is a tough business," says Williams. "You have to have skill, talent and preparation to make it. That’s what we have been able to amass over the years. It’s an all-or-nothing proposition."
OPERATING IN PERILOUS WATERS
In the early 1990s, the use of derivatives to create novel and complex securities became one of Wall Street’s best-kept secrets. Williams’ entry into the oft-perilous waters of entrepreneurship came when he set up Williams Financial Markets in April 1992 as a division of Jefferies Group Inc., a Los Angeles-based financial services company. The initial agreement between Williams and Jefferies gave Jefferies the right to purchase up to 49% of a successor firm.
When the company first opened its doors, it was solely focused on the then-thriving derivatives market, structuring transactions with debt instruments backed by the value of the underlying securities. The company would customize securities by using interest-rate swaps and options, tying the performance of securities to various benchmarks in the market.
It was a highly lucrative business. For Williams, the potential for engineering these financial instruments seemed limitless. In January 1994, Jefferies exercised
its right to purchase 49% of the new firm williams created. It was christened Williams Capital Group, L.P.
But in late 1994 the bottom fell out of the bond market. Most derivative bets were based on the widespread belief that interest rates would head lower, then the unthinkable happened — rates ratcheted up. In short, the derivatives market imploded.
To make matters worse, Orange County, California, one of the nation’s most affluent zip codes, made history in the spring of 1994 by filing for bankruptcy protection after losing $1.69 billion through derivatives trading. This was the largest municipal bankruptcy ever. Derivatives became a four-letter word. The instrument was responsible for 100% of the firm’s revenues.
"We faced the sobering reality that the marketplace does not always have a demand for esoteric products," says Williams. "Investors made a 180-degree turn against such instruments."
After raking in more than $2.5 billion in new bond issues in his first 18 months in business, the entrepreneur found himself struggling to survive in a market that forced even many bulge-bracket firms out of the bond business. Williams’ firm was still in its embryonic phase and on the brink of closing down. "We were spoiled by the level of success we had at the start," he reflects. "Now our cash cow no longer existed and we had to face the possibility of going out of business. Our greatest source of capital was my checkbook."
He and his partners lived in fear of being conquered by a double whammy — the nose-diving bond market that had no appetite for new issues and a derivatives market that had dried up. But they refused to die. For seven months, with no profits, they battled to stay afloat. "We were really dead, " he says. "We just didn’t have the energy to fall down."