Rivals all across the land
He kills them with his knife in hand
He’s the meanest guy around his town
One look and he will cut you down
Johnny Blade – Black Sabbath
Hello and welcome to the second to last week of Billions from the Trader’s Desk. This week I’ll be breaking down “Kompenso” in 3 Acts: Comp Day, The God of War, and Revenge of the Quants.
Before I get into my analysis, I’d just like to say that I love the casting of Patti D’Arbanville as Momma Axelrod. She’s a born and bred NYC girl, and that comes across in her accent and mannerisms playing Axe’s mom. Perfect casting Mr. Koppleman and Mr. Levien!
Comp Day: It’s a tense day at Axe Capital, and with what the firm has went through, who could blame anyone for being on edge. Most of the PM’s and analysts’ know they are going to make at least what they made last year (thanks to Taylor’s deal in E1). However, that deal was with Taylor; Axe is back in charge, and now that it is his money, he is pinching pennies so hard, Lincoln is screaming! He also believes he is the one who does “all the heavy lifting” and is the one who “actually earns the money”. Sorry Axe, have to disagree with you a bit there. Analysts and PMs do most if not all of the “grunt” work, from reading company 10Ks and 10Qs, listening to quarterly conference calls, updating and maintaining financial models and attending industry conferences to listen and meet with company management. All that work goes into the decision making process of putting a position into a portfolio. I should know – I did it for many years. Axe can go to a pitch meeting and spout out great performance numbers, but there is a small army that helped get him there.
You can tell Axe just doesn’t want to do this: give away “his” money, or waste his time. All he has is disdain for “his people” and wants to “punch their teeth in”. Just like a King who wants to love his subject, but doesn’t blink twice to raising their taxes to pay for his war. (Didn’t Damian play such a King?) He plays head games with Mafee, and just wants to say he met with Bonnie. I will say, he got off cheap by just promoting Ben Kim. However, as someone who has been in the business 30 years this August, in my opinion, Ben Kim is not Portfolio Manager material – yet. He would be better off being Prime Minister! I also don’t think I’m the only one who would have loved to see the Dollar Bill comp meeting!
The firms I’ve worked at, the bonuses were calculated on a formula (how you did against your benchmark, how you did against other managers in your universe, etc.), so there was little to haggle about. The head of your group did have discretion to give you a little more if you were a good team player, or give you the minimum amount if you were just coasting. I never had to experience that type of “lip synch for your life” scenario like the Axe Cappers had to go through, and I’m so glad about that. Your performance should speak for itself. Facts are facts, and the numbers don’t lie.
The God of War: I was originally going to call Axe, Mars, the Roman God of War. However, I decided to go with the original Greek on this one as the description was more appropriate.
“Ares was the Greek God of War and perhaps the most unpopular of all the Olympian gods because of his quick temper, aggressiveness, and unquenchable thirst for conflict.”
Sound familiar? This and much more, was all on display this week.
Axe is at war with the world: Taylor, Bach, his employees, and is even holding on to a grudge for who knows how many years against his old boss, Bill McGann (hello Arnie Becker!).
Seems McGann stiffed Axe on a Comp Day to the tune of $50K, and Axe comes by every year to buy McGann breakfast and remind him of the one who got away, and why. This isn’t the first time we have seen Axe be so petty and hold a long time grudge. It begs the question: if Axe knows what happens when you short-change a great employee, why would Axe do the same thing to Taylor? Axe knows Taylor is not a Carly or a Victor Mateo; Taylor is a force to be reckoned with. Axe does not need a “Taylor sized hole” in his firm, but that’s exactly the path he is going down.
We learn from a flashback at Axe’s mother’s basement that Axe has been at war in one way or another since he was a child. His dad was his first “enemy” long before he abandoned Axe and his Mom when Axe was about 12. Why did he always “take the fight” to everyone? I do hope we find out! We know Chuck is the way he is because we have seen the dynamics of his relationship with his Dad. I’d love to know what influence Mr. Axelrod had on a young Robert. Also, we know Axe’s Dad left the family, but it has not been mentioned if he is dead or alive. Could Poppa Axelrod show up one day?
Axe sees the world as wanting to take what is his, He has worked hard to build everything he has, just to be in a position not to have to compromise or give one inch. You are either with him 1000% (like Wags) or against him, even if you have done everything he has asked of you (as Taylor has done). Bach has been nothing but loyal, but Axe argues with him over a measly $1M. Lara has been by his side most of the time (and has been an important confident on Comp Day), but he sees her as “bailing” on him, and now she’s on the outside looking in. The only person who can come close to challenge him without nuclear fallout seems to be Wendy (and is rewarded with double her ICEJ profits!!).
The Axe-Taylor Comp Day talk is brutal. Does he need to be so tough on Taylor? Of course not, but he feels it is necessary to put Taylor in their place. Taylor uses a valid argument and facts in their defense, but Axe doesn’t care. It’s not about the money to him – it’s about someone challenging his rule. Axe sees a lot of himself in Taylor; it’s why he wanted them on board Axe Capital. But, just as the old King fears the young Prince, Axe fears Taylor.
Taylor kept Axe Cap alive, which Axe believed only he could do. Not only did the firm survive, it prospered (with a profit of $926M!). Axe’s ego needs to downplay Taylor’s accomplishments or what does it say about him? Is he needed at Axe Capital? Is he becoming just a figurehead? Low-balling Taylor on the money is just Axe being cheap; pulling Taylor from the cap raise team was a knife in the heart (with the Oscar move being a knife in the back). “The raise is my thing.” For a man who has basically everything, he sure is insecure.
Does he not think screwing Taylor will have consequences? Does he even care? He throws it in Taylor’s face that they don’t have their own shop; it never seems to cross his mind that that is exactly what he is pushing them to do? Just like McGann pushed him?
Wendy will advocate for Taylor, since it seems Wendy is the only one who knows which levers to pull with Axe. But Axe sees changing his mind in regards to Taylor as “another accommodation”, instead of a good business decision. He “got this rich” so he didn’t have to compromise. Axe doesn’t want to live by anyone’s rules, and he thinks his money has bought him that right. It’s the rantings of an egomaniac! Wendy tries to appeal to his human side: “There is no amount of money that frees you from being a person.” But Axe is not human; he is Ares, God of War and as Lara says he “sees every challenge as a life or death contest”, and Bach nails it with “a wins not a win unless it’s a kill!” How long can someone sustain that level of intensity and anger? It’s mentally draining, and emotionally isolating. I’ve written about this same thing last season here.
By the time Axe has another sit down with Taylor and puts them back on the raise and to assure them they really are on #TeamAxe, it’s too late. You can only burn someone so many times before they walk; and Taylor is walking.
Revenge of the Quant: : Taylor has finally got their algorithm to where they want it. Yes, they now only have one quant left, but that is all they need. Taylor now has an algorithm that at $20B can generate returns greater than 8% ($1.6B). This is an important point to make: some strategies and algorithms are not “scalable”, which means there may be a limit to how much money you can put into the strategy. The first strategy my partner and I developed was profitable, but not scalable for very big accounts. If you put too much money on a specific stock, you can move the market in that name. Our issue was more that we couldn’t put large positions in a stock at certain times of the day. We couldn’t put $100M in a stock at 9:45 AM – most stocks just don’t have that kind of volume that early in the day. (Luckily, we’ve come up with numerous strategies and algorithms where we don’t have those issues any longer.) Taylor’s quant has come up with something that won’t be troubled by market limitations.
“Bridgewater would have 50 PhDs writing this software.”
Taylor’s quant is correct on that. Bridgewater Associates is a very successful hedge fund founded by Ray Dalio that hires PhDs and mathematicians to come up with and program algorithms to beat the market. Taylor believes in the quant who was originally “too hard”, it has paid off and it’s a go! Live trading will begin in a week.
This algo is state of the art, and takes the human decision making (and the possibility of mistakes and emotions) out of the game. The trading of positions will be in micro-seconds (this is a high frequency trading (HFT) strategy). The perfect strategy for Axe Capital?
No! It’s the ideal strategy for the new firm on the Street, Taylor Mason Capital!! And who better to start a cap raise with than…..Grigor Andolov?
Let the games (and the season finale) begin!