathole. Through the thick smoke the guy standing on the desk was cajoling, urging, trying to persuade some poor old guy to pile his net worth into the stock—anything for the commission.

This was a classic sweatshop, a small outfit being paid by an obviously failing corporation to unload cheap stocks. These fat chain-smoking salesmen would say anything to their victims: “This stock is gonna double … it’ll be two bucks by next Wednesday … you don’t often get a chance like this … how many do I put you in for? What d’ya want? Gimme a number.” It was right here, in a haze of tobacco smoke and cheap hamburger fumes. I was on the skid row of finance, the rock-bottom end of the business. Places like this specialize in the walking dead of failing corporations.

In their own way these bucket shops are specialists. They have no clients from whom to protect their reputation. They also have no reputation to defend. They just get out there and sell stocks and bonds they often know full well are worthless, and to hell with the consequences. They usually are paid a fee for hawking these fraudulent equities. That makes it a win-win. The sleazeball scavenges a living, and the doomed corporation gets one more bag of dough before filing for Chapter 7. That, by the way, is worse than bankruptcy. Chapter 7 is forced liquidation—goodnight Vienna.

Get me outta here was my only instinct. But the managing director, a total sleazeball in a shiny suit, led me back into his office and, with a colorful flourish, brandished a document in front of my eyes. “Check out the number, rookie—that’s my paycheck for last month. Twenty thousand bucks.”

All he wanted me to do was locate guys with cash and then sell ’em, jam them into worthless penny stocks with promises or anything else that worked. From my view across that hellhole of an office, just picking up the merest snatches of conversation, I could work out this was an underworld operation, selling stock in fake shells of corporations to raise cash, which was tantamount to ripping investors off, stealing them blind. My moral standards would not allow me to work for such an operation.

But the sleazeball manager was not finished with me, and he made me an offer to which I was forced to listen. “Hey, kid,” he said, “you gotta pass your Series 7, right? Because if you don’t, you ain’t going no place. So here’s what I’ll do—you gotta have a sponsor, and I’m gonna be that sponsor, right? I’ll fill in the papers, get ’em entered up in the right places. You pass the exam, you come and work for us, okay?”

I’ve never known whether he really believed I would work there, and he had no intention of paying for my exam, as most sponsors would. All he would do was file the papers as my official sponsor. I would have to pay for everything, including a $1,000 fee to the bucket shop.

We parted on good terms, and I made my way back to Powelton Avenue to face what I saw at the time as the daunting task of passing the Series 7—the only way you can get into the world of securities. Officially, I was trying to obtain “the general securities registered representative license administered by the Financial Industry Regulatory Authority (FINRA) that entitles the holder to sell all types of securities products with the exception of commodities and futures.”

The bulk of the Series 7 exam focuses on investment risk, taxation, equity and debt instruments, packaged securities, options, retirement plans, and interaction with clients such as account management.

In order to write the Series 7 exam, a candidate must be sponsored by a financial company that is a member of FINRA, or a self-regulatory organization (SRO).

Successfully completing the Series 7 exam is a prerequisite for most of the FINRA principal examinations.*

That was my task, and I set off to work myself to death for five weeks, preparing for this six-hour bitch of an exam. It certainly was not as tough as the bar exam but was plenty tough enough for most of us. The official description scarcely did it justice. The entire paper was a demanding test of options, municipal securities laws, NASD rules and regulations, and that investors minefield, buying on margin. The main book I needed to study was about three feet thick, or at least that’s how it looked to me.

Night after night, I pored through the book, memorized rules and procedures. Without knowing where I was going or where I would end up, I devoured that book, morning, noon, and evening, surrounded by guys who were doing MBAs at Wharton and would soon head straight up the red carpet to the biggest firms on Wall Street.

But, in the fullness of time, each and every one of them would have to tread the same path and pass the exam. The main difference, of course, was that they would be sponsored by Merrill Lynch, Smith Barney, Lehman, J. P. Morgan, and Bear Stearns. Unlike me, who had nothing and was officially associated with one of the least attractive bucket shop gangs on the East Coast. Whether or not that Series 7 was a top priority or just a distant mountain to be climbed made no difference.

One by one my new Wharton buddies came and asked to see the study book, especially my pal and roommate Rick Schnall, a nephew of Carl Icahn, the most famous corporate raider on Wall Street, the Muhammad Ali of his trade. It was a big help being among guys like that, because when everyone is involved in the same subject, with similar insights and perceptions, the sheer velocity of the available information is ratcheted up a few notches. They were generous to me with their time and advice, and in turn I let them take a few peeps at the practice exams in the back of my book.

In the last couple of weeks my strategy was to take those practice exams over and over, and by the time I finally took the examination I’d completed a whole stack of them. Hell, I was darned nearly a veteran, and I crashed home to victory, scoring a 92 (the passing grade was 70). I was now licensed to walk in the steps of the mighty, and my elation was about 300 on the Richter scale.

Little did I know that the Series 7 exam was the very first step on my personal road to the greatest financial catastrophe in history, a global meltdown, the Armageddon of the world’s stock markets—choose your metaphor. I was on the yellow brick road leading directly to the biggest bankruptcy of all time. Dead center, matter of fact.

But money was running out pretty fast, and my only prospect of gainful employment was back in the bucket shop with the sleazeball and the smokers, a group I regarded as the totally unacceptable face of capitalism. From where I stood, Danny and the porkers back in Sagamore looked like the boardroom of Salomon Brothers.

So once more I set off to storm the ramparts of the brokerage houses. But this time I was armed not only with my Pork Chop Man of the Century award from American Frozen Foods but also with my outstanding grade on the Series 7 exam.

Merrill Lynch was my first call. The Philadelphia branch was situated in a beautiful old bank building down near Independence Mall, pitching-wedge distance from the Liberty Bell, on Chestnut Street. I moved smoothly past the front line of the brokerage house’s corporate defenses by unleashing a colossal whopper and telling the receptionist I had an appointment with the branch manager, Gary Begnaud. I think he must have been too busy to remember whether he had an appointment with me or not, but he summoned me into his mahogany-paneled office and listened to my story. He never did find out the true validity of my “appointment,” but he liked the sales experience, and he loved the fact that I had achieved the Series 7 on my own.

He treated me seriously and tried to explain the requirements for a Merrill Lynch retail salesman. Tell you the truth, they were pretty damn basic—find as many rich people as you can and talk them into investing their money with the company. The bigger the amount, the better Gary was going to like it.

Would he give me leads?


Would I get lists of the right kind of people?

“Forget that. Get your own lists.”

How about a desk in his office, where I could answer the phone and pick up a few leads that way?

“Larry, you get a desk and a phone in the bullpen. We’ll teach you the new but noble art of cold-calling clients to sell money market funds, stocks, and bonds. Our analysts put together these financial packages, and you get out there and sell them.”

He added that interrupting busy people with a sales pitch was no walk in the park. In fact, he suggested that if I was any good, I had a fighting chance of becoming, in a very short time, the least popular person in Pennsylvania. “But if you’re good,” he told me, “the money’s good.”

Would I get a salary?

“Oh, sure. Eighteen thousand a year. Plus commission on what you bring in.”

He said “eighteen thousand” as if it was eighteen million, but I swiftly calculated I’d be lucky to get three hundred fifty bucks a week. Hell, I could earn that in a day with American Frozen Foods.

But this was my chosen road, the road to Wall Street, and Gary was Merrill Lynch’s most trusted executive in what was then the fifth-largest city in the United States. I found out why when he imparted his final zinger to me: “Larry, you got a job here for six months. In that time I want you to bring in $6 million in assets and $100,000 in investment commissions. Fail and you’re fired.”

My mind raced, and I flashed from the sheer impossibility of the task to the joy of a paltry salary plus another $25,000 payout in commissions if I hit the minimum production threshold of one hundred grand. Would I give it a try? Damn straight I would, even though I suspected that Merrill Lynch in Philly operated on the same lines as the sleazeball and the smokers, except for the classy manners, the sophisticated product packages, and the towering reputation of this Wall Street powerhouse. That’s all.

Let’s face it—selling the stocks and bonds offered in the Merrill portfolio, offering a rock-solid 5 or 6 percent on clients’ money, beat the hell out of selling fraudulent stock for some carpet maker in South Philly. And the uppermost thought in my mind was that I needed money, fast, and if I didn’t take Gary’s offer, then my only alternative was to report back to my sponsors, and I couldn’t face that.

I shook hands with my new boss, took a swift tour of the office, produced my precious Series 7 diploma and my award from American Frozen Foods, and promised to report for duty the next morning at six. That night I made my transformation from earnest parka-wearing student to slick young hustler operating under the banner of Merrill Lynch. I went into Wanamaker’s, the famous Philadelphia retail emporium, and bought myself a new suit and a pair of black shoes.

I felt good, though a bit uneasy, as I walked into the office early the next morning. It was, after all, the only time in living memory I’d entered a brokerage house without telling a grandiose white lie to one of the front office staff or hiding behind a couple of empty white pizza boxes—sausage and extra cheese for Mr. Begnaud.

In a briefcase I’d borrowed from Rick Schnall, one of my Wharton roommates, I had my new set of weapons, my salesman’s attack blueprint: local maps, business directories, and lists of country clubs, golf clubs, and big-city men’s clubs, anywhere I was likely to find people who fit Merrill Lynch’s favorite marketing phrase, “persons of high net worth.”

They were my targets, and by nine o’clock I was putting together a power list and trying to convert key phrases from the meat-selling business to fit the much more complex task of selling stocks and bonds. I was using every ounce of creativity I possessed.

For instance, one of the prime ways a reluctant potential client gets out of making a commitment to invest is to say “I’m sorry Mr. McDonald, I need to run this by my wife.” Every salesman worth anything whatsoever is ready for that one. But because I didn’t want to use any phrase the prospective client might have heard before, I racked my brains for a line I could be ready with. Finally I got it, and I used it for months. When the potential client said he needed to run it by his wife, I answered: “Sir, these equities do not come in different colors. Your wife probably hasn’t picked a winner since she picked you.” A couple of people were mildly shocked at this flagrant chauvinism, but if anyone laughed, I knew I was turning for home, whippin’ and drivin’ down the stretch to the finish line.

The problem was, my new suit and shoes had just about wiped out my cash, and after six weeks of sixteen- to eighteen-hour days I was not making it financially. I couldn’t give up, but I couldn’t go on, because my success rate was hovering somewhere near the red zone. I’d hardly clinched a deal in that time, and I was broke. Which caused me to make a thoroughly desperate move.

I located a loan shark to borrow $500. The terms were harsh: pay $600 back in two weeks. I presumed that failure would result in my lifeless body being dredged up from the Schuylkill River, probably wearing cement boots instead of my new black shoes. But I had no alternative. I was now on my own and didn’t want to borrow from family and friends.

Somehow I had to sell these equities, and all I had was my brain and a killer work ethic. I cold-called until the phone was red hot, hundreds of calls every day, looking for the break, for the client with money to invest. I worked my way door-to-door all the way from the office near Eighth Street right down to Society Hill on the western bank of the Delaware River.

In the evenings I hit the suburbs, particularly the great mansions of Philadelphia high society along the Main Line. The name refers to the old Main Line of the Pennsylvania Railroad, which transported the rich home from Philadelphia to their castles, great and small. It’s a megabucks sprawl where even small is great, palatial residences set back in wondrous manicured gardens all the way from Bala Cynwyd through Merion, Ardmore, Bryn Mawr, Devon, Wayne, and Paoli. Today the Main Line is not so much a rail line as a state of mind, and its residents are apt to regard all other suburbs as if they housed the boat people of Vietnam. Philadelphia believes it has its own aristocracy. They even speak differently, with a kind of rigid set to the jaw, especially when uttering the words Main Line—it’s a kind of “Maayne Loyyyne” effect. I’m a pretty reasonable mimic, but I never quite mastered that pronunciation. I’m told you have to be born to it.

Anyway, the old Maayne Loyyyne became my new territory. Not as a resident, you understand, since I could barely afford the train fare, and the Volkswagen looked as if it belonged to one of their assistant pastry chefs. But it was a battleground where I would raise (a) the money to avoid being assassinated by the loan sharks and (b) the millions of dollars in assets that would put me on the fast track to Merrill Lynch’s head office at 250 Vesey Street, a thirty-four-story building at the north edge of the World Trade Center site in lower Manhattan.

I realized that in most cases I might not get past the front gates, and certainly not beyond the housekeeper’s telephone, but these guys had to put their cash somewhere, and I had a real good package to sell them. In my own mind wild horses would not stop me; I would use every trick and technique in the book, anything to get in front of the man with the dough.

The trouble was, I needed a human slingshot to get me in—a way to get noticed, some kind of an inside track—and I tackled the problem the way Eisenhower planned the Normandy landings. I attacked the alumni associations of every Ivy League university in the United States. Then I hit Duke, North Carolina, and UVA before taking a shot at Stanford, UCLA, and USC. All I wanted was a copy of the alumni yearbooks for, say, the classes of 1966 or 1967, because in there were hundreds of graduates. Those books gave birthdates and places, the names of their wives, and where they started their business careers. You’d be amazed at how many of the ones who’d started out in Philadelphia were still working in that city, and how many of them turned out to be in residence on the Main Line. I guess when a city has been a critical part of American industry and white-collar business since the Revolution it will always have a serious collection of blue-blooded tycoons in residence. And Philadelphia was for years, after New York, the second-largest trading port in the country.

The only trouble, as I saw it, was that much of the money was old. And people with old money are innately suspicious that someone is going to take it away. They’ve spent generations protecting themselves and their fortunes, and mostly they consider any Johnny-come-lately of the modern financial world to be radioactive. And boy was I ever a Johnny-come-lately.

With that in mind I plotted and planned with immense precision. In addition to the alumni yearbook assault, I invented the country club offensive, compiling a list of every expensive golf and country club in the area, especially those along the Main Line—and in particular the revered Merion Golf Club in Ardmore, with its 6,846-yard championship East Course and lockjawed Maayne Loyyyne membership. My objective was simple: to acquire the private members’ handbook with its complete list of members’ addresses and phone numbers.

Now, smart golf clubs were places in which I was entirely at home, despite being secretly in hock to the local brigade of loan sharks. Places like Merion can be extremely intimidating, with their rigid traditions, exemplary manners, and the inbred etiquette of the game, which seems to pervade every room, every lounge, every bar, and even the locker room. But they were not intimidating to me. My dad had taken me to private golf clubs, and while at the time I was not practicing sufficiently to play to scratch, I was still a single-figure handicap player, and that gave me a natural clubhouse confidence.

I knew all about this place before I arrived. I knew that Bobby Jones had completed the legend of his 1930 Grand Slam here when he won the U.S. Amateur before an eighteen-thousand-strong crowd. I knew that Ben Hogan had won the U.S. Open here. I knew all about the fabled “white faces,” as Merion’s bunkers are known. My dad had played and won here.

I knew the dress code, and I knew the language of the golfers. I had studied the layout and noted the difficult holes. I was expert with the throwaway lines of the membership—four-putted the eighth, again; hooked into the woods at the twelfth; couldn’t get out of the bunker on the fifteenth to save my life. By any standards I was ready.

I walked into the clubhouse locker room dressed like Jack Nicklaus and holding a putter. It was a Sunday morning, and the membership was out on the course. I did not even see an attendant, and there, lying on a bench, was a membership book.

I slipped it into my pocket and walked calmly out of the building and back across the parking lot. It was probably worth less than a dollar, that little white book with its club emblem, featuring the little wicker basket that sits, uniquely, on the top of every Merion flagstick. But to me it was priceless, and I headed back downtown with the joy of the conqueror in my heart.

In the ensuing few weeks I learned one thing about club membership books: they can always be found lying around, but nine times out of ten you find them in the locker room or by the bar. The interesting thing is, no one takes a bit of notice if you pick one up. Somehow if you’re in, you’re in, a member of the brotherhood.

Every day I cold-called club members and a selection of the names I had picked up in the area from the college alumni books. And with my excellent Merrill Lynch financial products I made some progress. It was never easy, but every now and then I ran down a prospect and piqued his interest. Sometimes I sent official Merrill Lynch flowers or chocolates to their wives before I called. And somehow I persuaded my Philadelphia clients to invest $1.5 million. My own commission was of course only about $15,000, but at that time it seemed like one hell of a lot of money.

And then, after several weeks of work, I got my first big break, and it came from the most unlikely quarter: the police. I had been on a charm offensive with a guy who was a finance official in the Philadelphia fraternal order of police, and who, to my amazement, invested a huge amount of his colleagues’ funds in the market. I made him offer after offer. I attended all kinds of police events. They even made me dress up like a cop for a Halloween party. Anyhow, I explained to him that the interest rate he was getting was not good enough, and I could do better.

In the end I was victorious. My new pal the cop invested $15 million with me. I was one of the top rookies for acquiring investment assets for Merrill Lynch in Philadelphia. The country clubs came through in the end, the alumni books proved to be a triumph of client location, and even the door-to-door offensive paid off. As it had been with the frozen meat, so it was with the stocks and bonds. I ended up one of the top first-year salesmen. Gary Begnaud was thrilled with my performance.

By now it was 1992. I was twenty-six years old, and I was not happy. I had money. I was comfortably placed, with a decent car and a lot of new friends. But I never liked Philadelphia, and every month that went by I was digging ever-deeper roots for myself. The Main Line was okay, and I had a few very good pals out there. But I missed New England, I missed Boston, I missed the Cape, and nothing in this historic but somewhat grim metropolis could ever feed my soul the way the beaches and the oceanside dunes of Cape Cod always did.

It was a real test for me to leave the world I had created for myself. But the feeling inside me was like that of a homing pigeon. And one day I walked into Gary’s office and broke the news. I was going home.

He nearly had a fit at the potential loss of one of his top salesmen, the kid he had plucked out of nowhere who might or might not have had an appointment. But he could see I was determined to go, and I presented him with all my accounts, requesting only that he grant me an official transfer with a senior sales position to Merrill Lynch’s office in Hyannis, which in financial terms is a kind of suburb of Boston. I could see he hated to do it. But for the second time in a couple of years Gary came through for me, in somewhat unusual circumstances.

On a bright autumn morning I gassed up my new car and headed north, out of Pennsylvania, up to New York, and on toward the Cape. Toward an old familiar world. Toward home. But with me I took a lesson issued to me over and over by my buddy Steve Seefeld, who for months had sworn to God that the only way forward in the world of finance was bonds, convertible bonds, which he personally had been trading since he was, ridiculously, about nineteen years old.

*FINRA, formerly the National Association of Securities Dealers, was established in 2007.


[image: ]
Scaring Morgan Stanley to Death

He yelled down the line, threatening bloody murder. “I’ll sue your ass … I’ll have you in court by Monday morning … I’ll have five partners on your case from the biggest law firm in New York. I’ll bankrupt you with legal fees.”

I LEARNED ABOUT the rich in Philadelphia, especially that they can stand just about anything except some smart-ass trying to run away with their bread. The only issue for them is retaining their assets. They can live with low returns and low rates of interest, but their unbreakable rule is, Don’t lose my capital.

As my months pitching and selling to the high rollers of Philadelphia had turned into a year and then another, I began to stick more and more to the creed of my roommate Steve Seefeld: Sell ’em bonds, Larry, it’s the only thing they’re comfortable with. It’s the least risky way you can ever invest.

Steve, of course, spoke from a position of strength. The early death of his landowner father had seen him inherit a great fortune. He actually drove around in a Mercedes when he was still in high school. Happily, he had no inclinations to run off with my father’s ex-wife, so his windshield and headlights remained intact.

The night before I left Philly, Steve and I had dinner. Our final conversation remained with me for the rest of my career. “Never lose sight of the critical difference,” he reminded me, “between the holder of a corporate bond and the holder of corporate stock. The bondholder has massive protection. Even though it looks like he’s bought something, he’s really only lent money to the corporation. The owner of equity is powerless because he’s just placed a bet on the company’s cash flow. If the stock crashes, he’s dead in the water, and there’s nothing he can do about it.”

Thus I drove back to Cape Cod a newly converted disciple of the new fashion for convertible bonds, an often misunderstood concept even today. There are always people, some of them quite shrewd equity investors, who remain confused about the literal meaning of the word bond. I can help right there. It means debt, pure and simple. It’s an IOU between a borrower and a lender.

Corporate bonds, Treasury bonds, and municipal bonds all represent nothing more than a loan—or, if you wish, debt—for which the lender will be paid an interest rate, known as coupon yield. And this is why U.S. Treasuries are considered the least risky bond of all: you are lending money to Uncle Sam, and he’s got the best credit score in the universe. That’s why, generally speaking, Uncle Sam is very big out on the Main Line.

People often use the phrase stocks and bonds, but in truth there is a vast gap between them. Anyone can buy stock or equities in large or small amounts. Bonds are for the rich. When issued they come in at $1,000 each, but you typically have to buy a thousand of them, which means you need a million bucks minimum to get in the game. (This is a typical minimum investment for any institutional investor. Retail investors, in some cases, can invest smaller initial amounts.)

But all you have done is loan either the government or a major corporation $1 million. When you buy your bond, you are given two key facts—the amount of interest you will receive annually and the date your bond will mature. On that maturity date you will be given your money back. All of it, no bullshit. And throughout the time you hold that bond, receiving, say, a 5 percent rate of interest on that $1 million investment ($50,000 a year, free of state tax if it’s a government bond), you have powers denied to the regular stockholder. In the great scheme of things, bondholders matter, with many carefully written covenants to protect them. Stockholders are cannon fodder. If the shares go up, they win. If the shares go down, no one cares.

But bonds … ah, those golden-edged bonds. They are just the ticket, because the large corporation that took your money is duty bound to give it back. Bondholders can have people hired and fired. If a few of them get together, they can throw out the board, unload the top executives. They can demand that the assets of the corporation be sold, and they rate real high on the pecking order for repayment if a corporation goes bankrupt.

And it’s important to understand that a large corporation going bankrupt is not the same as a person throwing up his hands in the face of a couple of low-flying creditors and declaring personal bankruptcy. Because when a company goes very badly bust, especially a small company, it’s usually because they have run out of cash and credit. They can’t pay the staff or their benefits or their pensions. So they have to fire them, shut the gates, and call it a day—for the moment. But behind the shut gates are assets. Not liquid assets, perhaps, but temporarily frozen assets. Freed of their monthly obligation to hundreds, maybe thousands of workers, the corporation is rarely flat broke. Rather, most corporate bankruptcies happen because a company needs a breather and to reorganize, because their debt load is too big relative to their cash flow.

Bankruptcy by no means signals all is lost for the bondholders. Stepping over the bodies of the shareholders, who have lost everything, they have the key to the company’s gates—behind which often stand acres and acres of concrete, massive plant buildings, downtown office blocks worth millions of dollars, and state-of-the-art machinery. There may be materials, electronics, steel, tires, aluminum. And product may still be sold, maybe at knockdown prices, but there is a cash flow.

First on the list of creditors is always the bank, and they can wipe out a lot of money. But next in line come the bondholders (senior secured, then unsecured), who now get their share of the spoils. Even if the corporation is in Chapter 11 bankruptcy,* those $1,000 bonds are still owed and must be repaid from the remaining assets. The bondholder even has a seat at the bankruptcy table along with the bankers and corporate execs.

Still, on the upside, if a corporation is either plainly going south or suspiciously heading that way, a bondholder is free to sell on the open market. He may only receive 80 cents on the dollar, but if he’s been collecting the annual interest for three or four years, he’s not going to come to much harm. Unlike the shareholder.

The person who buys the bonds on the market through a broker for, say, $800,000 is still owed the full $1 million by the corporation at the end of the ten-year tenure, the maturity date. And if it’s one of those traditional big, nearly impregnable U.S. corporations, it’s probably a decent buy. The iron-clad rule is that the bonds were issued at $1,000 and, barring bankruptcy, will always mature at $1,000. However, they do not always trade at $1,000. They can trade at a lot less than $1,000.

The buyer in the open market looks at one critical figure, known as the yield to maturity. This is the figure that matters. And it’s arrived at by a simple process. The bonds, with perhaps five years to run, issued by, say, the biggest chemical corporation in the world, are going to cost probably $800,000. They’re paying a 6 percent coupon annually on that initial $1 million investment for another five years, which is a total of $300,000. When the bonds mature, the buyer gets the original $1 million back, not just the $800,000 he paid. Which represents a straight $200,000 profit. That’s a $500,000 total return on the original investment of $800,000—a yield to maturity of 11.50 percent. Beautiful.

In the end, the bond was only a method by which the corporation was raising money, and it’s reflected on their balance sheet as debt. Because that’s what a bond is. The corporation was not trying to raise money to stay alive; it was raising money for a substantial expansion, maybe a new plant, a new retail branch, a new skyscraper, an acquisition, or, in the case of an airline, a dozen Boeings. Municipal bonds usually are for new roads, new bridges, or construction. U.S. Treasuries are for pretty well anything the federal government damn pleases, but they’ve never defaulted on one nickel.

Let me run through the bond creation process. A national chain of supermarkets wants to build a new superstore in a new development outside a prosperous U.S. city. It’s going to cost $100 million. The CFO goes to a major Wall Street investment bank and produces the business plan, which demonstrates its potential profitability, the location, the lack of competition, and the prospect of building around it an entire community of retail outlets. If the investment bank likes the sound of it, they will lend the supermarket the money to proceed with the construction, at an agreed-upon coupon yield for a specified time. Typical would be 6 percent annually for ten years, like a gigantic mortgage.

The investment bank will then securitize the loan, which is a snazzy way of turning a debt into a bond, dividing the $100 million into one hundred thousand $1,000 bonds, and then putting together a prospectus to sell them. This was a primitive form of securitization, one that would become much more dangerous down the road. For now, they put them out to their bond salesmen, located on their own trading floor, and offer them immediately to a few well-heeled clients, the big hedge funds, mutual funds, and investing institutions.

You can imagine the sales pitch: Just released this morning, a great new bond from Superfoods. Fantastic new retail facility right on the town line of Greenwich, Connecticut. According to their research, this can’t miss. They’ve been trying for planning review board permission for three years, and so have three other smaller outfits, but Superfoods landed the project. You want this bond, trust me. They got a great balance sheet, double-A rated. You can have a thousand for a mill. Or ten thousand for ten mill, but this offer will last about twenty minutes.

The successful selling of the bonds releases the investment bank from holding the $100 million debt on their books. It’s the corporation that continues to hold the obligation—but now it’s to the bondholders, and not due for ten years. With a stroke of the financier’s magic wand, a $100 million debt has been turned into an investment with an annual yield of 6 percent.

For years, this was the core business for investment banks—Lehman, Morgan Stanley, Goldman Sachs, and Bear Stearns. It was mostly the institutional side of the business—the big leagues, the place I’d been trying to reach ever since I left college.

When I arrived back on the Cape, my plan was to ensure that the packages I would offer clients would be heavy with bonds, because they represent the supreme method to ensure the preservation of capital. It’s been ever thus in the world of investment for both people and institutions with large amounts of principal. Investing now or anytime requires a continual search for ways to control risk and protect assets while still achieving above-average returns.

Bonds have been around for a very long time. In fact, America was built on bonds. Back in the second half of the nineteenth century, bonds were issued by the new industrial giants to finance the building of the railroads, which would open up the vast lands and wealth of the United States, still reeling from the devastation of the Civil War. They were issued on the same lines I have outlined. In the 1880s there was one far-reaching development: the emergence of the convertible bond, which had the added feature of allowing the holder to convert it into a fixed number of shares of common stock—equity shares—in an era when the market for railroads and anything connected with them were making fortunes.

The new iron horses, the enormous steam locomotives, took investors out of their covered wagons and onto the gravy train. Each bond was issued with a conversion value that permitted investors, if they sold before the maturity date, to partake of the profits engendered by a rising stock price. Equally, if the stock plummeted down, holders of convertible bonds were given a parachute that usually worked—that is, it would not let their price go below 70 or 80 cents on the dollar.

Also, same as now, the bond was still a bond, and whatever else, the corporation still owed that $1,000 when the maturity date finally arrived. You may ask why these corporations put the sweetener in there, and the answer is very simple: they needed to persuade people to invest, and the revolutionary idea of investing in a railroad, which somehow started near home and then kind of vanished over the hills and far away, ending up God knows where, unnerved some investors. The sweetener of the convertible bond often made the difference.

It also found great favor with the railroad companies whose bonds were not required to pay an 8 percent coupon.* They had to pay only 5 percent, because of the staggering rise in their stock price in that era. The beauty of issuing convertible bonds by a corporation is the ability to borrow money and pay a lower coupon. Investors are willing to accept the lower coupon because of the sweetness of the equity upside potential. That incentive still exists today with the modern convertible bond. And unless you make some lunatic selection of a doomed corporation, it’s going to taste as sweet as ever. Especially out there on the Main Line, where the parties that often started way back in the nineteenth century continue.

I was only half aware, because the signs were not yet cast in stone, but when I arrived back on the Cape to begin work in the Merrill Lynch office in Hyannis, the world was on the verge of a revolution. Technology companies were about to become the growth sector of the stock market. Motorola, Ericsson, Oracle, Texas Instruments, 3Com, Cisco Systems, and EMC Corporation led the charge to a high-tech-dominated business environment. They were the railroads of the 1990s. And many of them were about to make serious use of convertible bonds, the rock-steady way to raise money for expansion, with the coupon and equity kicker to encourage investors.

A corporation such as Motorola could borrow at 8 percent from Lehman because they could afford it. They wanted the major injection of capital, and they were happy to reward bondholders with a high annual coupon payment, because they were positive the new tech business would be highly profitable in the coming years. The task of the investment bank was to examine, investigate, and arrive at a yes or no that would not mislead their clients. I’d seen those beady-eyed analyst guys operate at close quarters, and I had enormous faith in them.

With my courage high, I straightened up to sell these convertible bonds that had been given the green light from Merrill Lynch. I’d already noticed this type of bond was beginning to outperform on a risk-adjusted basis every other kind of asset class, even residential property and gold. I also sensed the coming high-tech revolution, and I had visions of being carried directly into Wall Street on a wave of flying electronic sparks, flickering screens, and cyberspace mysticism. I was not that far wrong, either.

But first I needed to establish a business within the confines of Merrill Lynch in Hyannis. The work was not that difficult, and I cruised through the first few months, building a client list, selling the bonds, selling what equities I considered appropriate, and rekindling old friendships.

I realized, though, that there was a big difference between working in Philly and working on Cape Cod. Although Philadelphia wasn’t New York, it possessed that big-city edge of toughness, and it demanded competitiveness and hard-edged selling techniques. Cape Cod had little of that, and almost surreptitiously the danger of losing my own edge began to creep up on me.

The fact was I could now conduct a retail stock and bond operation with consummate ease. I always started early in the morning, but not like Philly, where I used to report to the office in the middle of the goddamned night, consumed by a desperation to win that I believe is nurtured only in a big city.

Cape Cod was not about strange desperations. It was about cooling it, enjoying the slow relaxed pace of the place, light traffic, no charging around looking for cabs, people being at their desks having coffee, and business lunches. Everything was more, well … civilized.

There was the sheer vista of the land and seascapes. The long lonely ocean beaches up around the village of Dennis, the majesty of the surf at Nauset on the Atlantic side, the great sweep of the Monomoy headland jutting out toward Nantucket. There were Wellfleet and Truro up there on the bayside, then elegant and prosperous Chatham with its historic fishing fleet, snooty Osterville, rarefied Oyster Harbors, and the spectacular coastline around the working seaports of Falmouth and Woods Hole.

My territory stretched right up to the great sandy eastern hook of the Cape at Provincetown and then more than a hundred miles back to the two gateway bridges that lead to mainland Massachusetts and the townships near the canal.

Wherever you look there are tempting distractions, including many golf courses, and especially Woods Hole. And for a twenty-six-year-old single guy with a bit of money, there were other distractions, such as girls, bars, restaurants, boats, and parties. The lifestyle was intoxicating. The Cape was luring me in, and so was a girlfriend I had at the time. For more than three years Cape Cod had been a lot of laughs, and I was going comfortably soft, losing my edge, finding no urgency to fight.

I changed my job, switching to the excellent competitive retail brokerage house of Smith Barney, and it didn’t change a thing. I was still cruising, making fewer phone calls to my old buddies in the industry, coming up with fewer new plans, kind of allowing the world to slip past. Jesus, looking back, it was great. It was also probably the most dangerous time of my entire career.

There’s a word for Cape Codders who rarely cross the bridge to go, as they phrase it, “off-Cape.” The place is like a drug. There are people who have never been off-Cape, never felt the need. These are the clamheads. But I could not become a clamhead. I needed to rev up my ambitions and start driving again toward Wall Street. I pondered my next move, because I now knew I had to get out, and soon. Otherwise I would have been there forever.

Around that time I also sensed there were big moves afoot in the market. For example, e-trades were beginning to catch on, and this process was lowering margins. For a few days I worried. And then I ran into an acquaintance in a bar. He worked for IBM and was about to start up one of the Cape’s first Internet service providers (ISPs), a revolutionary gateway to the Internet. It would allow both businesses and private citizens to plug into the World Wide Web, the new information highway, the dot-coms. I only half understood what he was talking about, because the Internet did not figure prominently in my job. But the guy in the bar told me that the whole business world was going to end up operating online, that the whole of the New York Stock Exchange would end up on that screen. In the next two or three years, people would buy and sell stocks and bonds online; brokerage houses would be closing down by the thousand. This was the start of the high-tech revolution.

“Don’t wait,” he added darkly. “Get online with the rest of the world’s business leaders. Because anyone who doesn’t is dead.” In his view, every scrap of information I would ever need in my entire career was going to find its way onto the screens. “Miss this opportunity to join the real world,” he said, “and you’ll be like a fucking dinosaur in a space station.”

Holy shit, I said to myself, the brokerage business is going to be destroyed. The guy had scared the living daylights out of me. And the vision of the Internet as this encroaching monster from cyberspace stood stark before my eyes, snaking out its electronic tentacles into my cozy world, tempting my clients away, showing them how to buy and sell, helping them create their portfolios without me. Three years from now I’d be standing in a financial wasteland. Wall Street would look like Dresden in 1945, and my bank account would look like the Empty Quarter.

I walked out of that bar with my mind reeling. I was going through a very obvious epiphany. I had located a way into Wall Street: the creation of a corporation every financial business in the world needed. For the first time the future was not merely the holy grail shimmering somewhere out there in the mists of broken dreams. My future was a laser beam leading to a place that I could identify, a shining city not on a hill but in lower Manhattan. I had tried so darned hard for so long, but for the first time I could see my way forward with a clarity that would never again desert me.

This called for decisive action. So I called my trusted old buddy, Steve Seefeld, and he listened in silence while I explained how the IBM exec was switching on the whole of Cape Cod to the Internet, and that the world as we knew it was about to end. We talked for two hours about the unlimited potential of the Internet.

“Tell you what,” said Steve eventually, ever the pragmatist, ever the poet. “The fucker’s right.” He confirmed that the high-tech revolution was upon us and that he was working on a way forward. Steve’s game was cyberspace and the Internet. Like him, I was very interested in convertible bonds. And over the next three hours on the line between Greenwich, Connecticut, and the Cape, we hatched a plot for a new and revolutionary concept: a Web site that would educate institutional investors about the bond market and then provide an opportunity to trade online.

When we had finished the call, neither of us was clear how to proceed, but I think we both knew that we would proceed somehow. The following morning I called Steve in Greenwich again and told him that in my opinion we should kick our plan into gear right away. He was very positive about a new online corporation, for us to be partners. And so I packed up my stuff once again, gave up my job and my condo, said a few good-byes, loaded up the car, and drove away. So far as I was concerned, I was headed not off-Cape but off-planet. I was driving into unknown territory and I had no idea what awaited me, except that Steve and I believed we were onto something big, and we had the bit between our teeth. I was thirty years old.

When I arrived at his house, he was full of optimism. We outlined the project and then set about opening our new office, a world headquarters, from which we expected to hit ’em low, hit ’em hard, and hit ’em fast. No more bullshit. The new corporation was to be named We needed to get up to speed both on the Internet and on the computers that channeled the World Wide Web into the places it was required. My new partner understood more about computer programming than anyone else in the country except Bill Gates.

We found a decent-sized office above a strip mall on Railroad Avenue in Greenwich. Chinese food to the left, printers to the right, pharmaceuticals dead ahead, dry cleaner down below—who could ask for more? We had our computers installed, hired a couple of programmers, and set about starting up a corporation that in time would knock people’s socks off.

The idea was brilliant but simple, like most trailblazing plans. Steve’s devotion to bonds was unflagging, but he had noticed over the years that when you wanted to know something about a new bond issue, it was a royal pain in the ass to find out. You had to call the corporation, explain who you were and what you wanted, and then request a prospectus. Bear in mind that some investors, especially big institutions, might want to know about perhaps twenty bonds. They wanted to study and understand them, and it might take weeks to gather the relevant material, which was all contained in these big, glossy, often overwritten prospectuses that often were full of bullshit.

In simple terms, we planned to collect these prospectuses from companies all over the country. We wanted to use them to build a huge back-end database that would contain details about every bond, either for sale or about to be issued, in the entire nation: coast to coast, north to south.

It was a mammoth task. Sometimes our goal seemed too far away. And sometimes we thought we were going too slowly. But we kept going, phoning, writing, e-mailing, visiting. Steadily our priceless database came into being. We talked to every mutual fund, hedge fund, and pension fund in the world, any fund that had any kind of record of buying or selling convertible bonds. We discovered their needs, and we tailored our information highway to all of their requirements.

“One day,” said Steve, “the whole world is going to need this. In time, anyone buying a convertible bond would not dream of doing so without going online and checking out the bond issuer with We’re on the verge of something enormous. This, Larry, old buddy, can’t miss.”

The trouble was, it was so difficult to get any kind of income. All we did was spend. We had nothing to offer until the database was complete. We certainly had nothing to offer the big investment houses yet, and we were both terrified some national outfit would copy our idea and run with it a whole lot faster than we could.

We spent between $300,000 and $400,000 financing the operation. We worked night and day, sometimes even sleeping under our desks—–anything to save time. We ripped open the prospectuses as they arrived in the mail, and then we set about transferring each and every one of them onto the computer, deriving a standard formula for them that in the not-too-distant future would allow investors anywhere in the world to go to and find out anything and everything significant to the bond in which they had an investment interest. Just at the touch of a few buttons.

As you can imagine, the sight of our office was amazing. We were trying to sort out more data than the U.S. Army’s recruiting department did. We had floor-to-ceiling, wall-to-wall, out-in-the-hallway prospectuses. Once we had this mountain of information under control, we planned to slip into Steve’s pet project. Each morning we wanted to highlight one single knock-’em-dead bond, deemed our Convert of the Day—chosen with the full and fearless approval of this new two-man operation, analyzed and researched right up here over the dry cleaner, next to the Chinese takeout. Stand back, America.

Of course, our own presentation was designed to make us look as substantial as IBM. It was the tried and tested American way, and we were following in the footsteps of the great U.S. entrepreneurs. There’s never been anything like the Internet to provide instant status to minor-league outfits like ours. To tell the truth, our Web site made us look like the Pentagon. Our creed was printed boldly at the head of the home page: “Founded in 1997 [which it still was], the site offers terms, analysis, news and pricing relating to the 890 convertible securities that currently can be found in the U.S. market.” The number 890 may not sound like much, but you should see what 890 looks like in stacks all over the floor, forming a kind of office minefield.

Our Convert of the Day was typically a bond issued by a corporation like Hewlett-Packard. That bond might offer a strike price of $63.15, which means, broadly, that a bondholder who had paid par for his convertible—that’s $1,000—could, if he wished, convert that into regular Hewlett-Packard stock at any time at the fixed price of $63.15 per share. That meant he could always exchange the bond for 15.83 HP shares. The moment that share price began to rise, the price of the bond rose with it. So if the stock went from $55 to $90, you multiply that figure by 15.83, and your bond is worth at least $1,424—which is sweet for the investor, especially since the coupon yielded 5 percent. In the raging dot-com market of the next twenty-four months, if the HP stock eventually surged to $100 a share, the investor’s bond went up again and was now worth at least $1,583. That’s more than a 25 percent annual return. It was especially good if you happened to have a thousand of them, because, including your 5 percent coupon, that added up to a $683,000 profit. Because Hewlett-Packard had a credit score nearly as good as the U.S. government’s, that bond was never going to be worth much less than $880—not with HP guaranteeing your 5 percent and the return of the original $1,000 in twenty-four months. The bondholder thus enjoyed the upside potential of the stock and downside protection from the mighty Hewlett-Packard. That’s why we made it Convert of the Day.

Getting all this data loaded and providing breaking news updates was hellishly complex and absolutely impossible to put into action for anyone except a computer genius. I could help with the design, but the actual mechanics of installing this huge site on the World Wide Web was a project for Steve and his programmers. It was 1997, and I felt like some kind of techno-peasant. In the late nineties there were only a limited number of people in the entire country who could undertake such a mind-blowing operation, and Steve Seefeld was one of them because he could speak the language of cyberspace. I was learning as we moved along. But Steve was fluent, probably had been since birth.

While my new business partner toiled away in the literal engine-room of, my group continued to hammer the phones, order the prospectuses, and gut them for the key points, the parts that were essential for the bond buyer. My work was then moved over to Steve for uploading. It was without question the busiest time of both our lives. We had no time for real meals. We kept going mostly on chop suey chicken chow mein, and fried rice from the restaurant downstairs. We were always driven by the fear of a new, bigger, and richer player entering the game and stealing our idea, because beyond the walls of our frenzied office the whole world was on the move in a kind of panzer-division march to the Internet. There were guys leaving Procter and Gamble, IBM, Johnson and Johnson, Kellogg’s, and other massive international corporations just to join Internet companies. Outfits such as Ask Jeeves, America Online (AOL), dating services, and God knows what else were on the rise. Yahoo went public.

Like them, Steve and I could see the future. In a very short span of time we would inaugurate a convertible bond Web site that had to prove itself priceless, and the only thing we needed was data. We already understood that much of this information was on the very expensive Bloomberg system, and we needed to get hold of more of it.

When we launched, we immediately charged institutional investors $1,000 a month to access our Web site at will. We had other sliding-scale charges for investors of all sizes, depending on how much data they wanted. And right from the outset we attracted traffic, paying customers. Our debt was growing to maybe $100,000, times were quite tough, and we were putting in eighteen-hour days. But our vision of the future remained undimmed: the indispensable convertible bond research Web site.

Once we were up and running in late 1997, we had the system operating virtually on automatic. My new project involved publicizing Once more I hit the phones, bombarding the media with calls, this time targeting the financial journalists who knew a bit, but nothing like as much as Steve and I did.

I would get through to the reporter, oftentimes a woman, and my pitch was dead-on, to say the least. Remember, I knew a thing or two about pitching, principally to tell ’em what they most wanted to hear. Oh, hi, Deborah, my name is Larry McDonald and I’m a co-founder of I have some information that might interest you. Key words: dot-com and information, both irresistible to a financial journalist in this climate.

I then proceeded to tell the journalist about the new project, but never too long, and never too complicated; I just kept feeding them the words they salivated over—revolutionary, World Wide Web, the next stock craze, state-of-the-art system, groundbreaking method.

Deborah, I am one of the frontline operators in this brand-new game. I can help you make sense of this. Take this new bond. It’s got a 4 percent coupon with one hell of a valuation. I will help you with every sliver of intelligence on this bond. Show you the ropes when you access Because there’s nothing more important you’re going to tackle this week, and I’ve read you, there’s no one better than you. Trust me …

Jesus, McDonald, you silver-tongued charmer, you.

Steve and I left no publication untouched. We called reporters at the Wall Street Journal, Barron’s, Investor’s Business Daily. We hit newspaper financial editors in New York City, on Long Island, and in Connecticut. We hit magazines, columnists, broadcasters. And for a very short while not much happened. Then it did.

Greg Zuckerman of the Journal suddenly called me and wanted to know all about this new bond due to be released in a matter of hours. Next morning I opened up the Journal, turned to C1, the front page of the hugely read Money and Investing section, and saw a major article: “Amazon, Bookstore of the World.” It centered around their new convertible bond, one of the biggest ever issued, involving institutions only and either marketed to or sold to firms such as Fidelity Putnam and Vanguard.

Shivers ran up my spine. There we were,, mentioned not once but twice, and given colossal credence: “According to …” We had arrived. Our Web site already had been clocking 1,000 hits a day, but now we exploded like Mount St. Helens—before close of business that day we had received 150,000 hits.

For months now the publications had been heralding some kind of a dot-com gold rush. Anyone who did not accept that such a surge was in progress was in danger of being mown down in the stampede. And here we were, one of the nation’s newest dot-com outfits being swamped with hits on our Web site. Looking back, we were right in the midst of the boom: we were becoming the guiding light for the biggest institutional investors in convertible securities on Wall Street.

It was a crazy time. The whole ethos of U.S. business was changing. In this new, vibrant atmosphere we were seeing big high-tech corporations where people no longer bothered with pin-striped suits and ties but rather turned up for work wearing sneakers, jeans, T-shirts, and denim jackets. The geeks were taking over the world as corporations settled into business models that were entirely based on buying and selling in cyberspace.

The sudden low price of reaching millions worldwide and the possibility of either selling to or hearing from those people promised to overturn established business dogma in advertising, mail-order sales, and customer relationships. The Web was, in the jargon, a killer app—a computer program so useful that people were rushing out to buy computers just to get hold of it.

The big scorers in this new atmosphere were Hewlett-Packard, Dell, IBM, and all the components companies that supplied them, such as Intel, Sun Microsystems, Sony, and Cisco Systems. Also making fortunes were Yahoo, AOL, Netscape, E*Trade, and Microsoft. So far as we were now concerned, at the top of the entire pile was, right over the dry cleaner, the new 150,000-hits-a-day gang-buster operation blazing a trail through the pages of the Wall Street Journal. That was a self-view, of course, probably not universal. Yet.

Thus our business began its early march toward becoming a cash cow, generating dollars every hour of the day and through the night. But it was still very tough going, because every day we received several new prospectuses, and they still had to be gutted and uploaded. And between us, Steve and I still had to select the Convert of the Day. Hell, we had thousands of unseen investors out there relying on us, our judgments, our research and analyses.

And still we were aware of the value of publicity. We needed to keep our name out there in the front lines of the bond investment world. The one exposure we lacked was the business channels on television, Bloomberg and CNBC. A slot there would surely send us straight through the roof. But how to pull that off?

My favorite CNBC program centered around a very beautiful reporter called Kate Bohner, who produced a daily ten-minute essay on some quite difficult financial subjects. Difficult for the average reporter, that is. But I had always thought Kate was different. She showed a very astute grasp of complicated matters. To me she always seemed more like an executive in a finance corporation, a big commercial bank, or an investment house. There was just something more thoughtful about her, a quality that went beyond merely telling a topical story.

There was no question of telephoning her, because there was no chance of getting through. There was probably a network screening operation designed to snag perverts, to protect women as good-looking as Kate, and I did not think it was in the interest of for me to find my way onto that particular list.

So I pondered the problem, and decided, when the time was right, to launch my message through the Internet. By now I was certain Kate Bohner would have her own e-mail address, which, of course, was a secret that I had no way of finding out. But I worked in a hotshot Internet company with access to a lot of know-how, and I resolved to try to crack the Kate Bohner code.

I started with the e-mail address and compiled a list of about thirty different permutations, waiting for the right moment to write a good friendly message. Days went by, and then one day I turned on the television, switched to Kate’s channel, and saw to my delight that she had a brand-new hairdo. Very slick, a bit shorter, and it made her look fitter than ever.

I pulled up those thirty different e-mail addresses on the computer, composed my short message—“Really nice new hairdo today”—and signed it “Larry McDonald, co-founder,” I then fired them all out, a scattershot approach, fully expecting all of them to bounce back with “address unknown.” And twenty-nine of them did. But fifteen minutes later, I got a reply from Kate: “Larry, so glad you noticed. Thank you.”

I now had her e-mail address, and all I needed was a reason to send her another message. And that was real easy. I just waited until she broadcasted another good essay on a subject I knew a lot about, and then fired off a signal: “Kate: I really liked your piece about bonds today. Very insightful. I might be able to give you a hand with that type of stuff. Maybe even give you a few creative ideas. Yours, Larry. P.S.: Don’t change your hairdo.”

I made no attempt to suggest a meeting or even a phone call, just kept it easy and complimentary toward her. By this time I had made some provisional inquiries about this goddess of the airwaves. And the answers, given her astute grasp of finance, were predictable. She’d done business and international studies at Wharton and graduated from Columbia University School of Journalism. Her dad was a professor of English literature, and she’d spent several years in Europe. Just about what you’d expect from someone that good at her job. Would I hear from her again? Would she make contact?

Back came another response: “I’d appreciate that, Larry. By the way, what do you do?”

I waited a day and then sent her an e-mail explaining about our new Web site, told her I was sure it was sufficiently revolutionary to make a very good piece, and noted that we were riding the dot-com wave in a very big way. The Wall Street Journal had already mentioned us. So had Barron’s.

Again sh