KIERAN GOODWIN: Most of the capital markets is just the transfer of risk.
The weird part of the bull market of the late '90s, and even 2000, is the credit was like, super volatile. Everything's bid. Like, how is this possible. Like, how is everything bid? So he's like, what do you think it's worth? I don't know, man. Mercer is trading at like, 7. 30? They got hits as big as--
TONY GREER: You're always at 30.
KIERAN GOODWIN: Yeah. They sell it at 80.
TONY GREER: Hi, this is Tony Greer of TG Macro. I'm excited to interview my dear friend, Kieran Goodwin today. We're going to talk about his experience as a credit derivatives trader, his experience as a head trader of a large hedge fund. His experience founding a hedge fund, and how it all relates to how he looks at life. Let's get started.
I'm very happy to be here with my dear friend, Kieran Goodwin. Kieran was from Redding, Pennsylvania. Spent his summers in Breezy Point. He went to Duke University, came out was a credit derivatives trader for Smith Barney, Citigroup, Merrill Lynch. He was head of trading at King Street Capital. He started his own hedge fund, Panning Capital. He's an entrepreneur, a rock star friend of mine, and I'm excited to talk to him today. What's up, bud?
You and I met on a basketball court in New York athletic club, right, in the early '90s? Yes right that's where we essentially didn't know each other. We started off on the hoops court playing every night, every day. And then you came up with this big idea that you were going to bet a whole bunch of your friends that you could run the New York City Marathon at two and a half hours.
KIERAN GOODWIN: Oh, that's a little hyperbolic.
TONY GREER: OK, what was the time?
KIERAN GOODWIN: It was three hours originally. And then I realized that that would be kind of tough. So I hedged myself. I had a buyout on all the bets, then I put a bunch more money at 3:10.
TONY GREER: Right. So this was my introduction to you as a risk manager. Was you layering in your bets that you could run the New York City Marathon at a certain time.
KIERAN GOODWIN: Yeah, not my finest risk-reward.
TONY GREER: No, that's OK. This is me getting to know you. And I have to finish out that story, because you took on everybody. And it was literally something to behold. And I had so much respect for you for that. And I remember the day that the marathon was being run, and we were all up on the Upper East Side, right? We saw you go by. You were roughly on pace or give or take. And at that point, we were so happy for you that everybody was cheering for you.
And we all retired to Kelly's Corner. And I will never forget that it was like New Year's Eve in Kelly's Corner, and we were like, man, is he going to make it? It's going to be down to the wire. We were all excited for you.
And all of a sudden, it was like needle crossed the record, and you came walking in the door.
KIERAN GOODWIN: Yeah, it was a disaster.
TONY GREER: And we were like, oh man, I guess it didn't work out, right? What stopped you that day? Just a tough day.
KIERAN GOODWIN: It was really cold that day. And that was before like-- and it was 1995, so everyone's wearing like, cotton. And I'm someone who actually gets more cold than more hot. But everyone's like, oh, you're going to get really hot. So I had basically, like a long sleeved cotton shirt on, and like the New York AC kind of mesh tank. I think it was like, 30 something degrees. Like, high 30s chill. Wind chill was in the teens.
And I remember coming over the Koscuiuszko Bridge, and I'm sweating, and the wind's blowing like, 25. Which is roughly about the halfway point. And I caught a chill. That was just like, oh my gosh, you know?
And then I started feeling punch drunk while I was getting over. So I feel like I had the beginnings of hypothermia, because I was kind of out of it. And then when I saw you guys, I had a boost of adrenaline to try to get through it. But then when you get up into the upper-- First Avenue in the 90s, 100s, and it's nowhere as light, and you're going over the Bronx, that's like--
Yeah, that's kind of like you have to make a decision. So I decided to bail out. And I was like, I'm not going to do it.
TONY GREER: That's all right.
You cut your losses, just like everybody does in trading. You paid everybody that you owed. I remember you handed me the cash that you owed me. And then I even gained more respect for you, because you went to another marathon and proved to yourself that you could beat that time, and then and you did.
KIERAN GOODWIN: I did, yeah.
TONY GREER: Where did you run that again?
KIERAN GOODWIN: Kiawah Island.
TONY GREER: Right.
KIERAN GOODWIN: Was like the next marathon on the east coast. And it was like early December, so it was basically a month later.
TONY GREER: You transitioned, you beat your time. And everybody was pretty blown away by that. So congratulations. So you are a guy that sets goals and accomplishes them clearly. I want to ask you one thing about Duke University. Why Duke? What made you choose Duke coming from Redding, PA?
KIERAN GOODWIN: Well, I really liked basketball growing up. I played in high school. And Duke actually went to the finals my junior year, 1986, which was the first time. Actually, it was Johnny Dawkins--
TONY GREER: You're a junior in high school.
KIERAN GOODWIN: In high school. Right, my junior year in high school was 1986. Johnny Dawkins was a star who actually just coached against Coach K last Sunday at UCF. Just saw him had an amazing game. So that was Dick Vitale prime time, when he was really ascending as a star commentator. And he would constantly talk about how the Cameron Crazies, and all these kids give an amazing amount of support to Duke, and cheer. But they're future doctors and lawyers from the Northeast.
I don't know about you, but I never really heard of Duke outside of that kind of basketball. I didn't really know that it was a great school. So that summer, saw some colleges, we did a little Southern Tour. Went to UVA, and UNC, and Duke, and a couple other schools. And you when you get on that campus for the first time, it's an amazing place. It's like some of the best decisions I made in my life come from the gut, right? When you're like, this is right.
So I walked on there, and it was like, wow, this is amazing. I actually ended up applying early to Brown, got deferred. Didn't get in. But got into Duke, so it was kind of like I'm glad it happened that way.
TONY GREER: Yeah, that turned out well. So when you got out, were you making a beeline for Wall Street? Did you know that that was in your blood and where you want it to go? Or were you sort of feeling out your options?
KIERAN GOODWIN: Well, I was born in Brooklyn. I think I'm fifth generation, probably Burrows, mostly. Some lower Eastside. So I have a lot of New York ties. So I knew I wanted to come back to New York City right after college. And my junior year, we were just getting back, and beginning of the semester in January. Good friend of mine-- great friend of both of ours, Keith [INAUDIBLE], he gave me a book. He's like, my dad got this for me. He's mentioned in the book. And I think you might like it.
And you know, Keith is pretty much-- what's his guy, Nelson DeMille? He's like a Nelson DeMille guy.
TONY GREER: Right, yeah.
KIERAN GOODWIN: So this was the book-- was Liar's Poker. So I'm a junior. It's like we're having a keg party at the tourney. Just like, a 600 keg already, I've seen this before. So I'm sitting there, it's about 7, 8 o'clock at night. And I start reading it. And I literally read it in one sitting. I read it from 8:00 to whenever-- 11:00. I mean, it's a quick read. Most of the stuff at that point I didn't understand as far as like mortgage securitization.
But I was like, wow, Kyle speaks to me in the sense that I always like to gambled from when I was like-- my grandparents only played poker when I was 7 or 8. And we would play just games for money in the family or it was like Yahtzee or cards. Or we'd bet on the Kentucky Derby. Whatever it was. There was just like--
TONY GREER: It drops whatever it was.
KIERAN GOODWIN: Yeah. So I had that, and I always liked angles. Like, I was looking for-- I don't even know the word for the time, but arbitrage, in a sense. In college, a good friend of my father's owned a bar in Brooklyn. And we were in the city visiting my grandparents. And I would notice like people were selling Christmas trees for like 50 bucks at the time in the late '80s.
And so I went into back to Redding, and we'd have Christmas tree farm a couple of miles from my house. How much can I get a tree for. it was like, $15. So I rented a truck. The next year, got a buddy of mine. We got 50 trees, drove it up there. You know, sold them in front. It was good until I learned two lessons. Like, there was an arbitrage there. So I think our all in costs for like 20 odd dollars, like $22, we' sell for $50.
But then the best lesson of it though was like as you getting up to Christmas day, 23rd, 24th, we were there for like, a week. We might have had 100 trees, I can't even remember. But you start getting bid for trees. Buying an option-- like, a tree is an option, right? And on the 25, it expires. It's worthless. So people were bidding me like, $35, and I'm like, holding price, whatever. I should've just been hitting every $35, $30, because I was still making money.
And I remember thinking when I started getting a risk position-- first started to be able to handle risk positions, I was thinking of that moment, sometimes, any bid is a good bid.
TONY GREER: Yeah, that's really interesting. I mean, I love the fact that you've got this drive in you, and that entrepreneurial and calculated. And you go from your fraternity reading Liar's Poker, and next thing you know, you're on a credit derivatives desk on Wall Street, and a pioneer in CDS trading.
KIERAN GOODWIN: Yeah, it wasn't as much of a straight line.
TONY GREER: Right. No, I know that. And that's why we're here. We're going to go through a little bit of the path of how you got there. So tell me about your earliest Wall Street days and a little bit about, was it just in credit, when did you get your exposure to credit derivatives, when did you start taking on risk. Going from a young kid out of college on the desk to becoming the guy that was OK, Kieran has got a book of his own now. But tell me about the early days. The transition from Duke to OK, I'm on the desk now, here we go, and I'm selling Christmas trees.
KIERAN GOODWIN: Right, exactly. So I was a computer science major. So I like math, I like logic, computer programming. And I felt like even though that skill set I wasn't using right away, I always felt like understanding logic and problem solving, that you learn and coding is helpful.
But my first job, I was working in the equity department at Smith Barney. And we were a group that was doing all the stock buybacks. I was an analyst, then I became a sales trader. And I wasn't really using those skills. And I started reading about or hearing about derivatives whether it's in a journal or just tangentially. So I try to get a job in equity derivatives, and started hearing about option theory. And I'm like, oh, that's math, and I can understand that. And there were no jobs, so then I got a job-- Smith Barney started an interest rate desk, interest rate derivative desk.
So I got a job up there, and I was the junior trader, let's say. But it was just more working with a model, and pricing swaps, and swaptions. It didn't really have risk. And then the head trader got fired. So then I was thrown into the seat of having risk, and having to deal with that, which was baptism by fire.
TONY GREER: There it is.
KIERAN GOODWIN: Which was great. But like, scary at the same time when you're like, 25 years old. So that trader then had went back to where he was from, Citibank. Eventually, Smith Barney did a whole tack on fixed income, they shut down derivatives. And they asked me to like trade treasury options. But I also had a job with this guy at Citibank doing credit derivatives, which was totally new at the time. And having seen other people be successful at interest rate derivatives, having been there in the beginning or equity derivatives, interest rate traders probably started in early '80s, equity derivatives kind of mid '80s, in a real way.
And then now we're in the mid '90s, I'm like, well, this makes sense, credit derivatives. I knew a bunch of people, friends that were trading corporate bonds and high yield bonds. So I had some familiarity in how big the product was. So I started working with him in credit derivatives in '95. He soon abandoned me, so I was by myself. He abandoned because there was no business.
So being a credit derivative a trader in 1995 meant you basically spent a lot of time talking to yourself. So I'd come in every day, I'd have a book about option theory. I'd read about credit. I'd go talk to the corporate bond traders, the loan traders, and they would just pretty much shoo me off after me bothering for 15, 20 minutes.
TONY GREER: Phone was not ringing off the hook.
KIERAN GOODWIN: No. But it was a good time in the sense I was young. And I had a lot of time to study, and read, and try to figure things out for myself, and observe.
TONY GREER: So that was like Wall Street university for you, essentially.
KIERAN GOODWIN: Yes. Yeah.
TONY GREER: Right. Bursting through you had to be your inherent desire to take risk and place smart bets.
KIERAN GOODWIN: Oh, yeah. 100%. It was frustrating at the same time. And then also at the same time, as you know, in the mid '90s, it was a bull market. Things were going off. We had friends that were really getting to high levels really quickly. And you hear about their successes, and you're sitting there. I mean, I did have faith that there was something here. I'd have to say that I could see that the first product being a credit default swap, how intuitively, it kind of made sense to me as a transfer of risk.
Which basically, most capital markets is just the transfer of risk. And there were so many credit risks out there that were kind of untransferable. I don't know if that's a word, but it couldn't be transferred efficiently.
TONY GREER: So there was no hedge for that. So what you guys came up with was the product of a credit default swap.
KIERAN GOODWIN: Right. Which the original use of it was if you were a bank, and you had to give a credit line to your Fortune 500 company that you were doing all kinds of different business with, the Walmarts of the world-- Walmart would get a credit line of billions of dollars that they could draw down on you at any time. And they were paying like nine basis points for that. And that was taking up regulatory capital, so that the return on that capital was terrible. But you had to do it as a big-- JP Morgan or, Chase at the time, or Citibank-- they had to do it if they wanted to do business with Walmart across the world.
TONY GREER: Right.
KIERAN GOODWIN: Whether they're doing FX trades or other capital market bond deals, whatever, it's like, hey--
TONY GREER: It's got to be maintained.
KIERAN GOODWIN: You've got to be in my revolver. The revolver is the same as a credit line. You've got to give me that. So then these guys were like, I don't really want that. I'm willing to pay up to get out of that to free up that risk capital that I can deploy to more profitable lines of business. So that was the original use, and why the banks like JP Morgan, they came up with the idea of hey, hedging these individually is not really efficient at the time, because there weren't counterparties. But if we put them all in one portfolio, and then tranched that portfolio into basically a CLO, we can get rid of it that way.
TONY GREER: Right.
KIERAN GOODWIN: So that was that trade that they did to hedge their own risk. This is probably '98 or so. Called BISTRO. That was like pretty watershed in credit derivatives.
TONY GREER: OK, BISTRO was what deal?
KIERAN GOODWIN: That was the acronym which I can't remember the name for that JP Morgan called the security. They basically took all their revolvers that they wanted to get rid of, put them in a theoretical portfolio, and then bought credit default swaps on the whole portfolio. But instead of it being a vertical tranche, they took that portfolio, and tranched it like a first loss piece, a second lost piece. First loss mezzanine, super-senior.
TONY GREER: Right, so that gave him access to capital to use them however they wanted.
KIERAN GOODWIN: Yes. They had freed up all that capital. They were paying out premium to different counterparties. And that counterparty, the counterparty was taking the equity, was getting paid equity like returns for that. And then there was a mez guy, a mez counterparty, then a super senior counterparty.
TONY GREER: Right. So now through the bull market of the '90s, and the tech boom, et cetera, et cetera, eventually, all of this activity became a bit of a casino.
KIERAN GOODWIN: Well, I mean--
TONY GREER: When was the transfer?
KIERAN GOODWIN: The Casino didn't happen for a long time.
TONY GREER: It didn't happen until much later?
KIERAN GOODWIN: It took until two probably 2006, I'm going to say. 2005. The weird part of the bull market of the late '90s, and even 2000, credit was like, super volatile. Unlike now, where all vol is correlated, we don't have volatility in anything.
TONY GREER: Right, zero vol.
KIERAN GOODWIN: Right? We have zero vol.
TONY GREER: FX,