Colossal Failure Of Common Sense Part 2

*FINRA, formerly the National a.s.sociation of Securities Dealers, was established in 2007.

2.

Scaring Morgan Stanley to Death.

He yelled down the line, threatening b.l.o.o.d.y murder. "I'll sue your a.s.s ... I'll have you in court by Monday morning ... I'll have five partners on your case from the biggest law firm in New York. I'll bankrupt you with legal fees."

I LEARNED ABOUT LEARNED ABOUT the rich in Philadelphia, especially that they can stand just about anything except some smart-a.s.s trying to run away with their bread. The only issue for them is retaining their a.s.sets. They can live with low returns and low rates of interest, but their unbreakable rule is, the rich in Philadelphia, especially that they can stand just about anything except some smart-a.s.s trying to run away with their bread. The only issue for them is retaining their a.s.sets. They can live with low returns and low rates of interest, but their unbreakable rule is, Don't lose my capital Don't lose my capital.

As my months pitching and selling to the high rollers of Philadelphia had turned into a year and then another, I began to stick more and more to the creed of my roommate Steve Seefeld: Sell 'em bonds, Larry, it's the only thing they're comfortable with. It's the least risky way you can ever invest Sell 'em bonds, Larry, it's the only thing they're comfortable with. It's the least risky way you can ever invest.

Steve, of course, spoke from a position of strength. The early death of his landowner father had seen him inherit a great fortune. He actually drove around in a Mercedes when he was still in high school. Happily, he had no inclinations to run off with my father's ex-wife, so his windshield and headlights remained intact.

The night before I left Philly, Steve and I had dinner. Our final conversation remained with me for the rest of my career. "Never lose sight of the critical difference," he reminded me, "between the holder of a corporate bond and the holder of corporate stock. The bondholder has ma.s.sive protection. Even though it looks like he's bought something, he's really only lent money to the corporation. The owner of equity is powerless because he's just placed a bet on the company's cash flow. If the stock crashes, he's dead in the water, and there's nothing he can do about it."

Thus I drove back to Cape Cod a newly converted disciple of the new fashion for convertible bonds, an often misunderstood concept even today. There are always people, some of them quite shrewd equity investors, who remain confused about the literal meaning of the word bond bond. I can help right there. It means debt, pure and simple. It's an IOU between a borrower and a lender.

Corporate bonds, Treasury bonds, and munic.i.p.al bonds all represent nothing more than a loan-or, if you wish, debt-for which the lender will be paid an interest rate, known as coupon yield. And this is why U.S. Treasuries are considered the least risky bond of all: you are lending money to Uncle Sam, and he's got the best credit score in the universe. That's why, generally speaking, Uncle Sam is very big out on the Main Line.

People often use the phrase stocks and bonds stocks and bonds, but in truth there is a vast gap between them. Anyone can buy stock or equities in large or small amounts. Bonds are for the rich. When issued they come in at $1,000 each, but you typically have to buy a thousand of them, which means you need a million bucks minimum to get in the game. (This is a typical minimum investment for any inst.i.tutional investor. Retail investors, in some cases, can invest smaller initial amounts.) But all you have done is loan either the government or a major corporation $1 million. When you buy your bond, you are given two key facts-the amount of interest you will receive annually and the date your bond will mature. On that maturity date you will be given your money back. All of it, no bulls.h.i.t. And throughout the time you hold that bond, receiving, say, a 5 percent rate of interest on that $1 million investment ($50,000 a year, free of state tax if it's a government bond), you have powers denied to the regular stockholder. In the great scheme of things, bondholders matter, with many carefully written covenants to protect them. Stockholders are cannon fodder. If the shares go up, they win. If the shares go down, no one cares.

But bonds ... ah, those golden-edged bonds. They are just the ticket, because the large corporation that took your money is duty bound to give it back. Bondholders can have people hired and fired. If a few of them get together, they can throw out the board, unload the top executives. They can demand that the a.s.sets of the corporation be sold, and they rate real high on the pecking order for repayment if a corporation goes bankrupt.

And it's important to understand that a large corporation going bankrupt is not the same as a person throwing up his hands in the face of a couple of low-flying creditors and declaring personal bankruptcy. Because when a company goes very badly bust, especially a small company, it's usually because they have run out of cash and credit. They can't pay the staff or their benefits or their pensions. So they have to fire them, shut the gates, and call it a day-for the moment. But behind the shut gates are a.s.sets. Not liquid a.s.sets, perhaps, but temporarily frozen a.s.sets. Freed of their monthly obligation to hundreds, maybe thousands of workers, the corporation is rarely flat broke. Rather, most corporate bankruptcies happen because a company needs a breather and to reorganize, because their debt load is too big relative to their cash flow.

Bankruptcy by no means signals all is lost for the bondholders. Stepping over the bodies of the shareholders, who have lost everything, they have the key to the company's gates-behind which often stand acres and acres of concrete, ma.s.sive plant buildings, downtown office blocks worth millions of dollars, and state-of-the-art machinery. There may be materials, electronics, steel, tires, aluminum. And product may still be sold, maybe at knockdown prices, but there is a cash flow.

First on the list of creditors is always the bank, and they can wipe out a lot of money. But next in line come the bondholders (senior secured, then unsecured), who now get their share of the spoils. Even if the corporation is in Chapter 11 bankruptcy,* those $1,000 bonds are still owed and must be repaid from the remaining a.s.sets. The bondholder even has a seat at the bankruptcy table along with the bankers and corporate execs. those $1,000 bonds are still owed and must be repaid from the remaining a.s.sets. The bondholder even has a seat at the bankruptcy table along with the bankers and corporate execs.

Still, on the upside, if a corporation is either plainly going south or suspiciously heading that way, a bondholder is free to sell on the open market. He may only receive 80 cents on the dollar, but if he's been collecting the annual interest for three or four years, he's not going to come to much harm. Unlike the shareholder.

The person who buys the bonds on the market through a broker for, say, $800,000 is still owed the full $1 million by the corporation at the end of the ten-year tenure, the maturity date. And if it's one of those traditional big, nearly impregnable U.S. corporations, it's probably a decent buy. The iron-clad rule is that the bonds were issued at $1,000 and, barring bankruptcy, will always mature at $1,000. However, they do not always trade at $1,000. They can trade at a lot less than $1,000.

The buyer in the open market looks at one critical figure, known as the yield to maturity. This is the figure that matters. And it's arrived at by a simple process. The bonds, with perhaps five years to run, issued by, say, the biggest chemical corporation in the world, are going to cost probably $800,000. They're paying a 6 percent coupon annually on that initial $1 million investment for another five years, which is a total of $300,000. When the bonds mature, the buyer gets the original $1 million back, not just the $800,000 he paid. Which represents a straight $200,000 profit. That's a $500,000 total return on the original investment of $800,000-a yield to maturity of 11.50 percent. Beautiful.

In the end, the bond was only a method by which the corporation was raising money, and it's reflected on their balance sheet as debt. Because that's what a bond is. The corporation was not trying to raise money to stay alive; it was raising money for a substantial expansion, maybe a new plant, a new retail branch, a new skysc.r.a.per, an acquisition, or, in the case of an airline, a dozen Boeings. Munic.i.p.al bonds usually are for new roads, new bridges, or construction. U.S. Treasuries are for pretty well anything the federal government d.a.m.n pleases, but they've never defaulted on one nickel.

Let me run through the bond creation process. A national chain of supermarkets wants to build a new superstore in a new development outside a prosperous U.S. city. It's going to cost $100 million. The CFO goes to a major Wall Street investment bank and produces the business plan, which demonstrates its potential profitability, the location, the lack of compet.i.tion, and the prospect of building around it an entire community of retail outlets. If the investment bank likes the sound of it, they will lend the supermarket the money to proceed with the construction, at an agreed-upon coupon yield for a specified time. Typical would be 6 percent annually for ten years, like a gigantic mortgage.

The investment bank will then securitize the loan, which is a snazzy way of turning a debt into a bond, dividing the $100 million into one hundred thousand $1,000 bonds, and then putting together a prospectus to sell them. This was a primitive form of securitization, one that would become much more dangerous down the road. For now, they put them out to their bond salesmen, located on their own trading floor, and offer them immediately to a few well-heeled clients, the big hedge funds, mutual funds, and investing inst.i.tutions.

You can imagine the sales pitch: Just released this morning, a great new bond from Superfoods. Fantastic new retail facility right on the town line of Greenwich, Connecticut. According to their research, this can't miss. They've been trying for planning review board permission for three years, and so have three other smaller outfits, but Superfoods landed the project. You want this bond, trust me. They got a great balance sheet, double-A rated. You can have a thousand for a mill. Or ten thousand for ten mill, but this offer will last about twenty minutes.

The successful selling of the bonds releases the investment bank from holding the $100 million debt on their books. It's the corporation that continues to hold the obligation-but now it's to the bondholders, and not due for ten years. With a stroke of the financier's magic wand, a $100 million debt has been turned into an investment with an annual yield of 6 percent.

For years, this was the core business for investment banks-Lehman, Morgan Stanley, Goldman Sachs, and Bear Stearns. It was mostly the inst.i.tutional side of the business-the big leagues, the place I'd been trying to reach ever since I left college.

When I arrived back on the Cape, my plan was to ensure that the packages I would offer clients would be heavy with bonds, because they represent the supreme method to ensure the preservation of capital. It's been ever thus in the world of investment for both people and inst.i.tutions with large amounts of princ.i.p.al. Investing now or anytime requires a continual search for ways to control risk and protect a.s.sets while still achieving above-average returns.

Bonds have been around for a very long time. In fact, America was built on bonds. Back in the second half of the nineteenth century, bonds were issued by the new industrial giants to finance the building of the railroads, which would open up the vast lands and wealth of the United States, still reeling from the devastation of the Civil War. They were issued on the same lines I have outlined. In the 1880s there was one far-reaching development: the emergence of the convertible bond, which had the added feature of allowing the holder to convert it into a fixed number of shares of common stock-equity shares-in an era when the market for railroads and anything connected with them were making fortunes.

The new iron horses, the enormous steam locomotives, took investors out of their covered wagons and onto the gravy train. Each bond was issued with a conversion value that permitted investors, if they sold before the maturity date, to partake of the profits engendered by a rising stock price. Equally, if the stock plummeted down, holders of convertible bonds were given a parachute that usually worked-that is, it would not let their price go below 70 or 80 cents on the dollar.

Also, same as now, the bond was still a bond, and whatever else, the corporation still owed that $1,000 when the maturity date finally arrived. You may ask why these corporations put the sweetener in there, and the answer is very simple: they needed to persuade people to invest, and the revolutionary idea of investing in a railroad, which somehow started near home and then kind of vanished over the hills and far away, ending up G.o.d knows where, unnerved some investors. The sweetener of the convertible bond often made the difference.

It also found great favor with the railroad companies whose bonds were not required to pay an 8 percent coupon.* They had to pay only 5 percent, because of the staggering rise in their stock price in that era. The beauty of issuing convertible bonds by a corporation is the ability to borrow money and pay a lower coupon. Investors are willing to accept the lower coupon because of the sweetness of the equity upside potential. That incentive still exists today with the modern convertible bond. And unless you make some lunatic selection of a doomed corporation, it's going to taste as sweet as ever. Especially out there on the Main Line, where the parties that often started way back in the nineteenth century continue. They had to pay only 5 percent, because of the staggering rise in their stock price in that era. The beauty of issuing convertible bonds by a corporation is the ability to borrow money and pay a lower coupon. Investors are willing to accept the lower coupon because of the sweetness of the equity upside potential. That incentive still exists today with the modern convertible bond. And unless you make some lunatic selection of a doomed corporation, it's going to taste as sweet as ever. Especially out there on the Main Line, where the parties that often started way back in the nineteenth century continue.

I was only half aware, because the signs were not yet cast in stone, but when I arrived back on the Cape to begin work in the Merrill Lynch office in Hyannis, the world was on the verge of a revolution. Technology companies were about to become the growth sector of the stock market. Motorola, Ericsson, Oracle, Texas Instruments, 3Com, Cisco Systems, and EMC Corporation led the charge to a high-tech-dominated business environment. They were the railroads of the 1990s. And many of them were about to make serious use of convertible bonds, the rock-steady way to raise money for expansion, with the coupon and equity kicker to encourage investors.

A corporation such as Motorola could borrow at 8 percent from Lehman because they could afford it. They wanted the major injection of capital, and they were happy to reward bondholders with a high annual coupon payment, because they were positive the new tech business would be highly profitable in the coming years. The task of the investment bank was to examine, investigate, and arrive at a yes or no that would not mislead their clients. I'd seen those beady-eyed a.n.a.lyst guys operate at close quarters, and I had enormous faith in them.

With my courage high, I straightened up to sell these convertible bonds that had been given the green light from Merrill Lynch. I'd already noticed this type of bond was beginning to outperform on a risk-adjusted basis every other kind of a.s.set cla.s.s, even residential property and gold. I also sensed the coming high-tech revolution, and I had visions of being carried directly into Wall Street on a wave of flying electronic sparks, flickering screens, and cybers.p.a.ce mysticism. I was not that far wrong, either.

But first I needed to establish a business within the confines of Merrill Lynch in Hyannis. The work was not that difficult, and I cruised through the first few months, building a client list, selling the bonds, selling what equities I considered appropriate, and rekindling old friendships.

I realized, though, that there was a big difference between working in Philly and working on Cape Cod. Although Philadelphia wasn't New York, it possessed that big-city edge of toughness, and it demanded compet.i.tiveness and hard-edged selling techniques. Cape Cod had little of that, and almost surrept.i.tiously the danger of losing my own edge began to creep up on me.

The fact was I could now conduct a retail stock and bond operation with consummate ease. I always started early in the morning, but not like Philly, where I used to report to the office in the middle of the G.o.dd.a.m.ned night, consumed by a desperation to win that I believe is nurtured only in a big city.

Cape Cod was not about strange desperations. It was about cooling it, enjoying the slow relaxed pace of the place, light traffic, no charging around looking for cabs, people being at their desks having coffee, and business lunches. Everything was more, well ... civilized.

There was the sheer vista of the land and seascapes. The long lonely ocean beaches up around the village of Dennis, the majesty of the surf at Nauset on the Atlantic side, the great sweep of the Monomoy headland jutting out toward Nantucket. There were Wellfleet and Truro up there on the bayside, then elegant and prosperous Chatham with its historic fishing fleet, snooty Osterville, rarefied Oyster Harbors, and the spectacular coastline around the working seaports of Falmouth and Woods Hole.

My territory stretched right up to the great sandy eastern hook of the Cape at Provincetown and then more than a hundred miles back to the two gateway bridges that lead to mainland Ma.s.sachusetts and the townships near the ca.n.a.l.

Wherever you look there are tempting distractions, including many golf courses, and especially Woods Hole. And for a twenty-six-year-old single guy with a bit of money, there were other distractions, such as girls, bars, restaurants, boats, and parties. The lifestyle was intoxicating. The Cape was luring me in, and so was a girlfriend I had at the time. For more than three years Cape Cod had been a lot of laughs, and I was going comfortably soft, losing my edge, finding no urgency to fight.

I changed my job, switching to the excellent compet.i.tive retail brokerage house of Smith Barney, and it didn't change a thing. I was still cruising, making fewer phone calls to my old buddies in the industry, coming up with fewer new plans, kind of allowing the world to slip past. Jesus, looking back, it was great. It was also probably the most dangerous time of my entire career.

There's a word for Cape Codders who rarely cross the bridge to go, as they phrase it, "off-Cape." The place is like a drug. There are people who have never been off-Cape, never felt the need. These are the clamheads. But I could not become a clamhead. I needed to rev up my ambitions and start driving again toward Wall Street. I pondered my next move, because I now knew I had to get out, and soon. Otherwise I would have been there forever.

Around that time I also sensed there were big moves afoot in the market. For example, e-trades were beginning to catch on, and this process was lowering margins. For a few days I worried. And then I ran into an acquaintance in a bar. He worked for IBM and was about to start up one of the Cape's first Internet service providers (ISPs), a revolutionary gateway to the Internet. It would allow both businesses and private citizens to plug into the World Wide Web, the new information highway, the dot-coms. I only half understood what he was talking about, because the Internet did not figure prominently in my job. But the guy in the bar told me that the whole business world was going to end up operating online, that the whole of the New York Stock Exchange would end up on that screen. In the next two or three years, people would buy and sell stocks and bonds online; brokerage houses would be closing down by the thousand. This was the start of the high-tech revolution.

"Don't wait," he added darkly. "Get online with the rest of the world's business leaders. Because anyone who doesn't is dead." In his view, every sc.r.a.p of information I would ever need in my entire career was going to find its way onto the screens. "Miss this opportunity to join the real world," he said, "and you'll be like a f.u.c.king dinosaur in a s.p.a.ce station."

Holy s.h.i.t, I said to myself, the brokerage business is going to be destroyed the brokerage business is going to be destroyed. The guy had scared the living daylights out of me. And the vision of the Internet as this encroaching monster from cybers.p.a.ce stood stark before my eyes, snaking out its electronic tentacles into my cozy world, tempting my clients away, showing them how to buy and sell, helping them create their portfolios without me. Three years from now I'd be standing in a financial wasteland. Wall Street would look like Dresden in 1945, and my bank account would look like the Empty Quarter.

I walked out of that bar with my mind reeling. I was going through a very obvious epiphany. I had located a way into Wall Street: the creation of a corporation every financial business in the world needed needed. For the first time the future was not merely the holy grail shimmering somewhere out there in the mists of broken dreams. My future was a laser beam leading to a place that I could identify, a shining city not on a hill but in lower Manhattan. I had tried so darned hard for so long, but for the first time I could see my way forward with a clarity that would never again desert me.

This called for decisive action. So I called my trusted old buddy, Steve Seefeld, and he listened in silence while I explained how the IBM exec was switching on the whole of Cape Cod to the Internet, and that the world as we knew it was about to end. We talked for two hours about the unlimited potential of the Internet.

"Tell you what," said Steve eventually, ever the pragmatist, ever the poet. "The f.u.c.ker's right." He confirmed that the high-tech revolution was upon us and that he was working on a way forward. Steve's game was cybers.p.a.ce and the Internet. Like him, I was very interested in convertible bonds. And over the next three hours on the line between Greenwich, Connecticut, and the Cape, we hatched a plot for a new and revolutionary concept: a Web site that would educate inst.i.tutional investors about the bond market and then provide an opportunity to trade online.

When we had finished the call, neither of us was clear how to proceed, but I think we both knew that we would proceed somehow. The following morning I called Steve in Greenwich again and told him that in my opinion we should kick our plan into gear right away. He was very positive about a new online corporation, for us to be partners. And so I packed up my stuff once again, gave up my job and my condo, said a few good-byes, loaded up the car, and drove away. So far as I was concerned, I was headed not off-Cape but off-planet. I was driving into unknown territory and I had no idea what awaited me, except that Steve and I believed we were onto something big, and we had the bit between our teeth. I was thirty years old.

When I arrived at his house, he was full of optimism. We outlined the project and then set about opening our new office, a world headquarters, from which we expected to hit 'em low, hit 'em hard, and hit 'em fast. No more bulls.h.i.t. The new corporation was to be named ConvertBond.com. We needed to get up to speed both on the Internet and on the computers that channeled the World Wide Web into the places it was required. My new partner understood more about computer programming than anyone else in the country except Bill Gates.

We found a decent-sized office above a strip mall on Railroad Avenue in Greenwich. Chinese food to the left, printers to the right, pharmaceuticals dead ahead, dry cleaner down below-who could ask for more? We had our computers installed, hired a couple of programmers, and set about starting up a corporation that in time would knock people's socks off.

The idea was brilliant but simple, like most trailblazing plans. Steve's devotion to bonds was unflagging, but he had noticed over the years that when you wanted to know something about a new bond issue, it was a royal pain in the a.s.s to find out. You had to call the corporation, explain who you were and what you wanted, and then request a prospectus. Bear in mind that some investors, especially big inst.i.tutions, might want to know about perhaps twenty bonds. They wanted to study and understand them, and it might take weeks to gather the relevant material, which was all contained in these big, glossy, often overwritten prospectuses that often were full of bulls.h.i.t.

In simple terms, we planned to collect these prospectuses from companies all over the country. We wanted to use them to build a huge back-end database that would contain details about every bond, either for sale or about to be issued, in the entire nation: coast to coast, north to south.

It was a mammoth task. Sometimes our goal seemed too far away. And sometimes we thought we were going too slowly. But we kept going, phoning, writing, e-mailing, visiting. Steadily our priceless database came into being. We talked to every mutual fund, hedge fund, and pension fund in the world, any fund that had any kind of record of buying or selling convertible bonds. We discovered their needs, and we tailored our information highway to all of their requirements.

"One day," said Steve, "the whole world is going to need this. In time, anyone buying a convertible bond would not dream of doing so without going online and checking out the bond issuer with ConvertBond.com. We're on the verge of something enormous. This, Larry, old buddy, can't miss."

The trouble was, it was so difficult to get any kind of income. All we did was spend. We had nothing to offer until the database was complete. We certainly had nothing to offer the big investment houses yet, and we were both terrified some national outfit would copy our idea and run with it a whole lot faster than we could.

We spent between $300,000 and $400,000 financing the operation. We worked night and day, sometimes even sleeping under our desks-anything to save time. We ripped open the prospectuses as they arrived in the mail, and then we set about transferring each and every one of them onto the computer, deriving a standard formula for them that in the not-too-distant future would allow investors anywhere in the world to go to ConvertBond.com and find out anything and everything significant to the bond in which they had an investment interest. Just at the touch of a few b.u.t.tons. and find out anything and everything significant to the bond in which they had an investment interest. Just at the touch of a few b.u.t.tons.

As you can imagine, the sight of our office was amazing. We were trying to sort out more data than the U.S. Army's recruiting department did. We had floor-to-ceiling, wall-to-wall, out-in-the-hallway prospectuses. Once we had this mountain of information under control, we planned to slip into Steve's pet project. Each morning we wanted to highlight one single knock-'em-dead bond, deemed our Convert of the Day-chosen with the full and fearless approval of this new two-man operation, a.n.a.lyzed and researched right up here over the dry cleaner, next to the Chinese takeout. Stand back, America.

Of course, our own presentation was designed to make us look as substantial as IBM. It was the tried and tested American way, and we were following in the footsteps of the great U.S. entrepreneurs. There's never been anything like the Internet to provide instant status to minor-league outfits like ours. To tell the truth, our Web site made us look like the Pentagon. Our creed was printed boldly at the head of the home page: "Founded in 1997 [which it still was], the site offers terms, a.n.a.lysis, news and pricing relating to the 890 convertible securities that currently can be found in the U.S. market." The number 890 may not sound like much, but you should see what 890 looks like in stacks all over the floor, forming a kind of office minefield.

Our Convert of the Day was typically a bond issued by a corporation like Hewlett-Packard. That bond might offer a strike price of $63.15, which means, broadly, that a bondholder who had paid par for his convertible-that's $1,000-could, if he wished, convert that into regular Hewlett-Packard stock at any time at the fixed price of $63.15 per share. That meant he could always always exchange the bond for 15.83 HP shares. The moment that share price began to rise, the price of the bond rose with it. So if the stock went from $55 to $90, you multiply that figure by 15.83, and your bond is worth at least $1,424-which is sweet for the investor, especially since the coupon yielded 5 percent. In the raging dot-com market of the next twenty-four months, if the HP stock eventually surged to $100 a share, the investor's bond went up again and was now worth at least $1,583. That's more than a 25 percent annual return. It was especially good if you happened to have a thousand of them, because, including your 5 percent coupon, that added up to a $683,000 profit. Because Hewlett-Packard had a credit score nearly as good as the U.S. government's, that bond was never going to be worth much less than $880-not with HP guaranteeing your 5 percent exchange the bond for 15.83 HP shares. The moment that share price began to rise, the price of the bond rose with it. So if the stock went from $55 to $90, you multiply that figure by 15.83, and your bond is worth at least $1,424-which is sweet for the investor, especially since the coupon yielded 5 percent. In the raging dot-com market of the next twenty-four months, if the HP stock eventually surged to $100 a share, the investor's bond went up again and was now worth at least $1,583. That's more than a 25 percent annual return. It was especially good if you happened to have a thousand of them, because, including your 5 percent coupon, that added up to a $683,000 profit. Because Hewlett-Packard had a credit score nearly as good as the U.S. government's, that bond was never going to be worth much less than $880-not with HP guaranteeing your 5 percent and and the return of the original $1,000 in twenty-four months. The bondholder thus enjoyed the upside potential of the stock and downside protection from the mighty Hewlett-Packard. That's why we made it Convert of the Day. the return of the original $1,000 in twenty-four months. The bondholder thus enjoyed the upside potential of the stock and downside protection from the mighty Hewlett-Packard. That's why we made it Convert of the Day.

Getting all this data loaded and providing breaking news updates was h.e.l.lishly complex and absolutely impossible to put into action for anyone except a computer genius. I could help with the design, but the actual mechanics of installing this huge site on the World Wide Web was a project for Steve and his programmers. It was 1997, and I felt like some kind of techno-peasant. In the late nineties there were only a limited number of people in the entire country who could undertake such a mind-blowing operation, and Steve Seefeld was one of them because he could speak the language of cybers.p.a.ce. I was learning as we moved along. But Steve was fluent, probably had been since birth.

While my new business partner toiled away in the literal engine-room of ConvertBond.com, my group continued to hammer the phones, order the prospectuses, and gut them for the key points, the parts that were essential for the bond buyer. My work was then moved over to Steve for uploading. It was without question the busiest time of both our lives. We had no time for real meals. We kept going mostly on chop suey chicken chow mein, and fried rice from the restaurant downstairs. We were always driven by the fear of a new, bigger, and richer player entering the game and stealing our idea, because beyond the walls of our frenzied office the whole world was on the move in a kind of panzer-division march to the Internet. There were guys leaving Procter and Gamble, IBM, Johnson and Johnson, Kellogg's, and other ma.s.sive international corporations just to join Internet companies. Outfits such as Ask Jeeves, America Online (AOL), dating services, and G.o.d knows what else were on the rise. Yahoo went public.

Like them, Steve and I could see the future. In a very short span of time we would inaugurate a convertible bond Web site that had to prove itself priceless, and the only thing we needed was data. We already understood that much of this information was on the very expensive Bloomberg system, and we needed to get hold of more of it.

When we launched, we immediately charged inst.i.tutional investors $1,000 a month to access our Web site at will. We had other sliding-scale charges for investors of all sizes, depending on how much data they wanted. And right from the outset we attracted traffic, paying customers. Our debt was growing to maybe $100,000, times were quite tough, and we were putting in eighteen-hour days. But our vision of the future remained undimmed: the indispensable convertible bond research Web site.

Once we were up and running in late 1997, we had the system operating virtually on automatic. My new project involved publicizing ConvertBond.com. Once more I hit the phones, bombarding the media with calls, this time targeting the financial journalists who knew a bit, but nothing like as much as Steve and I did.

I would get through to the reporter, oftentimes a woman, and my pitch was dead-on, to say the least. Remember, I knew a thing or two about pitching, princ.i.p.ally to tell 'em what they most wanted to hear. Oh, hi, Deborah, my name is Larry McDonald and I'm a co-founder of Oh, hi, Deborah, my name is Larry McDonald and I'm a co-founder of ConvertBond.com. I have some information that might interest you. Key words: dot-com dot-com and and information information, both irresistible to a financial journalist in this climate.

I then proceeded to tell the journalist about the new project, but never too long, and never too complicated; I just kept feeding them the words they salivated over-revolutionary, World Wide Web, the next stock craze, state-of-the-art system, groundbreaking method.

Deborah, I am one of the frontline operators in this brand-new game. I can help you make sense of this. Take this new Amazon.com bond. It's got a 4 percent coupon with one h.e.l.l of a valuation. I will help you with every sliver of intelligence on this bond. Show you the ropes when you access bond. It's got a 4 percent coupon with one h.e.l.l of a valuation. I will help you with every sliver of intelligence on this bond. Show you the ropes when you access ConvertBond.com. Because there's nothing more important you're going to tackle this week, and I've read you, there's no one better than you. Trust me ...

Jesus, McDonald, you silver-tongued charmer, you.

Steve and I left no publication untouched. We called reporters at the Wall Street Journal, Barron's, Investor's Business Daily Wall Street Journal, Barron's, Investor's Business Daily. We hit newspaper financial editors in New York City, on Long Island, and in Connecticut. We hit magazines, columnists, broadcasters. And for a very short while not much happened. Then it did.

Greg Zuckerman of the Journal Journal suddenly called me and wanted to know all about this new suddenly called me and wanted to know all about this new Amazon.com bond due to be released in a matter of hours. Next morning I opened up the bond due to be released in a matter of hours. Next morning I opened up the Journal Journal, turned to C1, the front page of the hugely read Money and Investing section, and saw a major article: "Amazon, Bookstore of the World." It centered around their new convertible bond, one of the biggest ever issued, involving inst.i.tutions only and either marketed to or sold to firms such as Fidelity Putnam and Vanguard.

Shivers ran up my spine. There we were, ConvertBond.com, mentioned not once but twice, and given colossal credence: "According to ConvertBond.com ..." We had arrived. Our Web site already had been clocking 1,000 hits a day, but now we exploded like Mount St. Helens-before close of business that day we had received 150,000 hits. ..." We had arrived. Our Web site already had been clocking 1,000 hits a day, but now we exploded like Mount St. Helens-before close of business that day we had received 150,000 hits.

For months now the publications had been heralding some kind of a dot-com gold rush. Anyone who did not accept that such a surge was in progress was in danger of being mown down in the stampede. And here we were, one of the nation's newest dot-com outfits being swamped with hits on our Web site. Looking back, we were right in the midst of the boom: we were becoming the guiding light for the biggest inst.i.tutional investors in convertible securities on Wall Street.

It was a crazy time. The whole ethos of U.S. business was changing. In this new, vibrant atmosphere we were seeing big high-tech corporations where people no longer bothered with pin-striped suits and ties but rather turned up for work wearing sneakers, jeans, T-shirts, and denim jackets. The geeks were taking over the world as corporations settled into business models that were entirely based on buying and selling in cybers.p.a.ce.

The sudden low price of reaching millions worldwide and the possibility of either selling to or hearing from those people promised to overturn established business dogma in advertising, mail-order sales, and customer relationships. The Web was, in the jargon, a killer app-a computer program so useful that people were rushing out to buy computers just to get hold of it.

The big scorers in this new atmosphere were Hewlett-Packard, Dell, IBM, and all the components companies that supplied them, such as Intel, Sun Microsystems, Sony, and Cisco Systems. Also making fortunes were Yahoo, AOL, Netscape, E*Trade, and Microsoft. So far as we were now concerned, at the top of the entire pile was ConvertBond.com, right over the dry cleaner, the new 150,000-hits-a-day gang-buster operation blazing a trail through the pages of the Wall Street Journal Wall Street Journal. That was a self-view, of course, probably not universal. Yet.

Thus our business began its early march toward becoming a cash cow, generating dollars every hour of the day and through the night. But it was still very tough going, because every day we received several new prospectuses, and they still had to be gutted and uploaded. And between us, Steve and I still had to select the Convert of the Day. h.e.l.l, we had thousands of unseen investors out there relying on us, our judgments, our research and a.n.a.lyses.

And still we were aware of the value of publicity. We needed to keep our name out there in the front lines of the bond investment world. The one exposure we lacked was the business channels on television, Bloomberg and CNBC. A slot there would surely send us straight through the roof. But how to pull that off?

My favorite CNBC program centered around a very beautiful reporter called Kate Bohner, who produced a daily ten-minute essay on some quite difficult financial subjects. Difficult for the average reporter, that is. But I had always thought Kate was different. She showed a very astute grasp of complicated matters. To me she always seemed more like an executive in a finance corporation, a big commercial bank, or an investment house. There was just something more thoughtful about her, a quality that went beyond merely telling a topical story.

There was no question of telephoning her, because there was no chance of getting through. There was probably a network screening operation designed to snag perverts, to protect women as good-looking as Kate, and I did not think it was in the interest of ConvertBond.com for me to find my way onto that particular list. for me to find my way onto that particular list.

So I pondered the problem, and decided, when the time was right, to launch my message through the Internet. By now I was certain Kate Bohner would have her own e-mail address, which, of course, was a secret that I had no way of finding out. But I worked in a hotshot Internet company with access to a lot of know-how, and I resolved to try to crack the Kate Bohner code.

I started with the e-mail address and compiled a list of about thirty different permutations, waiting for the right moment to write a good friendly message. Days went by, and then one day I turned on the television, switched to Kate's channel, and saw to my delight that she had a brand-new hairdo. Very slick, a bit shorter, and it made her look fitter than ever.

I pulled up those thirty different e-mail addresses on the computer, composed my short message-"Really nice new hairdo today"-and signed it "Larry McDonald, co-founder, ConvertBond.com." I then fired them all out, a scattershot approach, fully expecting all of them to bounce back with "address unknown." And twenty-nine of them did. But fifteen minutes later, I got a reply from Kate: "Larry, so glad you noticed. Thank you."

I now had her e-mail address, and all I needed was a reason to send her another message. And that was real easy. I just waited until she broadcasted another good essay on a subject I knew a lot about, and then fired off a signal: "Kate: I really liked your piece about bonds today. Very insightful. I might be able to give you a hand with that type of stuff. Maybe even give you a few creative ideas. Yours, Larry. P.S.: Don't change your hairdo."

I made no attempt to suggest a meeting or even a phone call, just kept it easy and complimentary toward her. By this time I had made some provisional inquiries about this G.o.ddess of the airwaves. And the answers, given her astute grasp of finance, were predictable. She'd done business and international studies at Wharton and graduated from Columbia University School of Journalism. Her dad was a professor of English literature, and she'd spent several years in Europe. Just about what you'd expect from someone that good at her job. Would I hear from her again? Would she make contact?

Back came another response: "I'd appreciate that, Larry. By the way, what do you do?"

I waited a day and then sent her an e-mail explaining about our new Web site, told her I was sure it was sufficiently revolutionary to make a very good piece, and noted that we were riding the dot-com wave in a very big way. The Wall Street Journal Wall Street Journal had already mentioned us. So had had already mentioned us. So had Barron's Barron's.

Again she responded, and suggested that we meet, perhaps for drinks one evening after work. Of course I immediately agreed, and she suggested the bar at the Gotham Lounge in lower Manhattan.

On the appointed day, beside myself with excitement, I finished work early, drove out of Greenwich, and headed into the city. The traffic was heavy, and I almost crawled over the Triborough Bridge and onto the FDR Drive, heading south. At last I was going against the afternoon rush-hour flow, and I remember racing along the highway beside the East River toward Wall Street at a real good clip. The good news was that I was right on time. The bad news was that Kate never turned up. I waited for ages, sipping fizzy water and becoming steadily more disconsolate. I did not have a phone number for her, and to be honest, I was completely baffled by her absence. In the end, after forty-five minutes, I left the Gotham and drove back to Greenwich. I decided not to contact her; I thought that was her prerogative.

Next day she sent me an e-mail apologizing. And her reason was not anything simple, like working late or a car that wouldn't start. Kate had been in a car crash, a full-blooded wreck, and this time we swapped phone numbers in case she was in another one. Our new date was for the next week, Wednesday at six.

Once again I drove into the city, and this time the traffic was worse. I was two minutes late and double-parked outside the Gotham before running in. I spotted her immediately. She was sitting way down at the far end of the long bar with a girlfriend.

I introduced myself, and she introduced me to Candace Bushnell, the New Yorkbased author of s.e.x and the City s.e.x and the City. I remember Kate ordered me a gla.s.s of wine while I dashed out through the bar to get the car legally parked. As I did so, I glanced into the mirror and could see Candace smiling and giving Kate a thumbs-up. I saw her mouth the words, "He's cute."

With my confidence high, I parked the car and went back in. Right away we all got along, and had a great evening together. The three of us went out for dinner, and ended up at Kate's place for a nightcap. Candace went home first, leaving Kate and me alone, an opportunity to show her I was a proper gentleman, not some smart-talking lounge lizard on the make. We concluded the evening with a chaste kiss on the cheek from Kate to me, and we parted, having established a friendship that has lasted to this day. I still think she's one of the best financial reporters in the business. But I knew right from the start that I could not really compete. I mean, Jesus, she'd been married to Michael Lewis, who wrote Liar's Poker Liar's Poker. She'd been at the soccer World Cup in Paris.

But Kate came through for me in spades. We talked quite often, and under my tutelage she wanted to do two programs on convertible bonds. One would plainly be on Amazon, bookstore to the world. This was a bond I was a real expert on. And she wanted to do a second program, on a global corporation with a recently issued convertible bond. I knew just the outfit for her: Diamond Offsh.o.r.e, the Louisiana-based deepwater drilling kings whose services are in demand worldwide. This has always been a very exciting, brilliantly run operation, and I really believed in their new bond and credit quality. I regaled Kate with Diamond's history and their success searching for oil in the depths of the Gulf of Mexico. So far as I could tell, they had always made a stack of money in oil fields throughout the entire planet, especially off the coasts of Texas, South America, and western Australia and in the North Sea.

What I always loved about Kate was the ease with which her imagination was fired. You could be talking about a bond, just a name, but you start painting pictures of a big sea off the coast of windswept Scotland, of men braving the storms, drilling into the ocean floor in freezing, dangerous conditions, pumping the crude oil, hundreds of miles from home, out there on a giant offsh.o.r.e rig. Right then you had a real audience, not just some impatient journalist looking for a sound bite. When Kate went on the air with her essays-CNBC coast to coast and worldwide, an international audience-talking about the bonds, the background, the price, and the potential profits, she was the best. And did she ever do us proud. She mentioned ConvertBond.com several times. She mentioned me constantly and prominently: several times. She mentioned me constantly and prominently: According to senior partner Larry McDonald ... I have just spoken to According to senior partner Larry McDonald ... I have just spoken to ConvertBond.com partner Larry McDonald, and there's no doubt in his mind ... partner Larry McDonald, and there's no doubt in his mind ...

Overnight Steve Seefeld and I became world oracles on the convertible bond. And we deserved it, because we both understood the subject as well as anyone and a lot better than most. Kate Bohner made us famous, and in turn we helped to make Kate look her peerless best. What a team.

I should perhaps mention here that at this stage in the proceedings ConvertBond.com's site went berserk. Those 150,000 hits we'd received off the Wall Street Journal Wall Street Journal story now looked like a real slow day. We had hits from all over the world, hundreds of thousands of them, inquiring about convertible bonds, extolling the virtues of convertible bonds, explaining about new issues. People were ransacking our site for information, sending messages, requesting interviews, hammering in their credit card details. story now looked like a real slow day. We had hits from all over the world, hundreds of thousands of them, inquiring about convertible bonds, extolling the virtues of convertible bonds, explaining about new issues. People were ransacking our site for information, sending messages, requesting interviews, hammering in their credit card details.