Armed with detailed knowledge of ancient Chinese language and culture, I got a job that would put all of that expensive knowledge to great use. I got a job on Wall Street.
Well it was not actually on Wall Street, but on State Street in Boston, dealing with the world of Wall-Street investments. I had majored in Chinese not because I thought the job prospects were good, but because it interested me. Turns out the job prospects were terrible, even after Nixon “opened up” China: My thesis advisor told me that in a typical year, very few jobs in ancient Chinese studies open up anywhere in America. Not three hundred jobs, or three dozen. Three.
Even if jobs were more plentiful, I wanted to stay in Boston where Margaret was starting her pursuit of a Ph.D. in clinical psychology.
To make a very long story short, I met a fellow who was in the business and said to me: “I guess if you can learn ancient Chinese, you can learn investments.” He hired me to specialize in “limited partnership due diligence.” That meant taking my knowledge of Sung Dynasty poetry and applying it to whether we should offer an oil & gas limited partnership to our hundred offices nationwide, so those investment specialists could offer the programs to their individual investors.
It might sound like a prescription for disaster to have someone like me doing that work, but it worked out. First, I had to get a number of different investment licenses. Second, the decisions were made by committee, based on my and others’ recommendations. Third, I got really very good at the art of asking the right questions, so as to understand whether I was dealing with a snake-oil salesman or a person who knew her stuff. By “stuff” I mean I analyzed the following types of investments, or “deals” as we called them:
- Triple-net lease real estate, like shopping centers
- Other commercial real estate like office buildings
- Many types of oil & gas investments
- Equipment leasing
- Government-subsidized housing
- Research & development deals involving things like monoclonal-antibody research for the treatment of AIDS
- Radio-frequency treatment of cutaneous leishmaniasis (actually interesting stuff)
- Hydroelectric projects
- Cattle deals
- You get the picture.
In all, I personally reviewed more than 3,000 deals and we offered more than 300 of them, ranging in size from about $1 million to $300 million each. Later I wrote a multi-hundred-page course on how to know if you’re being taken to the cleaners in a sophisticated investment like limited partnerships. I was invited to give a lecture at NYU and at conferences around the country about these investments.
I would not just recommend deals, but sometimes would strongly recommend against doing a popular program. It was one such scathing written analysis of mine that found its way to Capitol Hill. I was invited to testify before Congress on reform needed in the investment industry. I later helped the Senate with a similar effort.
Once again I gravitated to putting in print what I had learned, and got published here, here, and here in a peer-reviewed journal. Investment winds were changing, and limited partnerships had become synonymous with “abusive tax shelters.” We never offered the nasty stuff, and often our investments had no tax benefits whatsoever. At any rate, the industry dried up.
As is the case with many companies, from time to time we got swept up in business fads. Some C-level exec would read an article about reengineering, or quality, or whatnot. The following morning the article would be copied and distributed with a scrawled command at the top, along the lines of “Let’s do this!!” I write about one such adventure here.
I became involved with a whole other, arcane area known as “managed accounts.” Here too, it’s a very long story about what they are, how they work, which ones are good, and you probably don’t give a damn so I won’t go into it.
The good news was that I was deeply involved in the creation of a product that provided some excellent investment opportunities for investors. Part of what we pioneered was a way to explain investment performance to people who did not have a technical background. Our clear reports were the best in the industry, as far as I could tell. We accumulated almost $1 billion in assets under management.
The bad news was the parent company’s “size matters” growth antics led to an organizational mess. The parent company made a series of poor investments in real estate. That resulted in the oldest mutual life insurance company in America suddenly being in big financial trouble, and becoming an acquisition target. A giant insurance company bought us, along with a bunch of other, similar firms. We’ve all heard the typical line about how such acquisitions will provide “economies of scale” and “more opportunities for everyone.” Well, pretty soon the word came down: The parent company needs to cut budgets to the tune of $100 million in one year.
These days, $100 million is a crappily low amount to pay for some silly photo app with no revenue. But a few years ago, $100 mil was actually a lot of money. For us, it meant letting people go, halting projects, and second-guessing everything.
Deeply involved as I was with managed accounts, one of my responsibilities was to ensure that we had people or systems in place so that accounts got “rebalanced” regularly. It’s a process whereby you sell some of the investments that have done the best in the last period, and buy more of the ones that have gone down. Sound silly? It’s not. It’s well-established as the way to keep your portfolio from getting lopsided and too risky.
We didn’t keep up with rebalancing. Part of it was due to certain key people leaving, and part was due to the need for a much-more automated system than we had, because we had grown quickly. When I researched and made a presentation to the Big Dogs in Manhattan for the comprehensive system that would at last enable us to do rebalancing automatically, it was extremely well-received and given provisional approval. Until a week or so later it was put on hold for budget purposes.
I had been submitting weekly reports to my boss about exactly how many accounts we had, how many were in balance, and how many needed rebalancing. But the company was going through an upheaval of cost-cutting and reorganizations. A key executive 3 levels above me was ousted. Then the guy 2 levels up quit in disgust. My boss soon was let go. A few weeks later I got a call from a particularly well-connected colleague who said “Jon, resign. You need to resign now, as in before 11am, because that’s when they’re planning to fire you.” I knew she was trustworthy, so that’s exactly what I did. After having been 20 years with the company.
I had nothing to hide and in fact wanted to make sure that the records did not disappear of my reporting exactly where we stood on this rebalancing project. Even before I left I had been in a number of meetings with people inside and outside the company on the rebalancing problem, and that continued afterward. I spent many days meeting with the Securities and Exchange Commission in Boston, giving them a complete brain dump on what we had built, what we did accomplish, what did not get done, who knew about it, and so on. An analysis was done by an outside entity as to who did not get rebalanced promptly. Some portfolios actually benefited from not being rebalanced and they made more money than if the process had been done. Other investors lost money because of the lack of rebalancing, and they were made whole by the company. However, I was fined $10,000 and my boss was fined $100,000. The ironic part is that the Securities and Exchange people thanked me repeatedly for my long hours of answering every question in voluntary interviews after I had left the company, and explaining boxes and boxes of documents.
Here’s the interesting principle I’ve learned about this whole deal, and you might make sure that you’re not in this position right now as you read this: When there is some longstanding problem, it’s not good enough that you’re making progress toward a solution. It’s even not good enough that you’ve reported the situation up the chain of command. At some point, you need to get loud and indignant, and do it in writing. If I had only written an email that said: “Urgent: We can’t cancel that project due to budgets! I really really insist that we find the money and resources to fix this thing, because it’s gone on too long and investors are paying us for these services!” I’m confident that one such email would have saved me all sorts of pain—though whether it would have been enough to fix the problem is anyone’s guess. Even though I was by no means in a position to refund money to investors or move budgets around, I was technically an “officer” and should have pushed harder.
Later I was told by someone in the know that I was dealt with in a disproportionately harsh way, given that I did report where we stood at all times, did not benefit personally from any of it, and worked for a long time on the automation project. Apparently someone needed to take a hit.