average also tumbled, trouncing the previous record one-day percentage drop and triggering circuit breakers at the New York Stock Exchange. The dot-com bubble had burst. A few days later, Fenics' IPO was shelved. I returned to the United States to assist the investors in a sale of the company. I had taken a chance and it had failed.
In fact, it turned out for the best. The buyer of Fenics was GFI Group, an “interdealer broker,” which is a type of institutional agent that operates marketplaces for wholesale trading by the largest banks and financial institutions. Interdealer brokers, or IDBs, as they are known, were the precursors to SEFs that Congress recognized in Dodd–Frank. GFI Group specialized in brokering a type of derivative financial instrument called a swap. Swaps, as I mentioned earlier, do not trade on recognized exchanges, but rather on private, managed trading networks of the kind operated by GFI Group.
I immediately hit it off with GFI's brilliant founder, Mickey Gooch. He encouraged me to stay on and implement his vision of highly efficient marketplaces for financial institutions melding skilled professional brokers with market data, software analytics, and automated trade execution. I accepted.
As GFI's head of corporate development, I helped raise several rounds of private equity. With the proceeds, we opened additional offices in financial centers around the world and built some of the first electronic platforms for trading swaps. We also invested in the former Chicago Board of Trade Clearing Corporation and helped convert it into the first clearinghouse for credit default swaps, or CDS. In time, GFI grew into the world's largest trading platform for CDS products and other over-the-counter derivatives.
GFI's offices were then at 100 Wall Street. One summer day not long after joining the firm, I was returning from lunch when I came across a crowd in front of our building. At its center was a young man dancing wildly. I chuckled and went up to the office. Coming out of the elevator, I saw many of the brokers looking out the window and laughing at the young dancer. Someone explained to me that he was a GFI trainee serving a half hour's punishment for having screwed up a lunch order. When the dancer returned later, he was teased mightily. Someone shouted, “What a waste of a Wharton education!”
I was surprised at the hazing. I relayed the story to Gooch, who said that, rather than being a random bit of unpleasantness, what took place was an important part of the young man's training. Successful broking—the shorthand term for what brokers do—required individuals to remember for short periods of time discrete sets of random pricing data segmented by individual customers. Because the financial consequence of getting such pricing wrong could be enormous, prospective brokers had to develop memory skills away from the desk. Thus, trainee brokers listened to and recorded transactions for months before actually handling a trade. They also were required to take lunch orders that were made deliberately complicated. They were crazy things, like:
“I'll have a ham sandwich on whole wheat with two pickles, no lettuce, but olive paste on one slice of bread and honey mustard on the other and three oranges. No, make that two oranges and hold the honey mustard!”
Gooch explained that the trainee would get 12 such orders at once and, if he screwed up just one, the consequence was a half hour dancing on the corner or some other ridiculous embarrassment that they would never forget. Once the trainee could handle a lunch order with tens of dollars at stake, he could begin to undertake more sensitive work with millions of dollars at stake.
In 2005, I directed GFI's highly successful initial public offering (IPO). The next year, we conducted our secondary offering and completed a major acquisition. By 2008, GFI had grown to 18 offices around the world and was generating record revenue. We operated the trading platforms on which most of the world's credit default swaps were traded.
Then the 2008 financial crisis hit. Panic had been building steadily in financial markets since the demise of Bear Stearns that March. A double bubble had burst of housing prices and consumer credit, as lenders became concerned that falling residential and commercial property values would imperil repayment of mortgages. An extraordinary “run on the bank” ensued with rapidly falling asset values preventing US and overseas lenders from meeting their cash obligations. That marked the beginning of a financial crisis that was devastating for far too many businesses and families.3
On Wall Street, concern was rife about imminent failure of the world's largest investment and commercial banks. Tension was rising on our broking floor as summer waned and our front office staff worked under greater stress to maintain orderly markets. Mortgage companies Fannie Mae and Freddie Mac were placed under federal conservatorship to the tune of $187 billion and the Fed lent over $180 billion to bail out AIG. The storm was upon us and GFI was at its center.
In early September, a senior official at the New York Federal Reserve Bank called us. He was asking about the CDS trading exposure of several major banks, including Lehman Brothers. By then, trading conditions were deteriorating by the hour. It became clear that the regulator had little means, short of frantic telephone calls to firms like ours, to read all the danger signals that derivatives trading markets, especially CDS markets, were broadcasting.
In late September, Treasury Secretary Henry Paulson and Fed Chair Ben Bernanke submitted a $700 billion bailout package to Congress to stave off almost certain collapse of the global financial system. Yet, the damage had been done. The United States and, indeed, the world were entering the Great Recession, the worse financial calamity since the Great Depression eight decades earlier.
In 2009, the G-20 governments met in Washington and later in Pittsburgh to formulate a collective response to the crisis. Among the many steps proposed were reforms for swaps markets. These included moving bilaterally cleared swaps into central counterparty clearinghouses, increasing counterparty risk transparency, and executing swap transactions on regulated platforms.
As I've said, these were appropriate reforms. Indeed, the first two were innovations toward which the market was already moving on its own, while the third one just made common sense.
Speaking with my GFI colleagues, I argued that these reforms were not only inevitable, but they also would be good for financial swaps markets. I was concerned, however, that clumsy enactment and implementation of these reforms could minimize their benefits. It was essential that the interdealer brokers be heard as the legislation was crafted and implemented.
With the keen support of Gooch and GFI's savvy CEO, Colin Heffron, I organized a government relations effort for the firm in the summer and autumn of 2009. I hired a well-regarded Washington lawyer, Mike Gill, and made several trips to Washington to meet with members of key House and Senate committees on financial services and agriculture. It did not take me long to come to the view that individual action by GFI and each of its interdealer broker competitors would be inefficient or worse. A better course would be collective action by the five largest firms (or “the five families,” as we sometimes jokingly called ourselves). We decided to form a US trade association: the Wholesale Markets Brokers Association Americas (WMBAA).4
WMBAA launched over lunch in late 2009 at a private dining club in the historic India House on Hanover Square, just off Wall Street. Chris Ferreri, a seasoned executive with natural presence and command, was voted the first president. Serving with Ferreri on the board were Bill Shields, GFI's sharp-eyed chief of compliance; Julian Harding, a smart, cultured and elegant Brit who had founded one of the first electronic foreign-exchange options brokerages; Sean Bernardo, a Jersey boy who was smart to the ways of Wall Street; Steve Merkel, a demanding and brilliant lawyer; and me. Our Washington guide and counselor was Micah Green,5 whose charm, self-confidence, and determination would open many doors. The WMBAA was thus born.
And not a moment too soon. The Barney Frank–chaired
