Boaz Weinstein didn’t know it, but he had just hooked the London Whale.
It was last November, and Weinstein, a wunderkind of the New York hedge fund world, had spied something strange across the Atlantic. In an obscure corner of the financial markets, prices seemed out of whack. It didn’t make sense.
As the financial world now knows, what was out of whack was JPMorgan Chase and Co. One its traders, Bruno Iksil, the man later nicknamed the London Whale for his outsize trades, was about to blow a multibillion-dollar hole in the mighty House of Morgan.
But the resulting uproar, in Washington and on Wall Street, has largely obscured a simple truth of the marketplace. Yes, Morgan lost big—but, as Mitt Romney has pointed out, someone else won. And that someone or, rather, those someones, turn out to be Boaz Weinstein and a wolf pack of like-minded hedge fund managers.
In the London Whale, these traders saw a rich opportunity, and they seized it with both hands. That, after all, is the way hedge funds roll. His cool calculus has made Weinstein a very rich man: He is in talks to buy the Fifth Avenue co-op of a reclusive heiress, Huguette Clark, for $24 million.
Photo: The New York Times
It might seem remarkable that someone like Weinstein, a man virtually unknown outside of financial circles, could deal such a stinging blow to one of the world's largest, most respected banks. Jamie Dimon, the chairman and chief executive of JPMorgan and a face of the banking establishment, is struggling to contain the damage from what he has called a “terrible, egregious mistake”. The loss—JPMorgan put it at $2 billion, but it may turn out to be $3 billion or more—has renewed calls for stronger financial regulation.
Given the secretive nature of the business, few on Wall Street, including Weinstein, were willing to speak publicly about how the hedge funds harpooned the London Whale. But interviews with more than a dozen hedge fund managers, investors and traders pull back the curtain on the ways of this band of traders and on what really happened.
One thing is sure: Weinstein, 38, played a central role in this, one of the biggest trading blow-ups since the financial crisis of 2008. Iksil and his colleagues in the chief investment office at JPMorgan may have lighted the fire, but Weinstein and his cohorts fanned the flames. In the hedge fund game, a business in which ruthlessness is prized and money is the ultimate measure, Weinstein is what is known as a “monster”—an aggressive trader with a preternatural appetite for risk and a take-no-prisoners style. He is a chess master, as well as a high-roller on the velvet-topped tables of Las Vegas. He has been banned from the Bellagio for counting cards.
From offices on the 58th floor of the Chrysler Building in midtown Manhattan, Weinstein runs a $5.5 billion hedge fund firm called Saba Capital Management. (Saba is Hebrew for “grandfatherly wisdom”, a nod to his Israeli roots.) It was there, last autumn, that he noticed an aberration in the market for credit derivatives. He knew from experience what it was like to lose a lot of money at a big bank. Before starting Saba, he was responsible for a team that lost nearly $2 billion, in the depths of the financial crisis, at Deutsche Bank AG. Others lost even more. Last November, however, he saw that a certain index seemed to be trading out of line with the market it was supposed to track. He and his team pored through reams of data, trying to make sense of it. Finally, as Iksil, the London Whale, kept selling, Weinstein began buying.
At the time, traders in London had no real idea that JPMorgan was behind the trades that were skewing the market in credit derivatives. In fact, they weren’t even sure that it was a single bank or trader. But soon the city of London, Europe’s financial hub, was buzzing. Whoever the mysterious trader was, he or she kept selling derivatives intended to rise in value in the event that certain corporate bonds became riskier. The volume of trades was off the charts. Who could possibly sell so much? And, what if the trade reversed, as it inevitably would?
And so the battle lines were drawn. On one side was JPMorgan, the US banking giant that had weathered the financial crisis far better than so many of its peers. On the other were hedge fund managers, including Weinstein at Saba.
Such stand-offs are not uncommon on Wall Street. An aggressive trader makes a wrongheaded bet, then doubles down to scare off competitors on the other side of the trade. Market rivals often get slapped down, unwilling to keep buying as the other side is selling, or vice versa. For traders with the backing of a major bank, like JPMorgan, the task is much easier.
But not always. Sometimes, the other side sits tight, then hits back in force. And it does so in numbers.
By January of this year, the trade against the London Whale was not going well for the hedge funds. The price of the index, as well as others, was still falling, and the losses were mounting for Weinstein and the others. But by February, it was clear that a single, big player was behind the selling. On trading desks in London and New York, everyone was talking.
It had to be JPMorgan.
Boaz Weinstein has always played the wild card in the markets. He grew up on the Upper West Side of Manhattan, in relatively modest surroundings, the son of an automobile insurance salesman and a translator, both regular watchers of “Wall Street Week”. As a student at Stuyvesant High School in Manhattan, he entered a contest to see who could pick the best stocks. He won—by selecting an assortment of the fastest growing stocks he could find from newspaper charts. He studied philosophy at the University of Michigan—he was partial to Hume and Camus—but today favours behavioural finance, particularly the work of his friend Dan Ariely, a professor at Duke. Weinstein is married to Tali Farhadian Weinstein, a rising lawyer in the US justice department.
Last February, at a conference organized by another hedge fund manager, his friend William A. Ackman, Weinstein was hailed as one of the savviest credit traders in the business.
The February conference was held, ironically, in JPMorgan’s offices on Madison Avenue. Workers at the bank milled about as Weinstein and others offered up investment tips.
Dressed in a sharp blue suit, Weinstein stepped up to the microphone and opened with a joke that only a financial wonk would appreciate. He showed a slide comparing the cost of credit default swaps on various government debt to the percentage of young men in those countries who live with their parents. The slide titled Mamma Mia! suggested that, by that measure, Greece, Portugal and Italy were in trouble.
But what really got people’s attention was his second-to-last slide. It was his pick for the “best” investment idea of the moment. Weinstein recommended buying the Investment Grade Series 9 10-year Index CDS—the same index that Iksil was shorting.
The crowd, 300 or so investment professionals, began buzzing.
“Once he came out in that meeting and was so specific, others jumped in,” one hedge fund manager said.
But the London Whale was so big that, for months, the hedge funds betting against him simply got steamrolled. One of Weinstein’s funds at Saba was down 20% heading into May .
Then the tables began to turn, as news reports about Iksil, fed by the hedge funds, began to surface on both sides of the Atlantic. Suddenly, everyone was checking out the obscure index that Weinstein and others had seized upon.
By May, when fears over Europe’s debt crisis again came to the fore, the trade reversed. The London Whale was losing. And Weinstein began to make back all of his losses—and then some—in a matter of weeks.
Other hedge funds were also big winners. Blue Mountain Capital and BlueCrest Capital, both created by former JPMorgan traders, were among those winners. Lucidus Capital Partners, CQS and a fund called III came out ahead, too.
Inside the hedge fund world, some joked that Weinstein had been able to spot the London Whale because he himself had been a whale once, too.
Weinstein was a pioneer in complex credit derivatives, latching onto them early in his tenure at Deutsche Bank, before they became the financial weapons of mass destruction that worsened the financial crisis. He was a profit machine at the bank, notching earnings in 10 of his 11 years trading there. At 27, he became one of the youngest managing directors in the bank’s history. Before his book blew up, Weinstein was reportedly pulling down about $40 million a year.
He exploited price discrepancies and piled leverage into his trades.
Then his team at Deutsche Bank lost $1.8 billion during the 2008 financial crisis. The trading losses ruined bonuses throughout the bank and ruffled more than a few feathers. He would later leave the bank and, along with 12 of his colleagues, set up Saba.
Weinstein started Saba with $140 million—a pittance by hedge fund standards. In the intervening years, he has outperformed his peers and managed to vacuum up assets at a time when most growing hedge funds have been struggling to hold on to what they’ve got. He now controls more than $5.5 billion.
The similarities between Weinstein and Iksil still resonate in the market. “It was one whale versus another whale,” one hedge fund manager said.
©2012/The New York Times