Fooled by Foreshortening

In some of my earlier posts, I've discussed the plot of a Ben Mezrich book, UGLY AMERICANS.

I got some important chronological points wrong, and I'd like to correct that now. Indeed, I've corrected it in my plot summary thus.

I've had a lot of trouble cross-referencing the events in the book with real-world events, and to some extent I at last understand why. Bear with me.

Mezrich tells the "true story of the Ivy League Cowboys who raided the Asian Markets for Millions." The central "cowboy" is the fellow he calls John Malcolm, who went to Japan to take a job with Kidder Peabody, apparently in 1993, then lost that job when the Joseph Jett scandal hit, the following year.

Then Malcolm got a job placing orders for Nick Leeson, which ended in February 1995.

Thereafter, Malcom called his former boss at Kidder Peabody, who was now the head of a hedge fund. The main story of the book starts there. Until now, I had believed that these central plotting events, involving the Hong Kong stock exchange's tracking fund, took place in 1995, soon after Malcolm had settled into his new job. That is the impression the book conveys. But the tracking fund at issue didn't exist then! It came into existence as a result of the East Asia currency crises of 1997-98.

But on a closer reading, I see that the story can be reconciled to that fact, and Mezrich can't be said to have simply gotten it wrong, foreshortened though his account is. At least part of the blame is mine.

There is a time clue on page 196 of his book, where Mezrich writes: "The brainchild of Richard Li, at thirty-five one of China's richest and most infamous characters, Pacific Century Cyberworks has started off...."

When was Li thirty five?

The answer is that he would have turned that age in November of 2001. This means that the Christmas party described in chapter 21 of the book, when the main characters discuss Richard Li, must have taken place in December 2001. That, in turn, makes the foollowing trades consistent with the actual existence of this fund, and with a merger in which Pacific Century Cyberworks was involved at the turn of the millennium.

"Understanding comes step by step, grasshopper."

"Thank you, Master."

Richard Tavoso

This is a bit of meta-blogging. Props to Cicily for explaining to me how sitemeter works.

Due to that wonderful data stream, I've noticed that I now and then get readers who arrive by googling phrases like "Dean Carney," or "Richard Tavoso" or "index arbitrage." They're looking for two entries I wrote about two months ago (May 14 and May 17, to be precise) which describe a book by Ben Mezrich, "Ugly Americans."

I believe Mezrich is probably getting extra attention now because an earlier book of his, "Bringing Down the House," has been made into a movie -- under a different title -- starring Kevin Spacey.

http://cicilycorbett.blogspot.com/search?q=21

So Mezrich is getting attention, his book on arbitrage trading in East Asia by Americans, largely Ivy Leaguers, is getting attention, and as the last link in the chain reaction, my humble blog is getting some hits. I blush for my unworthiness, but if you google the names [Carney Tavoso], this blog is second on the resultant list.

So let's try to make some use of that. I'll address Mr. Tavoso, in the event that he is or becomes among those who do that search. Sir, Do you agree that you are likely the real-world basis of the partially fictionalized Dean Carney? If so, do you think the portrayal is fair or unfair? Not only am I personally curious, but if the plot corresponds to reality, even somewhat, it sounds like an important piece of the financial history of the region, so it would be worthwhile getting it straight without the fictional veneer.

I hope to hear from you. Thanks.

Plot Summary

I discussed the book, Ugly Americans, in Monday's entry. Today I thought I'd offer a plot summary. In coming days I hope to make inquiries into the history behind it, how true a story it is/isn't.

We're told that in 1992, twenty Ivy League football players visited Japan, to play an exhibition game against Japanese college kids. Of course, American football isn't big in Japan, and the Ivy team (which would have been mincemeat before, say, the Boilermakers or the Sooners on even a bad year for either of the latter) handily defeated the Japanese who lent themselves to the show.

On this trip, Princeton's contribution to that all-star-Ivy team, John Malcolm, encountered a Princeton alum, Dean Carney. (I'll use their names as given in the book here. For their likely real names, see Monday's post.) Carney was a big-wheel at Kidder Peabody's Tokyo office, and he suggested Malcolm contact him about a job if no pro football career panned out.

None did, so Malcolm did, in 1993. Malcolm became one of KP's two Osaka-based traders. This lasted until April 1994, when KP discovered a $350 million "accounting glitch," and assigned responsibility for the glitch to one of its managing directors, Joseph Jett. KP (and its corporate parent, General Electric) made sweeping cutbacks in their trading operations as a result. Both Carney and Malcolm -- neither of whom had anything to do with Jett's accounting trickery -- were out of jobs, and they went their separate ways.

Malcolm took a position with a venerable English bank, Barings. He was again to work out of Osaka, but this time his orders were coming from Singapore, where Barings' star trader, Nick Leeson, held court.

Leeson, though, was making huge unauthorized trades during this period, and he was losing ... big. In January 1995 he made an enormous bet on a rise in the key Japanese stock exchange index, known as the Nikkei ... large enough so that if he won, he would recover all his losses. But of course he didn't win. That huge bet went against him, due to the Kobe earthquake January 17, and its devastating effects on Japan's economy.

After a brief period as a fugitive, Leeson was captured and did prison time. That didn't save Barings, which went into receivership. For the second time in eight months, a superiors malfeasance had cost Malcolm a job.

He called Carney for help. Carney, meanwhile, had founded a hedge fund, and Malcolm was soon trading for it. Mostly index arbitrage. What does that mean? In brief, there were by the 1990s funds in existence tracking most of the world's major stock market indexes. The idea is that someone might want to bet on the direction of, say, the Dow Jones, without having to invest in each of its component stocks. The managers of the index fund, by pooling a lot of investors' money, can of course more easily invest (according to their weight) in each of the components, and all the investors have to watch is the average itself. An "arb play" in this context means that a trader buys the components while selling the index-tracker fund, or vice versa, in order to take advantage of inefficiencies in the tracking process.

Anyway, Carney hired Malcolm again to come to Tokyo and arb the Nikkei and its components.

In 1994, the Hong Kong government created a tracker fund for the Hang Seng -- its equivalent of the Dow Jones or the Nikkei. [BLOGGER CORRECTION. The Mezrich account makes these dates seem plausible by a gross foreshortening of the events. The tracker fund actually came about as a result of actions taken by the government during the currency crisis of 1998.] In 1995, after Malcolm was settled into his Tokyo job, a company named Pacific Century Cyberworks (PCC) merged with Hong Kong Telecom, and under the terms of the tracker funds' charter, its managers had to buy $225 million worth of PCC stock. [AGAIN. MY MISTAKE, though with authorial encouragement. Mezrich is referring here to events of the year 2000].

Everybody knew it was going to have to do this, so a lot of traders tried to get a risk-free profit by front-running this deal, i.e. buying PCC stock ahead of the fund's expected purchases.

Malcolm, though, discovered that the tracker fund wasn't going to buy the PCC stock through the exchanges at all. It made a private off-exchange deal with PCC's founder Richard Li. This meant that, when the day of the expected fund purchases arrived and no purchases took place, there'd be a strong downward pressure on the stock price.

Accordingly, on Malcolm's suggestion, Carney's hedge fund took a "short" position on $100 million of PCC stock. When the big day arrived, and the tracking fund didn't make the expected purchases, the price dropped dramatically, and Malcolm covered the short position, winning his firm more than twenty million dollars.

This one deal made Malcolm a star, known to expat western traders throughout east Asia as their "hot young gunslinger."

The ending of the book turns on another, quite similar, but even larger deal involving the addition of several high-tech firms to the Nikkei index. This is the deal that justifies the book -- Malcolm made Carney's firm five hundred million dollars in cash out of the restructuring of the Nikkei.

Then Malcolm leaves Carney's employ and heads for semi-retirement in Bermuda, although we're told he still does some light trading.

That's not the whole of the story, of course. There are some characters -- including Ivy Leaguers, other than just Carney and Malcolm. In the days leading up to the Hang Seng trade, for example, we're introduced to "Vince Meyer" (another pseudonym, surely), described as "the top trader of one of the biggest American banks in Hong Kong" who gives Malcolm a crucial datum. Meyer is a Harvard grad.

There's also some raw sex, some hinted-at violence, one vividly described auto accident, and some romance to liven up the prose, for those who don't think that index arb traders sitting in front of computer screens throughout the working day is by itself a very exciting spectacle even if it is profitable.

Ugly Americans

I've been inspired (not for any very good reason) to look again at a book I first read three years ago, soon after its publication.

The book is "Ugly Americans," by Ben Mezrich, who is better known as the author of the beating-Las-Vegas tale, "Bringing Down the House," soon to be a Hollywood movie, http://cicilycorbett.blogspot.com/2007/04/luck-be-lady.html

The two Mezrich books bear some similarity, but in "Ugly Americans" the casinos that the protagonists want to beat consist of the east Asian stock markets and their indexes. The unwieldy subtitle describes the book as "the true story of the Ivy League Cowboys who raided the Asian markets for millions."

Mezrich writes in the "new journalism" borderline style of a Tom Wolfe or Truman Capote -- novelistic techniques abound, although we're assured that they apply, as that subtitle says, to a "true story."

The chief of the protagonists are two Princeton grads, known here as Dean Carney and John Malcolm. When we're first introduced to Carney, circa 1992, he's a Tokyo based senior trader for Kidder Peabody, "derivatives mostly," and we're told that he hired Malcolm for his KP's Osaka office. An author's note tells us the name "John Malcolm" is fictitious, and strongly implies the same for the name "Dean Carney." It also says that "job titles and positions at companies that were actually in existence at the time the events in the book took place ... should not be read to refer to any specific people who were actually employed by those companies at any time."

Aside from an obvious desire to keep libel lawyers at bay, I'm not sure what this means. That sounds sweeping enough to render the phrase "true story" rather pointless. How different is that language from, "The facts as stated here are not to be confused with the facts as they actually were at the places and times purportedly described"? And if it isn't different, why not just re-classify the book as ... fiction?

For such reasons as that I wasn't initially impressed by the book. But I've been giving it another go of late. Why? Because of the upcoming movie version of Mezrich's other book, because of a possible re-assignment to east Asia in connection with my own employment, and because ... I have a couple of real-life names to attach to Mezrich's characters.

The Boston Globe did a profile of Mezrich soon after the book appeared, and its reporter did some commendable spadework, discovering that the particulars in the book concerning Malcolm fit pretty closely those of Princeton grad and football player Michael Lerach.

That inspired me to do a little more googling, which led to the suspicion that dean Carney could be Richard Tavoso, also a Princeton alum, who managed Kidder Peabody's equity derivatives business in Tokyo, 1990-93.

With real names, and with some determination, one might piece together the truth behind the "true story" as Mezrich has sort-of-given it to us. I'll work on it a bit.