In The News

Derivatives Pioneers:
Rich Tanenbaum, The Tech-Master

from Dow Jones News Service , June 30, 1999

By Paula Froelich, Dow Jones Capital Markets Report

NEW YORK (Dow Jones)--Years before he helped start the firstderivatives trading group on Wall Street at Bankers Trust in 1985, Rich Tanenbaum wasalready enamored of the world of high finance. Tanenbaum was greatly influencedby his father, who traded options. So, for a social studies project in high school,Tanenbaum aimed high: while other kids were building model volcanoes and dioramas,he was busy structuring an options pricing model. It was the first of many ambitious undertakings.

More than a decade later, Tanenbaum, who now heads up a computer softwarecompany, would become well-known throughout Wall Street as the man who wrotethe original computer programs that allowed equity and fixed-income derivatives to betraded and tracked on a regular basis.

"He used to do all the complex pricing and mathematical work," said David Aaron, an ex-Bankers Trust employee who used towork with Tanenbaum. Aaron also described Tanenbaum as particularly intense. "I have never seen a man sit so close to acomputer screen than Rich," Aaron said.

Despite his intensity, those who know him describe Tanenbaum as something of ananomaly - an affable, nice guy even though he worked in a high-pressured arena.Dean D'Onofrio, managing director and head of convertible bonds and equityderivatives at Merrill Lynch, knew Tanenbaum when they worked together atBankers Trust. "He had all the brains and none of the attitude - a rare combination on Wall Street," said D'Onofrio.

Politics At Bankers Trust

Tanenbaum was a member of the original derivatives trading group at BankersTrust, which was formed in 1985. He joined the firm's asset management groupin 1980, writing computer systems that could handle complex options andderivatives for fixed-income portfolios. The program he created, dubbed Controlled Risk Management, or CRM, was stillbeing used at the time of Bankers Trust's recent merger with Deutsche Bank, although Tanenbaum had other ideas about whatit should be called. "Iwanted to call it Structured Hedging Investment Technique - better acronym,"he joked to Dow Jones Newswires.

All puns aside, the software was considered to be the leading product inderivatives pricing, according to Aaron, who is currently is a director atDerivatech, a derivatives software company. Tanenbaum left Bankers Trust,and Wall Street in 1989, due to what he calls a "changing climate" wherehe saw derivatives start to be used as tools of greed and harm. "I think one ofthe most common phrases used right before I left was 'cleaning their clocks,'which referred to whether or not we could really make money off of customers,"Tanenbaum said.

The final straw for Tanenbaum came when, during a daily meeting, hisderivatives group, which had grown to more than 20 employees by 1989, wasdiscussing certain derivatives products. "A salesman who I had thought ofhighly before - he was a nice, quiet, religious man - stood up and said 'So,can we rape them with it?' He was referring to our customers," saidTanenbaum." What was once a sleazy minority was becoming more andmore prevalent," he added.

It was this type of atmosphere that he abhorred, and which, he says, led tomany of Bankers Trust's problems and well-publicized client blow-ups.In 1989, Tanenbaum started his own software firm, which five years laterbecame Savvysoft. His company specializes in derivatives pricing and hedgingsoftware.

High School, Bell Bottoms and Options

Soon after high school and the ambitious social studies project, Tanenbaumlanded his first job assisting a trader on the floor of the commodities exchangein New York during breaks from Dartmouth College. "It was like Saturday Night Fever," Tanenbaum said, getting slightlynostalgic. "I used to show up every day in myblue polyester bell bottoms and matching day glow shirt with a huge collar - becauseI looked around and thought that was the uniform," he said.

While there was a lot of money to be made - Tanenbaum said it was notuncommon for traders to make over ten thousand dollars a day - he decided tohead West to California to "use his brains and live the bohemian life."

In San Francisco, a year before he started at Bankers Trust, Tanenbaum didprogramming for an options trader at the Pacific Stock Exchange, whileliving in a rooming house, earning a "couple hundred bucks" a week.While there, Tanenbaum spent much of his time in computer stores, and oneday a salesman showed him VisiCalc, the software for what is considered tobe the first spreadsheet. "I said, 'Yeah, that's nice, but who would needthat?'" Tanenbaum said, shaking his head at the thought of missing out onthe precursor to spreadsheets like Excel.

Almost nine years later, he would hear almost the exact same words fromothers about his own software, Tanenbaum Options Pricing Software, alsoknown as TOPS.

"When I started trying to sell my software, it took me a long time torealize that I was doing people some good - that they needed my product," hesaid. Tanenbaum had an aversion to marketers from his experience at Bankers Trustand at first tried to market the product himself. Five years later, with nopaycheck or bank deposits he was almost broke, when a friend suggested heinvest in a marketing team.

"I had been trying to sell the product by approaching people I knew on WallStreet and asking them, 'Do you know anyone who could use this?' They wouldsay, 'It's interesting, but no." In 1994, he established Savvysoft and TOPS took off.

Tanenbaum declined to comment on his firm's revenues or his customers, but didsay that since the start, the firm has been operating "in the black." Success has been long in coming for Tanenbaum, butnot undeserved, and his company has just produced TOPS 2000 Credit, a credit derivatives pricing and hedging software package."Now I have respect for salespeople and also for anyone who has ever started a business. Even if it fails," he said.

-By Paula Froelich; 201-938-2010