Prime Brokerage Stories: Big Mack and the Phantom Pricing

This is the first of a series called “Prime Brokerage Stories,” real-life experiences from a close family member of mine who has worked in this area of the Street for about 30 years.

You’ll hear about the frauds he uncovered, the laughs he enjoyed, and of course, the characters he encountered. This is all meant to expand the information available on the prime brokerage area here on WSO.

To get a primer on what prime brokerage is, recommend you read this before proceeding if you haven’t already: //www.wallstreetoasis.com/blog/what-is-prime-brokerage

In the late 80’s I worked in prime brokerage (PB) at a major US broker dealer at an associate level. I worked for ‘Big Mack’, who was starting the ‘prime brokerage’ business at this white glove firm, despite the reputation of hedge funds. The view at the time was you did business with these guys (hedge funds) but you held your nose when doing so.

Getting service and support within the firm was almost impossible. Big Mack had to coerce, scream, yell, curse and threaten loudly to get things done. If he didn’t, clients would leave and costs would bury us. This was survival: the reality game.

Big Mack was a classic type A personality and he often used the same tactics on the small group of us who made up the ‘hedge funds’ group. I don’t think anyone today would believe what was said; looking back now it was comical, but more on that another time.

My job was technically “margin surveillance” but really it was to keep the nascent prime brokerage business out of trouble, and making clients happy. Fortunately I had some previous training and a good sense of compliance rules and a growing understanding of risk, in the sense of things the rules don’t cover.

Occasionally accounts would incur margin calls—a request for more client collateral if their equity dipped below a certain threshold (suffice to say hedge funds are not really always ‘hedged’).

I generally did whatever it took to make the client happy, generally slicing and dicing information, explaining why, and letting the client know it was not his fault: ‘I can’t believe how stupid this market is, long stock A went down and short stock B went up! This market is ridiculous’.

I was good at this.

I had to be because if the client was not happy, Big Mack assured me, certain parts of my male anatomy might be lost.

Inevitably there was a client who was not happy. Margin calls seemed to be omnipresent. Motivated as I was, I compared the client’s portfolio daily with the margin statement – this was a manual job for the most part.

What I found was that the client’s portfolio record had different prices, showing the value higher than what I did. I re-checked the prices, but could not explain the hedge funds pricing. What was he doing, where were his prices coming from, was something else missing? In the end I could not rescind the margin call, stood my ground: “Your prices are wrong……..no, we can’t wait until next week……..now please, I’m sure there’s no reason for name calling.” Point was, client was pissed.

Finally the day came when Big Mack said, ‘See me in my office.’

“Oh damn,” I thought, “here it comes. I can hear him now: ‘Why am I harassing his client, why are we so f***g bad, you suck,’ and then there were my male parts…Nothing personal.”

However when the door to his office closed, Big Mack shook my hand and said ‘Thank you’. I was mystified. He explained, “You know what those scum bags at hedge fund XYZ were doing? They were marking up their portfolio to meet performance targets – so they would still get their fees. I’m throwing them out of here.” These guys were screwing their investors!

And they would have gotten away with it too, if it wasn’t for that meddling Prime Brokerage associate and that dog!

I was not getting fired after all. I earned Big Mack’s trust, and learned I was not the only one concerned with integrity. It was times like these that helped me understand what I had to do to be successful on the Street.