A Star Goldman Trader Goes Cold

  • Savarese trades demonstrate how bank still stomachs volatility
  • Peabody Energy bonds had contributed to a trading-desk rebound

Adam Savarese was looking to make a splash in his new job as Goldman Sachs Group Inc.’s top distressed-debt trader last year, and found it in Peabody Energy Corp.

The coal miner was hurtling toward bankruptcy. Savarese snagged its unsecured bonds for pennies on the dollar and rode them up for one of 2016’s most successful trades, according to people familiar with the desk and its wagers. It was risky: Some peers at other banks played it safer with secured bonds, which offered greater protection, though a smaller upside. But Savarese’s blockbuster Peabody move helped engineer a rebound on a desk buffeted by losses and the departure of senior leaders.

Now that same rescue play is inflicting pain. Though the trade is still a winner over its lifetime, it reversed course in the first quarter to contribute to a fixed-income trading performance at Goldman Sachs that was so unexpectedly soft that the stock tumbled as much as 5.8 percent on April 18. While currencies and commodities trading left an even bigger dent, the performance by Savarese -- and the bank’s entire credit desk -- has attracted attention because it contrasts with better results at rivals.

Savarese’s is a familiar tale in the business, where you can be riding high one minute and humbled the next. If the 39-year-old sold or reduced his holding in December, he could’ve locked in gains. Instead, the bank’s position in Peabody declined about $40 million this year, a person with knowledge of the matter said.

But Goldman Sachs has demonstrated an ability to stomach trades that work brilliantly and then, suddenly, don’t, showing how it still embraces a volatility in trading operations that’s out of favor on much of Wall Street. In the first quarter, gains on other positions helped compensate for the Peabody losses. In the end, the distressed desk was more profitable than during the same period last year, according to Michael DuVally, a Goldman Sachs spokesman.

Still, the bank’s total fixed-income trading revenue rose just 1 percent from a year earlier to $1.69 billion, falling short of analysts’ estimates by about $340 million as rivals outpaced forecasts.

“If those losses sustain for a long period and aren’t addressed, then you’ve got yourself a problem,” said Brennan Hawken, an analyst at UBS Group AG, who has a buy recommendation on the stock. “Investors were generally willing to give Goldman a pass on the first-quarter weakness, but if we see that translate into second-quarter or third-quarter weakness, then I think people will start to ask themselves far more fundamental questions.”

Read more: Goldman said to get burned by coal, retail in trading miss

Because Savarese did so well last year, the first-quarter miss may be viewed as just a blip, according to a person with knowledge of the internal politics. The person said support from Savarese’s boss, Justin Gmelich, global head of credit trading, hasn’t wavered.

Savarese and Gmelich declined to comment, according to DuVally, who said he wouldn’t discuss personnel or specific trades.

Work Ethic

Under the Volcker Rule, the regulation named for former Federal Reserve Chairman Paul Volcker, banks with federally insured deposits are barred from betting their own money. Financial institutions must prove their bond inventory is used to meet client demands, which may mean holding positions for long periods. A person familiar with the bank’s policies said the trades were within the rule’s bounds.

DuVally, the spokesman, declined to comment on the Volcker Rule, but said that according to internal estimates, the bank was a market maker on about one-quarter of the Peabody Energy bonds traded in 2016. The bank also held some of the company’s secured debt.

Known for his work ethic, Savarese is often first to arrive at the office and last out at night, according to another person. Some mornings he works out beforehand with fellow traders, and he often takes junior analysts out for lunch to talk about their careers, the person said.

He wasn’t always so respected. After he departed Morgan Stanley for Goldman Sachs in late 2015, the buzz among his new colleagues -- and rivals -- was all about the fate of the distressed book he left behind, according to people who have worked or traded with him. The bank’s distressed bets helped contribute to a 42 percent decline in third-quarter bond-trading revenue that year, the people said, a tumultuous period that Chief Executive Officer James Gorman called the worst for fixed income at the firm since he took the top job in 2010. Savarese left just months before Gorman fired 25 percent of fixed-income traders and salespeople.

High-School Wrestler

He landed at Goldman Sachs, where his older brother Jason is co-chief operating officer of the securities division, which houses the trading units, including the distressed-debt desk. Adam joined as a partner, one of the few people the bank has hired from a competitor at that level.

At the time, Goldman Sachs’s distressed-debt desk was in turmoil. Jerry Keefe and Dennis Lafferty, who had been co-heads of the group with Tom Tormey, both left after Tormey was elevated to partner. Keefe joined hedge fund CarVal Investors and Lafferty departed for HSBC Holdings Plc. Some time later, Tormey moved into a different role and handed oversight to Savarese.

In 2016, spurred by the Peabody bet, as well as a position in Ultra Petroleum Corp., his team brought in more than $200 million in revenue, according to two people with knowledge of the matter. That came close to the performance turned in by Thomas Malafronte, Goldman Sachs’s star junk bond trader who was one of Wall Street’s best last year with about $300 million in revenue.

The Savarese brothers grew up on Long Island and attended St. Anthony’s High School, an athletics powerhouse in western Suffolk County. Adam Savarese wrestled at the Catholic school and was a member of the Tau fraternity, founded on the teachings of St. Francis of Assisi, whose members volunteered at soup kitchens, according to Denise Creighton, director of alumni relations at St. Anthony’s who taught both brothers.

“He wasn’t a brainiac but did very well in school because he worked very hard,” Creighton said of Adam Savarese. “I haven’t seen him since he graduated, but when you said his name I smiled.”

A skilled grappler, Savarese wrestled at James Madison University and joined Goldman Sachs after graduation. In 2002, he left for Morgan Stanley and rose to managing director, according to his LinkedIn profile.

Since returning to Goldman Sachs, he’s played an active role in the bank’s push to diversify its trading partners, doing more business with asset managers and corporations. He’s hosted dinners and other events for clients, according to a person with knowledge of his schedule.

Distressed debt has returned 9.8 percent this year, Bank of America Merrill Lynch index data show, including a 7.4 percent gain in February and a 2.1 percent decline in March.

Indeed, trading in the debt isn’t without its ups and downs. “There’s an understanding when you have a business like that that you have a greater risk,” said UBS’s Hawken. Busts aren’t necessarily a problem unless they become a pattern. “If you have a manager that allows for losses that are out-sized, then that’s a ding on risk management.”

— With assistance by Emma Orr, Tiffany Kary, Hugh Son, and Laura J Keller

    Before it's here, it's on the Bloomberg Terminal.