EXT: SIDEWALK NEW YORK CITY

Ground floor view looking up at a skyscraper. 

The building is grey, gothic and mammoth.  An ornate sign over the entrance gives us the name of the owner of this building: JPMorgan Chase.

A date flashes at the bottom of the screen: March 13, 2008

INT: OFFICE LOBBY

Two men stand uncomfortably in front of a beautiful, red headed woman, BRONWYN HENDRICKS, who sits at a receptionist’s desk.  One man is bearded and bald.  The other is thin and boyish looking with floppy brown hair.  Each wears a cheap, ill fitting suit with shoes that don’t match.  These men are BEN BERNANKE and TIMOTHY GEITHNER.   

BRONWYN: Is Mr. Dimon expecting you?

TIMOTHY: Well, not exactly, you see…

BEN (cutting TIMOTHY off, somewhat franticly): We have to see him!

TIMOTHY: Just tell him it’s ol’ Timmy Geithner.

BEN (even wider-eyed and more frantic than before): We have to see him!

 BRONWYN (dubiously): Geetner and

BEN: Bernanke!

BRONWYN: OK, I’ll see.  Please sit over there while I check in with Mr. Dimon.

TIMOTHY: Remember to tell him it’s Timmy Geithner.

BEN: We have to see him!

TIMOTHY: Don’t worry, Ben. (Grabbing Ben by the shoulders and moving him to the waiting area.)  You see me and Jamie go way back.  Yes we do.  Jamie told me if I ever got into a fix I should call him up and he would take care of it.

BEN (Calming slightly):  He did? 

TIMOTHY: Now, you let me do all the talkin’, Ben.  I know these Wall St types.  They real tough.  Tough as nails, but I know how to speak their language.  

Out of the doorway of the office walks a tall, fit, good looking man.  He is impeccably dressed and groomed.  He stands straight, walks with confidence and oozes success.  He flashes a big, bright smile as he exits his office door and enters the reception area.  This is JAMIE DIMON.

JAMIE: Little Timmy Geithner.  What are you doing in these parts?  (looking at Bronwyn reproachfully) Bronwyn, how could you keep Timmy Geithner waiting?  Timmy’s an important man.

TIMOTHY: Ah gee, Jamie…

JAMIE: And what do we have here?  Is that Ben Bernanke?

BEN: We’re in a heck of a mess, Jamie!

TIMOTHY: Shush, Ben!  Yes, this is Ben.  Say hi, Ben.

BEN (embarrassed and downcast): Hi, Jamie.

JAMIE: A mess, huh?

TIMOTHY: No, no, Jamie.  Not a mess.  More like, um, we have a great opportunity for you.

 JAMIE: A great opportunity for me?  Come on in and tell me all about this great opportunity.  Bronwyn, get these boys a glass of Noah’s Mill.  Ice or neat, boys?

BEN: Is that alcohol?  I dunno if we should be drinking right now.

TIMOTHY (furiously to Ben): Ben!  Quiet! This is the way you do it on Wall St!  Yes, of course we would love some Noah’s Ark.  Neat is just fine.

JAMIE: Great.  Come right in.  Bronwyn, some Noah’s Mill for the boys and me.

BRONWYN: Yes, Mr. Dimon.

INT: JAMIE DIMON’S OFFICE.

Jamie walks in and sits behind a massive oak desk.  The office has expansive views of the New York skyline.   Ben walks in with mouth opened awe.

BEN: Wow.

Timothy and Ben sit in the guest chairs.

JAMIE: They say Mr. JP Morgan himself used this desk.  Really something, isn’t it?  Now, what is this about an (beat) opportunity?

BEN: It’s Bear, Jamie.  They can’t pay their bills…

TIMOTHY: Ben!

Bronwyn interrupts to drop off the drinks

TIMOTHY: Thanks.

Timothy takes a big sip of courage before restarting.

TIMOTHY:  It’s Bear, Jamie.  Jimmy Cayne, he’s got himself in a whole heap of trouble.

JAMIE: Jimmy? My mother was at a bridge tournament recently and saw him there.  She said he looked great.  Has something happened?

TIMOTHY: Oh, it’s this whole subprime mortgage thing, Jamie.  I guess, Jimmy, he got himself a little too deep in that stuff and now he needs some help gettin’ out.

JAMIE: Subprime?  I’m not sure I’m the right man for that.  I’m a simple commercial banker. 

BEN (animatedly): You have to help!

 TIMOTHY: Quiet, Ben.  Let me do the talking.  See the thing is Jamie, Bear is having some, um, short term cash flow needs and they need a little money, just for a little while mind you, or they may go (leans in and whispers) out of business. 

JAMIE: Short term cash flow needs?

TIMOTHY: Yes, exactly.  See, Ben and I here we was hopin’ that maybe you can help Bear out with a little loan. 

JAMIE: Golly, boys.  You know how much I would love to help, but I don’t think there is anything I can do.  I’m so busy right now.  (Gestures at the two files sitting on his desk) My wife is badgering me about re-doing the kitchen at our Hamptons place.  Bronwyn keeps pestering me to look at some plans for renovating the building lobby.  I’m burning the midnight oil around these parts.

BEN: Man, oh, man.  That is a lot of stuff.

TIMOTHY: (Losing his cool) Jamie, you have to… (Immediately calming himself down)   I mean, couldn’t you even check it out, Jamie?  It would mean the world to us.

JAMIE: I tell you what I’ll do.  Now, I’m going to get in trouble with Bronwyn over this, so you owe me big time, but maybe I can put that dang lobby renovation on hold and take Bear off your hands.

BEN: (Excitedly) You would do that for us?     

TIMOTHY: That’s great, Jamie.  And what are you thinking of paying for Bear?

JAMIE: Paying?

TIMOTHY: You know, what are you willing to pay for Bear to, uh, take them off our hands?

JAMIE: (Rubbing his chin) Well, I guess if you guys take, I don’t know, let’s say $30 billion of the worst assets off their books then it is one done deal.       

 BEN (Dumbfounded): $30 billion?

TIMOTHY: (Wiping sweat off his brow) $30 billion?  That’s a lot of money.   Well, I guess maybe we can do that.  Yeah, yeah, we can do that.  OK, how much will you pay then?

JD (Confused): Pay?

TG: For all the rest of the assets and liabilities?

JD: (Shaking his head) I’m sorry, guys.  I thought I had explained about the lobby renovation.  That is a big sacrifice.  Then there is also all the work of bringing the Bear guys over and teaching them the JPMorgan corporate song.  It takes a lot of work to get that song right.  I’m not sure you guys appreciate…

TG: Oh, no, Jamie.  It ain’t like that.  We totally understand.  Don’t we, Ben?

BEN (Nodding furiously):  We understand!

TIMOTHY: It’s just the taxpayer, Jamie.  Sometimes they don’t understand all this high finance and e-co-nomics talk.  Some reporter tells them that we gave Bear to JPMorgan while taking on $30 billion dollars in potential losses and they think we ain’t doin’ our jobs.  Ain’t that right, Ben.

BEN: The taxpayer, Jamie.  He just don’t understand all this finance and economics.

JAMIE: Hmm.  I guess that is a problem.  I know what a great job you all are doing and I would hate for some know nothing from the NY Times to get this all mixed up.  (beat)  I tell you what I will do boys. (Pounding his desk)  I will take on the first $1B in losses on that $30B portfolio.  How can anyone complain then?

TIMOTHY: Great.  OK, ok, and the shares?  How much will you pay for those?

JAMIE:  Man, you boys drive one hell of a hard bargain.  The board is going to crucify me for this one, but, for you little monkeys, I’ll do it.  I’ll give you 2 bucks a share.

TIMOTHY: Gee whiz, 2 dollars, Jamie.  You would do that just for us?  That’s mighty swell.  That’s mighty swell, ain’t it, Ben?

BEN: Oh, oh, great job, Tim.  Wait til we tell Paulson.  He’ll respect us then.  He’ll start letting us attend the big boy meetings after he hears about this.

 JAMIE: Ah, my reputation is going to be shot, but it’s a deal, boys. (Standing up and walking over to shake hands).  Bronwyn (calling out), pour a celebratory round for me and the boys.

Bronwyn enters and tops off everyone’s glass.

JAMIE: (holding up his glass) To Wall Street!

BEN and TIMOTHY together: To Wall Street!

The three men clink their glasses and take deep sips.

Fade to black.     

HOSPITAL INTERIOR: Dr. H. Paulson sits at his desk, examining charts.  Vikram PANDIT, a Super Bowl-winning wide receiver, enters, hobbling, his hand clutched to his thigh.

PANDIT:                               Dr. Paulson! Just the man I wanted to see!

PAULSON:                           What seems to be the problem here? [Double take as he recognizes the famed WR] Oh my goodness! Are you Vikram Pandit?

PANDIT:                               Yeah, playa! You see this ring? [Flashes gleaming Super Bowl ring, denoting wealth and status]

PAULSON:                           [Startled] You’re bleeding!  How did this happen?

PANDIT:                               Well, I was at the club, and, well… some unprecedented market conditions went down, and, well… the result is I got shot.

PAULSON:                           Oh, well, clearly.

PANDIT:                               C’mon Paulson, get movin!  Where’s my bailout at?  Stitch me up, beeatch!

PAULSON:                           Well, the law requires me to go through certain constitutional procedures before I stitch you up…

PANDIT:                               “Bleep”  THAT! We need to keep this on the DL, so I maintain my competitive position against the Germans and Swiss.

PAULSON:                           [Getting agitated] Actually, I’m not sure that’s legal…

PANDIT:                               “Bleep” legal, I’m BLEEDING dammit.

PAULSON:                           [Alarmed] I guess you’re right.  [Bellows] NURSE!

Bearded male nurse enters, groveling, whimpering a bit

NURSE BERNANKE:         [Meekly] Yes, Dr. Paulson?

PAULSON:                           [Panicking]  Can’t you see this man is bleeding?!  Get some “bleepin”  gauze and stuff, stat!

NURSE BERNANKE:         [Calm, but uncertain]  But… but… how did this happen?

PAULSON:                           [Yelling at the poor nurse] Unprecedented market conditions, goddammit! Just “bleepin”   do your job!

NURSE BERNANKE:         Well, hold on.. . That doesn’t really make a lot of sense.  Most people don’t just get shot because of “unprecedented conditions” – don’t you think we should ask a few more questions?

PAULSON:                           [Really panicking now] NO! Dammit, this is critical!

NURSE BERNANKE:         OK, I’ll call the proper authorities, as we are required by law to do.

PAULSON and PANDIT [unison]:                               “BLEEP” THAT!

NURSE BERNANKE:         [Meekly]  Ummm, ok, ok.  I’ll do it.  [He shudders to himself, shaking his head, disgusted at what he has become.]

END

My mother picked me up from the airport and proceeded to drop a bomb on me – my father is retiring. He is closing his office to become a full-time gardener, online chess player and WWII scholar. This discussion inevitably wound and wended to investments and sound financial planning.

My family has historically been poor financial managers. They typically hold too much cash and often resort to stock picking rather than leaving that up to the professionals. We were discussing the last time my mother had taken an active role in the family’s finances and that was back in 1999. She had been swept up in the mania (who wasn’t besides Warren Buffet) and bought shares of Amazon, Yahoo, Go.com and a few others. The ones that are still in business are still sitting in her portfolio – at a mere fraction of her purchase price. I asked why she hadn’t sold. Her response is interesting for two reasons. She said that she didn’t want to sell because she had lost so much and wanted the stocks to go back up before she sold. She also explained that she had bought quality companies and not silly dot coms.

Her first comment, regarding her desire to avoid turning a paper loss in to a realized loss, is fascinating and one worth of reams of academic and financial discourse – but I will leave all that for another article and when I do, remind me to give all of you my elevator analogy.

The notion of buying quality assets versus ‘fad’ assets is an interesting distinction. This difference is especially relevant right now whilst we are in the midst of a housing bubble [only in certain markets – without this disclaimer, Seneca Spade starts foaming at the mouth] because I keep hearing that the main contrast between the dot com boom and subsequent bust and the housing boom and future bust is that there is real value in homes that isn’t present in stock certificates. Investors make a distinction between assets that have fundamental strength from ones that don’t. This is of course true. But it is not the whole truth.

There are many components to any investment, but the two largest are the asset and The Price. So often, people do not take in to account the price they are paying for something. In the equity markets, one hears comments like, “Intel is a horse of a company and will be around forever.” In real estate I hear things like, “coastal properties in Del Mar are irreplaceable.” You even hear it in consumer purchases “car X is extremely well built” or “company Y makes the best sounds systems.” All of these comments may in fact be true – but that shouldn’t complete the investment decision making process. There is still the question of the price you are paying for those assets and of course the price for competitive or similar assets. Let me give you two thought questions – Is the Nissan Pathfinder a good SUV? I assume that generally the answer is yes. Nissan makes good cars and trucks (one can check consumer reports or Kelly Blue Book) and further, their Pathfinder has been successful for many years. So in terms of the arguments above, we should buy it. Now, would we buy it if the price tag were $350,000? Probably not. Price is important.

This is a good time for a brief discourse on market efficiency and the glories of competition. In terms of equities, many argue that whatever price a company is trading for is probably the correct price. Their reasoning for this being true is as follows; the equity markets are extremely efficient. You have many informed buyers and sellers trading very liquid securities with prices quoted after every trade. This combination allows for investors to adjust their portfolios almost at anytime with little cost to doing so. So when news comes out, rational investors buy or sell shares affected by that news immediately. Or in other words, stock prices reflect all the current, publicly available information about a company and further, they also include everyone’s predictions for the future of that company.

Similarly, with consumer goods, competition forces prices to fall somewhat inline with values. The reason that Panasonic can’t charge $123,566.99 for a television is that we can substitute other similar TVs for the Panasonic and thus Panasonic is forced to price their television somewhat close to its competitors.

Now you can see where I am going with this – real estate, or specifically, residential real estate doesn’t really have the two previous qualities. Real Estate is a much less efficient market than the equity markets and the ability to substitute is severely diminished.

It just isn’t that efficient. There are relatively few trades, [how many homes in your neighborhood sell in a month? Microsoft shares trade about 70 million times per day]. The prices aren’t always disclosed. When they are disclosed, they are often wrong, often include special deal terms that are hard to value (seller threw in some furniture, buyer accepted a questionable termite report, seller cleaned the carpets…) and are often weeks or months old. In addition to information being somewhat spotty, trading has many frictional costs. When one sells a stock one pays $19 when one sells a house, one pays 6% (median priced homes in San Diego are around $500g so that is $30g).

It is also hard to substitute. Every home and piece of property is unique. No two lots are the same. One is closer to the intersection, one gets better light, one has better views, one has more mosquitoes. Compare that with two JVC stereos or two shares of Philip Morris. Real Estate doesn’t lend itself well to substitution.

What this means is that real estate prices and specifically residential real estate prices do not approximate the value of the underlying asset nearly as well as in the equities markets or even the super markets. So what does this mean to you? It means that in real estate the question of pricing is all the more critical. Always ask yourself, is this asset a good asset, but also, ask yourself if it is priced appropriately.

I explained all of this to my mother. She said she understood. And then she said that maybe she should sell her old dot com stocks and buy the apartment building for sale on Montana (street near the old homestead). I asked why. She said “Montana seems like a great neighborhood.”

I was 21, living in LA and I was hungry for a job. Having just graduated from the University of Chicago with a degree in English Literature my options weren’t exactly wide open.  Up to that point, the sum total of my knowledge of the U.S. capital markets came from playing Millionaire on my parent’s Apple IIe.  But I was going to be a titan in the financial world.  I just hadn’t figured out how.

The reality of moving in to my first apartment with no help from my parents and being off of the meal plan at school meant that I had to make some money.  I decided that it was probably smarter to make a lot of money rather than a little.  But a problem arose – English majors have very few jobs to choose from and even fewer that pay a real wage.  Why not just enter the financial world?  I was just as smart as anyone in it, I could do it too.  So that became my goal.

Opening the phone book, I found the numbers for the major brokerage houses in Los Angeles – I called the ones that advertised during college football games.  You know, Paine Webber, Merrill Lynch, Bear Stearns.  The first one I called was Paine Webber.  They asked me if I wanted to be an “Associate Investment Advisor,” and I said yes.  I wasn’t quite sure what that was, but I knew I wanted to work in the financial world and these guys were in it.  They asked me to come on down for an interview that day.

The Hook

Wearing my best (and only) suit, I walked in to the Beverly Hills Office of Paine Webber – it was dazzling.  The cars in the parking were all expensive and gleaming; the men walking in and out of the firm were good looking, well dressed and exuded refinement, wealth and success.  The walls were adorned with art and the couches in the lobby were soft leather.  On the coffee tables were glossy brochures extolling the virtues of certain funds and showed graphs of all shapes with the same message – your money will grow and be safe with us.  A receptionist asked my name and before I knew it, I was whisked back in to the office of the manager.

The manager was tall and animated.  He spoke quickly and with purpose.

“Here is how it works, if you do well in this interview, then you take a test.  You do well on the test, you have a job here.  Then you will begin your apprenticeship here.  Then you’ll sit for your 7, 63 and 65 and then you start making me money.  Got it?”

I nodded.

The interview was brief, I don’t remember the ‘get to know you’ questions, but I suspect there were very few.  But I do remember this exchange very clearly.  This was my first hint that the brochures, clothes and couches might be a façade.

“So, Jesse, do you want to be rich?”

“I want to be comfortable and I want a career that is fulfilling” I thought I was giving the right interview answer.

“Bullshit.  Do you want to be rich, I mean filthy rich?”

Sensing what the right answer is, I stammered “yes.”

“Yeah, how rich?”

A 21 year old kid doesn’t know what money is.  I didn’t know what my expenses were going to be that year, let alone what it is to be married, own a house, pay for car insurance, pay for private schools, pay medical bills.  “Really rich” I answered.

“What kind of car do you want to drive?”

I just smiled, I thought he must be kidding.  He wasn’t.

“Come on kid, what make and model car do you want to drive?”

“A Porsche?”

“You asking me or telling me?”

“A Porsche.”

“That’s a good starter car.  Now go take this exam, you pass and you got the job.”

The exam was a dumbed down version of the logic section of the LSAT.  Questions like ‘if the roads are always slippery when it rains and the roads are slippery, is it necessarily true that it has rained?’  It was just a simple if P then Q type of question.  I was always a great test taker.  I passed. 

Then the second red flag went up.  As I got the news that I passed the exam, the manager turned to me and said, “Well, are you coming to work for me?” 

“Do I have to decide right now?”

“Yes.”

I didn’t have to think too long.  He was selling what I was buying. I was going to learn about the capitalist system here in our great country and I was going to get rich doing it.  Done and done.

The Apprentice

I drove a Jeep in those days; it was beat up and ten years old.  What I liked about it was that it had no top.  Not that it was a convertible (it was), but I didn’t own a top for it.  So when I was driving to work at 5:30 in the morning, it was cold.  One needed to be at work long enough before the market opened to be get up to speed on anything a client might ask you.  What I learned on my first day was that one doesn’t just go to work as a broker, one needs to be registered with the Securities and Exchange Commission as well as the State of California.  Those are the aforementioned 7, 63 and 65.

The Series 7 is a six hour, 260 question nightmare, but before you can even sit for the Series 7 exam, you have to apprentice at a brokerage house for six months.  During those six months, we were expected to do two things; help with the daily sales meeting and be prospecting slaves for one of the more senior brokers in the office…….to be continued