First things first: We don’t really think it’s essential to be a financial or legal expert to enjoy Billions. It is a show more about complex characters and their even more complex relationships than about the workings of Axe Capital or the US attorney’s office. Having said that being the “forensic fans” that we are, we believe it is more likely for us and probably for some of you to enjoy Billions once we understand exactly what’s going on… which brings us to this post.
I would put my signature under what Bookworm has told us in our anniversary post: “If you told me 365 days ago I’d be trying to wrap my head around stock market jargon, I would have laughed at you.” Oh yes, I would have laughed, too. And quite loudly! I would have laughed even louder if someone had told me I would root for a hedge-fund guy… It is all Damian Lewis to blame! 😀
Before I get to it, I would love to introduce our Lady Trader, our incredible source about all things Wall Street, who has taken her time to meet me several times in person to go over financial jargon and concepts together.
How come she gets the nickname Lady Trader? Oh no it’s not us, it’s the trading floor that gives her the nickname! A guy that she works with at the American Stock Exchange asks one day: “So you want to be a girl trader?” And she responds: “No, I am a lady, who just happens to be a trader.”It turns out nicknames on the trading floor stick! 🙂
Lady Trader has over 20 years of experience in the securities industry. For 8 years, she was a software and media equity analyst in asset management at The Bank of New York and Weiss, Peck & Greer. In addition, she was responsible in supporting the portfolio managers in portfolio construction and risk-control. She previously worked for 6 years at the American Stock Exchange as a special assistant in the Finance and Information Technology Departments. Prior to that, she was at Dean Witter Reynolds in the Retirement Plan Operations Division.
And we are extremely pleased to have her support!
Now… We learn in Episode 1 what Bobby fears the most in life is the Windbreakers. I would suggest him add whiteboards to that… Well… We have been obsessed with Chuck’s board since we saw it in a Billions promo video. We took multiple screenshots and talked about it at length. JaniaJania opened a FUN window to our “forensic” team conversations about Chuck Rhoades’ whiteboard two weeks ago here. And while she loves to focus more on the psychology of it, I would love to take the next step and do my best to translate the technicalities of Chuck’s Board into layman’s language…
We see in the middle of the board Axe Capital has assets valued at approximately $15 Billion. And we have three different pieces of information on the board all of which we have seen as three separate scenes in the Pilot and I suggest we dig in and examine them closely in chronological order.
Scene 1:
Ari Spyros from the Securities and Exchange Commission (SEC) pays a visit to the US Attorney’s office with a suspect trading pattern by three firms that have links to Bobby “Axe” Axelrod. There has been a “days long buy spike” with Century Capital, Quaker Ridge and Old Oaks, three small firms, buying a lot of Pepsum Pharmaceuticals shares. Lady Trader comments that SEC pays particular attention if firms buy or sell at a time the stock is not moving. If it is not moving, why do three companies all of a sudden get interested in this particular stock? SEC flags it thinking these firms might be involved in “insider trading.”
So what is insider trading? Here is a very helpful blurb from Lady Trader: “Insider trading is when you buy (or short) a stock with information that is not known to the public. Example: if a Chief Financial Officer (CFO) tells me privately that their company had a very good quarter, but the quarter hasn’t ended, and I buy the stock at $20. When the company reports good earnings the stock goes up to $30, I made $10 per share. That’s a very clear cut insider trading case.”
We don’t know what kind of insider trading is going on in Billions yet. However, the first thing that comes to mind about a pharmaceutical company is that there may be some breakthrough about a new drug that is not public information yet but these firms somehow find out about it through an “insider” and maybe even through Bobby Axelrod who hears it from an “insider.”. He may be sharing this information with these firms with the expectations that they may return the favor later.
But then why does Chuck not really take this suspect trading pattern very seriously? Or why does he NOT trust Spyros? The SEC and the US attorney’s office must be on the same side, right? Hmmm… Maybe their interests do not overlap completely given that all these guys are ambitious professionals with aspirations for higher office.
SEC is a government agency that is responsible for protection of the investors against fraudulent and manipulative practices in the securities markets. The agency can bring civil action to companies in violation of securities markets regulations and make them pay big fines. Lady Trader tells me big companies know these fees are inevitable and some big ones even have fee funds! So fees, as far as I understand, are issued like traffic tickets. They are “facts of life” as Hall tells Axe later in the episode and not much to worry about. The real worry is the US attorney’s office that can bring criminal action! And since they bring criminal action, their bar about evidence to act on some company is higher than that of the SEC. As Chuck tells Bryan, “we go in first and lose in criminal action, SEC can still get him civilly.” SEC wins either way and gets their fines paid.
It seems someone gets the ball rolling though in this “suspect trading pattern” case! They arrest Dan Margolis of Century Capital, a former Axe Capital employee and send him to Bobby Axelrod to implicate him in insider trading. Axe does not take the bait — he’s been in this long enough that he can diagnose “too much eye contact” and “sweating palms” just right — and says nothing about business other than inviting Margolis to the next dinner where they will “chop some steaks and talk concepts.” 🙂
Scene 2:
We see Mick Danzig, a portfolio manager for Axe Capital and his rookie analyst Ben Kim (aka Stanford-Wharton) on the whiteboard with the recent trade of $31.19 per share through which Danzig makes another $18 million for Axe Capital as well as information about Electric Sol, Lumetherm Power and Scott Kazawitz on the right… which brings us to the scene in the pilot where we meet the ruthless hedge-fund king Axe talking Danzig and Kim.
In case you missed it, Bookworm describes the role of the portfolio manager, the analyst and the trader in the hedge fund brilliantly here.
Danzig and Kim tell Axe Lumetherm is being bought by Electric Sol. Its price was $41 and it is now trading at $35 and they envision a 17% jump when the deal closes. Danzig plans to buy 2 million shares for the main fund which Axe agrees with at first. Then Danzig shares new piece of information. Scott Kazawitz will be the chairman of the company. Ha! Axe knows Kazawitz is an animal. He currently controls Electric Sol and he also owns 19.3% of Lumetherm backdoored through his stake in Southern Wind. Southern Wind had a block trade (meaning they sell a lot of their shares) through Merrill Lynch last Thursday at 12:52 pm —lunch time — which tells Axe they did want people to miss it. Axe thinks Kazawitz is using this potential merge as a ploy to temporarily prop up Lumetherm and use the blocktrade to get out of Southern Wind and Lumetherm… which means they need to get out of this immediately! So… Short! Well, Danzig shorts the stock at $41 and then covers it at $31.19 when the merge crumbles and makes extra $18 million for the company!
Now… What is shorting? What is covering? Well, “shorting stock” (also known as “shorting” or “short selling”) is the practice of selling stocks that are not currently owned, and subsequently repurchasing them (“covering”). A short seller, anticipating that a stock’s price will drop, first sells high, and then buys low. To do this, the seller actually borrows shares of stock and sells them in the open market, without ever owning the shares. Then he must buy identical shares back at a later date to return to the owner. His goal as a short seller is to purchase the shares back for less cost in the future and make a profit. However, if the market value of the shares increases during the period when the seller is borrowing them, then he can suffer serious losses.
Just to give a simple example: For example, if Bobby Axelrod thinks some certain stock is overvalued at $25 and is going to drop in price, he may borrow the stock and sell it for $25. If the stock goes down to $20, Bobby, after buying it back and returning it, would make $5 per share. However, if the stock goes up to $30, he would lose $5 per share.
And in case you missed it, Bookworm describes shorting and longing with incredibly intuitive examples here.
Scene 3:
The third piece of information on Chuck’s whiteboard is regarding Superior Auto about which Bobby has a pretty interesting conversation with Bill “Dollar” Stearn and Butch “Pouch” Probert — probably PMs — and his right-wing man Wags at his son’s basketball game of all places! “Dollar” and “Pouch” do not agree on what to do with Superior Auto. Pouch believes the stock will go up in value since aluminum is replacing steel in cars and light industry trucks and he suggests they long the stock (buy and wait for the value to go up to make money). In contrast, Dollar says Superior Auto over-produced this quarter and they are stuck with merchandise that the stock is going to dip and he suggests they short (sell the stock at a high value now and cover later when it dips and make money!).
As Dollar talks, we see him in a flashback, giving money to some worker at Superior Auto to see the excess inventory that leads to his “I am not uncertain” when Axe asks him how certain he is. This looks like a coded language they use in Axe Capital. “I am not uncertain” and they decide to short! Lady Trader says Axe is not involved in insider trading here, because “Bill gives money to a worker to get info no one else has (they have lots of inventory). That’s insider trading for Bill, but not for Axe – he didn’t know where the info came from; he’s taking the recommendation from his analyst.” Oh yeah it is a pretty gray area that Axe hangs in.
