What I Learned When I Was a Bond Trader at Goldman Sachs

By Patrick Lefler

Early in my career, I had the opportunity to spend seven years at Goldman, Sachs & Co.

I arrived at Goldman in July 1988 having graduated with an M.B.A. from The Wharton School just two months earlier. Back then, Goldman was still a relatively small firm – just 7,000 employees worldwide as opposed to its current size of almost 32,000 – and it was still structured as a partnership. I spent my entire career on the fixed income trading side of the business as a government bond trader.

The Goldman experience was incredible for me personally in that I received exposure to a number of really outstanding leaders within the firm – many of whom later made their mark in the both the corporate world and the American political spectrum. One such experience I will always remember occurred early on in my career – a short, but intense conversation with Robert Rubin who at the time was co-chairman and co-senior partner of the firm along with Stephen Friedman.

Bob Rubin ascended to his leadership position at Goldman by heading the firm’s risk arbitrage department – investing Goldman’s capital in high-risk/high-reward arbitrage opportunities that added hundreds of millions of dollars to the firm’s bottom line and capital base. He understood the intricacies of financial risk perhaps better than anyone else at the firm.

My interaction with Rubin occurred just after I had been given responsibility for one of the larger bond trading positions within the fixed income division. Within a few weeks of this promotion, I took an extremely large position in highly volatile zero-coupon government bonds as a result of taking the opposite side of a trade with a large Japanese counter-party. I priced and executed the trade (with a number of partners standing directly behind me just in case…) and knew it would take months to unwind the position. I also knew that the risks during this unwind period were significant and the sooner I was able to understand and quantify the various risks associated with the position, the more likely that Goldman would make money off the trade.

Less than an hour after the trade was executed, I found myself face-to-face with Bob Rubin.

He had quietly slipped onto the trading floor and sat next to me without my even noticing. It was the first time we had met – he introduced himself to me and then proceeded to talk to me about risk and my decision-making process. The essence of the conversation can be boiled down into these three precepts:

1. Focus today on the risks that you understand and can easily hedge.
2. Focus tomorrow on the risks you don’t understand today. Make sure you tap the vast resources of the firm to fully comprehend these risks – they’re usually the ones that hurt you the most.
3. Spend the vast majority of your time hedging the risks that you can control. If you can’t control the risk, don’t waste time spinning your wheels.

Our conversation lasted less than thirty minutes.

As Bob Rubin got up to leave, he shook my hand and wished me luck.

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