The Secrets of Billions

Wall Street is crooked. This is not really a surprise to anyone. I lived on the street. And I worked on the street.

Wall Street starts at Broadway and continues down to Water Street. Along the way, it gets crooked.

Right around Broad Street it starts to curve. If you are standing at one end of Wall Street and try to look at the other end, you won’t see it.

It’s crooked. It jags. It turns a little. People walk back and forth daydreaming about getting rich. Others are crying because they couldn’t make it. And if you can’t make it there, as the song sort of goes, you can’t make it anywhere.

Which is really true. Because “there” is where the money is. And people get desperate around money. So desperate they will do anything to get it.

At one point I invested in a dozen hedge funds. Eleven of them ended up being caught doing illegal activity. I think a few people are in jail.

Every night I was scared because I started to see what was going on until eventually I shut the whole thing down.

My investors were very upset I shut things down when things were going well. This was in mid-2006. By 2009 I finally got my money back from all of them. That’s how desperately Wall Street tries to hold onto your money. I thought Wall Street was a quick way out. But it was a quick way to stress and misery. I got out. I stayed out.

“BILLIONS” the new show on Showtime is the first show that I think accurately describes what is going on on this tiny street.

But there’s a lot of terminology in the show and I thought I would explain some areas. This is to say, I’m about to have spoilers. So don’t read further if you are a purist. Watch the show. I may do this after future shows as well if you like this post.

At a basic level, the show is about a “hedge fund manager,” Bobby Axelrod, played by Damian Lewis, and a US Attorney, Chuck Rhodes, played by Paul Giamatti. I put “hedge fund manager” in quotes because it’s a term I’m about to explain.

The US Attorney wants to go after the huge hedge fund manager for “insider trading.”

And that sets the stage for a good vs evil epic where you don’t know what is good, what is evil, what the law should be, what capitalism is about, what is the psychology of money and success, and, of course, let’s get some sex in there (else what good is life).

Here’s what you need to understand to fully understand the show.

 – “Hedge fund manager” – I was a hedge fund manager for awhile. Not like “Axe” in the show. Much smaller. But the same principles. People invest money with you (like in a mutual fund) and you can do WHATEVER you want with that money to return greater money.

Unlike mutual funds, hedge funds are fairly unregulated. Which means…bad stuff can happen. Like a Bernie Madoff who steals billions.

One time I tried to get Bernie Madoff to invest money in my fund. His response, “We have no idea where you put your money and the last thing we need is to see ‘Bernard Madoff Securities’ on the front page of the Wall St. Journal.”

Hedge funds are called “hedge” funds because the original ones (and Warren Buffett had one of the original hedge funds in the 1950s) can both buy stocks and bet against stocks.

In other words, they can “hedge” their risk by being half in favor of the market going up and half in favor of the market going down. And if they pick the right spots, then they win no matter what and avoid losing money when the market goes down.

That said, there is a famous saying on Wall Street, “when you ‘hedge’ you take twice the risk and make half the money”.

“Insider trading” – there is no one definition of this. And the definition changes all the time. This is what makes the show interesting. It’s a gray area.

But basically, if you know information that is private (“Company A is buying Company B”) then you are not allowed to make money on that information.

The essence of stock market law in the US is this: every transaction has to have risk in it. If you eliminate risk by, for instance, paying for information that nobody else knows, then you have committed a crime.

Should Insider Trading Ever Be Illegal?

Whether it should be or not…it is illegal.

But let’s play for a second.

I don’t think it should be illegal. When someone makes a trade in the market, the knowledge they had in their heads is now encoded directly into the stock market.

The more “knowledge” that is baked into the market, the more efficient the market is. The more insider knowledge that is in stock, the more smoothly they will move and the more they will reflect the actual things that are effecting a company.

I’d rather have insider trading be legal and let the government go after the funds that actually steal money, like the Madoffs.

But many people disagree and this is not a fight worth arguing about.

“Dominatrix” – in the first scene we see a man (later revealed to be the US Attorney) being tied up and peed on by a dominatrix. The question is, why does this powerful man need to be dominated to achieve satisfaction?

When I lived in the Chelsea Hotel one of my neighbors was a professional submissive. When we would meet for drinks at the end of a work day she often couldn’t sit on the chair. “Ow!” she’d say.

She had been hit all day by men paying her money. One time she told me a story, “This guy came over with a bag of fruit. He put the fruit all over me.”

She then told me she was in a huge rush because she had to meet her girlfriend. It was Valentine’s Day. She made the client clean up her room because there was fruit and whip cream everywhere.

Later, I met the girlfriend, Veronica. She told me a story. About how she went to the mansion on Park Avenue of a famous movie director, “You would be shocked if I told you the name,” is all she told me.

She had to knife him until there was blood all over his lobby and she almost had to call the hospital. But that was what he wanted.

“Why would he want that?” I asked her.

“Powerful men spend the entire day giving orders and being in charge,” she said. “At the end of the day they want someone to be in charge of them.”

Much later she married a computer programmer. I ran into her at a party. She said, “He’s just like you!” And she was happy.

The SEC (Securities and Exchange Commission) versus the US Attorney

Not everyone on Wall Street (or prosecuting Wall Street) is on the same side. Early in the show we see that the SEC has some “evidence” against Bobby Axelrod, the mega hedge fund manager who is managing billions of dollars.

He shows the evidence to Paul Giamatti, the US Attorney who, correctly, throws him out of the office.

Why would the US Attorney ignore evidence.

The evidence was that before a major stock market situation happened, three different hedge funds that spun out of “Axe Capital” (meaning: the guys used to work there but then started their own funds) all made the same trade at the same times and the timing was such that they made the maximum amount of money.

You can only do that if you know something.

The problem is “knowing something” and proving that someone knew something is not the same thing.

If the SEC knocked on their door, they could get scared and pay a huge fine. That’s roughly how the SEC stays in business.

But with the US Attorney, the government has to prove a crime has been committed.

That the funds illegally obtained information, that the information may have come from Axe Capital, and that they traded because they had that information. That’s a much higher bar.

Why would the SEC do that? Because they don’t have enough people to figure out where all the crimes on Wall Street are.

Let me tell you something: I would estimate 90% of hedge funds commit crimes along the way. There are 1000s of hedge funds. You can’t go after all of them. And the huge ones are huge for a specific reason – they know how to avoid being caught.

So the SEC would love it if the US Attorney used their resources to pursue a big hedge fund and the SEC could come in later and sweep up the mess and collect massive fines.

Paul Giamatti knows this. Doesn’t want to be used. Throws the SEC out. But it plants the seed. This could be his biggest case. And like with some many US Attorneys or District Attorneys (Elliot Spitzer, Rudolph Giuliani) before him – going after big financial targets could be stepping stones for larger careers. But he doesn’t want to mess up by going after someone too early.

An Actual Trade

Let’s go to Axe Capital and see a trade happen.

Two analysts approach Axe. They have a simple trade idea.

Here’s the thing you have to know about Wall Street. If money looks like it’s easy, then it’s not. Nobody ever got free money on Wall Street.

I won’t go into the details of the conversation. But I will describe roughly what happened.

Here’s the trade idea the analysts simplistically had.

Company A was trying to buy Company B for $41 a share.

Company B was trading for $35.

In other words, you could buy “B” at $35 and once the deal was closed at $41, you just made 18% on your money. If the deal closed fast, that’s an incredible return.

That is what is called “an easy trade”. How many times do easy trades occur on Wall Street? I have seen them zero times.

Bobby hears one more piece of news. Not important what it is. But he realized that the man behind all the deals is known for one thing – making easy trades seem like they are going to happen, sucking in all the day traders trading at home who don’t know any better, and selling his own position for a profit before everyone realizes the deal is not going to happen after all.

So Bobby explains this, and says to not buy the deal but to bet against it. Specifically he says, “Short”


You can buy a stock., Or you can short a stock. When you buy a stock at $10 and goes to $12 you just made $2 on your money. If you bought 1000 shares, then you made $2 x 1000 = $2000. That’s how most people make money on Wall Street.

But hedge funds often “short” a stock instead of “going long” (i.e. buying) a stock. Shorting, without explaining the technical details of how it’s done, means you bet that the stock will go down.

So if you short 1000 shares of a stock at $10 and it goes to $8 then you just made $2000. If someone buys 1000 shares at $10 and it goes to $8 then they just lost $2000.

Here is the big problem.

I had a friend once who shorted 4,000 shares of Qualcomm when it was at $80. He said to me, “Qualcomm is so high its crazy”.

When people use the term “crazy” on Wall Street (just like when they yell, “You’re crazy” to their spouse or friend) it usually means they are projecting. They are the crazy one – not the spouse or the friend or the company.

Qualcomm went up to $1000.

What does this mean for my friend? It means he lost more than 100% on his money. He lost $1000 – 80 = 920. TIMES 4000. So almost $3.7 million.

He only put $4000 * 80 at risk = $320,000.

My friend attempted suicide. 16 years later he’s still a stockbroker. Maybe he is your stockbroker.

Shorting is very dangerous. Having inside information is often a great technique (but illegal) for managing risk in a trade.

The trade in Billions described above wasn’t illegal. It was actually very smart, but starts to lead you into the fact that you can’t be smart all the time. Sometimes you need an extra edge.

Hedge Fund Compensation

This needs to be explained to fully understand what is happening. Why do hedge fund managers make billions of dollars for themselves but mutual fund managers and stock brokers do not?

Why do even the employees of hedge funds make millions when the employees of mutual funds make a strict salary of $100-200,000 a year (or less).

Here’s how a mutual fund makes money: you put money in and they take a small fee (1-2%) on your money. Some of that money is returned to the broker who recommended the fund. And that money is used to pay for office, all employees, all accounting, often marketing, etc. So there might be very little left to pay the managers of the fund.

A hedge fund is different.

If you put in $1,000,000 to a hedge fund (and often that is the minimum that can be put in), hedge funds charge what is called “2 and 20”.

The 2 stands for a 2% fee that comes out every year (so about $20,000 a year if you put in $1,000,000).

The 20% is the percentage of profits that the hedge fund manager takes. So if a one billion dollar hedge funds returns 10% (about the same as most mutual funds on a good year), then the profits are $100 million and the hedge fund manager makes an extra $20 million for himself (20% of $100 million).

When John Paulson’s fund made $6 billion by betting against mortgages in the middle of the financial crisis (“betting against mortgages” being something that mutual funds can’t do but hedge funds can do). he took home an extra $1.2 billion in salary.

When, in a later year he lost $15 billion (I might not have the number correct and it might be totally wrong but I am using this as an example of what could happen) – he made no money that year other than the “2”. But he still gets to keep his $1.2 BILLION from the earlier year.

This is why the main skill of a hedge fund manager is not picking good stocks (although this is important) – it’s staying in the game until you have that one good year where you can raise an enormous amount of money and take the enormous fees from it.

Hedge Fund Psychologists

Trading is very stressful. I hate it. I would make a bad trade and I would feel my blood pumping all over my body all day long. And then if the trade was a loss I would cry at night. I was so scared all the time. I hated it.

I even would wake up early in the morning, go across the street to a church, and pray to Jesus and ask Him to make the markets go up so I could get out of my losing trades. I was Jewish so those prayers never worked out.

So I went to a therapist for awhile who specialized in helping traders. She never really helped me (I was hopeless) but I appreciated the effort.

Many big hedge funds employ psychologists. I was privileged to meet two of the best. Ari Kiev, who worked for SAC Capital before he died. And Brett Steenbarger who has worked for many hedge funds, including one that I worked for. I highly recommend their books to learn more on the psychology of trading.

Axe Capital employs a psychologist. The psychologist, by coincidence (or not) is the wife of the US Attorney.

There’s a scene where she does her magic with one of the analysts who works at Axe. He was very depressed because he was down 4% on the year, which meant he wouldn’t make any money.

First she asks him how much money he made the year before. He said “7.2 million”. [See about hedge fund compensation above. ]

The joke here is that no matter how much money he made, he was still depressed right now. Is he foolish? Maybe. Tests have shown that the testosterone levels of traders go down after a losing trade, no matter how much money is in the bank.,

The best traders can handle it. Which is why therapists are needed to help them keep their cool (and their testosterone) even when times are bad. You can’t make a good trade if you are trading from a place inside of desperation or fear.

One time I visited one of the largest hedge fund managers in history, Stevie Cohen. It was the end of the day after the markets closed. I wanted to work for him. He wasn’t sure (I ended up never working for him but it was a longer story).

We had a great conversation. He was making jokes, smiling, asking questions, very engaged.

When the meeting was winding down I asked him how his day went. He said, “we just had our worst day of the year”. During the entire meeting I had no idea he was probably sweating it out after such a horrible day.

That’s a pro.


There’s a scene where Bobby mentions how he lost all his friends in 9/11.

Here’s why that scene is important. It’s impossible to say who each of these characters are in real life. They are an aggregation. Bobby seems like some big well-known hedge fund managers in many of the scenes.

But in the 9/11 scene he seems like Howard Lutnick, the CEO of Cantor Fitzgerald, who lost most of his partners and friends (and his brother) in 9/11.

So there is no one person that Bobby is based on. Kudos to the extensive research of the creators of the show.

Fleece Jacket

The analyst who visits the psychologist at Axe Capital is wearing a fleece jacket indoors. Why would anyone do that?

Some big hedge funds think that traders are more alert at cooler temperatures so they keep the thermostat in the low 60s.

“Cut Bait on Your Losers”

The therapist who advises the analyst suggests he sells all of his losing positions.

Often we want to keep the losing positions. We pray that they come back. We feel we already lost so much money in them we need to make that money back. This is a cognitive bias called “investment bias”.

An example from real life – you put $200,000 into a college education. Your brain refuses to believe that investment was a mistake so you will justify until your dying day the benefits of a college education despite increasing evidence that a college education is A) not worth it financially and B) not the best education you can get during those years of your life.

Same thing happens with actual investments. You put the money in. Your brain won’t accept that the investment was a mistake.

But specifically in this scene I think she is referring to Jim Cramer’s book, “Confessions of a Street Addict” where Jim was losing a lot of money in his fund and his wife, a former trader, comes in out of retirement and forces him to sell all of his losing positions.

I don’t know if the writers were referring to this scene but that’s what it seemed life to me. By the way, “Confessions of a Street Addict” is one of the best books on running a hedge fund in the 90s.

“I am not uncertain.”

There’s a scene where Bobby is at his son’s basketball game. A place where it would be impossible for him to be overheard by any investigators.

Two traders come to visit him. One wants to buy a stock, the other wants to short the same stock.

Bobby asked one of them how certain he is. Then we see a flashback of the guy paying for information. He, of course, does not say that to Bobby.

He simply says, “I am not uncertain.” Bobby then says “this meeting is over,” implying that the trade is to go with the guy who says he is not uncertain.

Why did he use the double negative: Why didn’t he just say he was “certain.”

Well, remember that the essence of the law is that there is some risk. “Certain” means “no risk.” While “not uncertain” technically means “certain,” does it really? It’s a bit confusing. It’s somehow not as sure as “certain.” It implies there is still a tiny amount of risk.

Bobby ends the conversation right there because he still knows none of the details. He still can say he was taking a risk.

This is not spelled out in the show but is the reason for all this language and the reason that Bobby did not press further on the details when the sentence was worded that way. But he knew. The trade was done.

Again, kudos to the writers for catching that subtlety in how language can be used to subvert the technicalities of the law.

Lawyers Going To the Dark Side

There’s a scene where one of the “good guy” lawyers is visiting with an old professor of his who now works for the hedge funds.

This is an important scene in that it underlines why hedge funds are not prosecuted more often and often investigations are done with so little scrutiny as to be dumbfounding but there is more to it than it seems.

Why, for instance, did all the investigations of Madoff never uncover anything even though it was obvious to almost all institutional investors (Madoff had few to none serious institutional investors)?

It’s because after the investigation, Madoff would get resumes from all of the lawyers involved in the investigation.

Many lawyers (not all) work their government jobs and then eventually get co-opted into the industry that they were hired to investigate. They can make ten times the money once they establish a name for themselves on the government side.

This is detailed in Andrew Ross Sorkin’s book, “Too Big To Fail.” Andrew is one of the co-creators of the show, along with Brian Koppelman and David Levien.

How to stop this? Perhaps you can put a ban on where they can work after they work for the government but that might also prevent the best and the brightest from making a decision (to work for the regulatory agencies) that will prevent their future options.

Smart people don’t like to limit themselves.

Century Capital and Nick Margolis. 

At one point Bobby Axelrod is visited by an ex employee of his who has been caught up in his own insider trading scandal but Bobby doesn’t know that yet.

It turns out the ex-employee, Nick Margolis is all wired up and while he is trying to share inside information with “Axe,” the FBI are listening.

This is again a sign that the character of Bobby Axelrold is an amalgamation of many characters. Wiring up hedge fund managers and traders was a common part of the Raj Rajarataman insider trading scandal (the scandal that launched the next several years of investigations against hedge fund managers) but I haven’t heard it being used as significantly in other cases.

“Winning the Meal”

In one scene, Bobby opens up a restaurant for lunch (it only opened for dinner) just to wine and dine a Wall Street Journal reporter.

After he’s done doing the wining and dining, Bobby leaves without eating any food. The Wall Street Journal reporter is caught off guard about this because now he is going to eat alone after such a good start to the conversation with Bobby.

This is Bobby’s way of “winning the meal.”

When the writers, Brian Koppelman and David Levien came onto my podcast they described the research they did while preparing to write the first episode.

They described a scene where a billionaire had to “win the meal” and that was an example of how brutally competitive these guys are. They have to win at everything. I think this scene is an example that comes out of that research.

“No email” 

Before Bobby leaves that meal with the reporter he writes down his number on a napkin and hands it to the reporter but also says “no email”.

Reminds me of a conference from about ten years ago where Elliot Spitzer addresses a room filled with hedge fund lawyers and specifically said, “the greatest thing you guys do for me is send emails” because he was able to win a lot of his investigations by digging through all of the emails. Now hedge fund managers will rarely send anything via email.


Bobby is speaking at a conference called “Delivering Alpha.” The word “alpha” refers to the extra edge a hedge fund manager can deliver above and beyond the basic returns of the market.

If a hedge fund can’t deliver alpha, then there is no point in investing in them and pay their high fees.

That said, something called “activist hedge funds” often deliver value and the show is portraying Bobby as somewhat of an activist investor.

An activist investor not only invests in a stock but buys so much of the stock they become a significant owner of the company.

Once they become an “owner” they take steps to force the company that will make changes that unlock value in the company so the stock can go higher.

For instance, an activist investor like Carl Icahn might buy enough of Yahoo that he can force them to sell their stake in Ali Baba.

Or another activist investor might want to kick out the CEO and install his own people as the management of the company so they can sell off pieces of the company that are dragging down the stock price.

The SEC requires activist investors to file special forms with the SEC (13D forms as opposed to “passive” 13G forms). These forms specifically broadcast to shareholders that the fund might talk with management.

“What’s the Point of Having F-You Money If You Never Get To Say F-You”

Of course on Showtime the word is spelled out. Bobby says this line to Chuck Rhodes (Paul Giamatti) in the one heated confrontation they have during the pilot.

The line is excellent and Damien Lewis delivers it with ruthlessness.

But I always think the reverse.

When you have a job, people often daydream about saying that to their boss or colleagues or whoever. But I always felt, “When I get F you money, the last thing I want to do is come back here and talk to my boss, even if it is just to curse at him.” What’s the point?

This begs the question, why do billionaires even keep going after they get their F you money?

I guess it’s because they are so driven that that is how they got the F you money in the first place. So that same force that drove them initially is still driving them.

And then there’s the question – how much is F You money?

In the show, at the end, Bobby buys a house for $63 million. But clearly you don’t need a house that big to be happy. Many people have much smaller houses and are happy with their lives.

I tried thinking of an answer.

For instance, one answer is: you have F you money if from morning to night you only have to do the things you love doing and you don’t have to do anything else.

But what if what you love doing is building and flying rocketships to the Moon. That’s pretty expensive. Your number is going to be a very big number.

I don’t know the answer. I like to sit at home and read and write all day. And not ever feel so angry I feel the need to say “F You!” to anyone since that is a stress and stress will make you sick.

For me, “F You money” simply means I get to keep physically healthy, spend time with friends (emotional health), be creative (mental health), and be grateful (spiritual health) every single day, without anyone or anything getting in the way of that.

Life throws us difficulties and stresses every day, no matter what. And you can see that the characters in the show are setting themselves up for potentially many, many episodes of stress, no matter how rich they are, no matter how powerful.

At the end of all shows and stories, everyone eventually dies and their stories are eventually forgotten, like a lingering pain that eventually subsides and disappears.

What’s the point of having F You money if eventually everyone dies?

Please tell me the answer when you get there.

To listen to my interview with Brian Koppelman and David Levien click here.

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