Then we ran into a problem. One morning the market opened way down and our positions started working against us. The markets were getting crushed right before our options were expiring, and our positions were moving against us fast. I had a strategy for this type of situation. It meant taking a loss, but certainly it was survivable. As the day progressed, though, the market got a little worse than I had anticipated. Suddenly a manager of one of the funds who had about $500,000 in it called. He was in a complete panic. “Where am I? What’s my loss?” His potential loss was capped at $250,000, but he was still far from that figure, I thought. As the market plunged he called back several times, and finally he told me (actually he ordered me), “Close me out right now.”
I hung up the phone and told Neil, who pointed out, “Taking an order from a client in a situation like this is probably never a good thing. We should get him to fax us his instructions.”
I sold his position and he took a substantial loss. The way I had modeled this strategy allowed me to close out the position that was going against me while the position going for me continued to run. That cut my losses substantially. So I went into the market and started trading. As I made each trade I told it to Neil, who logged the trade ticket and updated the portfolio. I finished the trade that basically closed me out of my losing position and hung up the phone. I figured we were okay. But I could see that Neil was confused, almost in a panic, about something. He was looking over the models and the portfolios as they updated rapidly with each market change. “What’s the matter?” I asked.
“Harry, there’s something wrong here,” he said, looking at the numbers. “This isn’t adding up.”
He showed me his calculations. “Either we’re doing something wrong, or we didn’t think about this scenario.”
That’s when I discovered my mistake. As I looked at his calculations I realized I’d made a math error. As a result, instead of being down the maximum 50 percent, I was actually down more than 100 percent. Potentially, I was looking at a financial disaster. The only hope I had was that the market would move in favor of the positions I’d kept. Typically when you make a mistake the market goes against you, but this time it was moving to our benefit. Neil was running spreadsheets trying to find that point at which we would come out whole. I was on the phone, placing orders, trying to ride this wave out of danger. I placed my orders and hung up. Neil and I sat there silently, staring at the screen, holding our breaths and twiddling our thumbs as we watched the market proceed to save my ass. We had traded out of the position perfectly. In fact, every one of our clients, except the fund manager who bailed, ended up with a slight gain. We’d been breathtakingly close to losing several million dollars.
So we had successfully proved that this product had some potentially serious problems. But Thierry and Tim Ng were sold on it. They believed it could be a viable alternative for those clients too deeply invested with Madoff. I thought I had done my part by creating it; I wasn’t a salesman. But in early December 2001, Rampart’s senior investment officer, George Devoe, who normally would have sold it, was diagnosed with a fatal form of brain cancer. That was stunning, devastating. George sat a few feet away from Neil and me. George was a runner and a biker and a hiker; he was a mountain climber; he was the epitome of good health. At lunch he would sit there making fun of Neil, who was devouring a sauce-dripping sub sandwich for lunch and eight or nine sodas and never gaining one ounce, while he was eating a healthy salad and taking his vitamins and washing it all down with mineral water. But one day he told us he wasn’t feeling too great and went to his doctor. He had an MRI and was told he had inoperable brain cancer. Three months later he was dead. It was really an awful situation, and it left me as the senior investment manager. So when Thierry wanted to market my product to European hedge funds in June 2002, I was really the only person who could go with him.
I had been to Europe briefly several times in my life. I had done a three-week art tour in France while I was in college, I’d vacationed in Greece with my family, and the army had sent me to Germany and Belgium a few times. But this trip was different. During this trip I met the rich and the royals of Europe. But also during this trip I got to really know Thierry de la Villehuchet. His founding partner at Access, Patrick Littaye, went with me to several meetings, and I also spent time with Prince Michel of Yugoslavia, who was marketing for Access; but mostly I was with Thierry. Thierry de la Villehuchet was a nice person, a French nobleman who was a noble man. He lived his life, and he died, by a very strict code of honor and obligation.
I think I began to understand the burden he was carrying the day we drove past the Arc de Triomphe. “Look up there, Harry,” he said. “Look at those names under Napoleon.” As I read those names, I recognized several of them. These were the people we were going to be meeting with on this trip. Several lines down was the name Flaghac. François de Flaghac was also selling my product, and Thierry explained, “His father was only a general. Everybody else was a field marshall or an admiral.”
Thierry had been born into royalty.
