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December 4, 2009 in a conference room on the 16th floor of the TCW Group headquarters at 865 South Figueroa Street in downtown Los Angeles. The company's chief legal advisor walked into a meeting and informed the investment director of the company's fixed income division that he was to be immediately dismissed for cause .
The investment director was 49 years old. He had been with TCW for 24 years . He managed a $9.3 billion bond fund that finished in the top 2% of all medium-term bond funds in the US over the past decade. He had personally generated more revenue for the company than any other employee in its history.
By then, the financial press was already calling him the next Bill Gross. His name was Jeffrey Sherman Gundlock. The accusation against him was that he was preparing to steal proprietary trade secrets, customer lists, and key personnel in order to launch a competing company. He denied it. TCW's lawyers asked him to clear his table.
According to several later accounts, the lawyers followed him 17 flights of stairs as he left the building, presumably to make sure he did not return to his office to take more documents. What happened next is one of the most remarkable cases of corporate self-harm in the modern history of asset management.
Within 48 hours, 14 senior members of Gundlock's team met at his home in Santa Monica. Using the BlackBerry devices that the firm had given them , they emailed their simultaneous resignations to the TCW executive committee. Within 10 days, on December 14, 2009, Gundlock announced the formation of a new company, Doubleline Capital, named after a Piet Mandrean painting from his personal collection.
The firm received a $20 million investment from Howard Marx's Oak Tree Capital Management for a 20% stake. By the end of December, 14 of TCW's senior bond professionals, plus the team's intern and 26 other employees who would follow in the following weeks, had resigned and joined Double Line. TCW filed a lawsuit.
Gundlock filed a lawsuit for unpaid wages owed to him under a compensation agreement that TCW failed to honor after firing him. The case went to a Los Angeles County jury in July 2011. After a six-week trial, the jury awarded Gundlock $66.7 million in compensation. Gundlock, who would later say that he celebrated his birthday 3 months after the verdict by renting a restaurant in TCW's own office building, won the legal claim and the wages.
TCW saw Double Line grow from zero to 50 billion in three years. Today, Double Line manages more than $90 billion. TCW's fixed income division has never recovered the position it held when Gundlock left. The story is well known in the bond business. What is less well known is how a Dartmouth mathematician and philosopher summa kum laadude, who had dropped out of a doctoral program in theoretical mathematics at Yale in 1983 because his thesis proposal on the non-existence of infinity was rejected as being outside the mainstream of mathematical thought, who then drove to Los Angeles in a beat-up car to play drums in a glam rock band called Radical Flat, who decided in 1984 to become a banker because he had seen an episode of Lifestyles of the Rich and Famous and learned that investment bankers were the highest paid, who had sent 23 resumes with aggressive cover letters to investment firms listed in the Los Angeles Yellow Pages, ended up becoming the most influential bond manager in the world.
Jeffrey Sherman Gundlock was born on October 30, 1959 in Amherst, New York, a working-class suburb of Buffalo. His father Arthur was an industrial chemist at Pierce and Stevens Chemical Corporation. His mother, Carol, was a housewife. Gundllock grew up in a modest house in a middle-class neighborhood.
He attended Ammerst Central High School , where he earned near-top grades in his class and scored in the 99th percentile on the SATs. He was admitted to Dartmouth College on a full scholarship . At Dartmouth, he earned a degree in mathematics and philosophy, completed his undergraduate degree in 1981 at Suma Kum Laad, and was admitted to the doctoral program in theoretical mathematics at Yale University.
Gundlock arrived expecting to spend the next 4 to 6 years working on the kind of pure mathematics research that would lead him to a tenured professorship . However, what I wanted to work on was the proposition that infinity does not exist. Constructivists, intuitionists, and ultrafinitists, going back to Brewer at the beginning of the 20th century, have argued in various ways that mathematical objects that cannot be explicitly constructed are not properly mathematical objects at all, and that infinity in particular may be a useful fiction rather than a mathematical reality.
Gundlock proposed to write his dissertation on a probabilistic version of this argument. His advisor felt that the issue was outside the department's main interests . The advisor told Gundlock to choose a different topic . Gundlock refused. He left the program. The episode is, in retrospect, the first example in his life of a pattern that would define everything that came after.
When the institutional consensus disagreed with him, he left the institution. Gundlak moved to Los Angeles in 1983 with a Dartmouth bandmate named Bev A. The two rented a cheap apartment and spent the next few months trying to make it as glam rock musicians. Gundlock was the drummer. He played bass.
They formed a band called Radical Flat, a deliberate play on words with their math background, and performed in small Los Angeles clubs without much commercial success. He would later say in interviews that Gundlock was a really talented drummer with the kind of timing and rhythmic precision that suggested he could have carved out a real career in the music business if he had wanted to.
I didn't really feel like it . In the fall of 1984, the band's prospects were going nowhere. His savings had run out and he was eating ramen noodles in a one-bedroom apartment in Hollywood. The conversion occurred, according to his own account, while he was watching television one night in late 1984.
The Lifestyles of the Rich and Famous episode that Robin Leech was presenting that night included a segment that ranked professions according to income. The investment banker topped the list. Gundlock, who had spent his life optimizing to obtain the highest academic ranking available, decided that night that he would optimize to obtain the highest financial ranking available.
The next morning, he went to the Los Angeles Yellow Pages , looked up all the investment firms with offices in the city, and counted 23. He typed 23 resumes on a borrowed typewriter. Each one was accompanied by a one-page cover letter that, by their own later description , was deliberately aggressive, demanding an interview rather than asking for one.
22 of the 23 companies did not respond. The 23rd spot went to Trust Company of the West, an $ 8 billion Los Angeles-based asset manager. The interviewing partner gave Gundlock a series of mathematical problems about bonds on a whiteboard. Gundlock, who had never studied bonds in his life, solved them by reasoning from basic principles.
He fared better than any of the candidates the company had previously interviewed. He was hired as a junior portfolio analyst in 1985. To prepare for the job, he bought a copy of Sydney Homer and Martin Lieowitz's seminal 1972 text on bond mathematics, Inside the Yield Book, and read it cover to cover three times in his first month.
After his first 6 months at TCW, the firm's partners entrusted him with the management of a $500 million fund. At the end of his first three years, he was the firm's chief manager of mortgage-backed securities . In 1990, at the age of 31, he was earning one million a year. Over the next 20 years, he would turn TCW's fixed-income division from a modest niche operation into a $100 billion powerhouse.
The operation that defined Gundlock's reputation was his public statement in June 2007 that the U.S. subprime mortgage market was, in his words, a total and utter disaster that was only going to get worse. The statement was made at a conference for institutional investors. At that time, this was a minority opinion.
The SNP 500 would not reach its peak until October of that year. Federal Reserve Chairman Ben Bernani testified before Congress in May 2007 that the subprime problem would be contained. By then, Gundlock had been studying mortgage-backed securities for more than 20 years . His specialty in fixed income was non- agency mortgage-backed securities, mortgage-backed bonds that did not carry the implicit federal guarantee of Fanny May or Freddy Mack.
He understood in detail that very few portfolio managers in the world understood the underwriting rules that had been used during the mortgage origination boom from 2004 to 2007. By June 2007, when he made his public statement, he had already substantially reduced TCW's total returns exposure to risky segments and had moved to agency-backed securities.
The operation unfolded over the next two and a half years exactly as Gundlock had predicted. Subprime mortgages plummeted. Layman Brothers went bankrupt . In March 2009, when the SNP 500 bottomed out at 676, the market for residential mortgage-backed securities had lost a huge portion of its value. Gunlock's fund, which had largely avoided carnage, was called into question.
He bought non-agency securities at fire-sale prices during the spring and summer of 2009. The fund earned an approximate return of 19.5% in 2009, with most of those gains occurring before his dismissal in December. This was the record for which TCW fired him. The dismissal has become, in retrospect, one of the most studied and least defensible dismissals in the history of asset management.
Mechanics has entered into the folklore of Wall Street. On the morning of December 4, 2009, TCW's chief legal advisor met with Gundlock in a conference room and handed him a folder containing the allegations. They told him he would be fired immediately. He was told to leave the building under escort.
The escort followed him up the 17 flights of stairs that led from the law firm's offices to the lobby. Gundlock later said that he found the follow-up flight more amusing than humiliating. I had already decided during the elevator ride that I would build something better than TCW within 5 years. The day after the firing, 14 senior members of Gundlock's team at TCW met at his home in Santa Monica.
Using their TCW Blackberry phones, they drafted simultaneous resignation emails and sent them to the TCW executive committee. The emails had an immediate effect. Within 24 hours, TCW had lost its head of fixed income, his deputy, Philip Barack, all of the firm's senior mortgage-backed portfolio managers, all of the firm's senior mortgage-backed traders, all of the firm's structured credit analysts, and the team's intern.
On December 14, 10 days after the dismissal, Gundlock announced the creation of Doublelined Capital. The company was named after a painting by Piet Mandrean from his personal collection. Oak Tree Capital Management, owned by Howard Marx , which Markx himself had founded after leaving TCW in 1995, agreed to invest $20 million for a 20% stake.
By the end of January 2010, Double Line had raised $1 billion in commitments from former TCW customers who simply moved their assets across the street. The growth from there was extraordinary. 45 employees and $1 billion in assets at the end of January 2010 grew to $50 billion in 2013, $100 billion in 2016, and a peak of approximately $150 billion in 2018.
Gunlock himself appeared on the cover of Barons in 2011 with the headline "the bond king." In 2014, when Bill Gross left PIMCO, the financial press had completed the succession. Bill Gross was the former king of bonds. Jeffrey Gundlock was the new guy. What does Jeffrey Gundlock teach a traitor sitting in front of a screen today?
Four lessons in order of depth. The most important lesson is math. Understand the underlying instrument better than anyone else in the room. Gundlock's advantage in mortgage-backed securities did not come from macro vision, timing, or charisma. It emerged from 20 years of obsessive technical study of how mortgage securitizations were structured, how cash flows were divided between the trenches, how prepayment behavior interacted with interest rates, and how credit losses propagated through the cascades.
He read the returns book three times in his first month. He spent 20 years building structural models of every major non-agency deal he could get. The retail operator analogy is simple. Choose the instrument you actually trade and understand it more deeply than the average participant in that market.
The most profound lesson is institutional. The institutions that built you up can also destroy you, and you have to be willing to leave. Gundlock's key decision was not the subprime bet. It was the willingness to twice distance oneself from an institutional consensus that one believed was wrong. First at Yale in 1983, when his thesis was rejected, and again at TCW in 2009, when being fired forced him to do it.
On both occasions he discovered that what appeared to be the loss of an institutional platform was actually the release from a limitation. The most profound lesson is still intellectual. Take your own opposing view seriously, especially when it is unpopular. Gundlock's subprime prediction in June 2007 was no accident.
It was the conclusion of two decades of rigorous mortgage securitization analysis applied to a question that almost no other major portfolio manager was carefully asking. He was opposed because the data, when applied correctly, gave him a different answer than the consensus. The trader who copies it by reflexively betting against the consensus on every issue will lose money.
The traitor who follows the real lesson takes his own analysis seriously, especially when he disagrees with the consensus, and honestly asks himself whether the disagreement is based on superior analytical work or mere stubbornness. The most profound lesson is reputational. Your most valuable asset is your track record, and the only thing that protects it is the willingness to be honest about your mistakes.
Gundlock has been more publicly visible than almost any other bond manager of his generation. In return, he has been more honest than most of his colleagues about decisions that went wrong, including in his quarterly Doubleline Investor webcasts, where he reviews his past predictions in detail. Transparency is, in the long run, the source of its continued credibility .
The retail trader operates on the same principle but on a smaller scale. The record of operations, the journal, the honest review of the trades that worked and those that didn't, is what accumulates over the years until it becomes a real advantage that other traders can recognize. The temptation to remember only the gains is universal.
The discipline of remembering losses and learning from them in writing is uncommon. That was Jeffrey Gundlock. This was episode 45 of The Greatest Traders. I am your host.
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