They’re Lying to You About Market Crashes… Here’s How to See One Coming | John Devaney

John Deainy built his career in mortgage and structured-finance trading, eventually making hundreds of millions of dollars before suffering a near-$200 million loss during the 2008 financial crisis. He said he was 37 when the loss occurred and that his net worth fell by a little more than half.

He founded United Capital Markets in 1999, at age 29, to specialize in structured-finance bonds that larger firms were not serving well. The business made markets in securities backed by mortgages, home-equity loans, auto loans, aircraft loans, franchise loans, commercial mortgages and other assets.

His early edge came from studying relatively new and poorly understood securities in unusual depth. He wrote papers about them, modeled how they worked and focused on parts of the market where there were few willing buyers.

He said many structured-finance products created in the 1990s had never been seriously tested through a downturn. Deals were divided into senior and subordinate tranches, with the lower-rated pieces absorbing losses first when the underlying collateral performed badly.

The 1998 Long-Term Capital crisis created one of the opportunities that launched his business. He described the hedge fund as operating with roughly 25–50 times leverage and about $100 billion of debt spread across Wall Street, forcing other leveraged investors to sell asset-backed bonds when markets fell.

Deainy positioned himself as a buyer when forced sellers were dumping illiquid structured-finance securities. He concluded that markets with a shortage of liquidity could offer unusually large profits to specialists willing to understand the assets and commit their own capital.

One important early trade involved high-LTV home-equity bonds that had been heavily discounted after the 1998 disruption. He said many borrowers had FICO scores around 740 even though the loans allowed borrowing up to roughly 125% of a home's value, leading him to believe some bonds were much safer than their distressed prices implied.

He reinvested heavily rather than taking most early profits out of United Capital Markets. Some distressed bonds were producing returns of roughly 30–40%, and he described buying pieces around 30 cents that ultimately paid out at 100.

His reported earnings rose extraordinarily quickly: about $5 million in his first year, roughly $25 million in his second and about $45 million in his third. He repeatedly put profits back into the firm's trading inventory.

A later corporate-bond investment caused a significant setback before the firm's biggest year. He discussed Green Tree Finance, saying an acquirer had paid roughly $4.5 billion for a business he believed was worth closer to $1 billion and financed the acquisition with billions in debt and preferred securities.

He said he still made around $5 million during the weaker year around 2002, then rebounded dramatically in 2003. United Capital Markets produced roughly $130 million in revenue and about $110 million in net income, implying operating expenses of only about $20 million.

The firm's unusually high margins came from its trading model rather than a large traditional brokerage infrastructure. Its securities sat in Deainy's trading accounts, and the company earned spreads by repeatedly buying and reselling inventory.

United Capital Markets functioned primarily as a principal market maker, not simply as an agent earning commissions. It bought bonds using its own money from hedge funds, money managers, insurance companies, mutual funds and other institutions, then tried to resell them the same day or soon afterward.

The company developed particularly strong market share in risky subordinate tranches such as C, D and E pieces. Deainy said United competed directly with much larger Wall Street firms while sometimes handling more activity in those specialized securities.

The scale of trading made relatively small spreads enormously valuable. He illustrated that earning two points on $1 billion of securities produces about $20 million, while the same spread on $5 billion produces roughly $100 million.

He attributed the firm's advantage to more than pricing trades. Relationships, salesmanship, modeling, technical knowledge, white papers, educational primers, speaking at conferences and bringing new investors into the market all helped build its franchise.

United Capital Markets also became an industry advocate. Deainy said the firm publicly challenged legal structures it believed were poorly aligned with investor interests.

He developed a strong preference for principal trading because he believed it aligned his interests with customers. His philosophy was that if he first risked his own money buying a bond, he could later sell it to a customer in better faith than an agent whose only incentive was earning a commission.

Deainy said early success gave him the confidence to create a regulated broker-dealer while still in his twenties. He believes he may have been the youngest person at the time to receive the necessary regulatory approval to own one, after going through extensive interviews.

His path into finance began after a troubled academic start. He described himself as an upper-middle-class child who attended private and boarding schools but rebelled during high school, drank, left campus without permission, was expelled from schools and graduated with roughly a 1.8 GPA.

Family upheaval helped force him to change direction. After his parents divorced, he said his father stopped working, leaving him without money and dependent on financial aid; at community college he matured academically and earned approximately a 4.0.

He then talked his way into Colorado State over the telephone. Once admitted, he earned straight A's, pursued two majors, won scholarships and began experimenting seriously with small businesses.

One of his first major entrepreneurial wins came from promoting a hotel bar while still in college. He persuaded the owners of a South Beach hotel operation to give him roughly one-third of the register, and said his share during the summer of his sophomore year amounted to about $90,000 in cash.

That $90,000 changed his identity from a heavy partier into an intensely competitive student and entrepreneur. He began trying to earn the highest grade in every class and said repeated achievement created the confidence to attempt increasingly unconventional businesses.

He was also operating a small real-estate strategy in college. He owned a five-bedroom house and rented rooms to other students.

His first securities trade came after learning about options in an introductory class taught by Mrs. Burns. He said he had barely understood stocks or bonds beforehand but became fascinated by the leverage available through options.

A classmate mentioned that his father at a major brokerage firm was bullish on Motorola ahead of earnings, and Deainy decided to act on the information. His friends thought the idea was reckless, but he searched the Yellow Pages for a discount brokerage and rode his mountain bike there to open an account.

He put roughly $3,000 of newly received scholarship money into out-of-the-money Motorola calls priced around 50 cents. The position returned about $14,000, becoming his first important securities-market win.

He then repeated the Motorola strategy successfully eight times in succession. He said individual trades generated roughly four-to-seven-times returns, with later profits growing to around $20,000, $50,000 and, on one occasion, $100,000.

Deainy explicitly rejected the idea that these early wins proved he was an investment genius. He said the more important ingredients were recognizing an opportunity, having enough information to form a view and being willing to take a risk when others would not.

His first professional finance job was much harder than his college trading success suggested. At roughly 24, he obtained a Series 7 and worked as a registered representative at a small Miami brokerage trying to sell mutual funds and stocks to wealthy people, but prospective customers frequently dismissed him because of his age and his firm's lack of a Wall Street brand.

He responded by attempting an enormous options trade intended to finance the purchase of a hotel. The property cost roughly $1.2 million, and the owner offered to lend him $600,000 if Deainy could supply the remaining $600,000.

He risked about $120,000 in out-of-the-money Motorola calls hoping to produce $600,000–$700,000 in one trade. Motorola missed the relevant result by roughly a penny, the shares fell and he said he lost the entire position.

He compounded the loss by doubling down, eventually leaving his brokerage account underwater. He had recently paid about $35,000 for a two-year-old Mercedes, sold it only a month later for approximately $25,000 and put the proceeds into the account to cover the deficit.

That failure left him nearly broke and became the transition point into the bond business that later created his fortune. He presented it as an early lesson that a long streak of success can create dangerous confidence just before a severe loss.

At the height of his success, Deainy gained direct access to some of the country's most prominent financial and political figures. He recounted attending a dinner at Senate Majority Leader Bill Frist's home where President George W. Bush and senior banking executives were also present; he said his first general counsel's relationship with Frist's family helped lead to the invitation.

At that dinner, a senior Goldman Sachs executive asked the then-33-year-old Deainy about United Capital Markets. Deainy said the executive was surprised to hear about roughly $130 million in annual revenue and a profit margin above 90%, comparing the firm's earnings favorably with much larger public regional broker-dealers Deainy had studied earlier in his career.

Deainy briefly moved beyond trading into outside asset management. From roughly 2005 through 2007, he operated a hedge fund containing both his own and outside capital; he said it returned about 49% after a 20% fee in its first year and roughly 42% the following year when assets had grown to about $1 billion.

He described the fund as the top-performing hedge fund during that period, although that was his own characterization in the interview. He later closed the outside-money business and said he now trades only his own capital through the broker-dealer.

Goldman advisers were encouraging him to turn United Capital Markets into a much broader financial company. The plans included taking the business public, issuing corporate debt, developing asset management and entering investment banking; Deainy completed several investment-banking deals before the financial crisis derailed the expansion.

Large entertainment events became a deliberate client-acquisition tool for United Capital Markets. In 1999, organizers of the ABS West conference in Scottsdale asked him how to attract people to an poorly attended opening-night reception, and he proposed turning it into a major concert.

He hired Blues Traveler for roughly $30,000, with another approximately $25,000 spent on the stage and sound equipment. The conference covered drinks, everyone was invited rather than just selected clients, attendees received concert shirts and Deainy used the event to introduce his firm to the industry.

The conference concerts produced measurable business rather than serving only as personal entertainment. Deainy said United quickly gained customers who had not realized how active it was in structured finance, where a single new relationship could generate six-figure trading profits.

The company continued sponsoring major conference entertainment until the financial crisis. One later event featured Counting Crows for about $350,000, an exceptionally large entertainment expense at the time.

He also described tensions around pay-to-play conference economics. A nonprofit conference emerged partly because participants disliked a for-profit model in which sponsors could spend hundreds of thousands of dollars and then place representatives on numerous speaking panels; United sponsored entertainment at both types of events.

Deainy's business networking extended to flying clients in his helicopter. Conference venues allowed him to land his Sikorsky on golf courses, and he would take customers on trips from Scottsdale to the Grand Canyon after participating in panels and events.

By 2007, United Capital Markets was carrying hundreds of millions of dollars of structured-finance positions across many sectors. Its book included residential mortgages, commercial mortgages, CDOs, franchise-backed securities, home-equity bonds and other instruments, supported by a roughly $250 million credit line from Bank of America.

The principal-trading model that had made the firm extremely profitable also meant United directly absorbed collapsing market prices. Unlike an agent simply collecting a fee, the firm owned the securities on its balance sheet and therefore lived or died with their value.

Deainy said highly leveraged banks were simultaneously holding enormous amounts of supposedly AAA-rated mortgage securities. He cited one major bank as having roughly $50 billion in such assets inside an offshore vehicle financed with only around 1–2% equity.

During the crisis, he said some AAA mortgage bonds fell from prices near 95 to roughly 40–50 cents on the dollar. In his account, extreme leverage meant these losses effectively consumed the equity of several major banks and forced extraordinary government capital support.

His own holdings were concentrated further down the capital structure, where the collapse happened even faster. He described roughly 200 securities across numerous specialized categories, with subordinate B, C and D pieces plunging to about 5–10 cents on the dollar.

Borrowing against United's trading book magnified the damage. Although he said the firm had relatively limited direct exposure to subprime-credit bonds and that many of its other securities ultimately recovered, the simultaneous collapse in liquidity rapidly destroyed trading equity.

He characterized 2008 as an event of extraordinary systemic scale rather than the failure of one isolated investment thesis. He called it effectively a once-in-a-thousand-year storm and said he regretted failing to anticipate it despite understanding the mechanics of the securities business extremely well.

He also rejected the suggestion that ordinary retail customers had simply entrusted money to him and lost it. United's customers were institutional investors—including hedge funds, money managers, mutual funds, banks and other dealers—whose professional managers made their own investment decisions; he said virtually everyone in those markets suffered severe losses.

Deainy survived partly because substantial wealth had already been moved outside his core trading company. Art, real estate, aircraft, yachts and other assets could be sold to provide liquidity even though his broker-dealer's capital was being destroyed.

In November 2007 he sold a 45-piece Impressionist and Post-Impressionist art collection for about $55 million. He then put much of that cash back into his trading account, illustrating both the benefit and the danger in his approach to diversification: outside assets supplied liquidity, but he was still willing to redeploy that liquidity into the core business.

He sold several luxury assets at profits even as the financial system deteriorated. He said an aircraft bought for about $26 million sold for roughly $36 million, while a 142-foot Trinity yacht bought new around 2003 for about $16 million sold four years later for approximately $22 million.

He believed aggressive private-bank lending had created a separate bubble in yachts and aircraft by 2007. Wealthy buyers could finance planes with roughly 15% down or $20–$30 million yachts with around 25% down and a personal guarantee, pushing asset prices sharply upward.

Ironically, losses in subordinate bonds forced him to liquidate luxury assets before the later collapse in senior mortgage securities crippled major banks. He therefore described being pushed out of yachts, aircraft and other expensive holdings close to the top of those markets.

He also sold a roughly 40,000-square-foot office building, extra houses and other property to raise cash and reduce expenses. He said several of those sales still produced profits.

The crisis strengthened his conviction that entrepreneurs should remove money from a successful operating business before they desperately need it. His recommendation was to build meaningful holdings in assets such as real estate, art or other businesses rather than leaving virtually all wealth tied to one enterprise.

At the same time, he acknowledged the powerful temptation to redeploy diversified capital into the highest-returning business. If a trading operation can generate 50–100% in a strong year while outside assets merely cost money to maintain, he said a rational owner naturally wants to put fresh capital back into the "golden goose."

A large portion of his real-estate diversification was motivated by family rather than pure investment logic. After earning more than $100 million in a year, he bought waterfront homes near himself for his mother, his wife's family and other relatives while he and his wife were raising children.

Those family properties later became highly successful investments as well. He said values had increased substantially since roughly 2003, making the real-estate portfolio an important part of his long-term diversification.

He deliberately arranged for grandparents to live only a few houses from his children. His mother eventually lived about six houses away, and he bought neighboring properties for other family members, even demolishing one large house to create a garden.

At one point he estimated owning roughly 15–20 houses or properties. The ongoing property taxes and maintenance created substantial obligations, but he viewed supporting and physically connecting the family as one of the most valuable uses of wealth.

He argued that having parents and grandparents close to young children is more valuable than maximizing financial returns. In his view, family responsibility can also become a source of motivation that pushes an entrepreneur to keep performing.

Film became his newest major form of diversification after a friend introduced him to investment opportunities in movies. He described the transition as almost providential rather than part of a long-standing plan to enter Hollywood.

The project that pulled him into filmmaking was City of Dreams. He described it as a story about a young Mexican boy trafficked into Los Angeles and forced to work in a sweatshop before finding the courage to escape and help other children.

The film affected him strongly enough that he cried when he first saw it and then spent until roughly 3 a.m. speaking with its director, Mohit, over Zoom. Learning how difficult it had been to complete and distribute the project convinced him to become directly involved.

The producers needed roughly $5–$6 million for advertising, without which Deainy believed the independent film might reach only about 20–30 screens. He said he financed the advertising campaign, helping the movie open on roughly 900 screens.

He then used his own public profile to promote the film's anti-trafficking message. He also made broader claims connecting growth in child trafficking to U.S. border practices and the handling of unaccompanied minors; those were presented in the interview as his own interpretation of the issue.

Tony Robbins and Vivek Ramaswamy became important supporters of the film in Deainy's account. He said both were emotionally affected by it, participated in events alongside him and helped promote the project, which reinforced his sense that filmmaking could create a community around a cause.

His next project, The Prince, represented a shift from an explicitly social-impact film to a dark character drama. Deainy said he was producing it alongside his daughter.

The story centers on a troubled man from a powerful American dynasty whose life has been manipulated to protect his family's political and corporate interests. The character is the family's black sheep, carries trauma from his relationship with his father, turns to drugs, alcohol and exploitation, moves through an urban underworld and ultimately searches for truth and redemption.

The film assembled a well-known cast. Deainy said Nicholas Cage plays a pimp, Scott Hayes—whom he described as both his partner and friend—plays the lead, his neighbor and friend Andy Garcia plays a villain, and J.K. Simmons plays the family patriarch.

He expected The Prince to be released later that year and was especially enthusiastic about the lead performance. He believed the film's deeper theme was having the courage to reject false narratives imposed by one's family and confront painful truths.

His final advice to younger people was broader than entrepreneurship or money. He urged them to pursue work they genuinely care about, while emphasizing honesty, love, trust, close relationships and being authentic to themselves.

He explicitly said money was not the most important measure of a successful life. After a career defined by large gains and catastrophic losses, he framed family, character and meaningful work as more important.

At this stage of his life, Deainy said mentoring younger people had become a major priority. He wants people of his generation to serve as positive examples rather than treating accumulated wealth as the final objective.

He described his current legacy goal as redirecting resources toward things he believes do good. Through family, community involvement, mentoring and Manor House Films, he wants the wealth and influence created during his finance career to support projects with messages that can help other people.