The Greatest Trade Ever (10 page)

In many ways, the Pellegrinis’ attitudes reflected a period of economic upheaval and frustration in Italy, as a series of governments clamped down on foreign-currency holdings and took other restrictive measures to try to stem runaway inflation.

Early signs suggested that Paolo didn’t quite share his parents’ perspective. At the age of six, he used toy Lego pieces to build a huge replica of a bank, startling his parents. From the age of twelve, he worked at his father’s company, writing computer code and showing unusual interest in the business world.

“I always liked money,” Pellegrini recalls. “My parents were puritanical about it; I think it was a reaction to them.”

Paolo excelled in school, especially in math and physics, but his grades dropped in high school as he showed little interest in a curriculum featuring Italian literature, philosophy, Latin, and Greek.

Most summers Pellegrini worked at various international companies operating in Italy, or could be found in front of a computer at his father’s company.

“Programming computers taught me to break down problems and set up intellectual experiments to verify and demonstrate theories, and to run simulated experiments,” Pellegrini recalls. “My dad indirectly provided certainty that I could handle it all because he had.”

At the University of Milan, Pellegrini finally could focus on the computer sciences and electrical engineering courses that intrigued him, and he received top grades. He spent one summer working for Hewlett-Packard in France and another in Boston working for Honeywell.

Most graduates served in the Italian army after school, but after five years of university Pellegrini already was a year behind contemporaries in the United States, and he was in a rush to catch up. So he found an entry-level job at a computer-equipment company in Holland. Pellegrini quickly became bored, though, quitting after just two years to attend Harvard Business School.

Class work came easily to Pellegrini, even though English was his second language. He received honors in his first year at Harvard and was described by one professor as having one of the “most creative mathematical minds” he had ever seen in a student.

“I remember him very well, he was really special,” says Elon Kohlberg, a professor at the school. Pellegrini was “sort of like those annoying kids who are just too smart for their own good. Whatever comes up they can just poke holes in it.”

Pellegrini aced a class on regression analysis, a course that Harvard later abolished because students complained it was just too hard, Kohlberg says.

During his first summer in business school, Pellegrini worked at the investment-banking department at Bear Stearns, sharing an office with John Paulson, impressing him by developing a detailed, proprietary database of merger deals.

At Harvard, Pellegrini felt uncomfortable socializing with his classmates; he was a bit older than most of them, and was concerned that his English wasn’t up to par. The six-foot-two Pellegrini was more relaxed in one-on-one settings. He soon discovered that his accented English held a special charm for certain women. Pellegrini dated a series of classmates but found himself looking forward to seeing fellow student Claire Goodman, the daughter of legendary New York State Senator Roy Goodman, to whom he gave regular tutoring sessions.

Their relationship blossomed, as Goodman’s outgoing personality seemed to complement Pellegrini’s more introverted nature. A year later they married; John Paulson was among the attendees. After Pellegrini graduated from Harvard with distinction in 1985, the young couple moved to New York. He landed a job at investment-banking firm Dillon, Read & Co., and Goodman took a job at First Boston.

Pellegrini seemed on the fast track to success. He quickly received a promotion, joining Dillon Read’s mergers-and-acquisitions department, and then was hired away by the prestigious banking firm Lazard Freres & Co. for its international mergers and acquisitions group. The firm didn’t have an insurance-industry expert and turned to Pellegrini, who enjoyed the challenge of figuring out a new industry.

Clients and colleagues seemed taken with his unique style. Well dressed and possessing boundless enthusiasm, Pellegrini was passionate about his deals, pushing hard to get buyers and sellers on the same page. Working on a floundering deal with David Nelson, a senior banker at Chase Manhattan Bank, Pellegrini pushed the various parties toward a compromise, impressing others at the negotiating table.

“Paolo wasn’t your typical investment banker, he was full of life, almost flamboyant, with a tremendous amount of positive energy,” recalls Nelson, who helped arrange financing for some of Pellegrini’s insurance acquisitions. “Most guys were Anglo-Saxon, white-shoe bankers, but [Paolo] was this bigger-than-life, good-looking guy with Romanesque features and a distinctive accent driving the conversation.”

But Pellegrini found it difficult to woo clients, blaming his unfamiliarity with American social norms. He once watched a playoff basketball game with the two top executives of a large insurance company and struggled the entire night to come up with topics of conversation or a single player he was familiar with.

The best Pellegrini could muster to fill the awkward silence: “So you like basketball in Chicago?”

Other times, the cutting, sarcastic humor he displayed that went over so well in his native land seemed to offend clients in the United States.

Pellegrini failed to gain a promotion at Lazard, even as contemporaries vaulted past him. He became seen as a laggard and his work suffered. Pellegrini turned brusque with colleagues, convinced that his accent raised doubts among clients about whether he fully understood the nuances of the complicated transactions.

“I was an outsider, it wasn’t my home turf, and my accent made clients worry that I’d miss the fine print. It tilted the balance away from
me,” he recalls. “I was never the first call for companies; we had difficulty relating personal experiences.”

Pellegrini was bursting with new ideas about how companies could raise money or undertake innovative merger structures, but the nitty-gritty of the banking job overwhelmed him. Pellegrini tried to focus on big-picture issues, ignoring details such as his appointment schedule. That led some to question his competence. Traveling to Rome with a group of senior Lazard bankers for a big meeting, Pellegrini had trouble guiding them to the meeting’s location and they arrived a half hour late, frustrating the group.

“Everyone assumed I knew my way around because it was Rome but I didn’t; it was embarrassing,” he says.

Pellegrini paid a coach to help him become an “active listener,” to better understand his clients and their needs, and he hired another coach to help eliminate his accent. He couldn’t shake it entirely, though. When Pellegrini became uncomfortable in public, he found it difficult to express himself, seeming stiff and awkward.

A flurry of successful insurance deals improved Pellegrini’s stature at the firm, however, and by 1993 he was on his way to becoming a partner. Riches and prestige were sure to follow. That year, Lazard’s senior banker, Felix Rohatyn, set up a meeting for Pellegrini with the chief financial officer of Xerox Corp. to discuss a possible sale of the company’s flagging life-insurance subsidiary. Pellegrini was competing for the business with a fierce rival, Morgan Stanley’s star banker Gary Parr, even as rumors swirled that Lazard was quietly wooing Parr to join the firm, perhaps to lead Pellegrini’s insurance group. Pellegrini tried to get out of the assignment, but he couldn’t extract himself.

As Pellegrini researched Xerox Life to prepare for the meeting, he concluded that it had deep problems. But he tried to strike an upbeat tone with the Xerox executives, encouraging them to pursue a sale because merger activity was so buoyant.

“You can turn chicken shit into chicken salad in this market,” Pellegrini told them with enthusiasm, trying to drive home his point.

Suddenly, the room went silent. The jaws of the Xerox team seemed to drop. They were shocked and insulted by Pellegrini’s coarse description
of a unit that they didn’t consider to be operating so poorly. Pellegrini tried to backtrack, but it was too late; the damage had been done.

Days later, his boss, Luis Rinaldini, a hard-driving Argentinean, called Pellegrini into his office—Xerox wanted him off the account. At that moment, Pellegrini was certain that his once-bright future was in jeopardy.

“It was a lesson to me that people are always waiting at the pass to shoot at you,” Pellegrini recalls. “I knew my career was in trouble.”

As his anxieties built, Pellegrini’s marriage to Goodman began to crumble. Word of their troubles, which soon led to a divorce, spread within Lazard. Pellegrini took comfort in a special bond he had developed with his two young sons. He frequently brought them to the office and boasted of their exploits to colleagues, showing a tender side that softened their view of him.

But when Kendrick Wilson took over Lazard’s investment-banking group, the pressure grew. Wilson, a no-nonsense former Marine who had served as an officer in the Army Special Forces in Vietnam, had little patience for Pellegrini and his grand schemes. One day, Pellegrini brought Wilson an idea for an improved version of an employee stock-option plan that could be pitched to Lazard’s clients. Wilson was dismissive and sarcastic, telling Pellegrini to stick with mergers.

“Just get it done, Paolo,” Wilson implored him, repeatedly.

Pellegrini turned stubborn, unwilling to back down from his boss, colleagues, or rivals, even over minor points of disagreement. Some at Lazard buzzed about a screaming match between Pellegrini and another top banker, Chris Flowers. When Wilson heard a client complain about how rudely Pellegrini interacted with others at the firm, Wilson had had enough. He fired Pellegrini in 1995, after nine years at the firm, telling him that “a knife-and-fork role isn’t suited for you.”

“He’s very, very smart, and his analytical skills are extraordinary,” Wilson recalls, “but he’s a classic hot-blooded Italian; he got into situations where everything was a zero-sum game.”

Pellegrini says more bluntly, “He thought I was full of shit.”

Pellegrini was thirty-eight years old, unemployed, and newly single.
He threw a party at his apartment, trying to meet some new friends, but he was too uncomfortable to enjoy it very much, retreating to a corner of the room. His job prospects weren’t much better. Lazard was a topflight Wall Street firm, but nine years as a vice president without a promotion raised all kinds of questions in others’ minds.

Pellegrini still had big ideas, however. He started an insurance company in Bermuda with Bill Michaelcheck, a former Bear Stearns colleague, to invest insurance premiums in hedge funds. He threw himself into developing complicated models. The idea was a success for Michaelcheck, who turned it into a separate business to invest in hedge funds, but it didn’t do much for Pellegrini, who left after a couple of years.

He found more luck in love, marrying Beth Rudin DeWoody, the daughter of the late New York real estate mogul Lewis Rudin, in a 1996 wedding in Bermuda officiated by former New York Mayor David Dinkins. Pellegrini now was part of a wealthy, well-established family.

Instead of relaxing, however, he began to worry about what would happen if DeWoody ever left him. Pellegrini was tapping into his 401(k) retirement savings to make hefty child-support payments for his two sons, who attended expensive New York private schools. The payments had been set when Pellegrini was working at Lazard and making much more money than he now was making from irregular consulting gigs in the insurance industry.

Pellegrini and DeWoody lived an expensive lifestyle, and bills for art, evenings of entertainment, and a deluxe apartment added up quickly; Pellegrini favored expensive clothing, trying to keep up appearances and to fit into a privileged social scene. But he chafed at how little money was coming in and at the fact that the couple depended on DeWoody’s family to pay for their lavish lifestyle. His growing insecurities began to weigh on their marriage. Pellegrini tried to get his wife’s family to stake him some money to trade in the stock market, but they refused, asking to first see evidence that he could trade profitably. As Pellegrini watched other men his age lose jobs and have difficulty making much of their lives, he worried that he would, too. He pushed DeWoody to adjust their prenuptial agreement to increase any payout
to him, telling her that the terms gave her encouragement to leave him. But lawyers within the Rudin organization wouldn’t budge on the agreement.

DeWoody tried to boost her husband’s confidence. “You just need the right situation, where someone believes in you and you don’t have to deal with clients,” she told him.

Pellegrini never felt reassured, though. “A number of Beth’s friends had disposed of their husbands, and I felt that pressure,” he recalls. “I felt vulnerable and expendable.”

In 2000, Pellegrini finally snapped, waking DeWoody in the middle of the night to demand sweetened terms from the prenup agreement and threatening to leave her. That’s it, DeWoody decided. She ignored his demands and Pellegrini walked out. A few days later, he tried to get his wife to take him back, but by then she was set on a divorce, no longer willing to deal with his insecurities.

“I could have handled it better,” Pellegrini acknowledges.

Pellegrini moved out of their Gracie Square home to an apartment in Westchester, receiving $300,000 from DeWoody in a divorce settlement, a pretax payout that he figured might have to last him through retirement. Being financially successful was at the top of Pellegrini’s life goals, right up there with having a happy family life. He had failed miserably at both.

“I was forty-five and had zero net worth,” Pellegrini recalls. “And from my perspective, I had no prospects.”

Pellegrini’s bright ideas kept coming, though. He developed a new method to use “statistical arbitrage” to trade stocks, though he couldn’t make much money with it. A stint at Tricadia Capital, a hedge fund founded by Michaelcheck’s Mariner Investment Group, Inc., gave Pellegrini an education in the world of securitized debt and credit-default swaps (CDS), which the firm was heavily involved in.