All the Devils Are Here [177]
Trying to calm the others, Cioffi told them about the time he and Warren Spector, Bear’s co-president, with whom Cioffi had risen through the ranks, had been caught with a big bond position way back when. They didn’t panic, and they ended up making a lot of money. Tannin commiserated with Van Solkema about how the stress made it hard to get any sleep. For Van Solkema, it was comforting to hear that even the “big senior guys,” as he later called them, weren’t sleeping, either. And then Cioffi opened a small fridge in his office and took out a very good bottle of vodka. They all did a shot out of paper cups, toasting to better times ahead.
Cioffi also suggested that they keep the discussion among themselves, which Van Solkema interpreted to mean that they should try to avoid worrying other employees.
At 6:32 a.m. the next morning, Cioffi sent a message to Tannin, trying to put their stress in perspective. He wrote: “1. We have our health and our families. 2. We are not a 19 year old Marine in Iraq. 3. We have each other and a great team.”
Tannin responded: “We are not marines—in fact—we have all triple won a Powerball lottery a few times over.”
Within six months, both funds were bankrupt. A terrible storm was gathering.
The Bear team was in many ways a paradigmatic example of how Wall Street had evolved. Both Cioffi and Tannin were self-described “securitization people.” They believed in the models and the ratings and the notion that risk was being divvied up and tucked away. They bought supposedly safe securities that offered a little extra yield. To boost the yield and produce respectable returns, they took advantage of the cheap, short-term money available in the repo market. “The borrowing was the absolute lifeblood of the funds,” Tannin’s lawyer later said.
Their first fund, the High-Grade Structured Credit Fund, which was part of Bear Stearns Asset Management, was started by Cioffi in the fall of 2003. Like many Bear employees, Cioffi had been a scrappy, lower-middle-class kid; during his eighteen years at the firm, he had risen to become a highly successful fixed-income salesman. Fearing that he would bolt to another firm, Bear staked him with $10 million and allowed him to start a hedge fund, even though Cioffi had never before managed money. Cioffi was soon making hedge fund compensation: $17.5 million in 2006, up from around $4.5 million just two years earlier. He owned a multimillion-dollar house in the Hamptons and became the executive producer of the indie film Just Like the Son. His lack of experience, though, was an issue. “Ralph was not a trader,” says one person who knew him. “He was an honest guy trying his hardest, sitting at his desk twenty-four/seven, but he was like a deer in the headlights.”
In 2003, Cioffi recruited Tannin to help him run the fund. Tannin had even less experience than Cioffi. A philosophy major who’d graduated from the University of San Francisco law school in 1993, Tannin had joined Bear’s capital markets group before moving to the derivatives desk. After a brief stint at a start-up, he returned in 2001 to work as a junior analyst in the structured finance division. Even in good times, he was full of angst, befitting a philosophy major. Working with Cioffi was a huge opportunity for him, and he knew it. As his pay rapidly climbed from meager (just $66,000 in 2000) to respectable, at least by Wall Street standards ($2.5 million in 2006), Tannin never forgot to whom he owed his good fortune. “I want to thank you again from the bottom of my heart for all you have done for me,” he wrote to Cioffi in early 2007. “I will be eternally grateful.”
The High Grade fund started small. Some of its investors were high-net-worth customers of Bear Stearns, one of whom would later say that he thought he was getting in on a special “club.” In truth, though, High Grade wasn’t all that selective. Eventually, the three biggest investors