Book Review: IMs From the Edge and the Lehman Blow-Up

Title: Street Freak, a Memoir
Subtitle: Money and Madness at Lehman Brothers
By Jared Dillian
(Touchstone/Simon & Schuster, New York, 356 pages) $26

Successful professional traders, even when they’re riding high, need a medical plan that pays for psychiatric care and another job to fall back on when things go sour. They should also understand the power of the central bank.

Those are some of the themes of this remarkable, at times raucously ribald, book. It details the trading industry’s Darwinian warts, as well as those of our nation’s most powerful bank.

Trading, says the author, is one of the purer forms of capitalism. Unlike many other professions—jobs in which results can’t be seen in the short term and in which workers may be well paid for years no matter how incompetent they are or how unprofitable the business—traders have to face the indisputable truth of raw numbers every day: their P&L.

“Profits are profits. Losses are losses. And there are no evading losses,” writes Jared Dillian, a former Coast Guard officer, who traded for Lehman Brothers and specialized in arbitrage and ETF trading.

“You see your P&L every day, and the negative number stares you in face,” he writes. It’s easier for most other people to fake it in their jobs for years, he argues, avoiding the unpleasant reality of the sometimes futility of their work.

And given how brutally competitive the business is, the trader survival rate is low, notes Dillian, a scarred veteran of the trading wars. Among other things, Dillian suffered from bipolar disorder, had a nervous breakdown and needed hospitalization. But such was the nature of the trading game, where there are only ex-traders and survivors, according to Street Freak.

“If the markets are mostly a zero-sum game, then the winners stick around and the losers find other things to do with their lives.” Dillian estimates the chance of a trader lasting 10 years as “about one in five hundred.”

Dillian was not the one out of 500, yet he was very successful for a number of years. He traded for Lehman Brothers from around 9/11 until the firm’s demise in 2008. He rose to become a star who headed its ETF trading effort.

But he was also a casualty of the trading wars. He had an emotional breakdown, though eventually he found a way out for himself. While at Lehman, he developed a popular newsletter that analyzed market trends and pinpointed the dangers of our monetary policies. He used those writing skills to survive in his post-Lehman life. He founded and runs a subscription-based financial market report. This fascinating book is the story of his voyage from Coast Guard officer to trader to newsletter editor.

Street Freak is being pushed by its publicists as the latest version of Michael Lewis’ Liar’s Poker. There are similarities, but also differences. Liar’s Poker is tame stuff compared with the sexual content, lurid language and macroeconomic analysis one finds here.

Indeed, in contrast to Liar’s Poker, Dillian’s work is more a mix of blistering insights about the nature of trading, along with the story of a trader’s breakdown and a sage analysis of the policies of a flawed central bank called the Federal Reserve.

That central bank critique is something I don’t remember in Liar’s Poker. But it is here all over Street Freak and gives the book a different, more insightful dimension. Dillian not only seems to comprend his job and career, but also understands why the economy was about to tank in 2007. His analysis was exactly right: Look at the ultimate banker, the bank of banks that is supposed to prevent recessions but actually causes them.

The Federal Reserve, Dillian correctly notes, constantly lowered interest rates as a way to pump up the economy, but it ultimately depressed the economy. It was a dangerous strategy, which he was able to take advantage of, making millions for Lehman. But it was also a loose money policy that eventually blew up the economy.

Dillian saw it all and understood it all because understanding how to profit from the Fed’s cheap money policies was part of his job. This, along with his relentless work ethic, which in part originated in not having a diploma from an elite school, was an essential part of how he made his way up Lehman Brothers’ greasy pole.

As a former trader, Dillian is remarkably good at identifying why the Fed’s policies failed. What happened, according to Dillian? People were borrowing too much money, and they could never hope to pay it back. “I saw them do it. We all saw them do it,” he writes.

Correction: Dillian, a math whiz, certainly saw it and understood what was going on. But many other Americans and lawmakers pining for re-election didn’t and still don’t get it to this day. (They’re the ones cheering when the Fed announces it will not raise interest rates for the next year and a half).

But it’s dangerous not to understand history. That is why this book is almost as much a warning of future disasters as an explanation of how markets were led into the subprime, market meltdown crisis during Dillian’s Lehman years.

How did it happen?

In two words the problem was, and is, cheap money. Average people, with the support of leading members of Congress perpetually screaming for lower interest rates and easy loans, thought they could get something for nothing.

“From sophisticated housing speculators to people whose eyes were bigger than their stomachs, everybody was getting in on the act and taking out negative-amortization mortgages with no money down,” he writes.

Indeed, Dillian’s fascinating something-for-nothing message is confirmed by George Melloan’s recent book The Great Money Binge. In it, Melloan contrasts two Americas—the America of 1945 and the America of the third quarter of 2008: “The rate of debt-to-equity was $18.6 billion to $97.5 billion in 1945. By the third quarter of 2008 it had reinvented itself big time, with $10.6 trillion in debt stacked against only $85 trillion in equity.”

This is the same thing Dillian finds. But Dillian also adds a warning for the cheap-money fans about the next potential crisis and where to find its source: “Every hyperinflation in human history can be traced back to a situation where the central bank was being operated for political ends.”

Indeed, testimony abounds of the wisdom of this Dillian insight. Separately, in Alan Greenspan’s The Age of Turbulence, the former Fed chairman—once whooped up by the mainstream in silly books like Bob Woodward’s Maestro—gives a breathtaking learned-nothing performance.

In The Age of Turbulence, Greenspan concedes that the Fed’s loosening of loan criteria caused the meltdown. But in the next sentence, he admits it was worth it because he believes in the goal of every American having a home!

How many more meltdowns, how much more must we all suffer before the Greenspans learn the lesson that cheap money is a kind of crack?

Elsewhere in Dillian’s book, the author identifies the technical details of various trades. He also explains why a few prosper in the business. Why do only the few do well?

They understand the nature of business is not a final end, but a process; that a trader, no matter how successful he or she is, is always someone who must evolve and adapt. More important than knowing any one thing is the endless ability to learn the next thing.

“Trading,” he writes, “is a constant process of intellectual and emotional growth, and people who trade for twenty years are still learning what to do and who to be when they finally hang it up. I was so focused on becoming a trader that I was missing out on the good stuff inherent in the process…”

Along the way, Dillian also spices up the book with the lurid lexicon of the business. That gives the book at times more than a touch of Animal House, but also provides the reader a feeling of reality.

Street Freak is quite a brew and, if one has the slightest interest in trading, it will be impossible to put it down.

Dillian writes very well and at times has the sensibilities of a brilliant fraternity-house party boy let loose on Wall Street. One stays with the book to the end for the same reason people can’t take their eyes off a train wreck and will then speak about it in hushed tones for weeks afterward.

There’s some of that morbid curiosity in reading this book. But ultimately, the merit of the book is that Dillian clearly explains how and why the train went off the tracks.