I recently caught up with one of my best friends whom I’ve known since Junior High School. We were on the Math Team together in High School (yeah, we were geeks). We went to MIT together. We moved to Southern California after college together. We got our Masters degrees at USC together. And we both worked in the aerospace industry as our first jobs.
After several years at the Aerospace Corporation, Gary moved back to New York for family reasons. As it turned out, much of the engineering methods and mathematics used to analyze spacecraft attitude control stability (estimation theory stuff like Kalman Filters, etc.) were directly applicable to computational finance (or what is more recently been called financial engineering). With this knowledge, Gary landed a job at an investment bank and did very well, analyzing complex financial instruments to help clients hedge against risk (at least I think that’s what he did … I don’t really understand this stuff that well).
Shortly after September 11, Gary left the corporate world in order to spend more time with his young growing family and to chart his own course. He performed some personal investing for private clients and eventually created and ran his own privately managed mutual fund. I know this was a big deal for him and he took it very seriously. He always did painstaking research on companies he’d invest in and never took undue risks with his clients’ money. As he told me the other day, “this is not a game”.
The first year or two the mutual fund did pretty well. Not great. Not terrible. But pretty good.
Early in 2008 I called Gary’s business line and the number was no longer in service. I left several messages at his home number but did not hear back. Finally, about a month and a half later I got a hold of Gary and asked him what was up. As it turns out, Gary had been really busy with all of the details of closing down the mutual fund he had started less than 2 years earlier. And here is where the story gets interesting.
Gary had been talking with lots of companies about their business and sensed from all of them that things were not good. He also had a first-hand understanding of the financial markets and financial instruments that were to eventually be blamed for the real estate crisis. Whereas Gary had worked on creating these products to hedge against risk, others were using them to create risk and the ratings agency’s were covering it all up by putting AAA ratings on them.
All in all, Gary knew that there was going to be bad times coming up. So what did he do?
- Did he paint a rosy picture for his clients so they would keep their money in his fund and he could continue to collect his management fee?
- Did he go out and get new investors in order to pay impressive returns to the older ones?
- Did he do something else to cover it up (after all, he knows enough to do that)?
No. Gary did what it seems that very few in financial services would do. Gary called up each of his clients and told the truth. That there was going to be bad times and that he could not make money for them in this environment. That the risk was too high. And, even though he had put so much effort into building this fund, he was going to close it down for their benefit.
Many of his clients wanted him to keep going and were willing to assume the risk, but in the end he convinced them to cash most of it out and closed down the fund.
This was early in 2008, before the worst of the news and most of the crash occurred. Now, looking back at that decision, Gary’s decision probably saved his client’s millions of dollars. Some of them have called to thank him since then.
I think this is a great story about integrity and ethics and a great way to wash off the slime of 2008 and start 2009 clean and fresh. If you have not yet chosen a new year’s resolution, let me suggest one.
Just once in 2009, do the right thing when you stand to lose.
harry the ASIC guy