Liar's Poker

by Michael Lewis

  Another stress-inducing trick was the silent treatment. You’d walk into the interview chamber. The man in the chair would say nothing. You’d say hello. He’d stare. You’d say that you’d come for a job interview. He’d stare some more. You’d make a stupid joke. He’d stare ana snajce nis nead. You were on tenterhooks. Then he’d pick up a newspaper (or, worse, your resume) and begin to read. He was testing your ability to take control of a meeting. In this case, presumably, it was acceptable to throw a chair through a window.

  I want to be an investment banker. Lehman Brothers is the best. I want to be rich. On the appointed day, at the appointed hour, I rubbed two sweaty palms together outside the interview chamber and tried to think only pure thoughts (half-truths), such as these. I did a quick equipment check, like an astronaut preparing for lift-off. My strengths: I was an overachiever, a team player, and a people person, whatever that meant. My weaknesses: I worked too hard and tended to move too fast for the organizations I joined.

  My name was called. Lehman interviewed in pairs. I wasn’t sure I stood much of a chance against one of these people, much less two.

  Good news. Lehman had sent to Princeton one man and one woman. I didn’t know the man. But the woman was a Princeton graduate, an old friend I hadn’t expected to see. Perhaps I would survive.

  Bad news. As I walked into the cubicle, she didn’t smile or otherwise indicate that she knew me. She later told me that such behavior is unprofessional. We shook hands, and she was about as chummy as a boxer before a fight. She then retired to her corner of the room, as if waiting for the bell to ring. She sat silently in her blue suit and little bow tie. Her accomplice, a square-shouldered young man of perhaps twenty-two, held a copy of my resume.

  Between the two of them they had two years of investment banking experience. The greatest absurdity of the college investment banking interview was the people the investment banks sent to conduct them. Many of them hadn’t worked on Wall Street for more than a year, but they had acquired Wall Street personas. One of their favorite words was professional. Sitting stiffly, shaking firmly, speaking crisply, and sipping a glass of ice water were professional. Laughing and scratching your armpits were not. My friend and her accomplice were exhibit number one in the case against becoming a professional. One year on Wall Street and they had been transmogrified. Seven months earlier my friend could be seen on campus wearing blue jeans and a T-shirt that said dumb things. She drank more beer than was healthy for her. She had been, in other words, a fairly typical student. Now she was a bit player in my Orwellian nightmare.

  The young man took the seat behind the cold metal desk and began to fire questions at me. Perhaps the best way to describe our encounter is to recount, as best as memory will allow, what passed for our conversation:

  SQUARE YOUNG MAN: Why don’t you explain to me the difference between commercial banking and investment banking?

  ME (making my first mistake by neglecting to seize the chance to praise investment bankers and heap ridicule on the short work hours and Lilliputian ambition of commercial bankers): Investment bankers underwrite securities. You know, stocks and bonds. Commercial bankers just make loans.

  SQUARE YOUNG MAN: I see you majored in art history. Why? Aren’t you worried about getting a job?

  ME (clinging to the party line of the Princeton art history department): Well, art history interested me most, and the department here is superb. Since Princeton doesn’t offer any vocational training, I don’t believe that my choice of concentration will make much difference in finding a job.

  SQUARE YOUNG MAN: Do you know the size of U.S. GNP?

  ME: I’m not sure. Isn’t it about five hundred billion dollars?

  SQUARE YOUNG MAN (casts a meaningful glance at the woman who I thought was my friend): More like three trillion. You know we interview hundreds of people for each position. You’re up against a lot of economics majors who know their stuff. Why do you want to be an investment banker?

  ME (obviously, the honest answer was that I didn’t know. That was unacceptable. After a waffle or two, I gave him what I figured he wanted to hear): Well, really, when you get right down to it, I want to make money.

  SQUARE YOUNG MAN: That’s not a good reason. You work long hours in this job, and you have to be motivated by more than just money. It’s true, our compensation is in line with our contribution. But frankly, we try to discourage people from our business who are too interested in money. That’s all.

  That’s all? The words ring in my ears. Before I could stop it from happening, I was standing outside the cubicle in a cold sweat listening to the next candidate being grilled. Never for a moment did I doubt the acceptability to an investment banker of a professed love of money. I had thought that investment bankers made money for a living, the way Ford made cars. Even if analysts were not paid as well as the older investment bankers, I had thought they were meant to be at least a tiny bit greedy. Why did the square young man from Lehman take offense at the suggestion? A friend who eventually won a job with Lehman Brothers later explained. “It’s taboo,” he said. “When they ask you why you want to be an investment banker, you’re supposed to talk about the challenges, and the thrill of doing deals, and the excitement of working with such high-caliber people, but never, ever mention money.”

  Learning a new lie was easy. Believing it was another matter. From then on, whenever an investment banker asked for my motives, I dutifully handed him the correct answers: the challenge; the people; the thrill of the deal. It was several years before I convinced myself that this one was remotely plausible (I think I even fed some variant of it to the Salomon Brothers managing director’s wife). That money wasn’t the binding force was, of course, complete and utter bullshit. But inside the Princeton University career services office in 1982 you didn’t let the truth get in the way of a job. I flattered the bankers. At the same time I seethed at their hypocrisy. I mean, did anyone, even in those innocent days, doubt the importance of money on Wall Street other than people from Wall Street when talking to people from elsewhere?

  Seething was soothing. I needed soothing, since when I graduated from Princeton, I had no job (Salomon had rejected me sight unseen). In the following year, while running through three different jobs, I managed to demonstrate that I was as unemployable as the bankers had found me. I didn’t ever doubt I got what I deserved. I just didn’t like the way I had gotten it. I did not learn much from my stack of Wall Street rejection letters except that investment bankers were not in the market for either honesty or my services (not that the two were otherwise related). Set questions were posed to which set answers were expected. A successful undergraduate investment banking interview sounded like a monastic chant. An unsuccessful interview sounded like a bad accident. My Lehman interview was representative not just of my own experience but of thousands of interviews conducted by a dozen investment banks on several dozen college campuses from about 1981 onward.

  Still, the tale has a happy ending. Lehman Brothers eventually went belly up. A battle between the traders and the corporate financiers caused the firm to collapse in early 1984. The traders won, but what was left of the august house of Lehman wasn’t worth living in. The senior partners were forced to go hat in hand to Wall Street rival Shearson, which bought them out. The name of Lehman Brothers was forever cleared from the business cards of Wall Street. When I read the news in The New York Times I thought, Good riddance, which I admit wasn’t a deeply Christian response. Whether Lehman’s misfortune was directly related to its unwillingness to admit it was out to make money, I do not know.

  Chapter Three

  Learning to Love your Corporate Culture

  He who makes a beast of himself gets rid of the pain of being a man.

  —Samuel Johnson

  I REMEMBER almost exactly how I felt and what I saw my first day at Salomon Brothers. There was a cold shiver doing laps around my body, which, softened and coddled by the regime of a professional student, was imagining it was still a
sleep. With reason. I wasn’t due at work until 7:00 A.M., but I rose early to walk around Wall Street before going to the office. I had never seen the place before. There was a river at one end and a graveyard at the other. In between was vintage Manhattan: a deep, narrow canyon in which yellow cabs smacked into raised sewer lids, potholes, and garbage. Armies of worried men in suits stormed off the Lexington Avenue subway line and marched down the crooked pavements. For rich people, they didn’t look very happy. They seemed serious, at least compared with how I felt. I had only a few jitters that accompany any new beginning. Oddly enough, I didn’t really imagine I was going to work, more as if I were going to collect lottery winnings.

  Salomon Brothers had written me in London to announce that it would pay me an M.B.A.‘s wage—though I had no M.B.A.—of forty-two thousand dollars plus a bonus after the first six months of six thousand more. At that time I hadn’t had the education required to feel poor on forty-eight thousand dollars (then equivalent to forty-five thousand British pounds) a year. Receiving the news in England, the land of limp paychecks, accentuated the generosity of Salomon’s purse. A chaired professor of the London School of Economics, who took a keen interest in material affairs, stared at me bug-eyed and gurgled when he heard what I was to be paid. It was twice what he earned. He was in his mid-forties and at the top of his profession. I was twenty-four years old and at the bottom of mine. There was no justice in the world, and thank goodness for that.

  Perhaps it is worth explaining where this money was coming from, not that I gave it much thought at the time. Man for man Salomon Brothers was, in 1985, the world’s most profitable corporation. At least that is what I was repeatedly told. I never bothered to check it because it seemed so obviously true. Wall Street was hot. And we were Wall Street’s most profitable firm.

  Wall Street traffics in stocks and bonds. At the end of the 1970s, and the beginning of both superindulgent American politics and modern financial history, Salomon Brothers knew more about bonds than any firm on Wall Street: how to value them, how to trade them, and how to sell them. The sole chink in its complete dominance of the bond markets in 1979 was in junk bonds, which we shall return to later and which were the specialty of another firm, similar to us in many ways: Drexel Bumham. But in the late 1970s and early 1980s, junk bonds were such a tiny fraction of the market that Salomon effectively dominated the entire bond market. The rest of Wall Street had been content to let Salomon Brothers be the best bond traders because the occupation was neither terribly profitable nor prestigious. What was profitable was raising capital (equity) for corporations. What was prestigious was knowing lots of corporate CEOs. Salomon was a social and financial outlier.

  That, anyway, is what I was told. It was hard to prove any of it because the only evidence was oral. But consider the kickoff chuckle to a speech given to the Wharton School in March 1977 by Sidney Homer of Salomon Brothers, the leading bond analyst on Wall Street from the mid-1940s right through to the late 1970s. “I felt frustrated,” said Homer about his job. “At cocktail parties lovely ladies would corner me and ask my opinion of the market, but alas, when they learned I was a bond man, they would quietly drift away.”

  Or consider the very lack of evidence itself. There are 287 books about bonds in the New York Public Library, and most of them are about chemistry. The ones that aren’t contain lots of ugly numbers and bear titles such as All Quiet on the Bond Front, and Low-Risk Strategies for the Investor. In other words, they aren’t the sort of page turners that moisten your palms and glue you to your seat. People who believe themselves of social consequence tend to leave more of a paper trail, in the form of memoirs and anecdotiana. But while there are dozens of anecdotes and several memoirs from the stock markets, the bond markets are officially silent. Bond people pose the same problem to a cultural anthropologist as a nonliterate tribe deep in the Amazon.

  In part this is due to the absence from the bond market of the educated classes, which in turn reinforces the point about how unfashionable bonds once were. In 1968, the last time a degree count was taken at Salomon Brothers, thirteen of the twenty-eight partners hadn’t been to college, and one hadn’t graduated from the eighth grade. John Gutfreund was, in this crowd, an intellectual; though he was rejected by Harvard, he did finally graduate (without distinction) from Oberlin.

  The biggest myth about bond traders, and therefore the greatest misunderstanding about the unprecedented prosperity on Wall Street in the 1980s, are that they make their money by taking large risks. A few do. And all traders take small risks. But most traders act simply as toll takers. The source of their fortune has been nicely summarized by Kurt Vonnegut (who, oddly, was describing lawyers): “There is a magic moment, during which a man has surrendered a treasure, and daring which the man who is about to receive it has not yet done so. An alert lawyer [read bond trader] will make that moment his own, possessing the treasure for a magic microsecond, taking a little of it, passing it on.”

  In other words, Salomon carved a tiny fraction out of each financial transaction. This adds up. The Salomon salesman sells $50 million worth of new IBM bonds to pension fund X. The Salomon trader, who provides the salesman with the bonds, takes for himself an eighth (of a percentage point), or $62,500. He may, if he wishes, take more. In the bond market, unlike in the stock market, commissions are not openly stated.

  Now the fun begins. Once the trader knows the location of the IBM bonds and the temperament of their owner, he doesn’t have to be outstandingly clever to make the bonds (the treasure) move again. He can generate his own magic microseconds. He can, for example, pressure one of his salesmen to persuade insurance company Y that the IBM bonds are worth more than pension fund X paid for them initially. Whether it is true is irrelevant. The trader buys the bonds from X and sells them to Y and takes out another eighth, and the pension fund is happy to make a small profit in such a short time.

  In this process, it helps if neither of the parties on either side of the middleman knows the value of the treasure. The men on the trading floor may not have been to school, but they have Ph.D.‘s in man’s ignorance. In any market, as in any poker game, there is a fool. The astute investor Warren Buffett is fond of saying that any player unaware of the fool in the market probably is the fool in the market. In 1980, when the bond market emerged from a long dormancy, many investors and even Wall Street banks did not have a clue who was the fool in the new game. Salomon bond traders knew about fools because that was their job. Knowing about markets is knowing about other people’s weaknesses. And a fool, they would say, was a person who was willing to sell a bond for less or buy a bond for more than it was worth. A bond was worth only as much as the person who valued it properly was willing to pay. And Salomon, to complete the circle, was the firm that valued the bonds properly.

  But none of this explains why Salomon Brothers was particularly profitable in the 1980s. Making profits on Wall Street is a bit like eating the stuffing from a turkey. Some higher authority must first put the stuffing into the turkey. The turkey was stuffed more generously in the 1980s than ever before. And Salomon Brothers, because of its expertise, had second and third helpings before other firms even knew that supper was on.

  One of the benevolent hands doing the stuffing belonged to the Federal Reserve. That is ironic, since no one disapproved of the excesses of Wall Street in the 1980s so much as the chairman of the Fed, Paul Volcker. At a rare Saturday press conference, on October 6, 1979, Volcker announced that the money supply would cease to fluctuate with the business cycle; money supply would be fixed, and interest rates would float. The event, I think, marks the beginning of the golden age of the bond man. Had Volcker never pushed through his radical charge in policy, the world would be many bond traders and one memoir the poorer. For in practice, the shift in the focus of monetary policy meant that interest rates would swing wildly. Bond prices move inversely, lockstep, to rates of interest. Allowing interest rates to swing wildly meant allowing bond prices to swing wildly. Before Vol
cker’s speech, bonds had been conservative investments, into which investors put their savings when they didn’t fancy a gamble in the stock market. After Volcker’s speech, bonds became objects of speculation, a means of creating wealth rather than merely storing it. Overnight the bond market was transformed from a backwater into a casino. Turnover boomer at Salomon. Many more people were hired to handle the new business, on starting salaries of forty-eight grand.

  Once Volcker had set interest rates free, the other hand stuffing the turkey went to work: America’s borrowers. American governments, consumers, and corporations borrowed money at a faster clip during the 1980s than ever before; this meant the volume of bonds exploded (another way to look at this is that investors were lending money more freely than ever before). The combined indebtedness of the three groups in 1977 was $323 billion, much of which wasn’t bonds but loans made by commercial banks. By 1985 the three groups had borrowed $7 trillion. What is more, thanks to financial entrepreneurs at places like Salomon and the shakiness of commercial banks, a much greater percentage of the debt was cast in the form of bonds than before.

  So not only were bond prices more volatile, but the number of bonds to trade increased. Nothing changed within Salomon Brothers that made the traders more able. Now, however, trades exploded in both size and frequency. A Salomon salesman who had in the past moved five million dollars’ worth of merchandise through the traders’ books each week was now moving three hundred million dollars through each day. He, the trader, and the firm began to get rich. And they decided for reasons best known to themselves to invest some of their winnings in buying people like me.