From Christmas Trees to Options (w/ Kieran Goodwin)


JUSTINE UNDERHILL: Welcome to
How I Got My Start in Finance. In this episode, co-founder of
Panning Capital Kieran Goodwin tells Tony Greer how a
book, an unexpected business opportunity, and his
interest in programming led to a pioneering career in
the world of credit default swaps trading. KIERAN GOODWIN: Well, I
really like basketball. Growing up, I played
in high school. And Duke actually went to the
finals my junior year, 1986– TONY GREER: Wow. KIERAN GOODWIN: –which
was the first time– actually, it was
Johnny Dawkins, who– TONY GREER: Your junior
year in high school. KIERAN GOODWIN: In
high school, right. My junior year in high
school, it was 1986. Johnny Dawkins was the star,
who actually just coached against Coach K
last Sunday at UCSF. Just saw him, had
an amazing game. So that was Dick
Vitale prime time, when he was really ascending
as a star commentator, and he would constantly
talk about how the Cameron Crazies and all these kids give
an amazing amount of support to Duke and cheer, but they’re
future doctors and lawyers. And from the Northeast,
I don’t know about you, but I never really heard of
Duke outside of basketball. I didn’t really know that
it was a great school. So that summer, we did– saw some colleges. We did a little
southern tour, went to UVA and UNC and Duke
and a couple other schools. And you when you get on that
campus for the first time, it’s an amazing place. Some of the best decisions
I’ve made in my life come from the gut, when
you’re like, this is right. So I walked on there, and it
was like, well, this is amazing. I actually didn’t end up– I ended up applying
early to Brown, got deferred, didn’t get
in, but got into Duke. So it was like– I’m glad it happened that way. TONY GREER: Yeah. Yeah, that turned out well. So when you got
out, were you making a beeline for Wall Street? Did you know that
that was in your blood and where you wanted to go? Or were you feeling
out your options? KIERAN GOODWIN: Well,
I was born in Brooklyn. I think I’m fifth-generation
probably boroughs mostly– some Lower East Side. So I have a lot
of New York ties, so I knew I wanted to come back
to New York City after college. And my junior year, we
were just getting back in the beginning of the
semester in January. A good friend of mine, a
great friend of both of ours, Keith Melchionni,
he gave me a book. He’s like, my dad
got this for me. He’s mentioned in the book,
and I think you might like it. And Keith is pretty much– what’s his guy? Nelson DeMille. He’s like Nelson DeMille guy. TONY GREER: Right, right, right. Yeah. KIERAN GOODWIN: So this was– the book was Liar’s Poker. So I’m a junior. We’re having a keg
party at the fraternity, which is like the
600th keg party. I’ve seen this before. So I’m sitting there. It’s about 7, 8 o’clock at
night, and I start reading it. And I literally read
it in one sitting. I read it from 8:00
to whenever, 11:00. It’s a quick read. Most of the stuff at that point
I didn’t understand as far as mortgage securitization. But I was like, wow,
this speaks to me, in the sense that I always liked
to gamble from when I was– my grandparents taught me to
play poker when I was probably seven or eight. And we would play just games
for money in the family, whether it was Yahtzee
or cards, or we’d bet on the Kentucky
Derby, whatever it was. There was just a– TONY GREER: Rain
drops, whatever it was. KIERAN GOODWIN: Yeah. So I had that. And I always liked angles. I was looking for– I don’t even know the
word for it at the time, but arbitrages, in a sense. In college, I– my good
friend’s– a good friend of my father’s, he
owned a bar in Brooklyn, and we were in the city
visiting my grandparents. And I would notice people
were selling Christmas trees for like $50 at the
time, in the late ’80s. And so I went back to Redding,
and we had a Christmas tree farm a couple miles
from my house. How much can I get a tree for? It was like $15. So then I rented a
truck the next year. Got a buddy of mine. We got 50 trees, drove it up
there, and sold them in front. It was good until I
learned two lessons. There was an arbitrage there. So I think our all-in costs were
like 20-odd dollars, like $22. We were selling them for $50. But then, the best
lesson of it, though, was, as you’re getting up
to Christmas day, 23rd, 24th– we were there
for like a week. We might have had 100 trees. I can’t even remember. But you start getting bid
for trees, and I’m holding– but I have an option. A tree is like an option,
and on the 25th, it expires. It’s worthless. TONY GREER: Yeah, exactly. KIERAN GOODWIN: So people
were bidding me like $35, and I’m holding price, whatever. I should’ve just been
hitting every $35, $30. TONY GREER: Yeah, yeah. You always– right. KIERAN GOODWIN: Because
I was still making money. And that was– I remember thinking
when I started getting a risk position– first started to be able
to handle risk positions, I was thinking of that moment. Sometimes any bid’s a good bid. TONY GREER: Yeah. That’s really interesting. I love the fact that you’ve
got this drive in you and you’re that
entrepreneurial and calculated. And you go from your fraternity
reading Liar’s Poker, and next thing you know,
you’re on credit derivatives desk on Wall Street and
a pioneer in CDS trading. KIERAN GOODWIN: Yeah. It wasn’t as much of
a straight line, but– TONY GREER: Right. No, I know that. I know that. And that’s why we’re here. We’re going to go through a
little bit of the path of how you got there. So tell me about your
earliest Wall Street days and a little bit about– was it just in credit? When did you get your exposure
to credit derivatives? When did you start
taking on risk, going from a young
kid out of college on the desk to becoming
the guy that was– OK, Kieran’s got a
book of his own now. But tell me about the early
days, the transition from Duke to, OK, I’m on the desk now. Here we go. And I’m selling Christmas trees. KIERAN GOODWIN: Right, exactly. So I was a computer
science major. So I like math. I like logic,
computer programming. And I felt like, even
though that skill set I wasn’t using
right away, I always felt like understanding logic
and problem solving that you learn in coding is helpful. But my first job, I was working
in the equity department at Smith Barney. And we were a group that was
doing all the stock buybacks. So I was an analyst. Then I became a sales trader. And I wasn’t really
using those skills. And I started reading about
or hearing about derivatives, whether it was in a journal
or just tangentially. So I tried to get a job
in equity derivatives and start hearing
about option theory. And I’m like, oh, that’s math,
and I can understand that. And there were no jobs. So then I got a job- Smith
Barney started an interest rate desk and a straight
derivative desk. So I got a job up there, and
I was like the junior trader, let’s say. But it was just more working
with a model and pricing swaps and swaptions. It didn’t really have risk. And then, the head
trader got fired. So then I was
thrown into the seat of having risk and
having to deal with that, which was baptism by fire. TONY GREER: Yeah, there it is. KIERAN GOODWIN: Which was great,
but scary at the same time when you’re like 25 years old. So that trader then went back
to where he was from, Citibank. Eventually, our whole– Smith Barney did a whole
tack on fixed income. They shut down
derivatives, and they asked me to trade treasury options. But then I also had
a job with this guy at Citibank doing credit
derivatives, which was totally new at the time. And having seen other people
be successful at interest rate derivatives, having been there
in the beginning, or equity derivatives– interest
rate derivatives probably started in the early ’80s. Equity derivatives, kind
of mid ’80s in a real way. And then, now we’re
in the mid ’90s. I’m like, well, this makes
sense, credit derivatives. I knew a bunch of
people, friends, that were trading corporate
bonds and high yield bonds, so I had some familiarity
in how big the product was. So yeah, I started
working with him in credit derivatives in ’95. He soon abandoned me,
so I was by myself. And he abandoned me because
there was no business. So being a credit
derivative trader in 1995 meant you basically spent a lot
of time talking to yourself. So I’d come in every day. I’d have a book
about option theory. I’d learn about– I’d
read about credit. I’d go talk to the corporate
bond traders, the loan traders, and they would just
pretty much shoo me off after me bothering them
for 15, 20 minutes. TONY GREER: Phone was not
ringing off the hook yet. KIERAN GOODWIN: No. But it was a good
time in the sense– I was young, and I
had a lot of time to study and read and try to
figure things out for myself and observe. JUSTINE UNDERHILL: After reading
Michael Lewis’s Liar’s Poker, Kieran Goodwin’s interests
shifted to finance. He even used psychology
behind options trading to sell Christmas trees. It’s all the small
things that helped shaped his view of
the world of credit. For Real Vision, I’m
Justine Underhill.

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