The memo landed on a Sunday in November. It was 2007, and securities backed by subprime mortgages were roiling markets and imperiling banks. Merrill Lynch Chief Executive Officer Stan O’Neal had just resigned under pressure, and Citigroup CEO Chuck Prince was rumored to be on his way out.
So the Nov. 4 memo to employees in Citigroup’s markets division seems bold in hindsight. While other banks were looking to unload the toxic securities and Citigroup was taking an $11 billion writedown on its holdings, then-trading chief Jamie Forese and fixed-income head Paco Ybarra had other plans. They announced they’d turn the bank’s souring mortgage debt over to a new team and chart a course for the future. It was, they said, a “great opportunity.”
The man they would soon ask to oversee that strategy was Mark Tsesarsky, a refugee from Ukraine with intense blue eyes and a cool demeanor. At the time, T-Man, as he was known around the bank, was head of special situations for securitizations, which meant he made bets on Citigroup’s behalf with bonds backed by mortgages and other assets. Now his bosses were asking him to help limit losses on someone else’s portfolio of collateralized debt obligations—instruments with names such as Bonifacius and Jupiter that were threatening to destroy the bank—and find a way to profit from the turmoil.
Over the next eight years, Tsesarsky and his team did just that. They rebuilt their bank into Wall Street’s biggest for CDOs, not by issuing securities but by buying billions of dollars of debt, holding it as values rose, and trading with customers. In the three years ended in December 2015, the handful of traders notched almost $2 billion in revenue, more than any other desk at the bank, according to people familiar with the company’s operations. Their performance was made possible by an unprecedented rescue of the financial system, including a bailout of Citigroup, and a flood of central bank money that lifted asset prices.
Tsesarsky, 54, declined to comment. He hasn’t given an interview since 1999, when he told the Jewish Week that his experience being discriminated against as a Jew in the former Soviet Union “makes me stronger and different.” The bank’s senior executives declined to comment as well. But the story of how he did it, pieced together from conversations with more than a dozen current and former executives, shows that even on a safer and sounder Wall Street and at a bank that says it wants to be more boring, a trader can wager billions of dollars in often opaque debt markets.
On a sunny day this spring, construction workers in hard hats mingle outside two buildings in Lower Manhattan that have long housed Citigroup’s investment bank and that this year became the company’s headquarters. Michael Corbat, who became CEO in 2012, has been restructuring Citigroup, selling unwanted assets, shrinking its global footprint, boosting capital, and trimming staff. The scaffolding shrouding the bottom of one building is a sign of the changes.
But on the trading floor where Tsesarsky has a desk, at the top of the other building, little has changed. A wiry man who favors designer suits and ties, Tsesarsky runs the asset-backed bond-trading business behind a veil of secrecy. CDOs are only a small part of an empire that includes securities linked to auto or credit card loans, mortgages, and consumer-installment debt. For two decades, Tsesarsky shared leadership with Jeffrey Perlowitz, who announced his retirement in March. The louder of the two, Perlowitz was the id to Tsesarsky’s superego, says one person who’s known both men for years.
“There’s a serene balance that he has,” James Zelter, a former Citigroup colleague and now head of investments at Apollo Global Management’s credit unit, says about Tsesarsky.
To understand how Tsesarsky turned toxic assets into gold, it’s worth going back to the market’s beginnings. In the 1970s, less than 10 years before Tsesarsky joined Salomon Brothers in 1986, a trader there created the first private mortgage bond by pooling home loans and divvying up the cash flows into different securities. The innovation spread risk across thousands of loans, making them easier to trade and attracting investors unwilling to buy single mortgages. It catapulted Salomon to the top of Wall Street.
By the turn of the century, the idea’s success led bankers to a little-used instrument with an esoteric name, the collateralized debt obligation. Working much like a mortgage bond, a CDO packaged existing securities into new debt. It was a second-generation magic trick that enabled even subprime mortgages to be transformed into triple A-rated paper. The market took off, increasing to $521 billion in 2006 from $68 billion in 2000, according to Securities Industry and Financial Markets Association data. Citigroup, which had swallowed Salomon in 1998, became the biggest issuer of CDOs.