The Speculator

November 23, 2000

A trader triumphs as his era ends
As a trader in the '80s, everything Mark Kessenich touched turned to gold. After a series of medical problems and business setbacks, and with a little help from his friends, he's back doing what he loves best.
By Victor Niederhoffer and Laurel Kenner

Mark Kessenich ran one of the most successful bond trading operations during one of the most extraordinary speculative eras in market history. Throughout the 1980s and early 1990s, his teams earned many hundreds of millions of dollars by taking the risks required to keep the economy running as inflation raged and interest rates soared.

By the mid-1990s, inflation had faded and so, too, had rewards in the bond market. But that was when Mark Kessenich's greatest triumph -- a Thanksgiving tale, Wall Street style -- began.

Now 62, he welcomed us in a sweater and loafers when we visited him last week at his home in Westhampton, N.Y. From the second story where he works today, far from Manhattan, the views are spectacular. He can look past his trading monitors out to the Atlantic.

He has been buying Xerox (XRX, news, msgs) lately. And he's purchasing six-month bills while selling five-year notes -- a strategy that would make money if the economy slows and the Federal Reserve brings interest rates back down.

Figuring out the Fed's next move helped make Kessenich's reputation some 20 years ago, and he's still beating the market today. Nowadays, it's more of a problem to wait for his assistant to ask the right question, so he can nod yes or no, than it is for him to come up with the right answer. The alternative is to laboriously tap out words on a synthesizer. For while Kessenich's mind is as sharp as ever, his body is failing him.

A baron of bonds
For almost two decades, before a strange feeling in his legs signaled trouble, Kessenich was a star in the world's biggest market. "If you wanted to be in big-time finance, you were in bonds," said Paul DeRosa, his longtime lieutenant. "And Mark was widely known as the best trading manager in the business in those years."

Fortunes were made and lost in minutes when Kessenich, a former Marine just a few years out of Wharton, was put in charge of Citibank's bond trading in the mid-1970s. But they weren't being made or lost at Citibank. Of the 90 people on the bond desk, "only 15 or 20 of them had any idea of what they were doing," said DeRosa, who came from the Federal Reserve's open market desk in 1977 to become Kessenich's economist and later head of proprietary trading.

In those days, the financial world revolved around the Fed's release of money supply numbers each Thursday afternoon. Kessenich started a training program and hired smart traders. His revamped shop came up with an innovative strategy: it called banks directly for money supply figures, and started putting together remarkably accurate forecasts. In 1977, $6 million had been considered a good year for Citibank's bond traders. In 1980, they made $50 million; two years later, profits reached $100 million.

Even as the money rolled in, it fell to Kessenich to patiently explain to his risk-averse managers why his bond traders were making or losing $20 million in a typical week. He needed more than the usual fortitude for the task in July 1980, when the Fed raised the federal funds rate to 19%.

"We had a big trade on where we were long hundreds and hundreds of millions of dollars in two-year notes and we were short 30-year bonds against them," DeRosa recalled. As losses grew to tens of millions, "I got so sick of it I couldn't take any more. I went to Europe on vacation. Mark hung in there, keeping things together, keeping the bank managers pacified." Finally, a recession began in October 1981, and the funds rate tumbled from 17.5% to 10% -- earning the bank a couple hundred million that quarter.

Kessenich took a pay cut to serve on the bank's management committee, hoping to transform Citibank into an investment bank. When John Reed became chairman in 1986 and started steering Citibank into consumer operations instead, Kessenich left to head trading at E.F. Hutton, which had just weathered a $150 million loss in fixed-income and a check-kiting scandal.

During the October 1987 crash, his bond traders made $35 million -- enough to balance losses from equity trading. But the volatility and uncertainty scared the firm's bankers. Kessenich called in favors to keep lenders from yanking Hutton's financing on the day of the Oct. 19 plunge, but by Thanksgiving the weakened firm was sold to Shearson (which was later acquired by American Express).

Tommy Strauss, president of Salomon Brothers at the time, gave Kessenich and DeRosa a call. Japan's Nippon Credit wanted to buy a government bond dealership, he said. "We told them maybe it's a better idea to team up with you guys, and you'll build them one from scratch."

Kessenich, outrageously undiplomatic, entertained his prospective investors with stories about his Marine artillery training in Okinawa. Yet "the worse he treated the Japanese, the better they liked him," DeRosa said. "They thought he was some kind of samurai." Kessenich's counterparts may have also been impressed by his golf game; he had a one or two handicap and played all over the world.

By 1995, the bond-trading firm that Kessenich set up for Nippon Credit -- Eastbridge Holdings -- had increased its initial $50 million equity stake to $175 million, "after paying huge bonuses to Mark and me and everybody else," DeRosa said.

Illness brings him down
The success of Eastbridge was gratifying and Kessenich was enjoying marriage to his second wife, Beverly, as well as the success of three grown children. But there was trouble on the horizon.

One day in May 1994, after a session on the treadmill in the company gym, Kessenich complained that his legs didn't feel right. Several months later, after doctors discarded other possible causes, he was diagnosed with Lou Gehrig's disease -- amyotrophic lateral sclerosis.

Kessenich was told that average life expectancy is about 20 months after diagnosis -- the same as it was when legendary Yankee slugger Lou Gehrig developed the malady in 1939. Nobody knows what causes it. The disease attacks the brain's ability to control the muscles, progressively paralyzing the patient while leaving the mind intact.

In July 1995, Kessenich withdrew as Eastbridge's president. DeRosa and other friends presented him with a special golf cart with a seat that swung out, allowing him to hit the ball without dismounting. Characteristically, Kessenich went to see a golf pro that very day to help him devise a swing technique for the new cart. He got in one more season. By 1997, he was confined to a wheelchair.

He fought back. He moved into an apartment in Palm Beach, Fla., and equipped it with 32 phone lines for trading. He got massages. He became a serious collector of American art. And he raised a $3 million endowment for the University of Miami's neurological department to help other patients obtain the best medical care. His wife, head of New York's Circle Line Cruises, remained by his side. "When Kessenich got sick, she was there," said DeRosa. "For the first time in a long time, he had a happy domestic situation."

In the winter of 1998, though, Beverly became physically incapacitated and was confined to a hospital herself. Kessenich never got over her illness.

Eastbridge, meanwhile, was forced to close its doors the year after Nippon's 1997 bankruptcy. And the bond business itself began to deteriorate. In 1990, New York City had 25 proprietary bond-trading firms; now almost all have closed their doors. The only ones still trading are the primary dealers, who have an obligation to buy and sell government Treasuries.

Master of survival
Yet Kessenich continued to show the instincts of a samurai Marine, a mastermind of survival. He started a new bond-trading firm with a friend and got staked with seven figures from a private asset manager. And so today he trades from his perch above the Atlantic, nodding yes or no to questions posed by his partner over a speakerphone -- his answers relayed by a nurse.

On our visit, DeRosa and Kessenich discussed the latest news on people they knew. They spoke in a sort of shorthand based on the inside jokes of a long friendship, with Kessenich laboriously tapping out words on a laptop voice synthesizer.

DeRosa told Kessenich that John Meriwether, formerly of Long-Term Capital Management, has formed a new firm in Greenwich, Conn., and is buying junk bonds.

"Golf," Kessenich replied.

DeRosa laughed, acknowledging an inside joke that the only way to hedge junk bonds is with 50 rounds of golf -- which is to say, no hedge at all, a hilarious thought to a veteran trader.

"This fund that Fred Levin has opened has $40 million to manage," DeRosa said, changing the subject. "He's calling it a monetary policy fund. All he does is trade the futures on fed funds contracts and the near futures on the euro.

"I see why these guys like (former Soros trader Stanley) Druckenmiller are long in twos and fives," DeRosa continued, meaning he had purchased two-year and five-year Treasury notes. "The potential for the economy to get really slow is pretty high. I mean really slow. The stocks have been so strong, people have let their savings rate get so low. If people went back to saving even 3% or 4% of their income, it would slow GDP growth down a lot. Nothing's happening right now. But with the stock market working its way lower, sometime in 2001 you could have a chance for a really big rally in Treasuries."

Personal prognosis
Kessenich, of course, has already taken positions that would take advantage of that scenario -- and with any luck, he will live long enough to see it work out. In the United States, up to 30,000 people have the disease at any one time -- and 5,000 new cases are diagnosed every year. With better medical care and earlier diagnosis, life expectancy reaches up to five years after diagnosis; Kessenich is beating the odds.

Several drugs are in preliminary tests. Amgen (AMGN, news, msgs) and Regeneron Pharmaceuticals (REGN, news, msgs) have teamed up to study nerve growth factors. Sanofi-Synthelabo (FR:12057, news, msgs) of France and Guilford Pharmaceuticals (GLFD, news, msgs) are conducting preliminary drug studies. Massachusetts General Hospital and Northwestern are doing basic genetic research on the disease. But the one currently approved drug, sold by Aventis (AVE, news, msgs), slows progression by 20%.

The disease attacks on many fronts. Patients need help to breathe, eat, move around, communicate and cope. Families need counseling and practical help. "Mark said ‘you need a multidisciplinary team,'" recalls Dr. Walter Bradley, head of the Mark Kessenich MDA ALS Research and Clinical Center in Miami. "I said, 'you're absolutely right. But insurance companies don't pay for that.' He said, ‘I'll raise the money for you.' And he did just that."

Why continue to trade when he's already made a fortune large enough for the retirement of 10 men? "It's the game," he explained to his trader, Tom Parker, when they set up their new firm. He thinks it's as much fun as golf, which is saying a lot.

Parker calls Kessenich daily. Kessenich's ability to analyze, interpret and assimilate data is the same as ever, said Parker, who was an apprentice trader at Citibank when he met Kessenich in 1974.

One of many people who stuck with Kessenich through his career, Parker likens Kessenich to the Tom Hanks character in "Saving Private Ryan," Steven Spielberg's World War II film -- a hard-nosed survivor in an world almost beyond control. Yet one with enough heart to give thanks for blessings and friends along the way.

Despite his physical burden, Kessenich "has not strayed from his desire to keep going at any point," Parker said. "He's as tough as a $2 steak."



At the time of publication, Laurel Kenner owned Xerox.