FIASCO: The Inside Story Of A Wall Street Trader – Frank Partnoy, 1997 ★★★

PERLS Before Swine

Partly a first-hand account of the culture of derivatives trading and Wall Street in the early 1990s, partly a cry for greater regulation in the face of increasingly out-of-control investment practices, FIASCO is an entertaining read hampered by a scattershot focus and offputting tone.

Frank Partnoy arrived on Wall Street with an unusual non-finance degree (Law) and a general idea that derivatives were a “safe” if dimly understood instrument of high finance. This illusion faded quickly in a culture where the greatest satisfaction a trader enjoyed was the thrill of ripping someone’s face off, especially that of a trusting investor.

Just do yourself a favor: Don’t read this while eating:

If you haven’t had the pleasure of physically comparing different Wall Street trading floors, you needn’t bother. They are all basically alike. The floor itself is a checkerboard of stained carpet squares covering a maze of twisted wires and electronic equipment. These removable squares serve as the lid of a massive trash can, and hidden below are dozens of half-empty Chinese food containers and mice. (Mice love trading floors, and banking employees are constantly discussing creative ways to trap and kill them.)

I spared you the part where a trader offers Partnoy a steak sandwich he keeps unrefrigerated at his messy desk. You’re welcome.

Partnoy lays out a simple maxim: The way you made money selling derivatives was by trying to blow up your clients. Eventually, he explains, this led to a multitude of ruined careers and widespread financial hardship, not to mention legal trouble at the firm where he spent the final years of his investing career, Morgan Stanley.

Partnoy’s focus was trading what were once dubbed “Third-World” but by then called “emerging markets” products. Exactly what were “emerging markets,” anyway? Partnoy’s explanation showcases the tone that makes FIASCO so readable:

It wasn’t clear what “emerging” meant, or how these markets might “emerge.” Still, it sounded awfully good, and it helped cloud the fact that the emerging bond an investor bought actually was a Peruvian loan that hadn’t paid any interest since the 1800s.

That same snarky tone makes FIASCO problematic, at least for me. Partnoy has a wit and a fierce energy that kept me reading, but the more I read the more I had to wonder how much of his book was on the level and how much of his Letterman-esque narrative was dialed up for effect.

The first hundred pages are the best, and showcase the author on solid ground. Here Partnoy lays out the journey which took him to Morgan Stanley from a second-tier competitor, First Boston. He owns up quickly to money as his motivation, same as it was for everyone else he knew. But the nakedness of greed at Morgan Stanley took his breath away.

Once upon a time, as recently as the late 1980s, Morgan Stanley was a sensible giant where old money and sober deal-making dominated. Then derivatives invaded this Eden, creating what Partnoy calls “a precarious house of cards.” Traders embraced a mercenary culture where Soldier Of Fortune magazines were prominently displayed on desks. At Morgan Stanley’s Derivatives Products Group, no risk was too great if there was money to be made, never mind the repercussions:

With the floodgates of risk open, by the time I arrived in mid-February 1994, any evidence of the old, stodgy Morgan Stanley had been washed away. The new firm was a turbo-charged profit machine, generating great risks and even greater profits and winning the battle of the bulge brackets, mostly because of its new powerful sales-and-trading operation. By 1994 sales and trading was driving most of the firm’s revenues, and its engine was fueled by derivatives.

Everything from the unhealthy recreational habits of Morgan Stanley to their obsessions over bonuses [“I am not leaving this room until you pay me at least $500,000!”] and Ronald Reagan is exposed for the reader’s amused edification. One veteran salesman tells Partnoy: “If a bond cannot be sold with two hockey tickets and a good bottle of wine, the bond cannot be sold.”

FIASCO was one of a number of books that came out in the wake of Michael Lewis’ Liar’s Poker, a first-hand account of double-dealing in the world of equities trading. FIASCO’s focus on derivatives lays out a highly-complex milieu of financial instruments that include such entities as Commodized Mortgage Obligations [CMOs], inverse floaters, Peso Linked U. S. Dollar Secured [PLUS] Notes, and Principal Exchange Rate Linked Securities [PERLS].

While it may appear a highly complex thinking-man's business to outsiders, selling derivatives isn't all that difficult, according to Partnoy. But it isn't a job for sissies. Image from https://news.efinancialcareers.com/uk-en/241927/goldman-sachs-to-fintech. 

Sound confusing? Well, that’s the point. Over and over, Partnoy explains that these and other like devices are designed not to extract value from a turbulent market, but to sucker foolish buyers hoping to score windfalls for their shareholders and pensioners.

Partnoy places you in a hazy jungle where dealers double as predators and a carnivore’s law presides. Partnoy famously quotes John Mack, then president of Morgan Stanley: “There’s blood in the water. Let’s go kill someone.”

Mack is but a distant figure through most of the book. More prominent is an unnamed, temperamental executive on the derivatives team known to her co-workers as “Queen of the RAVs,” RAVs being a particularly dicey derivative that could be likened in composition to a Chicken McNugget. [Other derivatives are described as “crap” doled out with yummy icing in the form of high-yield note scraps which make them palatable to hungry investors.]

There’s also the Scarecrow, a senior member of Morgan Stanley’s derivatives team whose name comes from the original Scarecrow’s song in The Wizard Of Oz, “If I Only Had A Brain.”

To build his thesis of derivatives as a poker game played not by liars but money-mad pirates, Partnoy pulls out some case examples, which he overheard on the trading floors of Morgan Stanley and First Boston, and also gleaned from reviewing some of the big headline stories of the day, like the bankruptcies of Orange County and Barings Bank, which led to arrests and investigations.

Partnoy doesn’t make these two approaches cohere, though. He wasn’t at the scene of these derivative-sparked disasters and presents himself more as an increasingly-skeptical interpreter of derivatives. His closest association with a dangerous derivative, an instrument sold to Japanese investors called the “MX,” led to high tension but no Orange County-caliber bloodshed. The problem there was that Morgan Stanley made too much at their investors’ unknowing expense.

Sometimes Partnoy lands blows with a cagey aside: There are a few minorities and women on most trading floors, but many of them wear janitors’ overalls or very short skirts. The only evidence of any socially progressive act is an occasional toppling stack of empty yogurt cartons.

“The only way to become well rounded on a trading floor,” he concludes later on, “is by eating fattening foods.”

Sometimes, though, he just sounds shrill, like when he decries the greed of his Wall Street colleagues or repeatedly points to George Soros as a lone voice of reason (Soros apparently made all those billions in derivatives without the taint of greed involved).

Seller's Regret: Since leaving the derivatives industry, Frank Partnoy has become a law professor. He insists on two key truths: "Derivatives carry hidden seeds of destruction, and no one understands their risks." Image from https://www.npr.org/templates/story/story.php?storyId=102325715.

By the end of the book, Partnoy is calling for tighter regulation and more government spending to control the big-money boys like Morgan Stanley. He even gives you the number for Morgan Stanley’s Derivatives Products Group so you can call them and complain. He pushes the “den-of-thieves” line so strongly, you wonder just how Morgan Stanley survived and thrived the way they did if they really were just ripping off everyone they could.

Why, if Morgan Stanley was so shameless, did they worry so about being exposed? One odd scene shows the Queen of RAVs blowing a gasket when she spots the word “derivative” in the prospectus Partnoy prepared for one such instrument. She forced Partnoy to work the rest of the night eliminating all such references. Later, after MX’s successful launch, there is much consternation about Morgan Stanley’s excess profits over their fees. This doesn’t make sense if the whole game was as shameless as he paints it here.

As it goes on, FIASCO struggles with narrative drift, like when the author goes to Japan to sell derivatives there. He spends a lot of time on his homesickness and his discomfort over a culture even more ethically challenged than what he left. By then, Partnoy is ready to leave the business. For all his entertaining potshots, I was ready for it to end, too.

I actually thought Partnoy did a better job explaining derivatives than Michael Lewis did explaining the equities market in Liar’s Poker. But Partnoy doesn't have the characters Lewis had, and more damningly, lacks the empathy to get under anyone’s skin. He doesn't only dislike the rainmakers – he dislikes everyone.

Never mind poor Scarecrow. One harmless fellow working a less strenuous repurchase agreement desk is cavalierly likened to Lenny, the simple-minded loser of Steinbeck’s Of Mice And Men. Like many liberals, Partnoy gushes with humanitarian concern, only he doesn’t seem to like people.

To be sure, I enjoyed FIASCO. But the more I read, the more I felt at odds with the author, and disengaged from his choppy narrative.