Invest Like the Best with Patrick O'Shaughnessy - Danny Moses - The Big Short and Beyond - [Invest Like the Best, EP.34]

Episode Date: April 25, 2017

My guest this week is Danny Moses, who was directly in the middle of the biggest trades in market history, chronicled by Michael Lewis in his book the Big Short. Danny was the head trader on the Frontpoint team led by Steve Eisman, which was one of a small group of firms that figured out, in real time, the dire situation with mortgage-backed securities during the financial crisis, and how to build a portfolio to bet against the U.S. housing market. We cover his part in the Big Short story, but also lots of other interesting ground, including the state of sell-side research and financial markets. I love conversations with traders because they live and breathe market risk. You’ll be able to see why quickly in this great conversation with Danny Moses.   For comprehensive show notes on this episode go to http://investorfieldguide.com/danny For more episodes go to InvestorFieldGuide.com/podcast. Sign up for the book club, where you’ll get a full investor curriculum and then 3-4 suggestions every month at InvestorFieldGuide.com/bookclub. Follow Patrick on Twitter at @patrick_oshag

This podcast is sponsored by CFA Institute, the Global Association of Investment Professionals, whose mission is to lead the investment profession by promoting the highest standards of ethics, education, and professional excellence for the ultimate benefit of society. CFA Institute serves a global community of investment professionals, working to build an investment industry where investors' interests come first, financial markets function at their best, and economies grow. The chartered financial analyst credential is the most respected and recognized investment management designation in the world.

The views expressed in this podcast do not necessarily represent the views of CFA Institute. Hello and welcome, everyone. I'm Patrick O'Shaughnessy and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, methods, stories, and of strategies that will help you better invest both your time and your money. You can learn more and stay up to date at investor field guide.com. Patrick O'Shaughnessy is a principal and portfolio manager at O'Shaunicee Asset Management. All opinions expressed by

Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Shaughnessy asset management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of O'Shaunlessy Asset Management may maintain positions in the securities discussed in this podcast. Many of the most fun investing conversations are with traders and portfolio managers because they live and breathe risk day in and day out.

Of course, they are often risking other people's money, but controlling real money in markets is hard to match. Theories and ideals can fade quickly. Well-laid plans often don't last. This week's guest is someone who has lived through his fair share of market highs and lows, and I think you'll be able to tell quickly why I so enjoy conversations like this one. My guest is Danny Moses, who is directly in the middle of one of the biggest trades in market history, chronicled by Michael Lewis in his book The Big Short.

Danny was the head trader on the front point team led by Steve Isman, who along with a small handful of others like Michael Burry and John Paulson, made enormous profits during the financial crisis as they figured out in real time the disaster that was brewing in mortgage-backed securities and figured out how to position their portfolios in a way that would benefit from their insight. No easy feat. My conversation with Danny is multifaceted. We talk about Danny's role in the Big Short, both the trade itself and the making of Michael Lewis's book. We cover the history and current state of sell-side research and how ETFs and other trends have made it difficult for traditional bottom-up fundamental managers. We even talk about Dominic Strauss-Conn.

To start this episode, I've pulled a piece from the middle of the interview because I want to make sure that all aspiring asset managers out there hear Danny's answer about what he looked for when hiring an analyst. You can find show notes at investorfieldguide.com forward slash Danny. And now please enjoy this colorful conversation with Danny Moses. If you were designing a new analyst or you could somehow bestow upon a person three or four traits that you think would make. them successful, and this question's really aimed at younger people that are interested in asset management. What things or people know a certain strength about themselves do you think make for the best odds of someone succeeding, given all these challenges, right, given the fact that, you know, the fundamentals don't matter right now, they will at some point. So obviously I think a love for it

is maybe one of them because you're not going to last if you're in it just to make money. But what are the kind of most common traits that you think, you seem to have this kind of arbitrage mind, right, in numbers mind? What would you name as the most important? things and if you were hiring a 23-year-old. You've got to be an out-of-the-box thinker. You have to question everything that you see. It's not so much being cynical as it is being skeptical. Don't take anything at face value that a CEO is telling you. He may be telling the truth and most of them do, but don't take anything. Don't just rely upon that or other people in the investment world to tell you that you're right. You want people that are going to tell you that you're wrong. So the

first thing I do is when I meet somebody is how they how they approach things in life in general. Like how do you just accept everything at face value? Question it. Second is that, and this goes back to what I actually, when I hired a trader at Front Point, when we were really growing, I get all these resumes would come in. And I'm not going to single out any university, but let's just take some of the Ivy Leagues. They come in and I see the resume and I'd meet with them, brilliant people, very smart. But when I said, so where do you see yourself in two years?

I said, well, I'd be the portfolio manager. And I said, oh, that's, okay. So what exactly, how are you going to get to that level? well, I'm very good stock picker. I'm a very good, I go, what's your, you know, track record? So people that have a false sense of smart because they did business cases correctly and got an A on it versus the kid I ended up hiring that was from Boulder. You know, and I said, what are you going to do? He goes, I'll do anything. I will trade Asia for you. I will trade Europe for you. I will go meet to any meeting that you want. So it's the hungry person that's a sponge that just wants to break into the industry that you may want to come in equities. and then does it opening and fixed income? Just take it. It doesn't matter where you are within the spectrum because you're going to learn. It doesn't matter where you're learning balance sheet of a company or what their stock is worth. It's all the same, right? It all goes back to the same math. How do you get to these earnings numbers and how do you get to these interest payments and how do you get to those things? So first thing is out of the box. The second is, you know, obviously integrity, which you can't judge from meeting someone for the first time. But, you know, given certain situations, you can see this happened in their lives. How did you handle those situation? It's a people. It's a people.

People business, lastly, doesn't matter if you're dealing with coworker, a buy-side, sell-side analyst, a CEO of a company, and so forth. So understanding people and reading them and what drives them is another key. And that, again, I don't know if you can teach that to someone that doesn't have it already. So forth so, willing to put in the hard work, you know, willing to ask tough questions, and understanding that you don't know everything and really being a sponge and challenging. The best candidates to me are the ones that challenge that ask more questions in the interview than you do. They want to really understand what it takes. So you can tell, I think, right away, if a candidate is cut out for investment banking,

if he's cut out to be a sell-side analyst, a by-side analyst. And some are content were being grunt analysts, you know, at least. And that's great. Just get into the business. So it's an attitude and expectations. And what's happening right now is obviously the pay scales coming down across the board, buy-side and sell-side. So a lot of people are turned off.

That I would never hire the person that's now turned off by it. Because things are cyclical. There are some structural changes going on in the business for sure. But again, at the end of the day, it's not going away. And it'll come back. So I would almost want it, the person that said, I don't care that the pay grades coming down right now. I know if I get in, I'm going to be a star. And I want to.

So I also think it's the attitude of level of commitment you can tell by people that still want to pursue it. I know some of these kids out there looking right now that I'm trying to help at various places. They don't care what they make. They just want to get in and learn because they have a passion for the business. You truly need. My passion started when I was seven or eight years old. My dad promised my sister and I that we could get a dog if a certain stock at the time Oxford Industries hit $10.

Okay? So then back of the day, you had to get the newspaper every day. So I started reading the business section, just finding O. And it was OXM. And I just scan down, scan down, scan down. And you couldn't even, I mean, right, you had to wait for the paper the next day. And I'm like, seven and a quarter. Next day, you know, a week later, seven and three quarters, eight and a quarter.

And I started, that's actually how I got my interest in the stock market. I'm sure I would have had it anyway, but I'm like, wow, what is this? I'm following the company. It hits 10. Did we get a dog? No. You know, move the goalposts on me. So anyway, that's, you know, I had it at a young age.

Your role in sort of the financial crisis, playing a role on a team that now everyone knows about because it's been in a major book, in a major movie, the big short, we could start there. And instead of talking about the overall idea, everyone knows the broad story. I think it would be fun to hear your smaller particular story with how you ended up on Isman's team and what your background was sort of leading into that time. So I would probably go back to, I worked with Steve Isman starting in, I would say, 1996 at Oppenheimer. I was an institutional equity broker.

He was our research analyst. His associate was Vincent Daniel, who was also in the big short. And so they were a research team and I was a sales guy at the time. So I would take them around to meetings. fun stories like taking Steve to Alabama at the NBC Suite's Hotel to see the retirement system of Alabama where there's no hot water and he comes downstairs. You know, great, great stories like that. But the first go-around with these guys was the auto, the first subprime crisis, which actually was around auto, Subprime Auto, Ugly Duckling in those names back then. And that was in the late 90s.

And so Steve literally got up to the podium on the research platform and said, the following five stocks are going to zero. And he walks off. It's like, AIM, Ugly Duckling. You know, it was a, list of them and I turned I pulled viny aside I go vini what is this what is he talking about and it's easy it's the data go into the uh securitization database and you look at the moody's in s&p flows that are coming in and you can tell the x amount x amount of delinquencies there's only so much capital that these firms have they're going out of business there's nothing they can do about it i go okay well that seems pretty easy so it went into home equity loans from there and so forth so in the late 90s so fast forward steve leaves and goes to chilton then he leaves and goes

to an independent research firm that was basically dealing in Fannie and Freddie at the time. Josh Rosner was his partner who's now all over D.C., you see him a lot. And in the midst of that, 9-11 happens. And Vincent goes to KBW to be an analyst there to kind of fill many roles. Steve stays at Chilton and hires Porter Collins, who was the fourth person that was mentioned in the big short, as his associate. So I leave Oppenheimer from the south side and go to a place called Freeman Billings and Ramsey. Well, Freeman Billings and Ramsey was at the center of the subprime. business. They were the ones that brought Saxon public. They brought accredited home lenders public.

They brought New Century public. So as a salesman at the time, I was able to see these companies being built from the ground up. About the same time, 2003, 2004, Steve takes Porter and goes to a front point to be one of the first teams on the platform. I am a salesperson at FBR covering these guys. Vincent joins from KBW, joins Steve and Porter as well. So fast forward a little bit. The subprime business is growing. I'm a salesperson at FBR. I'm the senior salesperson, and I refuse to sell any of these deals. And instead, what I do is I go to these road shows. I take friends with me that are in fixed income. And I say, what's wrong with this? There's something wrong here. And so while I wouldn't sell the deals, which hurt me in terms of my own pocket and in my stature at the firm, I just didn't

believe in these companies. At the same time, Vincent Porter and Steve lost their trader at the time, and they were, they knew these companies well. They lost a trader and they said, hey, do you know anyone that can trade for us. So I said, I'll do it. I know your portfolio. I know how you think. This was late 2005, early 2006. Just give me a seat of the table and I'll figure it out. So I jumped over there in 2006 and this was right when things were starting to unravel in housing. So we were tracking housing data. We were tracking delinquent loans and mortgages and so forth. But more importantly, we all understood how these companies were financed, the bonds that they were issuing, the ABX that was being created and just the leverage.

that was entering the system. So if you combine our four brains kind of at the time, it really came down to we could no longer short stocks like New Century or Credit Home Lenders. One, there was not much stock that you could short. And if you found it, you were paying 40 to 50% interest on it. Secondly, they were paying these large dividends quarterly, even though we knew that they would run out eventually. So it really became the cost to short the securities was more than trying to figure out some other way to do it, which was buying credit default swaps on the bonds that are being issued themselves, which have been put together in various mortgage-back portfolios. So coming full circle on that, and as the movie portrayed, Michael Burry, who was played by

Christian Bale, was very early to this trade, and actually was the pioneer in terms of creating the ability to buy what in effect is a put option on the mortgage business. We did our first trade in August 2006. And from the very first statement that we received, we were making money. I can tell you that if we had been in the same position as Michael Burry, I don't think we would have made it through the trade. We were an equity fund that decided to go into the fixed income market. So your investors are going to have a very short leash. That way you guys doing. Exactly. So it worked right out of the gate. And I would say at the time, roughly, a third of the portfolio was long, a third of the portfolio was short, and a third of the portfolio was

in these mortgage-backed securities. So it wasn't our entire. It wasn't our entire portfolio. It wasn't really levered up very much. I think at the peak, we probably had five or six hundred million dollars worth of combination of CDOs and ABX and single name CDS. And so we probably could have made more at the time, but it was really going along with our strategy. And so we were able to look at our equities from a credit standpoint, which we has still done at my next firm, Seawolf, which we can talk about. But it was always a bottom-up approach because you cannot commoditize lending. It's one thing that you can't do. You can leverage it. But at the end of the day, if you underwrite poorly, it'll catch up with you. And Steve was a great

teacher for all of that. And so having the balance, you know, Steve is the brains and really understanding great instincts. Vinny is the best research analyst of all time. Porter, who understood the banks better than anyone in me, who was dealing with the street, trading, trying to understand the nuances at the time, really on the fly, was great. So I would say that from the book to the movie, the only thing that wasn't portrayed correctly was I was the guy that said, how you're going to fuck me? Excuse my French, I can say this on a podcast, okay, and so forth, because I was in the trenches, and Vinny and I did travel together

at various times Porter, Vinny and I traveled together, Steve, Vinny and I traveled together, the Las Vegas scene. So some of it was accurate. There was no alligator chasing us out of a pool, but we did go to neighborhoods and knock on doors and so forth. So it was just a surreal period of time, and none of us really took it for granted. It was lucky in the sense of timing, like I said.

We made money the day we put the trade on. And our counterparts, as you know, from the story, were Deutsche Bank and Goldman Sachs. And so it was just really a continuous discovery process of where the bodies were buried. And it was easy to see that people were making money too easily for a long period of time on Wall Street in the fixed-income business.

And it was too easy. So we can go into any of those stories in particular. But a lot of it was behavioral finance 101. and really understanding, recognizing that, and not in trying to trade away from everybody versus with everybody. So that was basically. You mentioned that you're making money right away. What was the moment, maybe not the first trade, but what was the moment that you first realized something was that an opportunity was there, that something was seriously wrong? Not only that something was seriously wrong, but there was a way to trade against it. You're saying pre-time we put the trade on or during

the trade? So both, yeah. Well, you know, I think. the stock started to work at the same time that the CDS was working. So we got confirmation on one side that the other was going to happen. There was a period of time, though, where spreads were widening in the fixed income market and the equities were still holding in. And there was a massive dislocation. So I would be talking to the head fixed income trader at Deutsche Bank and head financial equity trader at the same time. And the head financial trader had no idea what was happening on the fixed income desk. So here he is bidding for stocks in New Century, Cutter Home Lenders, countrywide. And I said, dude, you got to be very careful because your other side.

of your desk right now is out trying to short all this paper that these companies are out there creating. So there's a disconnect. So either walk across and find out what's going on. So there was a period of time where there was misinformation in the market. And I would say that when the stock started to drop, it kind of gave us a little bit more confidence in what we were seeing. And then there were some failed deals on the equity side. Companies' inability to go out and raise capital any longer. And New Century in particular comes to mind that they had really a highly levered balance sheet and they would go produce loans into the marketplace and they would sell the loans into the marketplace. So they would get funding from the Wall Street banks, produce the loans,

keep some on their balance sheet, and then sell the rest, right? And there was a retention rule that they had to keep a certain amount of bonds. Well, what was happening was they were selling the best bonds, say it, if PARs 100, at 103, 104, and keeping the worst. But they were assuming, everyone was assuming that 103 or 104 should be the price for their entire portfolio. So we realized it was a mismatch. And that was in the public domain that you could see that they couldn't sell a certain amount. And so as the performance on those mortgages deteriorated, the bonds deteriorated, obviously. And so the stocks were reflecting the balance sheet valuation of these companies at the time. And we knew once that happened that the other side was going to follow suit. So it was a combination

of having an antenna up. I mean, the movie portrays stuff on the news and seeing things that were out there. But I would say failed capital raises, companies go into trust preferred. to raise capital instead of traditional secondary equity offerings and so forth. There was a lot of signals that were out there. What was the first point that there was a, in the movie there's a bit of struggle between a great investing opportunity and the understanding that this is a disaster for the country and for a ton of people? Yeah. What was that feeling like or that that dichotomy like through the process? That was probably the strangest, craziest thing. The irony that we were at a Morgan Stanley hedge fund. So Morgan Stanley had acquired front point partners in the midst of

all of this and paid a nice chunk for it. I can't remember the exact amount, but I'd say four or five hundred million dollars, something in that range. And so while we found ourselves in a more stable platform, if you wanted to say, we realized, as this was all ongoing, and it was in the book and it was in the movie that, hold on, we work for the firm that may be at the center of all of this. What do we do about it? And so that was the first of all, the second part of that, to your point, was what's happening to humanity here, what's going to happen here? And there's a scene in the book, which is very accurate. And I actually have a panic attack on the trading desk because there was a day where the markets where all the bank stocks were coming

undone. We could have been long and we could have been short and everything was just dropping. So it wasn't a performance issue for us that day. It was more like, hold on a second. People are really flying out of these names. There's a real crisis going on. This is post-Fanny and Freddie. This is kind of pre-lemen right around that time period. And so Vinnie and Porter picked me up and took me to the steps of St. Patrick's Cathedral. So of course, as a good Jew, I'll go in and sit on the steps and, you know, pray. But sitting out there, and Steve had been at a Goldman Sachs conference, and he walked down, or Madison, or Fifth Avenue, sorry, came down, and I remember him coming up on the steps, and we were all just standing there. And so the scene in the book versus a scene

in the movie is when Vinny's on the phone with Steve somewhere and he closes out the trade. But the real scene is that in the book, we're on St. Patrick's steps watching people go by, and it's so surreal because we're thinking to ourselves, 95% of these people have no idea what's happening right now. And their job and their livelihood is going to be affected. They may not even be invest in the stock market, but they may work for companies that have some, you know, association and so forth. So we were scared at that point. So it became not about the money. And it really was never about the money for us. Of course, you make money for your clients to make money. It was about uncovering something, trading it. And I think the movie did a great job in terms of us being

detectives and in a fixed income world, equity guys in a fixed income world is really what it was. And so it was unnerving. We were able to deal with it, obviously, but it was scary. And I'll tell you, just take the one step further, the bailout stuff that happened, you know, the tarp, the tauph, the PIP and all the things that were occurring, we got very lucky, I think, in the sense that the trade that we were in while it was legal and there was documents associated with it, at any point in time the government could have come in and said, no, this is stopping, cancel it all, or whatever.

That's why Vinny and I were so emphatic about closing out the trade. 10 cents on the dollar. I mean, let the lawyers deal and let the brokers have the last 10 cents. We're not going to hang on here. I don't even know really what we're dealing with in terms of documentation. So their timing getting in was lucky and our timing getting out was timely, lucky, like hanging on for that last piece really for us. It wasn't about that. It was more about that we were right. How much relationship was there with other people that were also the detectives in this story? So Burry, Paulson, Kyle Bass, you know, other really prominent names in hindsight that also seemed to discover some part of this.

Yeah. How much did you, were you even aware of what they were doing? We were aware of some of them because we'd be at dinners or conferences and we would see other equity guys like, hey, equity guy, what's up? You're obviously on the same hunt that we are. And there were firms like Cedar Hill that they did exceptionally well in the trade. Paulson obviously did very well in the trade. But when Michael Lewis came around, he called Meredith Whitney because he had a relationship with her. And we all worked with Meredith at Oppenheimer, just to backtrack for a second. And he asked Meredith, who do you know, know out there that is involved in the subprime trade. And she knew Steve well, she worked with

him. She was the other associate with Vinny for Steve. And so he called us first. He called all these players, I believe, but he picked a select group of kind of three or four that he thought were the most interesting, the way they approached it, like the Michael Burry personality, you know, he was a surgeon, a doctor that became this hedge fund guy and so forth. So it was more of, I think, there were a lot of players out there. Some exploited the ABX, general, just kind of broad sense. of how to play the market. Some did single name bottom up stuff like us. And I think we were very unique in the sense of we use this information in the bond market to help us with our stock portfolio and everything with us was bottom up. And we were picking mortgage-backed securities in various

jurisdictions in California by various issuers that we felt had bad or shoddy underwriting standard. So for us, I think we were the ideal candidate for this trade and for Michael Lewis to portray us because of the uniqueness of how we approached it. It wasn't a blanket shorting call at all. But we were aware of the other people, but really it was maybe seven or eight firms that we were aware of. They were even involved in this trade to the degree. Again, a lot of firms were involved in the ABX,

but they were doing it against some other commercial mortgage-back portfolio or something. It wasn't a general, the world's going to end. It was like, this is an attractive trade. Ours was more, you know. What was it like working with Michael Lewis? It was great. So he first came in to interview us for an article. You know, that's how it kind of started.

It was going to be a 10,000-word article. Got to know him. I really helped him a lot in terms of introducing him to various people. Mark Rosenthal, who is mentioned in the book, is his shepherd, I think he says, or was my contact within fixed income who worked at Seabas at the time to really understand the markets and what was going on. But taking him to those meetings and then Michael asked the most incredible questions because he's a character guy. He likes to delve into what drives a particular person, not about the trade itself. or what the subject matter is.

He likes to see the introspective nature of a person and how they approach it. So working with him was great. And then he called up a couple months after the article came out and said, hey, this is going to be a book. I'm going to need you guys even more so. So it was an ongoing process. He would send words or paragraphs. Like, is this accurate?

We would say yes, but he was amazing. He had gotten so much information. And I learned more from reading his stuff than I knew what was going on, the marketplace. And then after the book came out in March 2010, We did some events together, and so all of us did. And then it was kind of done. And then May 6, 2010 rolls around, and the flash crash occurs.

And the first thing I did, other than not breathe for 90 seconds while it was happening, because we were still trading, but now we're on to the next trade, right, was call Michael Lewis and say, you have to write something. And he'll tell you this. You know, you have to write something about this because the markets are not sound. I mean, there's too many technologies being implemented in trading. It's just the safeguards aren't there. so forth. So one thing led to another there, and I introduced him to Brad Katsiyama, who now with

Ron and Ryan, they run I-E-X, and they were at RBC at the time, and I had just met Brad maybe six or seven months before that, and Brad was explaining to me why the market structure is in peril and what needs to happen and what he's seeing this going on out there. So long story short, Flash Boys came out of that conversation. And so from that point, I dealt with Michael again. And really, that was more me than anyone else on the team at that point because I was trading and so that kind of relationship. So then Flash Boys came out a couple years later. And so that, I've still talking to Michael a lot.

So I had nothing to do with his, with his latest book. But we're friends and we talk. He's always looking for the next great story. So we talk from time to time. Let's go all the way back to, because I don't know this story, and I'd love to hear it, the auto lending in the late 1990s. Kind of what the backdrop was there? What was the initial thread that Eisman found that was pulled on?

And how did that ultimately unfold? then I want to ask kind of your role back then as a salesperson, get into some of the nitty-gritty of Wall Street and the sell side and analysts and maybe tell a few stories there. So I would say that. So when you get hung up on, whenever you make a short call pretty much on the street to anybody. But I would say, like I had mentioned, in the Autoland, data is the data. So it's produced monthly. And you get to see the monthly rolls from Moody's and S&P because if you have outstanding debt in the marketplace in the form of a securitization, then you have to put this data out. And the data shows you what are your loss rates, what are your delinquency

rates, and how much cash do you have to back up these pools. And so it was pretty obvious that the underwriting that had been going on in kind of the mid-90s, 96, 97 was starting to catch up because auto loans, as you know, are two to three to four years. And what you normally see within auto loans is the first stage of deterioration is you extend loan maturities. The loan to values go up. And all that was occurring. So all that data was available. So what Steve and Vinny saw, the time was it was inevitable that the companies we either have to raise capital or go bankrupt. Well, they were ignoring the raising capital thing

and they were still producing these loans at a very high clip. So that was just math. And so the beauty of that is, as a salesperson, when someone gives you that information, you make that phone call. And I used to get hung up on or you can't get the portfolio manager on the phone. And I may find an owner.

So I would search out to see who own these stocks, right? And I may cover that hedge fund or mutual fund or not. and so I would call up, hey Patrick, listen, I see that you guys own 450,000 shares of Ames Financial. I really think you need to get Stephen Vinny in your office, and or let me just pitch this to you for 30 seconds, why I think you should sell it. Not even short it. You need to sell the position. You may ignore me, you may want.

But whenever I got Stephen Vinny in a room with that person, inevitably, that person would sell it. And if they did not own it and they were a hedge fund, they would short it. It was so compelling. It's just numbers. Really, then you apply that to what happened later on in the mortgage. It doesn't matter what it is. specialty finance is the most interesting area of all, I think, in the entire stock market. And that's not just because we have focused on financials for so long.

Non-deposit-funded institutions have the ability to do great things. And if they get greedy, they're going out of business. So it doesn't matter if it's auto. It doesn't matter if it's mortgage, right? It doesn't matter what area you're in and what you're lending in. If you don't underwrite correctly, then it's over. So that going through with that type of call was great because it was a great learning experience. And being on the sell side, I loved it.

you felt that you were an extension of all the portfolio managers that were paying you as a broker to find them ideas and to search for it. So calls like Steve's, and at the time, there was a handful of those on the street. No one makes those calls. The following six stocks are going to zero. I really think that's exactly what he said. So imagine as a salesperson, like, okay, well, I guess I'll just go with that then. We had Henry Blodgett at the time. So here's all this going on, right? And Henry Blodgett's out with a $1,000 target on Amazon. By the way, he would have been right eventually, right? Here I'm making one call in tech land that things have never been rosier. Oppenheimer was a big tech, had a big tech platform in banking.

And then here's Steve on the other side, ruining the investment banking business for the financial banker upstairs, right? So you're this ongoing. So I may call Amazon's going to 1,000. This is our morning call Amazon's going to 1,000, and the following six stocks are going to zero. Hey, it's Danny. Call me if you have any questions.

I'll be at my desk. So it was an ongoing. But having that variety, so having other sectors to cover was great because you needed stuff to other stuff to talk about. but I actually love the whole sell side experience. From your perspective, having been a part of it and then just in the asset management business ever since, how has the sell side evolved if you had to summarize it? What's still good about it maybe today?

What was bad about it in maybe the late 2000s? What's changed? Great question. So when I got into it, this was the DLJ was kind of the premier platform, right? It was entrepreneurs. You were paid on commission. There wasn't, you know, it wasn't banking first. It was research driven first.

And so when I got in Oppenheimer was a little miniature DLJ. It wasn't small, but it was kind of run that way, right? Entrepreneur, great sales traders, great traders, great analysts, and so forth. So it was set up well. And then, obviously, fast forward a few years. We had the technology issue with Quatron and so forth all over the street where it was, all right, my research is based upon how many banking fees can I garner. And we went through that whole process and so forth.

So we reemerge later with, okay, street's always going to pay, when I say the street portfolio managers, are always going to pay for very good research and so forth. But it became more about an access to management. We'll pay you for access to management. And so we moved from buy ratings on stocks to generate investment banking revenues to buy ratings on stocks so that I can have the CEOs of those stocks that I'm covering to visit portfolio managers so that I can get paid.

So pick your poison on either one, okay? So I just skipped like eight years, but that's really where we had gone. And in the same time when Dodd-Frank comes in and the large bank, are unable to really prop trade any longer and make money in various other ways, the capital starts shrinking at these firms. So from a trading perspective, the trading desk weren't committing as much capital as they have been in the past. They were all going to more electronic trading, dark pools, their own dark pools and so forth. So all this is going on at the same time where research, which is still research analyst trying to do very good work, are compromised, so

to speak, by many angles, right? One, to get access to management. Two, there's still the investment banking overhang. There always is, whether it's implied or not, it's always, it's always a part of it. And then the trading was changing at the same time. So now you have, you know, a algorithmic trading universe with not a lot of high touch trading. That's choppier, that's harder, with the commission rates dropping from what was an eighth, you know, to six cents to four cents to two cents, at the same time that the only reason many of these analysts are covering stocks is get access to the management. You also had a lot of these small boutiquey brokers pop up that were trying to be independent analysts that did not have investment banking at the time, and they realized

how hard it was to survive when you're independent because inevitably you're going to have sell ratings, if you're doing real bottom-up work, and you're not going to get access to management. You're not getting any banking fees. So great on paper, but not strong on execution. And we like the independent. I mean, I love some of these independent firms which have emerged today, and some are going to make it. Some will be bought by the larger firms probably. So I've seen a really disturbing transition of analysts that are turning a blind eye, I believe, to fundamentals and companies and listening to what the CEO tells you as opposed to doing their own work, knowing that they're getting compensated. It's all how you get paid in this business. If you get paid because you have

access to management and the big Boston funds say, hey, you're in our top quartile now because you got us 12, well, CEOs that are only going to willing to travel with you if you have a buy rating. I always try to get that list because I would short a lot of them because if I was a CEO of a company, I would want to travel with a guy that has a cell rating on me. Of course. Right? I want to, why do you have a cell rating? I want to see. So there's a lot of gamesmanship that goes on, but I would say this is the worst in aggregate that Wall Street research right now has ever been because I believe it is compromised. Listen, there's great analysts out there. There's great firms out there. There's people that really do good work. But it's hard.

to get, you know, a lot of momentum and stability at a firm that is completely bottom-up and objective. Now, there are a couple, like Autonomous, which is a great firm that follows our sector financials, is doing a great job, and they're completely agnostic. They get no investment banking fees. If they can get a company to come around, they do it if not, but they're just putting out data. And they have a, they're starting to build a larger following, you know, and I think that it's to take it one step further just in the market. And you're obviously in the business, so you understand this, with more and more computer. is taking over the landscape in terms of what's driving, if you look at some of these companies,

just pick a company, random company in the S&P, there's a chance, and probably more than mid-cap, small-cap, there's a chance that seven of the largest 10 shareholders of that company are ETFs. And so you're better off knowing what ETF owns your stock than what this company even does. And that's scary to me. And that's when fundamental investing goes by the wayside. And so you've even asked this question, but I'm going to take this to the next step. from an earnings quality perspective that's in the marketplace. If you move to a non-gap, which, you know, I'm taking us completely off subject, but gap earnings versus non-gap earnings.

And once you get on the non-gap train, obviously 99% of the time your non-gap earnings are higher than your gap, you're excluding stock comp and all these things which you need to live and breathe, so forth, these ETFs is where I'm going, are driven. There's momentum ETFs, there's earnings quality ETFs, there's dividend ETFs, there's all kinds. So as a CEO of a company, I'm not a lot of the company, I'm not. longer care about meeting with fidelity. I care about meeting the criteria of what these ETFs have in them. So if the ETF, if my biggest ETF is based upon earnings momentum, well, and I'm reporting non-gap, and I know that the ETF is following my non-gap earnings,

I can make up whatever number I want. That's going to make my stock price go up. So in what universe, you know, does fundamental investing matter in that? Now, it'll all come out in the watch eventually, right? But so I guess fast forwarding into that and bringing that all the way back to research. Research right now, fundamentally, at this moment, has never been less important. It will be important again. There is no doubt that we will transition and circle back to bottom-up investing at some point. The irony in that is, I feel that in order for that to happen, the market needs to have a major correction and an unwind, except for Oshanasi, which completely understands the entire quant model and gets it and it'll be there to protect everyone. What I'm saying is that, like,

there is a, there is something that really needs to happen here. And so I think we're going to come full circle back to the research question. But unfortunately, the only way you're going to get back full circle is if people figure out how broken the markets are. You bring up what I think is for me, the most interesting market dynamic story happening right now where I'll give you a couple examples. So one would be there's a guy who screens for over or underrepresentation of each individual stock in ETFs in aggregate. So they compare the company's market value just based on just simple weight in the market versus its average weight in ETFs. And one of the interesting ones is REITs. So REITs are way overrepresented in ETFs relative to their just weight in the overall market. The reason,

as you point out, is dividends. So people are buying dividend ETFs like crazy. Reitz have high dividends. But when you go and we've done this, look at the quant data behind REITs. The last thing you want to look at when buying a reed is its dividend yield. Right. In fact, the highest yield reits tend to go on to underperform. Look at the subprime mortgage reits. If those have been in existence, they were 40% dividend yields at the time before they went out of business.

Correct. The other one is like a Dorsey Wright, which is a momentum model that trades in other ETFs that then creates the momentum on which the model then trades. Correct. So you've got this crazy like cascades that, frankly, it's very hard to the timing of it. So you could be, this is one of those occasions when you could be early and it'll be indistinguishable from being wrong. And when we talked on the phone, you mentioned that looking at the market, it's a very non-fundamental tape. And I think that that's a really interesting way of thinking about this market is just the complete dominance of ETFs of passive relative to kind of old school bottom-up fundamental work.

And I'll add one thing to that, which you've touched on briefly with the REITs, is that a lot of these equity ETFs are fixed income ETFs. And that's a big problem. And the SEC, well, now they're, I don't know if there is an SEC any longer. I think they were just taken out. But they were looking into the mismatch between the duration of the assets in the ETF versus the ability to redeem in four seconds. And there's a massive mismatch. And so you've seen a couple times where in various bank loan ETFs, I would even say, there's been times where people have panicked. And there hasn't been the time yet where mom and pop have opened up their portfolio and seen a real change in understanding. what's going on, what just happened to my bank loan, ETF, but you have an equity security that's trading and fixed income. To me, that can't end well. So, again, I don't think people understand. To your point, they see

yield like, oh, great, 7% a year, I'll just buy this ETF. That's great, without any understanding of what they truly own. Let's go back to late 1990s, you mentioned Blodgett, and someone that's just able to move markets, we don't even talk about him specifically, but a much different environment where the sell side was

ascendant. So maybe a couple stories from back then that you found interesting or compelling in hindsight thinking back to that time. Well, they'd move markets because there was as much information, couldn't access as much information as quickly on Twitter and so forth. Now it comes and goes in four seconds. Somebody's already traded it before the news comes out. So I'm trying to think of times where, you know, back to Steve's example in the auto, right? The stocks were probably down 25% that day. When people are calling in and saying, what's going on, are you guys saying something and so forth? There was time periods during the crisis where Fannie and Freddie were trading down a lot. People couldn't figure out what was happening.

And we would understand what was happening exactly that the losses were mounting. We were looking at monthly data. Again, equity guys at that time weren't looking at any credit data. They were just looking at earnings per share. So back before information became as easy to access it as now, to your point, you were able to have market moving events in various names. I mean, there was some, I'm trying to think of all the analysts that we had back in the day. A lot in telecom, a lot of media. there was one guy that actually now that I just remember, Jung Jahan, Jim Jungjahan, one of the greatest guys and one of the greatest analysts at the time. He covered SDL, JDS Unifase and all these companies that were building telecom fiber.

So you'd have level three who was renting it out. You'd have, you know, you'd have all these companies. And the time was like telecom fiber was the greatest thing of all time. And so if you earnings were growing exponentially on these companies, or I should say revenues were growing exponentially on these companies, exponentially on these companies because companies were coming to them, Telecon companies were coming to the fiber companies to lease the fiber so they could use it in their networks. Well, you could actually do the math that as much fiber as people had been talking about that was possible,

would wrap around the earth a million times. Like there was just too much of it out there. So these stocks would go up literally 20% a day, 32% a day, on an analyst like Jim doing a revenue update, saying, I'm going to take my revenues up, 12% for the quarter, it's too low. And then people would immediately extrapolate. the 12% to mean, oh, 12% every quarter, this is going to compound it 60%. And so there was time periods, I would say really during the tech bubble. So I got to live through the tech bubble and the subprime crisis bubble.

Like I got to see a lot of iterations. You know what? It doesn't matter what the product is. It doesn't matter if it's tulips in the Netherlands, 1800s, doesn't matter if it's cotton and cotton in the 20s, Jesse Livermore style. It doesn't matter what it is. It's the same. People behave the same regardless.

They want to believe what they want to believe. they'll chase when they feel like they're missing something, so forth. So there was a lot of those I'd have to think back. But again, I'd go back to your point. It was more about access to information at the time. It wasn't as prevalent. So you depended upon, it took a lot more detective work to find out what was actually moving markets. So coming now post-financial crisis into Seawolf Capital,

where you spend a number of years continuing to trade and facing this non-fundamental tape. And thinking about the sell side as providers of ideas to the best, buy side. Do you think that that has gone down considerably, meaning are the best hedge funds, sort of the best buyside portfolio managers, a lot less reliant on sell side ideas today because of this problem, because the quality of research is lower with all these other, we'll call them perversions or externalities? A hundred percent, yes. For the most part, I think the great analysts that are on the by side use every resource they have to them. Many don't want to be confused or swayed a certain way. Like I said before.

or if I, being on the buy side and whether if I love a name, I would search out the person that had a sell rating on it. If I hated a name, I would seek out the person at the buy rating, right? That's what you're supposed to do in terms of finding the other side of your trade. As I mentioned before, the access to management. So if the portfolio manager, the analyst, knows he has to pay a certain firm because he does want to see this company and he does want access to them, it's kind of a quid pro quo. You have to act like you like the analyst, but they may indeed use it.

So I think it's a tool now more than a necessity, these sell-side analysts, because they are compromised. And again, not all of them, but many of them are. And so I think as an analyst on the by side, you're doing yourself a disservice if you don't do your own work first and then go, I think, to the street to see. So there are still some great ideas generated out of the sell side. There's some great analysts that are out there, and I can really only speak for our sector financial services that will throw you good ideas. now people though need immediate gratification if the idea doesn't work within an hour a day or so forth that's where we've gone it's about immediate returns and they'll say oh you're wrong no the thesis may be playing out over a period of three to four quarters and you're judging that call over period so so you can actually weed out the good by side analyst and the good sell side analyst at the same time through the same process the ones that are willing the ones that understand the dynamic so the ones that don't on either side won't be around forever the ones I like to call the athletes will always survive the roaches of this business. So when we do have a washout in the market at some point, whether we do or not, I don't know. But when we do, the survivors will be those

people, the people that truly understand fundamental. So, you know, I think the value is really hit or miss at various firms. What's also happened, I just want to add this, certainly in the hedge fund land, is hedge funds have come much more dependent on their brokers to raise them capital, to lend them money to for shorts. And that whole business, prime brokerage business, has been now consolidated to two or three firms. So you got Morgan Stanley Goldman Sachs, JPMorgan, but Deutsche Bank's been, you know, slowing down and backing out credits, Swiss, and so you're kind of prisoner to those firms also. So you need to pay those firms X amount. You're going to use their resources more. So things are pyramiding a little bit towards the top as far as buy-side accessing sell

side at the same time. That being said, you always have these spin-outs and these smaller unique broker dealers that can provide in various sectors. I'm always fascinated by which parts of the market, hedge funds or long short managers in general tend to traffic in. You mentioned financial services, so I want to dive in there, but why there are certain spots that might be more conducive to finding alpha or gaining an edge. So what was it about financial services that you found attractive, interesting, why was it fertile soil for an active strategy? Very good question. Like I mentioned before, the specialty finance group, so the non-deposit funded banks, so to speak, that don't have access to our deposits to go.

And, you know, as we saw with the whale trade that got in trouble, J.P. Morgan, right? You're using customer deposits to go. You're not allowed to do that. So companies that have unique strategy within a certain sector, again, whether it's going to be auto or mortgage or mortgage insurance or whatever, someone that doesn't have access to an endless amount of capital is dependent on the securitization markets to get funding. So for us, it becomes what is the rate you're willing to accept in that securitization market? at your cost of funds, basically. And then how are you running your business?

How are you underwriting your business? So, in the most time, we're talking about it's something in the lending space where you and I are talking about. And if you can find out the trends or the way that they're running their business, you can easily see what's going to happen down the road. If they're growing too quickly, they're going to be in trouble. They don't have enough in reserves on their balance sheet. We still see this all the time.

Of course, the socks don't go down. But we see stuff coming down the pipe. It's just a question of timing. The big banks, for the most part, it's a rate trade. They're all kind of grouped together. There's not a lot of differentiation between the companies, the drivers for the companies, right? It's the Fed Funds rate. It's the rate.

It's the loan growth, for the most part. There's nothing unique per se. Now, you can operate the best in credit card if you're J.P. Morgan. You can operate the best in your C&I book if you're JPMorgan. You can be the best at what you do, but your alpha maybe is, it's very small, in our opinion. And our whole idea at Sea Wolf was don't raise too much money. So cap yourself at $500 million in assets so that you can go play in small and midcap names. And really no need to trade the Bank America's and the J.P. Morgan's except at the inflection points,

oversold, overbought and so forth. And really find the best management that we think runs a particular company, the best industry with the best growth. It could be in student loans. We could have a long and a short in the student loan group. You could have a long and a short mortgage insurance. You could have two longs, two shorts. we never looked at it that way. We didn't need along to have a short.

We were just looking at on an absolute basis, and it just kind of works out. And Puerto Collins, my former partner, always had the best example. He goes, why would I trade a JP Morgan when I can create six companies, three longs, three shorts, that do exactly what these guys do?

So find the best and the worst in each of the six sectors that J.P. Morgan plays in and go after those six companies. And to us, that was kind of our strategy. And unfortunately, our return's been fine. nothing spectacular, is that fundamentals, again, haven't mattered, or it's just taken longer than you would have thought. And our investors' timeline may be different than ours. So I think what you're

seeing now and the hedge funds that are staying around are going to survive have to accept lower fees, but what they should do is get longer duration capital. So if you go from two and 20 to one and a half and 15 to 1 in 10, as that's coming down, I think the only logical thing is to ask for larger lockup so that you have much longer time frame for these things to play out. And that's what's also been going on in the market, is these baskets of also, which we didn't talk about, which is the same as ETFs. But Goldman Sachs has all these baskets. What basket is your stock in? Not what the earnings were.

What basket is in it? So long-winded answer to your question. But the same time, that's, you know, we want to find companies that if they succeed, the socks can triple. And if they don't, they're out of business. There is no, it's zero-sum in that world. We've talked about, obviously, the autos and subprime. Thinking back, though, on your sort of out-of-the-box, like don't take anything for granted, don't trust anything, do your own work. What was the first for you personally, whether it's a stock or a trade or an idea that pops to memory as something where you

were kind of applying that filter or that way of looking at the world where you found something and thought, wow, this is, markets got it wrong. I would say it was the JDS unifase that I mentioned before, SDI merger. Was a merger back? I don't remember what the year was. I'm going to say it was 1999, maybe 2000, somewhere in there. And I remember that having done the bottom up work on both companies, that both things have started to turn down, and both companies have started to turn down, and they merged with each other. And the stocks both went up at the time, and I remember thinking this isn't right. This math can't work. There's not enough, there aren't enough cost

cuts, so to speak, at the time. So that was one of them. But what really changed the way I looked at investments was a book, The Rise and Fall of Long-Term Capital, when Genius failed, Roger Lowenstein, which is the best book about, it doesn't matter that it was about rubles and currency crisis. It mattered that it was the egos of the people, the willingness of the sell side to trade for free because it was an honor to cover these guys. I was in long-term capital's office. My uncle got me an interview in there in 1996, I want to say, and it was over in Greenwich. And there was a room. They go, Danny, do you know Delta? I go, sure. I know Delta. Do you know gamma? And I go, yeah. He goes, do you know theta?

And I go, sure, decay. He goes, how about Vega? Or something like that? I go, what do you mean, Vega? And they take me in this room and there's like a war room. Meanwhile, you know, Scholes is walking down, one or I'm like, hold on a second. So prior to the book coming out in the crisis, I actually got to meet the people in brilliant minds, obviously, and very good people. But that book changed the way forever that I, or the incident in looking back, changed the way that I approach anything. It's that no trade is as good as it appears. Leverage will always bear you in the end if you have the wrong trade on. Egos always tend to get in the way of a very good story, and eventually those things always unwind.

So there's a cycle of life to all of the, you know, it doesn't matter again what product you're trading. So it really changed the way that I viewed, you know, the world of investments. And again, leverage is the root of every demise. It is. It can work for you for a long period of time. But when it works against you and there's a margin call, like happen in long-term capital, it's over. and their portfolios are taken on the other side, and those brokers will turn on you in a second

when they realize that they're now at risk. So I think understanding that no trades ever as good as it appears, for a long, that all good things must come to an end to a degree, but it was more about, I think, the egos, again, so it doesn't matter that it's Russian ruble. It could be internet stocks. It could be subprime mortgages. It could be whatever.

And the other thing is that one of the things I really look for is, how do people get paid? So if I'm looking at a company that has a sales force out there that gets paid on commission, so forth, or gets paid by duping customers at the cash register to buy a warranty on a product, right? Those things aren't sustainable of a long period of time. These aren't real numbers, real earnings. They're more ill-gotten gains, so to speak, that aren't sustainable. So, you know, just to dive into one other sector, which I think is really interesting,

is that one of the sectors which we kind of, within specialty finance, although they hide in retail, is looking at retail companies that have a finance arm that are really driven by their finance division. Walmart is a lot of its history. Think about like a Harley Davidson, which is not so much the motorcycle. It is how are they getting people into the motorcycle? Cons was an interesting name, C-O-N-N, which, you know, has had their issues. They were selling plasma television mattresses and so forth, and they were charging customers to finance these mattresses. Well, when you drive, when you take a mattress, I mean, take a car off a lot, it's worth half.

Take a mattress off a lot. It's down 99% is it's where zero. But they were making the money. They were making the money on the finance. So if you took apart the earnings and the balance sheet and the drivers, it was late fees. It was finance charges. It wasn't the mattresses and the TVs. And those same TVs and mattresses were being sold much less at counter.

But these are subprime people that were coming in and being taken advantage of. It wasn't that they were doing that Com was doing anything against the law at the time. They were within, you know, user. laws and so forth. It was more of, it's not sustainable because of credit. So finding things like that, ideas like that when you see that. Harley Davidson was a great example. I think it was in the book where we found a motorcycle company that was just a finance company. You know, it's all, and they had so much credit issues on their balance sheet. So it could be any, but I go back to, again, it always turns out to be the same thing. It always turns out to be the same thing. You mentioned value a few times,

PE ratios. I think it's very relevant. And at the market level, where by any measure, it's expensive. How did you think about valuation as part of the bottom up framework? At what stage did you consider it? How much did it matter in your evaluation? Yeah, it matters. Matters to your point. You and I talked earlier about something you guys do, which would be the growth and earnings and how do you apply metric to that? How important is that and so forth? Starting up bottom of valuation, cash flow is always the most important thing. It doesn't matter. You can adjust earnings to a certain level. You can have debt and not count that in your gap earnings and so forth. But cash flow is the most important component that we would look for, that I would look for in a company. If you're producing

cash, maybe you're paying a divin and maybe you're not, but it's always a sign of health. So that's one thing we would certainly look at. As far as other bottom of metrics that we would judge, it's tough to say that you can convince anyone to move a PE multiple from 9 to 12 or 10 to 15, because as we discussed, it's arbitrary, right? It's, do you see something or do you think the market is underappreciating an asset or a product this company has? And if so, even if they showcase it, will the market care? And that's why people pay one and a half and 15 or two and 20 to find those type of companies.

And then there's the next level, which we never did, which is activist investing. I think there is a great place for activist investing when it's done correctly. But we've seen what can happen when it's not and it's done out of greed and leverage. but sometimes you need the activists are the ones that come in, find a company that is trading in an APE, see a lot of expenses that could be cut, but more so just change the complexion of the company. So you'll see companies that were the same on Thursday as they were on Friday,

but an activist got involved and the PE went from 9 to 13. So to try to find something where you believe an activist will come along and maybe it'll be you that ends up doing it. Or you can sit on something, I guess I would answer it this way. You're willing to sit on a, on a stock for a long period of time. If you're confident that the business plan is good, the management is good, and they know what they're doing,

and there's an exit strategy down the road, whether it's a special dividend that causes a stock to move higher. You can't ignore it for a long period of time. That's why I mentioned cash flow being the most important opponent. You're going to do something with your cash. You're going to either buy back stock, you can issue a special dividend, you're going to make an accretive acquisition.

So I think another long-winded answer to your question, I think starting with the balance sheet is the best approach, how healthy is it, and what is this company involved in, and then go from there. So work your way up off the balance sheet out to what the company actually does, and then try to figure out what the long-term value is of the company and what the long-term. As someone that tries to model valuation just with data without diving into individual companies, trying to come up with ways of comparing balance sheets, cash flow statements, net income, aggressively accounted for earnings, things of that nature.

it's always very helpful to hear the fundamental perspective because that always then informs sort of the quant research, if you will. There's a lot of different kinds of quant research. There's the hyperaggressive informational edge with really short half-life signals. There's the much longer duration strategies. Things like valuation, I would argue, will probably work in some way, shape, or form forever because I think there's a behavioral undercurrent to it. But it's helpful to hear the fundamental perspective because that informs the quant. One thing is that this use of non-gap is really nuts. I mean, over two-thirds at least of SMB 500 companies report non-gap.

Sometimes it's valid, the most times it's not. A lot of technology companies, you know, exclude stock-based compensation out of it. I don't know when the, I don't understand how you can do that. It's a part of doing business and so forth. A lot of the in the mergers and acquisitions, you extract out merger costs related to the greatest rosy scenario of all time, only to add them back later in time over a period of time. And that's where you've got to be really careful in terms of your models, which I'm sure you guys do, and looking at what is the real earnings growth.

I don't know the numbers right not in front of me, but the non-gap earnings of the S&P versus the gap earnings. The S&P is trading well above 20 on a PE basis, on a gap basis. So we've forgotten. And once you're on the non-gap train as a company, you have to stay on the non-gap train. And again, last year the SEC was sending out letters. A couple of the larger companies have gone to, I think, Amazon has now moved to GAAP, or they're starting to move to gap and so people are starting to move there. But that's going to be a rude awakening for people when they go from a $12 non-gap,

even though the same company and same earnings to an $8 gap number, and then have to reassess the valuation. Nothing changed other than the way you reported, but the complexion changes. So identifying that, when does that trend stop? I don't know, but those are all. Yeah, I mean, one of the best examples of your idea of just don't take any reported number or idea or where to the seat. Take nothing at face value that you have to dive deeper to understand what's really

driving the business. It's amazing how markets can just all kind of be dancing to the same tune, the same number, even though the underlying truth is very different. And I think the current market and so ETF driven and obviously quant driven and so many different strategies, it's money flows, right? It's just about supply and demand. And there's still money that's chasing the market. So there's nothing you can really do about it right now. And I think each time we get a slight pullback or there's a macro event that happens, geopolitical, whatever, and it's reinforcing, I think, this false of non-fundamental stock market valuation. Because the money flows, you know, just to touch on this for a second, which I think is an

important point, active can't beat passive. If flows are going out of active into the benchmark the active is against, it's math. If I have a billion dollar fund that is tracking a midcap growth ETF, and the midcap growth ETF is attracting money at a billion dollars a month at a clip, and that's my index. And I need to see the structure of that ETF before I even. and looked at bottom-up stock picking, because by definition, if money is flowing out of mine into this, I lose. There is no way to outperform that unless you take cataclysmic chances and have a 12% stock position, which you're not really allowed to do in a mutual fund. So it's just reinforcing this false flow.

Again, not Oshanasi, not quant, you guys are perfect. But my point is that it's just reinforcing this. And at some point, it's got to go. You have ETF providers now closing ETFs because they can no longer put money to work. And then to your point, there's ETFs on ETFs. It's insane. It's not going to end well. Yeah, the relentless bids are kind of crazy.

So when we talked last, you told me a great story. I'd love you for you to repeat it about your friend Ira and the dinner you were at during the financial crisis, I think. So one of my best friends is Bill Bondsman to the stars, Ira Jettelson. And he's done everything from Pleistco Burris to Lil Kim to any mobster family you can think of in the New York area. It's a real treat to go to Rayos with him because you literally get lifted on a chair when you walk in. So during the crisis, I think it was in 2008, I have to check the date. But Dominic Strauss-Kahn, who was the head of the International Monetary Fund, the IMF, who was very central at the time to try to figure out what was going on worldwide,

not just with the U.S. financial crisis globally, was arrested, as everyone knows, in Midtown, actually taken off a plane after he had tried to leave, after he had committed, you know, or supposedly committed a crime in a hotel. Well, that night I'm out with Ira and his wife Blake and my wife, Allison, the four of us are having dinner. And Ira gets a text on his phone. And he looks at me, he goes, I got to go to the city. And I go, why? He goes, the head of the AMF just got arrested.

And I said, the bowling league? So there's a president of a bowling league? I don't understand. Ira, he goes, I don't know, some guy Khan. And I say, Dominic Strauss Khan? He goes, yeah, something French, something. Yeah, got to go. I'm like, dude, I'm coming with you.

I go, Domney's Josh Khan just got arrested in New York City, and he's the head of the IMF, and the global financial crisis is ongoing and what's going on? So I got a great look into his world. I stayed in the car. But this goes on for hours and hours. He ended up getting the judge to get him an ankle bracelet, allow him to be down in the village somewhere he had an apartment. And Ira doesn't judge the guilt or innocence of these people, right.

He just follows the process. And so his clients are the criminal defense attorneys who rely on IRA to get their clients out as quickly as possible. And a lot of time IRA finds out about an arrest weeks ahead of when it's going to happen. The racketeering charges come and get ready. Don't be out of town on April 4th, so forth. So he and I world could not be any more different. But at the same time during the time period I had off between Front Point and Sea Wolf in 2011,

we created something called Bell Street, which trademarked and so forth. And we did one video, it was a 30-minute long, about my world and his world, and often they do end up colliding. Now, many of the Wall Street crimes are federal, right? and he's a bail bondsman on the state level. It does any state, but it's all state crime. So it wouldn't be a hedge fund guy that's inside a trading. It would be a hedge fund guy that gets, you know,

that's in the Hamptons that gets arrested for assault. That would be an overlap potentially if that hedge fund person turned out to be someone that was market moving and so forth, right? So there would be some overlaps like that. Or you could be a mobster that was involved in penny stock ringing. Again, doesn't affect my world, really, but it does affect kind of the world of stock invest. and so forth. So there's many times, but there's characters. What's funny is his characters and our

characters are all just characters, right? So we've talked about doing something together, doing a podcast or a show called Bale Street. He had a book written about him called The Fixer. Well-known book. Yeah. So it was interesting. So again, it's nice to have a friend that's not in my same walk of life. So how does one become the hyper-successful bail bondsman? What is the, what is the skill set? Talk about working hard. It's a basic business. I mean, the math is pretty straightforward of what the service provided. Just like the book says, he's the fixer. So if a criminal attorney stakes his reputation on taking care of his clients or a group of clients or gets a reputation for being able to get you out on bail quickly, processed quickly through this system. So Ira knows the

system well. He knows every clerk at every court. You know, he knows which judge is friendly, which one isn't going into it. So the criminal attorney may call, hey, Ira, I need you. Ira says, where is the guy? What court is it going to be in? So he has all the information ahead of time. So Ira, before he even meets the client, is already doing all the back-end work, calls the clerk, I need to get this guy out. I don't know how he, you know, I'm not going to say how he does. Maybe the guy's sitting in the front row of the Knicks games. The clerk, I'm not sure exactly. He won't go there. But he has his network of people. And so people know that Ira will never drop the ball that'll get him out. So again, if you're a criminal defense

attorney, your first call is Ira. And in the book, and not only that, Ira does things outside of that. So he'll work with you if you can't come up with the bail, right? He'll go, all right, do you have an aunt that has a house? Do you have a, do you have something where I can get some, some type of collateral? Or sometimes he takes it a good, good faith. But he's, he's an insurance provider, right? So he has an insurance company behind him, behind him that has to sign off on the bales itself. So there is a regulatory process within, within your world. And I won't mention names, but I had mentioned that there was a, there was a hedge fund person out there that was trying to help a friend that called an IRA, got his name and said, Ira,

need your help. Ira helped him out. Bail went on for like six months. The case was actually dropped, ended up being dropped. And the money that was owed was like $7,200 that Ira was owed in interest. And the hedge fund manager said, no, it's $7,054. And Ira had to go back and say, no, there's two days that have accrued that you didn't, that you'd be the last, the first and the last. And so he tells me these stories about certain people like that in our industry, right? Right? And again, I'm not going to say who it is. But there's certain people who you're like, really? The guy's worth obviously Uber, Uber money. And so, you know, it's funny stuff. Just the colorful world. He'll call me every once in a while. Hey, do you know so and so? I'm like, yeah, he goes, okay, well, their son's about to get arrested. And I'll never share that information or something like that. But it'll be, I'm like, wow, you know, that's going to be a scandal. It reminds me I was reading Agassiz's autobiography recently.

And there's a little scene in there about how Sampras is leaving a restaurant ahead of him or something like this. And they're kind of like semi-friends, like frenemies or something. And he goes to the guy, the valet guy, and asks how much did Sampras tip you? And it was like a dollar. Right. Right. Right. So funny.

So what's next for you? What do you think? You mentioned this kind of fun idea of Bail Street. What has your interest right now? or do you think it would go from here? Yeah, a couple of products that I've kind of actually patented and working on. They aren't blackjack games or something else. There's potentially doing some type of podcast or something in the entertainment world.

There's a reality show that I really want to get started. And I talked to Michael Lewis about it. And it's kind of an interesting idea, has to do with former insider traders or white-collar criminals, putting them with blue-collar criminals, so to speak, and seeing how those worlds mix, something like that. some of these private equity investments, I'm helping the companies either try to raise capital or touch. And really, I mean, I got to tell you, 20 years on Wall Street with a two-month break in between the entire time, took a toll on me physically, psychologically. I'm literally spending,

you know, I've kind of been out of it now for almost two months. And so I'm just getting back into shape and spending time with the family and so forth. So right now I'm just kind of taking it easy, but I always have something going on. I'm curious what you think about, talked a bit about sports broadcasting too. Something that you're interested. Maybe you could touch on that for a second. But it sounds like you're interested in media, generally speaking. So what's the root of that interest? So I grew up in the South and my dad had an accent. He was from Southern Georgia. You wouldn't believe that the accent, my mom's from Greenville, South Carolina. And so I always thought that I end up with this Southern accent, which would be fine, except for the fact that

from a very early age, listening to University Georgia football games, it was a broadcaster. Larry Munson, who was always my idol. I mean, he has some famous calls against Florida, always who I hated growing up, hated the Gators growing up. And I would always find myself imitating him or some other sports broadcaster or doing my own show. So I'd watch games, and I would basically sit there, and I would do my own play-by-play.

And so when I got to Emory, I went to Emory, I got an internship at CNN. And I worked in sports, and it was when Fred Hickman and Nick Charles were The Rage. I mean, this was when, this was before ESP, PN really took off, but also the sports show was 1130 at night every night. So I was a senior at Emory and then I was interning. And I really felt that this was going to be my calling that I was making tapes and I've made some sports tapes before on air, not that never got released to the

public, but on air. And then when it came down to it, getting out of Emory in May of 91, all my friends were moving to New York City and everyone was coming back and going to get Wall Street jobs or whatever, going to law school somewhere. And I went into CNN and I could have stayed as a production assistant and probably done that. but I was given advice to go to the Midwest and go cover like a high school football, be a local sports anchor. And at that point, I decided, I chose that maybe I'll come back this later in life, but I wanted to go be with my friends in New York City and live that life versus doing that.

So I made that choice at the time. It's always been a passion of mine to not necessarily be on air, but doing something in media because I think it's fun. You meet great people and so forth. So it's still something I may want to go back to in time, whether it's the version of of this or talk show or something, but I don't know, it's being around people and living life to its fullest. It has something about it that you can touch other people's lives and have an impact on it. And if it's entertaining at the same time, like sports is and was for me

at the time, even better if your passion. But it was a really a passion thing for me back then. And then I moved to Wall Street and that became, that was also a passion and it quickly became more of a passion. But so you can always go back to that. The last question I always ask everyone is the kindest thing that anyone's ever done for you. Okay. In life or in business? You can interpret it however you want. That's a tough one. You got me. I mean, we went from Bulldog football and long-term capital to the kindest thing.

I mean, I've been given big breaks. And so anyone that says wherever they are in life that they weren't given an opportunity, I think it's what you do with the opportunity. I would say I was lucky to have the parents that I had. But secondly, there was a particular person, John Race in my life that kind of was my, he runs a fund DRZ to Prince, Rays and Zolo down in Florida. He was kind of a guy I looked up to, a good friend of my father, he's a little bit younger than him.

And he got me my job at Freeman Billings and Ramsey at the time, basically made a phone call for me. And it was really out of kindness because he knew I was a good sales guy and so forth. So that turned out to be the biggest break of my life. And he's always been that kind of guy for me that's kind of the guy I look up to my mentor in this business. So I would say that was one of them. I think what else?

My wife does kind stuff for me all the time. I would have to mention that or I would be in deep trouble. But you got me on that one. Many people have been great to me. And again, I would go back to people can open the doors for you. And it's what you do with it once you get it. And I was the first to say, my aunt got me my first job. But she didn't get me the promotion.

You know, she didn't get me. So, you know, there's always been people that have opened doors for me. But I think people should never take that for granted. And then always do the most with the opportunities that they get. I broke my leg in 1984. and Miss Sweden, who had just won Universe Pageant, signed my cast. That was why one of the kindest things

that anyone was ever done for me. That's a good one. So there's many great people in my life. Awesome. Well, I like to end on a Swedish Miss Universe. That's a good. Yes, exactly. Yvonne writing was her name.

This has been a blast. Thank you. Thanks for your time. Hopefully we can do it again. Thanks, Patrick. Enjoyed being here. Hey, everyone. Patrick here again.

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