The Education of a Corporate Bond Manager, Part IX

You aren’t supposed to act like a market-maker as a bond manager.  That is the role of a broker-dealer, and should they know that you aspire to making the risk-free profits that they do, they may use their power to harm you, notably:

  • Give you lower allocations on new deals.
  • Be tougher with you on haggling.

There are exceptions, though, and both tales are instructive.  One time, I received an offer that had a lot of spread on a bank bond that I had never heard of (given my memory, that was rare).  It was from a third-tier dealer that I rarely traded with.  I called over my new banking analyst (NOTE: She is a stupendous corporate bond analyst for banks, and is looking for a job now… if you need such an analyst e-mail me.  You won’t be sorry.) and asked her about the company.  She commented, “Solid franchise, boring.  Credit metrics are fine.  Go ahead.”  So I bought the bonds.  Remember, I trust my analysts, but if the trade works out badly, it is my fault.  The buck stops here.

On that day, the new corporate bond manager, with whom I would divide the portfolio (because it had gotten so big) was there for the first time.  We met and chatted for a while, but while we met, I got a phone call from a different third-tier dealer who wanted the exact same bonds that I had just bought.  He asked be where I would sell them, and I named a spread level 50 basis points tighter than where I had bought them minutes ago.  To my surprise, he bought the bonds at the level.  The new portfolio manager asked where I had bought them, and when he heard that I had cleared $3 per $100 on a 15 minute trade, he gave me a big “high five” and told me that I was the best.

Now, for those that know me well, in person, I get embarrassed with too much attention.  Writing, that’s another thing because it is somewhat anonymous to sit in front of a screen and write to people that you don’t know personally, like now.  I was surprised at his reaction, and it proved to be an indicator of what he was like as a trader.  He liked to take advantage of the Street where he could, and he had a bit of a greedy reputation, as some of my brokers told me later.

Most corporate bonds I traded had three basis points between the bid and the ask.  I would try to shrink that to two, or even one where I could, without being rude.  This was common after the new guy was hired:

DM: “Could I get the bonds one basis point wider?”

Broker: “Let me talk to the trader.”  (Fainter: “could he have them a basis point wider?”)  Pause, indecipherable.

Broker: “Let me try again.” (Fainter: “It’s XXX.” naming my firm)  Pause, indecipherable.

Broker: “Let me try again.” (Fainter: “It’s Merkel.”)  Pause, indecipherable.

Broker: “You are done at your level.”

DM: “Thanks! You’re the best!”

Reputation matters.  There was another example where I crossed bonds where it was legitimate — if it was done to help a broker in distress.  One day, someone offered me a rare type of Capital One bonds at a normal level, and I asked whether the bonds in question were the ones that were in a major bond index, without saying that per se.  After figuring that out, I bought them at the level, and called a broker that was likely to be short the bonds to see if he wanted them.  He certainly did, and offered them at a three basis point concession to where I bought them, as opposed to ripping the eyeballs out (as the technical term went).

The whole set of two transactions took 15 minutes, and made $15,000 for my client.  What was funnier, was that my whole family came to visit me that day, my wife and at that time, seven kids.  They heard the two transactions, though I had to explain it to them later. To the second broker, I had each of the kids say “Hi,” ending with the then three-year old girl who squeaked “Hi.”  He said something to the effect of, “I knew you had a large family, but it only really struck me now.”

Underwriting Your Brokers

Just as I said in an earlier part about underwriting your credit analysts, the same was true of brokers.  It paid to analyze what they would say, and what they would do, and compare them.  Over time, I gravitated secondary trading business to those the “walked the walk.”  So, one day, one of the brokers of a big firm who did not “walk the walk” called me and asked, “Of all of your brokers, where am I in your ranking of getting trades done?”  I told him that I didn’t know, but asked him to call back tomorrow.  With my computer expertise, I ran a few analyses, and got the answer.  When he called back the next day, I told him that he was number eight.

“EIGHT! I am number three at worst with the rest of my clients, and you are my smallest client! Who is ahead of me with you?”

DM: “Salomon, B of A, Chase, Wachovia…”


DM: “Hey, he covers me like a glove; you don’t often call. Lehman, Goldman Sachs…”

“No one does corporate business with Goldman!”

DM: “I do corporate business with Goldman, and I get a lot done because my coverage is earnest and looks out for me.  Merrill, Legg Mason…”

“LEGG MASON!!!  You’re &*^*&^ kidding me, they are nobodies!”

DM: “but they talk to me daily, and the broker I deal with there is honest, and we get trades done.  They may be nobodies, but I deal with those who will deal with me, and we care about the fixed income community of the city we are in.  You are next, do you want to hear who is after you?”

“NO! You are a TOTAL EMBARRASSMENT to me.  I don’t need to have you as a client.  You are my smallest client, and I have other clients who treat me with the respect the I deserve.”

DM: “Do what you want.  Other brokers send me ideas every day, but you don’t.  If you want to be a big broker with me; I am open to that, but you have to spend time on me.”

The conversation ended soon after that, but there were two results: I began to get more trade ideas from him, and he handed me off to a junior broker who worked for him who spent more time on me.  Business went up.

I have described some people I have worked with to my kids, but he was the first that I described as “a piece of work.”

There was a time that I had lunch with him in Midtown, with my old boss there as well, where he described the travails of his wife with two nannies, for his two kids.  My boss got angry on my behalf: my wife dealt with seven, home schooling, with no help, and he talked of the troubles of his wife.  Me?  I give people room.  What is hard for one is tough for others.

But what this touches on is the schmoozing that goes on with clients, and how that affects business decisions.  More on that in the next part.