Boaz Weinstein didn’t know it, but he had just hooked the London Whale. It was last November, and Weinstein, a wunderkind of the New York hedge fund world, had spied something strange across the Atlantic. In an obscure corner of the financial markets, prices seemed out of whack. It didn’t make sense.
As the financial world now knows, what was out of whack was JPMorgan Chase & Company. One its traders, Bruno Iksil, the man later nicknamed the London Whale for his outsize trades, was about to blow a multibillion-dollar hole in the mighty House of Morgan.
But the resulting uproar, in Washington and on Wall Street, has largely obscured a simple truth of the marketplace. Yes, Morgan lost big — but, as Mitt Romney has pointed out, someone else won. And that someone or, rather, those someones, turn out to be Boaz Weinstein and a wolf pack of like-minded hedge fund managers.
In the London Whale, these traders saw a rich opportunity, and they seized it with both hands. That, after all, is the way hedge funds roll. His cool calculus has made Weinstein a very rich man: he is in talks to buy the Fifth Avenue co-op of a reclusive heiress, Huguette Clark, for $24 million.
It might seem remarkable that someone like Weinstein, a man virtually unknown outside of financial circles, could deal such a stinging blow to one of the world’s largest, most respected banks. Jamie Dimon, the chairman and chief executive of JPMorgan and a face of the banking establishment, is struggling to contain the damage from what he has called a “terrible, egregious mistake.” The loss — JPMorgan put it at $2 billion, but it may turn out to be $3 billion or more — has renewed calls for stronger financial regulation.
Given the secretive nature of the business, few on Wall Street, including Weinstein, were willing to speak publicly about how the hedge funds harpooned the London Whale. But interviews with more than a dozen hedge fund managers, investors and traders pull back the curtain on the ways of this band of traders, and on what really happened.
One thing is sure: Weinstein, 38, played a central role in this, one of the biggest trading blowups since the financial crisis of 2008. Iksil and his colleagues in the chief investment office at JPMorgan may have lighted the fire, but Weinstein and his cohorts fanned the flames.
In the hedge fund game, a business in which ruthlessness is prized and money is the ultimate measure, Weinstein is what is known as a “monster” — an aggressive trader with a preternatural appetite for risk and a take-no-prisoners style. He is a chess master, as well as a high-roller on the velvet-topped tables of Las Vegas. He has been banned from the Bellagio for counting cards.
Weinstein runs a $5.5-billion hedge fund firm called Saba Capital Management. It was there, last autumn, that he noticed an aberration in the market for credit derivatives. He knew from experience what it was like to lose a lot of money at a big bank. Before starting Saba, he was responsible for a team that lost nearly $2 billion at Deutsche Bank. Last November, however, he saw that a certain index seemed to be trading out of line with the market it was supposed to track. He and his team pored through reams of data, trying to make sense of it. Finally, as Iksil, the London Whale, kept selling, Weinstein began buying.
At the time, traders in London had no real idea that JPMorgan was behind the trades that were skewing the market in credit derivatives. But soon the City of London, Europe’s financial hub, was buzzing. Whoever the mysterious trader was, he or she kept selling derivatives intended to rise in value in the event that certain corporate bonds became riskier. The volume of trades was off the charts.
And so the battle lines were drawn. On one side was JPMorgan, the American banking giant that had weathered the financial crisis far better than so many of its peers. On the other were hedge fund managers, including Weinstein.
Such standoffs are not uncommon on Wall Street. An aggressive trader makes a wrongheaded bet, then doubles down to scare off competitors on the other side of the trade. Market rivals often get slapped down, unwilling to keep buying as the other side is selling, or vice versa.
By January of this year, the trade against the London Whale was not going well for the hedge funds. The price of the index, as well as others, was still falling, and the losses were mounting for Weinstein and the others. But by February, it was clear that a single, big player was behind the selling.
But the London Whale was so big that, for months, the hedge funds betting against him simply got steamrolled. One of Weinstein’s funds at Saba was down 20 per cent heading into May. Then the tables began to turn, as news reports about Iksil, fed by the hedge funds, began to surface on both sides of the Atlantic. Suddenly, everyone was checking out the obscure index that Weinstein and others had seized upon.
By May, when fears over Europe’s debt crisis again came to the fore, the trade reversed. The London Whale was losing. And Weinstein began to make back all of his losses — and then some — in a matter of weeks.
Other hedge funds were also big winners. Blue Mountain Capital and BlueCrest Capital, both created by former JPMorgan traders, were among those winners. Lucidus Capital Partners, CQS and a fund called III came out ahead, too.
Inside the hedge fund world, some joked that Weinstein had been able to spot the London Whale because he himself had been a whale once, too.
The similarities between Weinstein and Iksil still resonate in the market. “It was one whale versus another whale,” one hedge fund manager said. Those who have traded against Weinstein describe him as an aggressive trader who bets big and moves fast. His confidence and willingness to take on risk, however, leave some worried that he’s never too far away from another Deutsche Bank trade — from, in essence, becoming the whale.
“If you hand me a list of the top-performing guys in the space, I’d expect to see his name on it,” said one bank executive who works closely with hedge funds. “If you hand me another list of hedge funds that might blow up, I’d expect his name to be on that, too.”
Like many hedge fund traders, Weinstein is comfortable with risky pursuits, particularly those that require spot calculations and a cool head. A gambling enthusiast, he has an affinity for blackjack and poker. In 2005, Weinstein won a Maserati by competing in poker in a tournament. And, financially, the payoff has been enormous. Last year, he earned more than $90 million and, by some estimates, landed on the rich lists of the hedge fund industry.
But he is described as someone who doesn’t flash his wealth. Before he won his Maserati, he didn’t own a car.
Now Weinstein is practically a featured attraction on Wall Street. He attends galas and charity events, and is sought out to speak at big events. Pictures of him clasping a drink at last night’s party appear with regularity on business Web sites.