A Wall St. Legend Leaves Us with Timeless Lessons

Great stuff from Larry McDonald (@ConvertBond on Twitter) in Forbes

Larry McCarthy 1964-2013

Wall St. lost a legend last week.  Over the last two decades, Larry McCarthy was probably most respected junk bond trader, a man with fearless resolve.  He was one of a kind and touched so many people in positive ways. The only thing that outshined Larry’s inspiration to others was found in his generosity.

Stories of Larry’s passing have been widely read.  Over the last week, his profile was the most viewed globally across the Bloomberg terminal.  He will be missed by many, the man left a mark.

He’s best known as the former Lehman Brothers’ executive who predicted that credit-default-swap traders were “working on bringing down the whole world.”   McCarthy placed over $1.5 billion of bets against Countrywide Financial and Beazer Homes, he was a trader with unique market insticts, true vision.  Before the crash, he wisely left the doomed firm in 2007, and made his fateful declaration to a large audience at his retirement party.   It’s the stuff legends are made of.

Hidden below, are some classic trading lessons that have more to do with psychology and attitude than anything else, virtues McCarthy mastered.   As we shared with you last week, fear and adversity are your friend in the markets, you must use them to your advantage.

As a tribute to Larry, this is an excerpt from my New York Times bestseller “A Clossal Failure of Common Sense.”

It was the Fall of 2005, the one person in all of Lehman Brothers who believed implicitly that analyst Jane Castle was correct, was Larry McCarthy. One of the most fearless traders ever to work on Wall Street, he would hear no word against her assessment of the Delta situation, and indeed had, working in concert with Joe Beggans and I, bought $750 million worth of the airline’s bonds during the company’s bankruptcy. He was keenly aware that it may be months before the price climbed to the levels Jane predicted. But he was sure of our position. And like all true gamblers, he was sure that his luck was running.

As a matter of fact he kept buying all through the next month, whenever an opportunity came up.  In truth, the situation at Delta itself did not really improve. Unrest in the Middle East continued, and the pilots were threatening to strike, which would blow Delta’s normal operations asunder, and cut off their cash-flow, which was, at this stage, their life blood. Larry was, however, adamant.

“It’s what Jane says. Those bonds are worth a lot more than 12 cents on the dollar. They got damn Boeings, hundreds of ‘em, parked all over Georgia.” (A year later the bonds traded at 65.)

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