Climbing Through the Back Window
How I Got My Start in Finance
Featuring Larry McDonald
Published on: April 29th, 2019 • Duration: 11 minutesLarry McDonald, author of The Bear Traps Report and New York Times best-selling author, joins Real Vision co-founder and CEO, Raoul Pal, to discuss his unconventional start in finance. Whether he was disguising himself as a pizza delivery man or selling meat to showcase his skills, perseverance and creativity define his story. This video is excerpted from a piece published on Real Vision on February 26, 2019.
JUSTINE UNDERHILL: Joining us today on How I Got My Start in Finance is Larry McDonald, a bestselling author and the founder of The Bear Trap's Report. In this interview with Real Vision CEO Raoul Pal, McDonald shares how he fought to find a place in the industry and how he made his big break.
LARRY MCDONALD: Well, I grew up on Cape Cod, and just before that, there was up toward outside of Boston, Bolton, Massachusetts, and very tough divorce I went through as a child, my parents, I think we were in probably six or seven schools in eight years and then finally, went from very countryside living to living in the housing project, went through the divorce. And as a young man, I really learned how to appreciate money, hard work, and finally made it in a team as- kind of came up through the bootstraps, public school systems, and started off my career that way. And it's been very challenging, but I got our first break years later, which we can get into.
RAOUL PAL: Yeah, you told me about this off-camera earlier. So, you graduate, and then you want to go to Wall Street?
LARRY MCDONALD: Want to get into Wall Street. And I think I had 155 no-s from every single-
RAOUL PAL: Yeah, I was there too. We talked about [inaudible], still throw though.
LARRY MCDONALD: And the motivation. And to me, life is about really that burning desire to break through those walls. Nothing's given to you. And you have to go get it. And you have to really have that burning desire, vision every day. And I couldn't figure out a way but there's always a way. If you can't get through the door, you got to climb in through the back window. And Joe Bronson used to say. And I tried to get into Merrill Lynch after like the seventh no, I snuck my way and dressed as a pizza delivery man.
RAOUL PAL: For real?
LARRY MCDONALD: Yeah. In Philadelphia- I mean, Boston, I'd struck out so many times, so I tried Philly. And I was thrown out of the building. On the way out, one of the senior producers of the firm, Gary Banga, grabbed me and brought me back and he said- he brought me into a room with five or six big producers. And they said, Larry, we'll give you a job. Just you got to go sell something for six months, prove that you can build relationships with people. And I'm like, what am I going to sell? The guy said pork chops. And so, I went back to Cape and Massachusetts, five, six months, put up some decent numbers. And next thing you know, they gave me a job.
RAOUL PAL: Selling pork chops.
LARRY MCDONALD: Selling pork chops.
RAOUL PAL: But how do you start selling pork chops?
LARRY MCDONALD: I just worked my way into one of these things, American frozen foods. And it was during the SNL crisis, I'm talking about trying to get a job in finance, coming out of school with hundreds- and the Bank of New England went out of business. Bank of Boston was on the verge of filing- so the whole area of New England was really near depression. And so, I just made my way through the back door.
RAOUL PAL: So then off to Merrill. So, when did your career go from there?
LARRY MCDONALD: I was on the retail side for a couple years and really always wanted to be into that major leagues. To me, I wanted to get into New York and work on the institutional side of the business. And that just fascinated me. And I ended up my- good friend, Steve Seefeld- he and I were talking about a vision for bringing convertible bonds to the web. And this is like in the mid-90s. And we started a website called convertbond.com. We were lucky enough to have CNBC do a couple of segments on us, got-
RAOUL PAL: So, that was very early for websites.
LARRY MCDONALD: Yeah, it was it was late '95- '96. Yeah, that was just the early construction of it. But by the time we sold it to Morgan Stanley is October of '99. And if we'd wait- we sold the company, this was the largest, most successful convertible bond research, potentially trading platform in the world. And Morgan Stanley bought us in October of '99. And I often say, if we had waited for the next bid, we never would have gotten it. Because the market collapsed in 2000. And God bless Morgan Stanley.
RAOUL PAL: Yeah, top stake in the market. Because it had a .com at the end of it. So, after that, so after you sell convertbond.com, what happened?
LARRY MCDONALD: Well, I stayed. There was a very nice quality of life. I'm in Connecticut, New York, running the convertible sales, I'm running really the website for Morgan Stanley, probably stayed there one or two extra years, it was very comfortable. But always wanted to make it into the trading side. And to me, that was really where I wanted to be. And once again, if you have to- if you can't get through the front door, you can come in through the back door, or the window. And I convinced Larry McCarthy and the team at Lehman to give me a job trading convertible bonds, high yield bonds, distressed bonds. That was my big break- making it from kind of on the sales side, research side into trading. And that was probably the biggest break in my career.
RAOUL PAL: Okay. And so, what kind of convertible bonds? So, you're now in New York trading, what kind of strategies are you looking at?
LARRY MCDONALD: Well, it's really distressed converts, high yield converts, because what we realize is that businesses when you work on a big bank, you have the equity division, and you have got the fixed income division. And most people don't realize that a lot of these divisions don't like each other. And so, back then, there's a lot of miscommunication between divisions across the street. And so, my job was to really work with both sides, and help bring markets, bring convertible bond markets to clients around the world. But also make sure that our teams on all the different floors- in high yield, distressed and equities- are on the same vision.
RAOUL PAL: So, explain to people, because some people won't understand what a convertible bond is because it's the hybrid nature. And when you're doing distressed, convertible bonds, you got multiple hybrids here. So, explain to people what that is.
LARRY MCDONALD: Well, I say in the book, and I ended up- I wrote The New York Times bestseller about Lehman. It's now published in 12 languages. And one of the parts of the book is about converts, and there's a convertible indicator. If you look throughout the history of corporate capital markets and financing, the repeat entries to the convertible markets are oftentimes the most likely companies to file bankruptcy, whether it'd be six flags or Fannie and Freddie. There's so many different companies- WorldCom, Adelphia, the multiple convertible issuer, it's really the last saloon.
So, a convertible bond is an obligation of the company. So, you sell the bond, maybe a 5- or 10-year bond, 1000-face bond, and it may be a five-year term, but you also have a conversion ratio, a certain amount of shares of stock. And what happens throughout the evolution of some companies is they get too much in debt. Companies like Calpine. Calpine had seven convertible bonds before they filed bankruptcy. And they will come to- it's really what we call the last saloon, that bar at two o'clock in the morning, you have to get to that last place. It's the place where a lot of companies can go and finance and lo and behold, guess who the new multiple issuer is in the markets? Is now looking like Tesla.
RAOUL PAL: All right, interesting. Again, sorry, just to explain a bit about convertible bonds. So, as you say, it's a bond, but it has an equity component, how does that work? Just so people can understand truly how it works.
LARRY MCDONALD: So, you have 1000-face bond, and there's a certain bond floor in there potentially, because it's an obligation of the company, but you'll have a certain number of shares of stock that the bond converts into. So, if the stock takes off, you can have $1,000 bond go to three or four or 5,000. In the.com era, there were convertible bonds that went from 1000-face- so, you have a bond that's 1000 that matures in five years at 1000. But you have a potential of turning that 1000-face into five or 10,000.
RAOUL PAL: Because there's a call option on the equity.
LARRY MCDONALD: Yeah, call option. That's a good way of putting it. It's a certain amount of shares, but essentially, it's an embedded call.
RAOUL PAL: And it has a strike price, like a call.
LARRY MCDONALD: Yes, it has a strike price.
RAOUL PAL: Which you convert [inaudible].
LARRY MCDONALD: And if you're Buffett, you don't negotiate the very low strike price. Buffett's, famous for converts, I mean, he convinced Goldman and General Electrics during the financial crisis to structure him a private convertible bond that he has between- it's an obligation between him and the company, loans the company money, but he wanted that income component, that coupon, that's your income, but you also have a low in his case, you negotiate a low conversion price.
So, let's just say the stock is $80 and his convert might convert at say 85 or 86. But in the case of other converts that are issued, a lot of times there's a bigger spreads. So, it's like when does that bond get in the money is the question. When can he convert? And Buffett's the classic in that regard.
JUSTINE UNDERHILL: Whether it'd be disguising himself as a pizza delivery man or selling pork to prove his chops, Larry McDonald is the definition of hustle. His perseverance and penchant for climbing through the back window has served him well. For Real Vision, I'm Justine Underhill.