Tom Wolfe Returns to Castrate Wall Street
- Joshua M Brown
- January 5th, 2013
Know ye Tom Wolfe? He's the author of one of the best novelizations of New York and the money culture ever, Bonfire of the Vanities, among other great works of journalism and lit.
Wolfe's bond trader protagonist in Bonfire was small potatoes compared to the "Masters of the Universe" who would come after book's publishing in the late 1980's. For decades, the testosterone-fueled Big Swinging Dick was a real-life archetype that actually, physically and literally inhabited the environs of Wall & Broad as well as the gleaming new headquarters buildings of the newer midtown financial district. But the credit crash was a death of sorts for that era and that particular brand of neanderthal... the fecklessness of last spring's Facebook IPO debacle may have merely been the funeral.
Tom Wolfe narrates the Death of the Salesmen of Predatory Capitalism in the first all-digital Newsweek issue out this weekend. He introduces us first to the Masters, then invites us to look on as the "quant nerds" slowly but surely usurp the pridelands, defrocking the Emperors on trading floors everywhere.
I particularly liked this passage, in which cardsharp turned proto-quant trader Edward Thorpe places the largest trade in Wall Street history until that time - an arbitrage play of all things! - during the 1983 break-up of Ma Bell:
As with his blackjack theory, Thorp put his market theory to the real, live-action test. In 1974 he launched a hedge fund named Convertible Hedge Associates and soon renamed it Princeton-Newport Partners. The administrative office was in Princeton, New Jersey. Thorp himself and a team of quants did the trading and cooked up new strategies in a sequestered money laboratory in Newport Beach, California. In 1983 he set off some StarStreamers over Wall Street when the Bell Telephone Company monopoly broke itself up into eight parts, seven new “Baby Bells,” as they were called, plus the mother company “Ma Bell,” whose name was changed to AT&T. They issued new stock. Each new share was either a blend of Baby Bell shares and shares of AT&T—or else shares that were all AT&T. Their IPOffering prices were identical. But the excitement was over the new Baby Bells, and so the blended shares were where things were happening. As a result, they were selling for three quarters of 1 percent, 75 cents per $100, more than shares of AT&T alone. In 1983 nobody but a quant like Thorp would open his eyes wide as a kid’s at this exciting sight. With the next breath he simultaneously sold short $332.5 million worth of the blended shares that included the exciting Babies and bought $330 million worth of AT&T-alones, for a profit of $2.5 million. It was then the biggest transaction in the history of Wall Street. Outsiders couldn’t believe the man. He bets $332.5 million—virtually one third of a billion—on selling a stock short—and bets another third of a billion buying the same stock to make a profit of one one-hundredth of 1 percent. Think of risking a total of close to two thirds of a billion dollars to make $2.5 million! Sheer madness.
Make time for the whole thing this weekend, it's quite a read.
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The Reformed Broker is a blog about financial markets and the economy. Joshua Brown is a New York City-based investment advisor for high net worth individuals, charitable foundations, retirement plans and corporations... More.