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Chapter 14. Betting the Bank > Joseph Jett and Kidder Peabody

Joseph Jett and Kidder Peabody

Joseph Jett's career in the finance industry was less than stellar. After being let go by Morgan Stanley and then First Boston, he was given another chance at Kidder, Peabody & Co. At the time, Kidder was a well-regarded investment bank with a 126-year history. Its reputation was so good that squeaky-clean General Electric had purchased it in 1986. Jett's limited trading experience was in mortgage-backed securities, but in 1991, Kidder placed him in the government bond group to trade strips.

A government strip is a Wall Street creation that creates many zero coupon bonds from government treasury bonds. Zero coupon bonds are bonds that have no interest payment. A regular bond would pay the $1,000 face value of the bond at maturity. In the meantime, the bond pays interest payments every six months. The zero coupon bond's only payment is the one principal payment at maturity. Many fixed-income investors like the zero coupon bond. Originally, only corporations issued them. However, investors wanted a zero that had no default risk. Since the U.S. government did issue zeros, investment banks filled the niche by buying large quantities of U.S. Treasury bonds and stripping the payment off. Each payment is sold individually to create a zero coupon bond whose payment originates from the government. These are known as government strips, or more colorfully, as strip-Ts.


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