Young Traders Thrive
In the Stock/Bond Nexus
By HENNY SENDER
Staff Reporter of THE WALL STREET JOURNAL
November 18, 2005; Page C1
NEW YORK -- Louisiana-Pacific Corp. may never become a target for the big
corporate-buyout funds. But in recent weeks, the paper company's debt has started to
trade as if such a deal is likely. In anticipation of such deals, which usually involve lots
of new debt, a company's bonds invariably head lower.
Scouring the Louisiana-Pacific stock and bond data, Boaz Weinstein, head of credit
trading for the Americas at Deutsche Bank AG, is trying to discern the company's fate in
order to make the right trade. If a deal is coming, the 32-year-old trader can buy
insurance on the company's debt -- a credit-default swap -- that would rise in value in the
wake of a buyout.
He may even snap up Louisiana-Pacific shares in anticipation of a buyout, in essence
doubling up his position.
Not long ago, Wall Street trading desks rarely thought to establish a link between how a
corporation's bonds and stocks traded. But that was before the development of the credit-
derivatives market and the emergence of a group of young traders who understand how
credit derivatives are changing the way Wall Street trades.
Credit derivatives have a short history, but their impact has been dramatic. They have
allowed investors to easily make negative bets on corporate credit for the first time. But
their impact has been equally profound on the stock market.
"Debt and equity were two separate worlds before credit derivatives," Mr. Weinstein
says. Today, traders like Mr. Weinstein are examining both stocks and bonds, looking for
clues that will provide ammunition for the best trades.
Credit-default swaps function as a kind of insurance contract that is worth more as a
country's or company's credit standing deteriorates. Such a so-called swap, the most
common credit derivative, pays out if that country or company defaults on its debt.
The development of the market received two distinct boosts, according to Rajeev Misra,
the global head of the credit-trading group at Deutsche Bank, who is based in London.
The first was the emerging-market debt crisis of 1997-98 with the Asian financial crisis
and the Russian default. And the second, more critical push came from the development
of the convertible-bond market over the past several years and the emergence of an
aggressive group of hedge funds trading in convertible bonds that wished to hedge their
convertible-bond positions -- through the credit-default swap market -- against the
possibility that the issuing company might default on its debt.
The credit-derivatives market is young but popular. And those who have grown up with
it, such as Mr. Weinstein, have prospered as it has expanded. He became a managing
director at 27, making him one of Deutsche Bank's youngest ever.
The rise of credit-derivatives traders is illustrated in Mr. Weinstein's career. Seven years
ago, Mr. Weinstein toiled in an obscure corner of the debt markets at the old DLJ, now
part of Credit Suisse Group's Credit Suisse First Boston. He joined the credit-derivatives
desk at Deutsche Bank in 1998, heading a staff of precisely one. At that time, a busy day
would mean one or two trades. Today he is part of a large team that trades billions of
dollars daily for Deutsche Bank, helps clients manage their credit exposures and, under
Mr. Misra, has built Deutsche Bank into a credit-derivatives trading powerhouse.
Trading in a new and swiftly evolving market, Mr. Weinstein had plenty of mentors but
no veterans to guide him. Successful players in the credit-derivatives market require a
blend of the trader's intuitive savvy and an analyst's quantitative skills.
"It required grafting the cultures of one onto the other," says Ron Tanemura, an advisory
director for Goldman Sachs Group Inc. who is based in Seattle. The former global head
of credit derivatives at Goldman and Deutsche Bank was once Mr. Weinstein's boss.
"Some of that can be taught, but true talent -- that's born."
Mr. Weinstein's background helped. He was a master of games ranging from chess to
blackjack and poker. His Israeli and Polish emigre parents had enrolled Mr. Weinstein in
chess workshops from age 5; today he has the rank of national master.
While chess enables him to sharpen his ability to plot long-range moves and evaluate
situations, the skills required for blackjack are similar to those required to dynamically
hedge positions. It is all about calculating the probability of gains versus losses and
adjusting the position as information changes.
He has taken his team to Las Vegas for bonding sessions over the blackjack tables, and
many of his traders are accomplished game players. For example, Bing Wang, his senior
proprietary trader, recently finished within the top 1% of participants in the World Series
of Poker main event.
Mr. Weinstein also has the intuition of a trader. In 1988, for example, at the ripe age of
15, Mr. Weinstein won the New York Newsday stock-market challenge, in which 5,000
students participated. He can't remember a single pick, but that wasn't how he approached
the contest, anyway. Instead, Mr. Weinstein calculated that he would need volatility to
win, so he just invested in the list of biggest movers on the NYSE and Nasdaq to get the
huge returns he sought.
The year Mr. Weinstein joined the bank, the credit-derivatives market experienced its
first test when Russia defaulted and Asian countries got into trouble. At that point the
market was so young that there was no consistency.
Mr. Weinstein, confined to trading corporate credit, would wistfully look over at his
colleagues trading emerging-market debt. Still, Mr. Weinstein's turn came quickly. First,
in 2000, the California utilities crisis arose, with the probability that companies with
market values as high as $20 billion might default. Then the true test of the market came
with the implosion of Enron Corp. and the abrupt end of the telecom-stock bubble six
months later in mid-2002.
WorldCom's stock dropped faster than its debt, leading Mr. Weinstein and his team to
plot a new relationship between markets. In the case of WorldCom (now MCI Inc.), it
was stockholders who responded more quickly to problems and dumped the shares. With
a shrinking stock-market value, the massive level of debt on WorldCom's balance sheet
By contrast, it was the bond investors who first fell out of love with AOL Time Warner.
At a time when the stock moved less than 20%, jittery debt holders drove the cost of
protection in the credit-default swap market to levels that implied a default was
Mr. Weinstein recalls walking home past the media company's new headquarters, then
under construction, pondering the company's probable fate. He decided that in the case of
AOL Time Warner (now Time Warner Inc.), it was the stock market that had it right.
Deutsche Bank then sold protection to nervous investors and made a fortune as the
company's credit ultimately stabilized.
Today, the company's debt trades at a narrow margin above Treasury bonds.
Write to Henny Sender at email@example.com