Kurtosis and heteroscedasticity.
These are the words that Haresh Venagopul is saying over and over into the other end of the phone. In between are words that Jonathan does understand, but they don’t help him comprehend what Haresh means. What is abundantly clear, however, is that Haresh is very agitated.
Jonathan is sitting in the middle of Wolfgang’s, a high-end steak restaurant on Park Avenue and Thirty-Third Street, and the entrée—steak for three, medium rare, extra char—has just arrived. His dinner companions are the hedge fund’s two biggest investors: Michael Ross, who heads the capital investment group at Maeve Grant, the sixth-largest investment bank in the world, and Isaac Goldenberg, the octogenarian casino magnate, who views investing with Jonathan as just another form of gambling. Neither of them is going to want to hear that the guy who monitors the fund’s position is in a full-blown panic.
“Can I call you right back?” Jonathan says to Haresh.
“I’m sorry,” Jonathan says to his dinner companions, getting up. “It’s my wife. I’ll only be a minute.”
Ross raises a fist and flicks his wrist while making the pussy-whipped sound. Goldenberg chuckles at that and helps himself to more steak.
It’s raining outside. Not a driving storm, but more than a drizzle, so Jonathan takes shelter under Wolfgang’s awning. The combination of the wind and the fact that the overhang is not very wide results in Jonathan getting pretty wet, so he’s hoping that this will be a short conversation, and that the steak will still be warm when he returns.
“Okay, Haresh. I can talk now. What’s the problem?”
His second-in-command says the gibberish words again. Kurtosis and heteroscedasticity.
“Goddammit, Haresh. I get that there’s a volatility issue. What I don’t get is why you’re calling me about it. There’s always volatility somewhere in the position.”
Jonathan can hear Haresh sigh. “You know what a tail is, right?” he says.
Jonathan hates it when Haresh talks to him like he’s a second grader, although he likely deserves it for talking to Haresh like he’s an idiot, which he most certainly is not.
“Yeah,” Jonathan says sharply. “What normal people call the variation of risk, you guys in the bull pen refer to as tails.”
“Right,” Haresh says, apparently with no recognition that Jonathan is being short. “It’s because that’s how the position shows up on a chart as deviating from the mean. We expect a small amount of deviation, but it should be negligible. Maybe .03 percent. But when the distribution is farther away from the standard deviation, it shows up on the chart as the tail getting fatter.”
“Haresh, I’ve got a hundred billion bucks sitting inside eating steak, and I’m standing here in the rain, so I’d really appreciate it if you get to the point already. And in English, please.”
“Our tail is fat as fuck.”
Haresh had these Chicken Little moments from time to time. Jonathan had come to believe that his second fancied himself as the lookout man on the Titanic, the last set of eyes that could avoid catastrophe on the horizon.
Jonathan, however, prides himself on being a man who exhibits grace under pressure. The one who keeps his head while those around him are losing theirs.
“So . . . the gap is widening,” Jonathan says with an air of calm. “Big fucking deal. It’ll close eventually. I mean, the sun is still rising in the east, right? We increase our position and then we’ll maximize our profit when the alignment hits?”
Silence on the other end, which means that Haresh disagrees. Finally, Haresh says, “We’re overleveraged, Jonathan. It’s already nearly three to one.”
This slows Jonathan down. The fund can only generate its outsize returns if it borrows heavily, leveraging the cash on hand so that it can put far more capital in the market than the money actually entrusted to the fund by its investors. The problem was that borrowing more than three bucks for every one dollar invested exceeded the model’s protocol, rendering the fund overly susceptible to interest rate movement—namely, the cost of such borrowing.
“What’s the CMT?” Jonathan asks.
The constant maturity tables. They’re more commonly referred to as the Treasury yield curve, but on Wall Street it’s known by its acronym.
“Almost inverted,” Haresh says.
Jonathan doesn’t know why Treasury yield curves become inverted any more than he understands the chemical reaction that causes water to freeze. But what he does know is that water freezes when it’s thirty-two degrees Fahrenheit, and the Treasury yield curve becomes inverted when an economy is slowing, and that, in turn, means there’s a good chance that interest rates will stay low.
That’s at least one bright spot. The cost to the fund to borrow a few hundred million dollars more won’t be prohibitive.
“Go to four to one on the leverage,” he tells Haresh.
“That’ll exhaust our credit.”
Jonathan looks into the restaurant, where he can see Ross and Goldenberg yukking it up. “Just do it, Haresh, and let me worry about where the money comes from, okay?”
“Okay. You’re the boss.”
Back in the restaurant, Jonathan sees that either Goldenberg or Ross has taken it upon himself to order another bottle of the four-hundred-dollar Amarone that Jonathan will be paying for. It’s just as well, as he’d prefer these guys get good and drunk tonight.
* * *
Jonathan stumbles home close to one in the morning. Natasha is asleep. Or pretending to be so she doesn’t have to engage her husband in his inebriated state. Jonathan doesn’t care which; he’d rather be alone, too.
After dinner, Ross thought the revelry should continue, so after they put Goldenberg in his limousine, Ross and Jonathan ended up at the St. Regis Hotel’s King Cole Bar, drinking overpriced scotch. Jonathan had watched his wine intake at Wolfgang’s, as he never liked to get too drunk with clients, but the scotch had pushed him over the edge. He’ll be good and hungover tomorrow, but it was worth it to keep Ross happy.
Before Ross’s speech became slurred, he clearly articulated the words that Jonathan had longed to hear: that he was open to staking Jonathan in his own fund. This had long been Jonathan’s ultimate dream, to be free of the Vincent Komaroffs of the world and to reap one hundred percent of the profits he earned. What impeded this fantasy from becoming reality was that he’d need somewhere near two billion in cash to start the fund, and in order to do the type of trading that would give his investors the returns they demanded, he’d also need to borrow close to six billion more. That’s what had long tethered Jonathan to Harper Sawyer: they have that type of borrowing power, and he doesn’t.
Jonathan realizes that given the amount of alcohol Ross had consumed, he might not remember anything about what he’d said tonight, or might pretend as if he didn’t if he thought better of his offer in the clear light of day, but if he was serious about putting a billion or so in a fund under Jonathan’s banner, that would go a long way toward convincing other big-shot CEOs to follow suit. The banks, in turn, might see that kind of blue-chip clientele as a reason to loosen the purse strings and give Jonathan the credit he’d need.
With the fantasy now a little closer to reality, Jonathan returns to one of his favorite parts of this daydream: the naming of his would-be fund. He’s considered honoring his humble roots (Carlisle Investments); or a Greek god (Ares Management); or going with a pop-culture bent (Gotham Partners). But in the end, he knew he’d never be able to resist the self-congratulatory ring of Caine Capital. It was just too good to pass up.
Right behind the name game is an even greater fantasy: his final showdown with that self-inflated egomaniac Vincent Komaroff. Jonathan envisions them walking toward each other like gunslingers in the Old West, in a final battle for supremacy. When they came face-to-face, Jonathan would tell Komaroff that if he had only been less stingy at bonus time, things would never have come to this, but now there’s no turning back. He imagines Komaroff begging—offering him a twenty-million-dollar bonus just for staying for a few more years—and Jonathan laughing as he literally turns his back on the boss on his way out the door.
Sometimes Jonathan even took the daydream to the trading floor of his self-imagined Caine Capital. Fifty thousand square feet of open space with helicopter views of New York City. Now a hundred traders occupy the X-shaped desk, with Jonathan still at its center.
His home is different in this fantasy, too. It’s now the penthouse of some new construction overlooking Central Park that he’s undoubtedly purchased for a record-breaking sum, and, of course, he summers in that oceanfront mansion in East Hampton.
It’s not lost on Jonathan that although he envisions his fantasy life with striking clarity, he never sees Natasha in these glimpses of his future. He doesn’t imagine that she’s divorced him, for he’s certainly upheld his part of their marital bargain by providing her the life of opulence she craves. And he doesn’t envision that he’s left her, either, as that would require alimony, and he’d rather not weaken this fantasy by depleting his net worth by half.
No, for it to truly be a fantasy, Natasha must meet some type of sudden end. Preferably one that makes Jonathan seem even more heroic for having endured such suffering.