Part 8 (1/2)

Three more sell orders came flas.h.i.+ng in. Beside me, Joe was talking in all directions-”Hit! Buy! Lift! Ten million up! Where are you on the follow?” He was a trading machine and on that day he was at his best. Everyone was shouting now, the salesmen and the traders, and millions of dollars were changing hands, darn near all of them in the same direction: outward. There was nothing we could do except buy and hope that Jane knew what she was doing. You've heard of the trenches. I was in there. Right above me, the sellers were circling, trying to get in line for a landing, like big pa.s.senger jets in a stack somewhere above JFK.

I dropped Delta's price again, to 13, and still the sell orders came in. I guessed the ratio of sellers to buyers was about ten to one. I got hit immediately for another seven million. Larry on the phone bought around $5 million worth. Then Terence, the best salesman I had, bellowed at me, ”I got a buyer at fifteen, five up. You want to let some fly right here?”

This was the only buy so far. It was the only lift I'd had all day. Way to go, Terence Way to go, Terence. I took it. Then I dropped the price once more, to 12. Two more huge sell orders came in, and we bought yet again.

Sitting right next to me, Jane said quietly, ”We're stealing them, Larry, we're stealing them. Stay focused. They're worth fifty-two cents, trust me.”

I trusted her because she knew the reality, not the far-removed fury of the investors and traders. She knew about the lines of gleaming aircraft, the value of the Delta fleet, their name, their reputation, the jet fuel problem that was strangling them, and the murderous debt. But above all she understood that bankruptcy would allow them to regroup, and she knew there was an intrinsic value to those bonds beyond the debt and into the future. Jane could probably have run the airline, and here she was right next to me, telling me to buy at the lowest possible price, telling me I was stealing them as I blasted away at the Lehman balance sheet in this outrageous spending spree.

When the dust finally cleared, Joe and Larry had bought $95 million face-value worth of Delta bonds, I'd bought $40 million, and Peter Sch.e.l.lbach had bought $60 million. When we added all the orders up, the tally when you include those bonds we already owned was about $350 million, buying all the way down to 12 cents, from outfits like Putnam and Fidelity.

There's an old traders' rule: never sell your holdings on a day of bad news. Stay away from the exit door while the mob is trying to get through. Because there's sure to be a bounceback, just as soon as the panic-stricken sellers have all run for their lives.

When the phones finally went quiet, Alex Kirk returned to his office. Jane said jauntily, ”Don't worry about it. We're golden.” And I sat down for the first time in an hour to a.s.sess the situation.

Four of the seven biggest air carriers in the United States were now operating in Chapter 11-that was half the pa.s.senger seats in the nation being operated by bankrupt airlines. They'd only recently recovered from the aftermath of 9/11. And now here was Lehman Brothers with a huge holding in Delta's bonds, and I couldn't help wondering how long it would take to climb back to the value Jane so confidently forecast. If she was right, we'd probably make the biggest one-day profit in the history of Lehman. If she was wrong ... let's not even go there.

The one person in all of the corporation who believed implicitly that Jane was correct was Larry McCarthy. One of the most fearless traders ever to work on Wall Street, he would hear no word against her a.s.sessment of the Delta situation; indeed, working in concert with Joe Beggans, he'd bought $95 million worth of the airline's bonds. He was keenly aware that it might be months before the price rose to the levels Jane predicted. But he was sure of our position. And like all true gamblers, he was sure that his luck was running strong. As a matter of fact, he kept buying all through the next month, whenever an opportunity came up.

The situation at Delta did not really improve. Unrest in the Middle East continued, and the pilots were threatening to strike, which would blow Delta's normal operations apart and cut off their cash flow, their lifeblood. But Larry was adamant. ”It's what Jane says. Those bonds are worth a lot more than twelve cents on the dollar. They got f.u.c.king Boeings, hundreds of 'em, parked all over Georgia.”

It's difficult to grasp the size of the gamble Larry was involved in, just as it's difficult to grasp the type of man Larry was-his astuteness, the speed of his calculations, and the depth of his nerve. You'll have to take my word for it: there was nothing ordinary about him. Larry McCarthy had stepped straight out of a scene from The Cincinnati Kid The Cincinnati Kid. He had a nose for victory and an instinct for trouble. And when he scented the former, there was no shaking him off.

I'll tell you just one story about McCarthy, and then you'll know precisely what manner of man held those Delta bonds. He and I used to go gambling together. I suppose it was in our blood; there are a lot of guys like that on Wall Street, cold and determined with the firm's cash but addicted to the chase, calculating the odds, the risk-to-reward ratio. I guess we're all junkies for the thrill of being right, of winning, always winning. Anyway, later in the fall of 2005 we decided to go up to the Mohegan Sun casino in Connecticut for a couple of days. After dinner at Michael Jordan's Steak House, we headed for the tables for some blackjack.

I settled into a modest corner where the stakes were around $50$100. McCarthy went to $100$500, a spot he had occupied many, many times before. But by any standards you'd have to say the cards were not running for him. He slogged it out, going head to head with the dealer, but nothing could change his luck. After two hours he'd blown a very large hole in $75,000. An hour later he'd lost $100,000. The dealer was pulling seven-card 21s and never busting.

Three times I saw Larry double down on a 10 and then pull a 10, only for the dealer to hit 21. The pressure was relentless, the bad luck apparently endless. But McCarthy never flickered, never stopped smiling, never stopped wisecracking his way through the evening. Never once did he lose his cool, laughing cheerfully with the pit bosses and the dealers, who knew, to a man, that the cards had turned against him before he even started.

After four hours he had blown out $165,000. Nothing had gone right, nothing had been even reasonable. But Larry stayed positive, once handing the c.o.c.ktail waitress a $500 tip. Finally I took him aside and told him, ”Come on, buddy, this is a disaster. I've calculated your losses. You're down a hundred and sixty-five thousand. Let's call it a night.”

I'll never forget his reply. He stared at me hard and said, ”This is all about staying positive, old pal. Most people quit in life when they're just three feet from the gold. But you got to be there with the big bucks, for the turn. Because it always turns. Remember that. Everyone has good luck. Everyone has bad luck. Just don't stampede for the f.u.c.king exit when there's a minor setback. Trust me, it's gonna turn, and that's when you want to be there.” And then he told me to call the pit boss and get another $100,000. He was playing on, and his credit was good. I just shook my head at the sheer guts of the man.

Both on the trading floor and in the casinos, most guys run for the hills when things aren't going their way. Bad negative att.i.tudes, whiners and complainers. But not Larry. On the trading floor and at the tables, he was always Captain Cool, waiting patiently, lying in wait for his moment.

He asked us to give him a little room. Then he collected his $100,000 and took over the whole table, all six slots. They roped off the area, except for him and me, and he started with $2,500 on each hand-that's $15,000 on each round against the dealer. That gave him a very slight advantage, because there was no one else playing, catching the good hand. I watched him win a few, then lose a few.

And then suddenly the dealer busted two hands in a row for the first time in close to five hours. Larry hauled back $15,000. Then he pulled nothing less than a mind-blower. He gestured to the pit boss and requested permission to up the table max from $5,000 a hand, $30,000 a table. ”Let's get this baby up to ten thousand,” he said. ”Sixty thousand a table.”

The pit boss nodded.

Larry proceeded to pile on his $1,000 chips, ten each on all six slots. The cards were not pretty. His best was a 16, but the dealer's cards were worse. There was a six, but when the second card turned, it was the dreaded five. This meant if she drew a face card she'd have 21, and Larry would be down another $60,000.

The dealer, still under 17, had to go again. Almost thirty people crammed together outside the ropes, watching this fight to the finish, holding their breath. The dealer turned the card. It was a three, which made 14. Larry never blinked. The dealer turned again, an ace, for 15. Larry stared straight ahead. The dealer turned once more and pulled yet another ace. That was still only 16.

This was sensational. But the dealer had to turn again. And it was as if the entire casino had come to a halt. The pit bosses had moved in and were standing watch with the crowd. c.o.c.ktail waitresses stopped serving, and a kind of telepathy swept around the gaming room. It was as if everyone was aware of the t.i.tanic struggle between the casino's ace dealer and Larry McCarthy from Wall Street, with $60,000 riding on the turn of a card.

I watched the dealer gulp and then reach for the shoe, selecting the card. For a split second, the hand that covered that card paused, and then flipped it over to reveal the queen of spades. Dealer's bust-26.

After five hours, Larry's luck had finally turned. He leapt to tackle me, taking both of us right off our stools, into the velvet ropes, and onto the floor in front of all the spectators, both of us laughing fit to die.

When we finally climbed back to our feet, Larry just said, ”Okay, guys, let's play some cards.” He swapped the $1,000 orange chips, the ”pumpkins,” for the $5,000 ”gray ladies” and placed two of them on each spot-another $60,000 hand. And when the cards came up they were devastating for the dealer: four blackjacks and two 20s for Larry, against the dealer's pitiful 17.

In thirty-five minutes, Larry had come back from the dead to be $25,000 in front. ”Remember this,” he said. ”You've seen for the past four hours the best part of this game, and the very best part of life. When things can't get any worse, they always do, and when they can't get any better, they always do.”

What he said was true. I'd watched this man get beat over and over again, and then I watched him ride his luck all the way back. When we walked out of there two hours later, he was $475,000 in front. I saw it with my own eyes. I think for the first time, I finally understood why Larry McCarthy was a full-blooded legend of Wall Street and why his name would live for a long time.

On the way out, he told me one more truth, as applicable in the market as it was at the table. ”Never blow your powder too early,” he said. ”Start nice and slow, nice and low. Get the feel of the market, get centered, make sure you got a ton of ammunition, and don't quit too early. Never do that. When they're running against you, keep going, because they're gonna turn. And the split second they make that turn, hit it, buddy, hit it real hard. Because that's when you're gonna f.u.c.king win.” win.”

Which was all very well, until we returned to the office the next day only to see that Beazer, the home builder we'd shorted so ferociously, was chugging upward yet again. With all of its thousands and thousands of suspect mortgage holders and all of its debt, the market didn't care. Beazer rode up to $82 against our short position of $75. The sons of b.i.t.c.hes were killing us. That morning we dropped another $2 million, which made $4 million altogether. Christ, we were losing $600,000 a point.

”Where's Babay? Where the f.u.c.king h.e.l.l's Babay?” Never had I seen Captain Cool so angry. He'd searched the entire floor, raging from one section to another. Most people were too scared to laugh. Larry decided to take it on the chin and take the short off, just to stop the hemorrhaging. Never before had I seen him go against his own instincts that severely. Jesus, if he'd done that at Mohegan it would have cost him $600,000 personally.

And still Karim Babay never showed. Once more Larry searched the floor, and when he came back he was even more angry-angry with himself for losing his nerve, furious at Karim, who was not there to offer words of encouragement and advice, and incandescent at Beazer Homes, which had the temerity to defy every form of known logic.

Words failed him. Any vestige of humor he had left had flown the coop. And with an outrageous display of brute strength he reached up, ripped the computer screen from its mounting, and hurled it to the floor, obliterating it in a shower of gla.s.s and electronic sparks. The noise was amazing, and of course it was too much for a lot of the younger traders, who started to crack up at the temporary disintegration of Captain Cool.

But Larry was not sorry. He leaned down, picked up the shattered monitor, raised it above his head, and once more hurled it downward, blasting the frame asunder, with sparks and gla.s.s once more flying every which way. Then he turned to face the crowd, and suddenly the anger seemed to drain right out of him. At last he chuckled, raised his fist into the air, and shouted to the cheering traders, ”f.u.c.k 'em, right?” The roar of applause almost took the roof off the building.

Right then Beazer jogged up another 50 cents. ”Screw 'em,” said Larry. ”We'll get 'em back on the way down.”

That 'ole dog, he could still hunt.

But not everything was going wrong. In fact, hardly anything was. And several weeks later we stood back and watched Calpine go down in flames. The clean-as-air energy corporation vindicated every last word Christine Daley had ever uttered about them. They crashed under the overwhelming burden of their own debt and made a few headlines on November 29 when their stock price lost 57 percent of its value after they fired their CEO and founder, Peter Cartwright, and their CFO, Bob Kelly, who Christine had said could dance through raindrops without getting wet.

The stock drop was not in fact that serious, since it had already plummeted from its high of $58 to $1.25, but now it had lost another 71 cents, which more or less wrapped it up. I've never been exactly certain of the amount of money we made from that cla.s.sic short, which we'd leveled at the corporation based on the words of one of the great Wall Street researchers. But it was, by all accounts, close to $100 million.

On Tuesday morning, December 20, Calpine filed for Chapter 11 in the U.S. Bankruptcy Court in New York. It was the eighth largest in history. They'd gone down under that ma.s.sive debt, now $22.5 billion. The news flashed on all of our Bloomberg terminals, and I traded over $100 million in Calpine bonds that day, having been short $50 million face. It gave me my first-ever $5 million profit day. Larry and Joe Beggans were short $175 million.

I talked to Christine later that day, the day of her great triumph. And like a true researcher, she was slightly preoccupied with a historical fact. How could it be, she wondered, just a few years after the Enron catastrophe, that a crazily overleveraged U.S. corporation, in complete denial of its untenable position, could keep right on pulling off questionable accounting moves, one after the other? And from her perspective the fact that she had spotted it while no one else seemed to care made it worse. You rarely find such a realist who is also ultimately such a purist. But Christine Daley was that person. She had watched from afar and her a.s.sessment was that Calpine executives were attempting to pull the wool over investors' eyes, and she'd contemptuously dismissed all that as a smoke screen. It was the pure darned wrongness of the evasions, the half-truths, the exaggerations, the unfairness to investors. That's what had gotten to her. That's why she was so unforgiving in her a.s.sessment of that corporation. Just the G.o.dd.a.m.ned lack of truth in their dealings with stockholders.

I felt I'd been with Christine from the start, since Calpine had been the topic of our very first conversation on my first day at Lehman. And I will always remember her astute determination. Just as I will always consider it a privilege to have known her.

7.

The Tragedy of General Motors ”I am ninety-nine percent certain,” said Christine, ”that General Motors is going bankrupt. It's not even a car company; it's a health care provider with an auto manufacturer on the side.”

THE NEW YEAR came howling out of the northwest in 2006, and we struggled to work every morning, the sun not yet up. Huddled into our top coats and fur hats, chins tucked down into our scarves, feet encased in galoshes, we made our way along the icy sidewalks, jumping slush puddles. Manhattan, winter-bleak, shouldering its way into the new day. came howling out of the northwest in 2006, and we struggled to work every morning, the sun not yet up. Huddled into our top coats and fur hats, chins tucked down into our scarves, feet encased in galoshes, we made our way along the icy sidewalks, jumping slush puddles. Manhattan, winter-bleak, shouldering its way into the new day.

Yet once we'd fought our way into the warmth of our building, there were smiles on the faces of the traders in our little corner on the floor. There was even a smile on the face of the elusive Scarlet Pimpernel of the research department, Karim Babay-they seek him here, they seek him there ...

In faraway California, slumbering on the warm banks of the Delta, Beazer Homes had just copped it. Their stock peaked in the first couple of days of the year at around $82.50, then began a relentless dive to where it belonged, losing $20 initially, then heading for $40 and then ultimately almost to zero, complete with its gigantic debt, and all of its dicey mortgage holders.

That January, the determined Larry McCarthy steamed back in and initiated a new short position on Beazer and was quickly on his way to a super $10 million profit as the stock finally plummeted. For one split second, I thought he was going to hug Karim for joy. And I never once noticed even one computer terminal in any danger whatsoever.