Ader as CRT’s Survivor-Strategist Seeks Fed Primary Dealership
David Ader survived a heart attack in a jet over the Atlantic, missed a chance to work at the CIA thanks to his friend the international spy, changed jobs during the worst financial crisis in a lifetime and helped upstart CRT Capital Group LLC almost double revenue in two years.
The next goal for the top-ranked bond analyst in Institutional Investor magazine polls for the past six years: Lead CRT into the select group of 21 primary dealers that trade with the Federal Reserve, are obligated to bid at Treasury auctions and earn the central bank’s “stamp of approval.”
“There’s no question we are interested in becoming primary dealers,” Ader, 54, head of U.S. government-bond strategy at CRT, said from his Stamford, Connecticut, office with a view of the Long Island Sound. “As a firm, I think that we’re doing everything we in the Treasury business can to be involved and to be market makers, and our market share is certainly comparable to primary dealers, and we cover hundreds and hundreds and hundreds of accounts.”
Since Ader joined CRT in 2009 with a ownership stake, revenue rose to $175.4 million in 2011 from $90.4 million in 2010, according to Securities and Exchange Commission filings. CRT reported $212.9 million in partner capital in its 2011 filing, more than the $150 million required of a primary dealer by the Fed. The institutional broker-dealer, which employs more than 270 people, was founded in 1989 with a controlling interest purchased in 2009 by current Chief Executive Office Ron Kripalani, Chairman Ben Carpenter and Jay Levine.
Ader earned his ranking as top government-debt strategist with calls such as his forecast for a bull market in November 2010.
It was a contrarian position at the time, with benchmark 10-year yields rising to 2.9 percent amid optimism the economy would expand at the end of the Fed’s first round of asset purchases. Rather than a period of expansion, Ader saw a situation similar to Japan’s in the 1990s, when the Bank of Japan failed to create growth amid deflation and recession.
Investors who acted on Ader’s call experienced three months of suffering, watching Treasuries fall and the 10-year yield rise as high as 3.8 percent in February 2011. Then came the payoff, as yields started a 17-month slide to an all-time low of 1.38 percent in July. Treasury 5-, 7- and 30-year debt yields also fell to record lows as volatility plummeted, the European debt crisis spread and unemployment in the U.S. remained above 8 percent.
The 10-year note yield has since risen as high 1.86 percent before trading at 1.62 percent yesterday.
“Nothing has changed in my outlook because nothing has changed in the market,” Ader said. “We are in the same place we’ve been in. We are not falling off the cliff immediately, but we will be on the edge for some time given the entrenched nature of the problems we have in the economy. I’m still bullish on bonds and bearish on risk assets.”
Ader forecasts 10-year yields falling to 1.15 percent by year-end. The weighted average forecast of 81 economists in a Bloomberg News survey is for it to rise to 1.79 percent.
Not all his calls have proved as prescient. He told members of the European Central Bank in a speech in 2003 that the Fed would cut its overnight lending rate between banks to 0.75 percent from 1 percent to help boost growth. The Fed didn’t, and a year later began raising its target rate to 5.25 percent by June 2006.
Dealing with changing environments is nothing new to Ader, an outdoorsman adept at foraging for food and building shelters in the wild. He can start a campfire with a bow and a couple of pieces of wood, he said.
He became a true survivor in 2009 when he suffered a heart attack aboard a British Airways flight over the Atlantic. The jet made an emergency landing in Reykjavik.
At the time, Ader was head of interest-rate strategy with Royal Bank of Scotland Group Plc’s primary-dealer unit as the financial crisis was changing the shape of Wall Street.
Merrill Lynch & Co. and Countrywide Securities Corp. had been bought by Bank of America Corp., Lehman Brothers Holdings Inc. filed for bankruptcy and Bear Stearns Cos. was acquired by JPMorgan Chase & Co. Goldman Sachs Group Inc. and Morgan Stanley converted to bank-holding companies and the U.S. Treasury Department took a stake in Citigroup Inc. In the U.K., the government nationalized banks, and now holds 64 percent of RBS.
“The biggest and the mightiest were falling,” Ader said. “The heart attack spurred on a degree of courage and willingness to take a risk. It freed me up from being inhibited.”
Within six months he left for CRT. He modified his diet, worked out with a personal trainer, and hikes and fly-fishes.
Finance wasn’t Ader’s first ambition. After earning his undergraduate degree at Tufts University in Medford, Massachusetts, and his master’s in international economics at Columbia University in New York, he applied in 1985 to the Central Intelligence Agency.
He was supported by a recommendation from a graduate student in international affairs at Tuft’s Fletcher School.
“I’d stayed at his apartment,” Ader said of his former schoolmate, who was working as a U.S. Navy intelligence officer at the time. “He was a nerdy, nebbish guy, but fun.”
That friend was Jonathan Pollard, who was arrested that same year and charged with spying for Israel. He was convicted in 1987, receiving a life sentence he continues to serve.
Ader’s application was rejected.
“So much for the CIA,” he said.
After working at Bond Week and Technical Data magazines, Ader joined RBS in 2002, becoming head of government-debt strategy in 2005.
Early on, he was willing to make his own predictions even if they went against consensus within the firm. “I don’t care if David Ader’s call represents the firm or not,” he said. “It’s my call.”
During the booming housing market in 2006 and 2007, Ader argued that most of the growth in disposable income in the U.S. was attributable to a bubble in home-equity loans. Though RBS didn’t foresee a sudden price drop that would threaten the economy, Ader was “extremely skeptical,” said Dave Chappell, who manages $2.5 billion in London at Threadneedle Asset Management Ltd.
Those doubts shored up Threadneedle’s view that the housing market was in danger, Chappell said in a telephone interview. “It definitely helped us to get into a position where we were very successful through the period that followed.”
RBS didn’t follow Ader’s view and after the financial crisis hit, the U.K. announced in October 2008 that it would take controlling stakes in RBS, HBOS Plc and Lloyds TBS Group Plc. Regulators threatened to cut bonus structures that had drawn public ire.
When CRT called, Ader was ready to take on the challenge for a primary dealership, bringing with him from RBS his colleague Ian Lyngen, now a partner at the new firm.
The ranks of dealers had been culled in 2007 and 2008 by the financial crisis, and the central bank over the next two years selected seven new firms to fill the gap. It bypassed CRT.
Then came the October 2011 collapse of MF Global Ltd., one of the Fed’s newly anointed firms, run by Chairman and Chief Executive Officer Jon Corzine, the former Goldman Sachs co- chairman and New Jersey governor. The eighth-largest bankruptcy in U.S. history raised the bar for prospective new primary dealers.
“You better believe introspection and caution abounds at the Fed regarding new dealers,” said Jim Bianco, president of Bianco Research in Chicago. “What happened to MF Global had nothing to do with their dealership, but it had to make the Fed more cautious about who becomes a dealer.”
Fed spokesman Eric Pajonk in New York declined to comment on CRT or its process of selecting primary dealers.
Even as the Treasury has sold $7.8 trillion of securities since 2009 at its auctions, trading volumes haven’t returned to levels seen before the collapse of Lehman Brothers in September 2008, according to trading data reported by the primary dealers to the Fed, and separately by ICAP Plc, the largest inter-dealer broker of the debt.
In the past year, an average of $533.1 billion Treasuries have been traded by the 21 primary dealers each week, or 5 percent of the $10.6 trillion of publicly traded U.S. government debt outstanding. During the 12 months before Lehman collapsed, an average $582.5 billion, or 12 percent of the total, changed hands each week.
In January 2010 the Fed tightened requirements for aspiring dealers, tripling the minimum capital to $150 million.
For firms looking to become dealers now, there “is a higher level of scrutiny, which is understandable,” said Don Galante, chief operating officer for ED&F Man Capital Markets Ltd. in New York, who oversaw MF Global’s efforts to become a dealer until 2010. “The Fed is really like a customer to you.”
Not having the Fed’s blessing hinders trading relationships with foreign investors, who owned 50 percent of the Treasury’s $10.6 trillion debt as of July, Ader said.
“They like to see the stamp of approval implied by being a primary dealer,” said Ader, who in recent months has focused on European markets, sometimes setting his alarm clock for 3:30 a.m. to see results of Spanish debt auctions.
The lack of a dealership “is a delicate area,” Ader said, but he doesn’t regret the move to CRT.
“I don’t like to move around,” Ader said. “If I found a good situation and am happy, a little extra money is not a motivation. I want to stay and build something.”
To contact the editor responsible for this story: Dave Liedtka at email@example.com