No Acronyms Allowed!

“We have to depart the LZ by 0500 so that the recon can be complete by 0600.”  That was about all I remembered from the briefing…or all that I could understand.

The briefing was given in the mess hall of a navy ship in the middle of the Mediterranean. I was part of a Marine unit that was deployed to the Middle East for six months. Given the instability in the world, the MEU Commander had to develop contingency plans for all types of situations.

These types of briefings are normal during a float. For example, if an embassy had to be evacuated, the Colonel of the deployment had to formulate a plan on how to accomplish the evacuation. Logistical complexities of such missions require that the Marine Officer would have to brief the Colonel, in a single meeting, on the strategy to employ. If any of the proposals seemed out of whack, or needed to be fixed, this was the platform where it was done.

Briefings usually lasted about an hour.  It was not uncommon to have thirty or so people presenting. Air officers, helicopter pilots, infantry officers, ordinance officers, radio specialist, etc. would all have their say. In order to make the briefings quick and keep them moving along, acronym’s were used to speed things up.  But given the number of groups inputting their perspectives and expertise, each with its own lexicon, it was like listening to a cacophony of terms that, for the uninitiated, was super confusing.

The U.S. Marines have been around for over 200 years. To their credit, they have been able to successfully orchestrate the system that brings all this diversity of information together. Luckily for me, I was able to figure out what was being said!

When I transitioned to finance and started working at an emerging markets desk, I had to once again learn a new language: this time it was “finance speak” and the acronyms used in that world.

The nature of the finance world is that it is secretive and cut throat. I did the best I could with the new language, but it was close to impossible to understand all of the jargon. In the Marine Corps, the officers would go out of their way to make people understand what they were saying (afterall, lives were on the line). But in finance, it was common for people to give vague and unhelpful answers.

Michael Burry, who made millions of dollars shorting the housing market, said one of the reasons he looked into the trades with greater scrutiny was the sheer number of acronyms and jargon used to describe the housing market. When he called bond salespersons to walk him through the details of the structures he was thinking of buying, he realized that for all of their pedigree they understood very little about what they were selling.

So, to educate himself on all the terminology, he ordered a variety of prospectuses and started combing through them to understand all of the terms. He created a dictionary of those terms and acronyms until he understood everything that was being marketed and sold to investors.  Armed with that knowledge and understanding he bet against Wall Street… knowing that the firms selling those instruments had no idea what they were doing.

Ray Dalio, the hedge fund manager of Bridgewater, does not allow any acronyms to be used in meetings or reports. Everything has to be explained down to the last detail, so that everyone within his firm understands what they are doing. He has stated that acronyms become like a code and secret language behind which people hide.

True knowledge comes from being able to explain things;  even the most complex things.

Part of the reason most of the major financial institutions went under during the last crisis was because information was hidden and guarded. Many of the employees at the banks had no idea the extent of the recklessness of their mortgage departments.  At the time, I worked at Merrill Lynch on a bond desk.  We were having a great year and had no idea the damage the mortgage department was causing. We were shocked by the amount of risk they had taken.  Be assured that had more people been informed of the risks the mortgage area was taking, the positions would have been wound down and the bank saved.

In reading memoirs written prior to the crash about working at a bank and trading for one,  what stands out for me is the lengths to which employees, as well as management, guarded their trading secrets. The mindset was, “If show people how I am making money, the firm will fire me and do it for themselves.” So the information was never shared.

Contrast this attitude with Google which gives away all of its information for free.

Part of the reason Bridgewater is so successful is because it shares its information. Bredgewater is relentless in getting at the truth…even down to the language it uses.  No abbreviations.  No acronyms. If you work for Bridgewater and want to share something, you must explain your thoughts fully…down to the last detail. Imagine if that same rigor and search for the truth had been the standard for the banking industry prior to 2008. How different our lives would be  today!

It really makes you wonder why its ever done otherwise.  Truth is inevitably revealed and when it is, it also prevails. Both companies and individuals willing to embrace that fact are the ones that will survive and prosper this time of cultural transition.

Steve

sleeclark@gmail.com

 

The Devil Is in the Details

“We need to pass the bill to see what’s in the bill.” Nancy Pelosi lobbying members of Congress why we needed to pass ObamaCare.

“You can read the Obama Trade bill after we pass it.” Paul Ryan commenting to the press on why they have not seen the details of the bill.

imagesCA27GPLZWe are all stressed. We all have too much to do. Life is so complicated that we don’t even have time to do the basics of our jobs….like Congressional Representatives actually reading the bills they plan to pass.

I get it. I used to sell new issues to my clients without reading the prospectus. (a prospectus is the document that governs the new issue).  In reality, nobody reads them and anybody who works on Wall Street will tell you that nobody reads them. I used to be  a salesperson at a bank and relied on the capital markets team to make sure that our governmental compliance was correct and accurate.

However, just as there is reason for Congress to read bills before they make them law, there is reason for traders and investors to read a prospectus before issuing or investing: there is money to be made by reading a prospectus.

Whenever a company issues a stock or a bond, a “prospectus” is attached that explains everything about the issue. These documents are thick with tiny print, boring, dull and obtuse. No one bothers to pore over the detail in them.  That is, until a deal goes bad. Then the prospectus become required reading for the professional speculator. When I worked on a trading desk, I would often have to price three deals per week. Doing a new deal is time consuming and entails the following actions:

  • Going on road shows;
  • Doing conference calls;
  • Talking to the different analysts;
  • Talking to portfolio managers;
  • Calling clients;
  • Looking at the financials;
  • Coordinating with the syndicate desk;
  • Pricing and trading the deal.

Its a lot of work and the whole structure of the deal is encapsulated in the prospectus.

The capital markets team, which brought the deals together, would be responsible for negotiating the terms and getting the legal documents together to build the prospectus. Given that the capital markets team was also overworked and pitching tons of deals, they would often use standard documentation forms from prior transactions to get the prospectus done. Think of a high-end “cut and paste” job.

If the deals were from the U.S that approach might present less of a problem. However, I worked in emerging markets where bonds were issued by different countries, in different languages, with different governing laws and an assortment of legal jurisdictions that governed the deal.

As long as the company paid its interest and principal no one would read the prospectus. But if the company fell in arrears, the first call we would get would be from the owners of the bonds requesting a copy of the prospectus. Suddenly, the fund managers, lawyers and traders found time to look at the intricate details of the issue they owned. They did so as a matter of protection.

Once a company was behind in its payments, vulture funds would circle around to see how they could pick at the carcass. Vulture funds were always looking at ways to buy assets on the cheap. For example, a typical prospectus might contain a clause stating that all the assets had to be sold to pay off all their bondholders. If the bonds were trading at 20 cents on the dollar, and the company could be liquidated for 30 cents on the dollar, a vulture fund might buy as many bonds as they could to make a quick profit.

To give you an idea as to what type of person and mindset you need to read prospectuses, take a look at a great book by Michael Lewis called “The Big Short.Lewis goes into great detail about how Michael Burry, an ex-neurologist with Aspergers Syndrome, would pour over the prospectus of arcane real estate structures. He locked himself in a room for hours on end for six months to understand what these issues were about. Only by doing so was he able to fully understand how these deals worked.

After reading the prospectus, he formed a fund and sold short many of the real estate instruments that were being issued by Wall Street banks. Many of his colleagues, peers and the bank themselves, thought he was crazy. The irony was that he had read the prospectus in its totality and knew more about the instruments than the banks that were issuing them!  The end result? Burry made millions of dollars.

He knew that the business of the banks is more transactional in nature and more orientated towards generating commissions. The salespeople were overwhelmed by the amount of deals they were doing and did not have the time to look at the minutia of the deals. Part of the reason that many salespeople did not understand the products is because the financial instruments were never fully explained to the professionals who sold them.

How does this happen?

Money is made in the financial markets by possessing knowledge that others don’t have. Even employees at the same firms will withhold information from each other. To the extent one trader can make more money than another trader, he will do so knowing that his take home pay will be greater. Because of this, employees at the same firm are not keen to share their trade secrets with their co-workers.

I have been in meetings where a firm would try to sell massive issues yet only give the barest minimum of information. Never were any of the intricacies of the deal  offered up. The presentation would be filled with acronyms and code language that made it virtually impossible for anyone to decipher.  If anyone asked a question, often times that person would be ridiculed for being stupid and not understanding what had just been explained and “clearly” understood by everybody else in the room.

Maybe that is why, in the end, all of the banks went under. They had no idea what they were selling. If the banks knew what they were selling, people like Michael Burry could not have made his millions.

Which gets me back to the quotes from Nancy Pelosi and Paul Ryan. Congress passes bills into law without even reading them. This is no different than what happened, and still happens, on Wall Street. It was only through one thoughtful man taking the time to actually do the research that was there for all to see that caused change to come to Wall Street.

If we don’t start taking the time to read the bills we’re passing, it won’t be a bank that goes under. It will be the whole country.