🔥Notice of Appearance - Daniel Kamensky, Former Managing Partner of Marble Ridge Capital. Part I.🔥
Daniel Kamensky Speaks. Part I.
Today we welcome Daniel Kamensky, former Managing Partner of Marble Ridge Capital. Unless you’ve been hiding under a rock, you’re likely aware of who Mr. Kamensky is. If you don’t, you can catch up on prior Neiman Marcus coverage here:
Answers were edited only slightly for clarity.
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PETITION: Welcome Dan. Thank you for making the time for us. This is not a question we typically ask our Notice of Appearance subjects but these circumstances are obviously extraordinary: how are you holding up?
Kamensky: It’s been a challenging time for me and my family. But we are taking it one day at a time. That’s really the only way to approach something like this. You rely a lot on your support network. The distressed community has been a source of strength, and I am grateful for that.
Going through this experience has made me appreciate even more what is important in life. Purpose, gratefulness. Not that I didn’t have those in mind before, but they were always competing against other day-to-day distractions.
I have a deeper appreciation for friendship and family. And the importance of empathy, the dangers of acting out of anger and panic.
In a moment, your entire life can change.
PETITION: Let’s take a step back and talk about your youth. Any important experiences you would like to share?
Kamensky: I have always had a strong sense of right and wrong and for fighting against injustice. When I was 12 years old I joined Chicago Action for Soviet Jewry. I made a poster with the verse from Deuteronomy, “Justice, Justice, Thou Shalt Pursue” to raise awareness of the plight of Jews living in Russia. It may seem like ancient history, but growing up in the Soviet Union in the 80s was dangerous for Jews. Jews lived in fear and with anxiety of an unknown future.
We had a large family still living in the old Soviet Union. So, I was able to hear of their stories first hand. And it was a call to action for me. We sponsored and worked to have them emigrate to the United States, which they did in the late 80s. We now have a large group of cousins living in Chicago. We helped them find jobs and adjust to their new lives. I then worked with a social service agency that worked with recent Russian immigrants to help them acclimate to their new country.
I have always tried to be a force multiplier for good and believe strongly in charity and doing well for others. That sense of justice and working to help others was borne from my youth.
In college, I studied Cervantes and traveled to Spain. My professor at the time, Señor Juan Lopez, became my mentor and my first great role model. Lopez and Cervantes believed that each one of us is a child of our own labors (Cada uno es hijo de sus obras) meaning that we have to stand up for what we believe in. Quixote criticized the goliaths (the knights and upper classes) of the medieval ages that relied on words of chivalry rather than standing against ignorance and bigotry. He challenged many of the prejudices and biases of his time by calling out inequality - that became a strong influence in my life.
PETITION: You made a jump “to the business side” that a lot of biglaw associates dream of. What advice would you give others looking to make a similar move?
Kamensky: Working at Simpson [Thacher] was at a great experience. I really enjoyed the people and the work but after 6 years there the work lost some of its challenge. Strategizing and the game theory of advising clients was one of the highlights of the job. But too often I spent my time waiting on others. I wanted more control over my career and to challenge myself. My advice to others would be don’t leave a law firm after only spending a few years there. Too many people leave a law firm too early in their career, without getting any of the benefits of the practice. A future employer will see greater value in hiring someone with more experience given the lock-step nature of associate compensation. Use that to your advantage.
Network. Network. Network. Always take a meeting and help others in making career choices. You never know when those people can help you. Read up. Take classes on finance and accounting and learn how to us excel.
And most importantly, play to your strengths. As a lawyer, you will have particular strengths that others with a more traditional financial background will not have. Use that to your advantage. My marketing pitch when I launched Marble Ridge started with, “I play to my strengths”. You should as well.
PETITION: What made you think you could make the jump from big law to an investment bank?
Kamensky: At the time I had no idea. I had no formal financial training, and had no idea how to build a financial model.
But I had learned about risk and reward as a lawyer. Law grounds you in reason and the building blocks of logic. That is an incredibly important skill-set. You can look at any problem and immediately see a three dimensional chess board of outcomes playing out before you. But not all lawyers make successful investors. The difference, and I have said this before when asked, is that most lawyers understand the risk of making a particular decision but few can look at both the risk and potential benefits of making a decision and explain how those roads could potentially diverge. And even fewer still can look at both risk and reward and then advise which decision, in their judgment, presents the best path forward. That is investing. A good example of someone who has that type of mindset would be someone like Paul Basta [of Paul Weiss Rifkind Wharton & Garrison LLP]. Paul does an amazing job of not only presenting bookends, the pros and cons of making a particular decision, but he also recommends a particular course of action even in light of the risks. Most lawyers don’t compare.
PETITION: You ended up at Lehman Brothers. Any defining experiences there?
Kamensky: Walking into the high yield and distressed trading desk of Lehman Brothers as the desk’s legal analyst in March 2005 was like entering a gladiator’s arena for the first time. The 4th floor opens up to a football field sized room with rows of trading desks set up with Bloomberg terminals and phone systems called turrets with dozens of dedicated speed dial buttons connecting sales/traders to clients and a protruding microphone called a hoot that’s used to immediately disseminate information across the trading floor. All this made for a cacophony of yelling and cursing with traders and salesmen yelling back and forth across the rows communicating orders to and from client accounts.
In February 2007, Hugo Chavez nationalized three major heavy oil projects located in the Orinoco region of Venezuela. Each project had financed its expansion with high yield debt placed with insurance companies based in the United States. When the Venezuelan legislature passed laws enabling the expropriation of these projects, the insurance companies ran for the exits. The head of the desk covering the insurance companies, Jimmy G., sensed an opportunity and came running over from his row across the room to the distressed desk asking for help. I ran into an office and closed the door to drown out the background noise and scanned the collateral and security agreement and quickly found what I was looking for. All the bank accounts for the project were based in the United States with deposit agreements in place governed by New York law. As long as PDVSA, the Venezuelan national oil company, continued to ship oil to their specialized refineries located in the United States, which seemed highly likely, cash would continue to accumulate in a U.S. based account for the benefit of bond investors. Within an hour, we were picking up debt that had plummeted from near par to as low as 30 cents on the dollar. Of the $600 million of debt outstanding, Lehman Brothers had quickly become a holder of $100 million of bonds.
Bondholders then started the process of declaring a “prospective default”. For as long as a prospective default existed, cash could not be distributed out of the collateral accounts and over the next year cash continued to build in the collateral accounts, eventually surpassing the total amount of debt outstanding. By the end of 2007, bondholders had negotiated a full pay out of the bonds including a premium, the best possible outcome representing an enormous success for the trading desk and for me professionally.
PETITION: At Paulson & Co., the next stop on your career trajectory, you allegedly made a killing trading Lehman claims. Walk us through your process there and what — other than your knowledge of Lehman from your stint there — positioned you for success with this strategy?
Kamensky: Analyzing financial companies is probably the most difficult skill set I’ve learned in my career. Working on insurance liquidations in my first few years as a lawyer helped prepare me to understand how a financial company undergoes stress. For a financial company, you have to understand how they finance themselves. If a company is relying on financial instruments other than funded debt to finance its business, it likely has a complex financing structure where legal niceties give way to financing tools. And that usually leads to shifting assets throughout a capital structure to find the most efficient financing structure. In those cases, you have to ask what counter parties relied on in extending credit. In the case of Lehman Brothers, it was a very simple observation that counter-parties extended credit based on the rating of the holding company. That ultimately led to the theory of substantive consolidation, which benefits holding company bondholders over subsidiary creditors. I also had precedent on my side. The only other comparable broker-dealer to have filed for bankruptcy, Drexel Burnham, relied on substantive consolidation to distribute assets to creditors. In early 2009, we purchased approximately $9 billion of holding company bonds and created a coalition of the willing, led by Jerry Uzzi [of Milbank LLP] (including bond behemoths like PIMCO and governmental agencies like the County of Santa Rosa in California) to advocate for bondholder interests. In April 2011, we filed a plan premised on substantive consolidation and ultimately negotiated a plan (kudos to Raj Iyer [of Canyon Partners LLC]) that included significant value allocation to holding company bondholders. While this was a successful investment it, more importantly, led to friendships that still exist today (you know who you are).
PETITION: On the flip side — putting aside Neiman, what was one trade that went horrifically sideways in your career and why? What did you miss and why? What could you have done differently?
Kamensky: Stay away from energy. It’s nothing but a bad bet on oil prices. We lost a ton in the energy space and I would stay away.
PETITION: In February 2015, you jumped ship from Paulson and decided to hang a shingle, so to speak. Tell us a bit about that process. What was it like starting a new fund as a first-time emerging manager and what was the fundraising process like? What were some of the challenges and if you could give your younger self any advice about it, what would that be?
Kamensky: It takes every ounce of energy, commitment and confidence to launch a fund. It is taking the ultimate risk, and my launch was risky even by those standards.
In 2015, I was preparing for a much celebrated launch of a hedge fund with significant funding from a large fund of funds based in Chicago. But as we neared our launch in October 2015, our seed went out of business and I had to pivot quickly and launched Marble Ridge Capital only a few months later in January 2016. We came limping out of the gates with only a bare minimum of capital raised from friends and family in what was an unheard of amount of $17 million for a credit fund.
We were well below the amount of assets required by even the most forgiving of banks to act as an intermediary between a hedge fund and a trading counter-party. Without a bank acting as a “prime broker” to extend credit to ensure closing of a trade, you cannot trade. And, if you cannot trade, you are out of business.
10 days before our anticipated launch, I managed to schedule a meeting with the Head of Prime Brokerage at J.P. Morgan Chase & Co. ($JPM), Mike Minikes. Mike is a throw-back to a bygone era, when relationships meant something and deals were made by handshakes. I had already been through credit and risk reviews with every third-tier bank and knew I would have to pull a rabbit out of a hat to make JP Morgan take us as a prime brokerage client. When I arrived at Mike’s office, he had his entire team assembled: risk, credit, capital introduction and relationship management. I made a pitch from my heart, that no challenge was too great but I needed JP Morgan to make my dream become a reality. At the end of my speech, Mike rose and shook my hand and the rest, as they say, is history.
As I left, my head was spinning. Not only did we have an open-for-business sign but it had been planted by none other than JP Morgan.
2016 was a banner year for my new fund. Of the more than 500 hedge fund launches in 2016, we received the much coveted “Absolute Return Award” for best risk-adjusted returns of any new hedge fund launch for that year. And investors began to pile in. By the end of 2016 we managed over $200 million, by 2017 $500 million, and nearly $1 billion by 2020.
But that growth came at great emotional cost. Stress and anxiety took their toll on me. I sought help and am better for that. But we need to do a better job of talking about the challenges of mental health in what is an incredibly intense and stressful business. No one should be afraid to ask for help. That’s the first step toward getting yourself to a better place.
PETITION: Neiman. Initially, you won. Discuss. How did it feel to defeat a couple of funds, BS independent directors, and a powerful law firm that had been gaslighting you for years?
Kamensky: This was never about winning or losing. This was about seeing something so wrong and so brazen that it needed to be called out. It is not about defeating any one party or about achieving a victory as such but rather righting wrongs. Throughout my entire life, my commitment has been to help right wrongs whether it be a social cause or otherwise. I have always believed and will continue to adhere to the concept “Justice, Justice thou shalt pursue.” In the end, my efforts to hold the board of Neiman, its management, lawyers at Kirkland and Ares accountable for their severe wrongdoing was addressed and was made right ultimately for Neiman creditors, which included not only bondholders but merchants and suppliers who had been harmed by Ares’ actions.
PETITION: But then you lost. You couldn’t stop yourself, exhibiting a fierce sense of entitlement in your interaction with Jefferies. Walk us through your thought process there.
Kamensky: At the end of the day, my position was vindicated by every unbiased party in the case. What happened on July 31 is somewhat unrelated to Ares’ fraudulent conveyance. What I lost was my ability to manage my emotions at a particular moment in time on July 31, when I let anger get the better of me, propelling me into an ill-fated phone call with Jefferies over their last minute attempt to get themselves cut into a potential bondholder deal. At the time, it felt like a shake-down by Jefferies and I did not believe that they were real. Subsequent events have proven me right.
Giving in to my anger in that moment has forever changed my life. I hope others can learn from my mistakes….
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In part II in Sunday’s a$$-kicking briefing, PETITION and Daniel Kamensky discuss:
📍More on the Neiman Marcus case;
📍Creditor-on-creditor violence;
📍The MyTheresa IPO;
📍Necessary changes to the bankruptcy process;
📍Activist judges;
📍Legal ethics in restructuring and more.
