Liar's Poker

by Michael Lewis

  After telling us nothing much, but showing us what a world-class financial celebrity looked like up close, he left. And that was the end of our exposure to the management of Salomon Brothers.

  I assumed the strange behavior of our managers was simply a response to having had a pile of loot dropped into their laps. They were still enjoying the turkey stuffed by Paul Volcker and America’s borrowing spree. There they were, modest men, living off other people’s scraps, when all of a sudden the big fat stuffed bird was handed to them.

  They were doing nothing more than what they had always done, yet overnight glory was thrust upon them. Their incomes had changed, and with it their lives. Imagine.

  If you are a self-possessed man with a healthy sense of detachment from your bank account and someone writes you a check for tens of millions of dollars, you probably behave as if you have won a sweepstakes, kicking your feet in the air and laughing yourself to sleep at night at the miracle of your good fortune. But if your sense of self-worth is morbidly wrapped up in your financial success, you probably believe you deserve everything you get. You take it as a reflection of something grand inside you. You acquire gravitas and project it like a cologne whenever you discuss the singular and laudable Salomon Brothers culture.

  Almost everyone on Wall Street took his money seriously, regardless of its origins, and our bosses were no exception. But a few of the old hands within Salomon Brothers suffered a more complicated response to their money. Not that they ever doubted they were worth every penny they got. But they were uneasy with the explosion of debt in America. (In general, the better they recalled the Great Depression, the more suspicious they were of the leveraging of America.) The head of bond research at Salomon, Henry Kaufman, was, when I arrived, our most acute case of cognitive dissonance. He was the guru of the bond market and also the conscience of our firm. He told investors whether their fast-moving bonds were going up or down. He was so often right that the markets made him famous if not throughout the English-speaking world then at least among the sort of people who read the Wall Street Journal. Yet Kaufman was known as Dr. Gloom. The party had been thrown in his honor, but he seemed to want it to end. As he wrote in the Institutional Investor of July 1987:

  One of the most remarkable things that happened in the 1980’s was [the] sharp explosion in debt, way beyond any historical benchmark. It was way beyond anything you would have expected relative to GNP, relative to monetary expansion that was taking place. But it came about, I think, as a result of freeing the financial system, putting into being financial entrepreneurship and not putting into being adequate disciplines and safeguards. So that’s where we are.

  That is where we are: wild, reckless, and deeply in hock. We at Salomon Brothers were among the leading financial entrepreneurs. What Kaufman was saying is that we had helped create the problem.

  While most of America imagined that Wall Street meant the stock market, our bond market was setting the tone and the pace on Wall Street in the 1980s. Salomon Brothers was at the crossroads of change, gorging itself on the windfall from being at the right place at the right time, priding itself, justifiably, on its superior bond-trading skills. But all the time wearing a blindfold. It lacked an accurate vision of where this explosion in the bond market would lead. There was no shortage of opinions on what to do with the windfall gains. A trader always has a view. But the opinions were both arbitrary and self-indulgent. And Salomon Brothers, from 1980 onward, took what must be one of the most expensive and fanciful commercial rides in the history of the American corporation. For most of that ride it patted itself on the back.

  With nearly eight weeks of education behind us the faces of speakers were beginning to blend together. Yet another trader with a Brooklyn accent and a hacking cough plunked down in front and lectured between drags on a cancer stick. Still, something distinguished him from other speakers. Exactly what it was eluded me at first. Then I realized: wrinkles. This man was old. His attitude toward his job was, by our standards, sentimental. He released his epigrams like pet doves: “When I’m trading, you see, I don’t stop to pat myself on the back. Because when I pat myself on the back, the next sensation is usually a sharp kick lower down. And it isn’t so pleasant.” When asked the key to his success, he said, “In the land of the blind the one-eyed man is king.” Best of all, he gave us a rule of thumb about information in the markets that I later found useful: “Those who say don’t know, and those who know don’t say.”

  He was speaking of the stock market. He belonged to the dreaded equity department, the sleepy backwater in which lurked such career stoppers as Equities in Dallas. The cheapest way to avoid being airmailed to Dallas to peddle stocks was never to meet anyone in the equity department. It first had to pick you out of a lineup before it could employ you. We sank low in our seats during the week that the people from the equity department spoke. We assumed we’d never have to see them again once they had left the training program. That is not to say they were inept—Salomon Brothers was the leading underwriter of new-stock issues on Wall Street and one of the two or three top equity traders—but inside Salomon Brothers the men from equities were second-class citizens. Equities, comparatively speaking, made no money.

  The equity department wasn’t on 41, the principal trading floor, but on the floor below. The fortieth floor had low ceilings, no windows, and the charm of an engine room. Besides the equity traders, it warehoused a large number of Salomon bond salesmen (only Big Swinging Dick salesmen were allowed on 41). The sound of 40, as perpetual as crickets in the woods at night, was the atonal strain of stocks and bonds being sold: the pleading tone in a hundred voices and the rustling of facts being repackaged to look better than when they arrived. Through a loudspeaker, known as the hoot and holler, a man on 41 hooted and hollered at the salesmen on 40 to sell more bonds. I once walked through when the firm was attempting to sell the bonds of the drugstore chain Revco (which later went bankrupt and defaulted on those very bonds). The voice boomed out of the box: “C’mon, people, we’re not selling truth!” Life on the fortieth floor was grim.

  The fortieth floor was more remote from the all-powerful forty-first than mere geography can suggest. A separate bank of elevators serviced 40. People conversed all day between 40 and 41 yet never laid eyes on each other. Communications systems were sufficiently advanced, and human relations sufficiently primitive, that a salesman in Dallas felt just as close to the forty-first floor as did a salesman on the fortieth floor. The salesman in Dallas was in some ways closer to Power Central. At least when he paid homage on 41, because he had come from a distance, the managing directors said hello to him.

  The equity department was an object lesson in life’s reversals. The stock market had once been Wall Street’s greatest source of revenues. Commissions were fat, fixed, and nonnegotiable. Each time a share changed hands, some broker somewhere took out a handsome fee for himself, without necessarily doing much work. A broker was paid twice as much for executing a two-hundred-share order as for a one-hundred-share order, even though the amount of work in either case was the same. The end of fixed stock brokerage commissions had come on May 1, 1975—called Mayday by stockbrokers—after which, predictably, commissions collapsed. Investors switched to whichever stockbroker charged them the least. As a result, in 1976, revenues across Wall Street fell by some six hundred million dollars. The dependable money machine broke down.

  Then, to add insult to penury, the bond market exploded. With the rise of the bond markets, the equity salesmen and traders had been reduced by comparison to small-time toll takers. They made a bit of money and had a few laughs, but not nearly so many as the bond men. No equity trader, for example, would dream of playing Liar’s Poker for a million bucks. Where would he get the money?

  We trainees weren’t into being poor. This presented the equity desk people with the problem of how to persuade us to join them. When they came through the training program, far from presenting their posteriors for our immediate attention, as did m
any of the bond men, the equity department speakers delivered one long uninterrupted sales pitch. Their speeches had a pitiful, pleading quality about them, exacerbating the problem. We trainees might have been slow in many ways. But we had a nose for fashion. And we knew that in general the quality of treatment we received in the training class varied inversely with the desirability of the job held by the speaker. In this there was a lesson: To get the best job, you had to weather the most abuse.

  For that matter, being a trainee wasn’t so different from being a customer. Just as the equity people had to flatter and indulge us, they had to flatter and indulge their customers to win business, because the equity market was brutally competitive. An investor could buy shares in IBM from Salomon, but he could equally well buy them from forty other stockbrokers. Bond people, on the other hand, could kick us and beat us trainees with impunity, as they could also, if they wanted, kick and beat their customers, because Salomon was nearly a monopolist in certain bond markets. From the way we were treated we were able to infer both the standards of behavior in every market and the degree of dominance Salomon enjoyed. Though perhaps not articulated by every trainee, the ultimate message was lost on no one: Join equities and kiss ass like Willy Loman; join bonds and kick ass like Rambo.

  Still, the people in the equity department seemed happy, though not until I spent some time with them did I began to fathom why. They felt less pressure than bond traders and bond salesmen. They had accepted their lot and, like the peasants in a Breughel pastoral scene, were content to celebrate the simple pleasures of life. A house on the Jersey shore rather than in the Hamptons. Skiing in Vermont rather than Zermatt. And, hard as it was for me to appreciate, the people in the equity department were having careers. They had seen bull markets, bear markets, and dull markets. As long as they had their beloved stock they seemed not to mind their relative penury. They desperately wanted to convey to us the soulfulness of their jobs. To this end, they distributed a book of poems, essays, and quotations at the outset of their training program module. It opened unfortunately, with the following passage written by an equity man, entitled “Memoirs of a Trader”:

  The market, he had learned, was like the sea, to be respected and feared. You sail on its smooth surface on a placid mid-summer day; you were borne along by a favoring breeze; took a pleasant swim in its waters, and basked in the rays of the sun. Or you lolled in the quiet currents and dozed. A cold gust of wind brought you to, sharply—clouds gathered, the sun had gone—there were flashes of lightning and peals of thunder; the ocean was whipped into seething waves; your fragile craft was tossed about by heavy seas that broke over its sides. Half the crew was swept overboard… you were washed upon the shore… naked and exhausted you sank upon the beach, thankful for life itself…

  The equity department weathered not only rough seas but rejection as well. It hurt to watch. Each day the MC of the equity module, Laszlo Birinyi, made a valiant and often brilliant pitch to sway us. Yet each day he failed. The gist of Laszlo’s pitch for the equity department was this question: When you turn on your television at six-thirty and Dan Rather tells you that today the market went up twenty-four points, what market do you think he means? “What!” Laszlo would say. “You think he’s talking about Grade A industrial bonds? Ha! He’s talking about the stock market.” In other words, if you joined the equity department, your mother would know what you did for a living.

  Laszlo also stressed the stock market’s long history and culture. Everyone from Will Rogers to John Kenneth Galbraith had held forth on the stock market. In joining equities, we could be a part of something far larger than ourselves. I’m not sure we could conceive of anything much larger than ourselves. And even if we had, it would not have been the stock market. As a result, this particular appeal by Laszlo never worked. We were unmoved by history and culture, and anyway the wise men invariably made the stock market seem an unappealing place to work. Their scribblings were as smarmy as “Memoirs of a Trader,” as in the case of this quotation from someone named Walter Gutman: “There is nothing like the ticker tape except a woman—nothing that promises, hour after hour, day after day, such sudden developments; nothing that disappoints so often or that occasionally fulfills with such unbelievable, passionate magnificence.” To which male trainees, who recalled only their sexual conquests, rolled their eyes into the backs of their heads and blushed. Who knows what the female trainees thought?

  Deep down, however, the stock market people didn’t care much for book learning or school or anything except raw experience. Quotes from stock market legend Benjamin Graham were wheeled in to defend their position: “In the stock market the more elaborate and abstruse the mathematics the more uncertain and speculative the conclusion we draw therefrom… Whenever calculus is brought in, or higher algebra, you could take it as a warning signal that the operator was trying to substitute theory for experience.”

  This sounded ridiculous to the eighty M.B.A.‘s and fifteen Ph.D.‘s in the training class. What was the point of owning a bazooka if the law made you hunt with a bow and arrow? The equity department seemed desperately backward. It was aware its pitch was badly off key. So it stopped singing one day and arranged for one of its Bright Young Men to speak to us. He was its shiny new toy. It was his job to dazzle us with his brilliance, blind us with his science. He worked in the newest and hottest area in the department—program trading (which has since been blamed for the October 1987 stock market crash). He lectured on his specialty. Then he opened the floor to questions. An M.B.A. from Chicago named Franky Simon moved in for the kill.

  “When you trade equity options,” asked my friend Franky, “do you hedge your gamma and theta or just your delta? And if you don’t hedge your gamma and theta, why not?”

  The equity options specialist nodded for about ten seconds. I’m not sure he even understood the words. We trainees were equally oblivious (it was an obnoxious question), but we felt that any self-respecting options trader should avoid being stumped by a trainee. The options trader lamely tried to laugh himself out of his hole. “You know,” he said, “I don’t know the answer. That’s probably why I don’t have trouble trading. I’ll find out and come back tomorrow. I ‘m not really up on options theory.”

  “That,” said Franky, “is why you are in equities.”

  That faced him completely. The young would-be stud from equities had no response. He just curled up in a little ball and writhed in pain. How humiliating! Faced by a trainee.

  Eventually it became uncool to be seen in the equity department. Imagine our horror, then, when the equity department began a trainee outreach program. Biryini insisted on dining with each of us, and all of a sudden we all were candidates for Equities in Dallas. People panicked. Many tried to make themselves deeply undesirable. A few were experts in the field. Still, they could run, but they could no longer hide. No one was safe. Rumors spread of a short list being created by the equity department, of trainees in whom it was “interested.” Then we received a crushing piece of news. The equity department was planning a boat trip to become further acquainted with the trainees on its short list.

  Could it be true? It was. Six trainees had been targeted by Biryini, though which six my source did not know. That became clear when the invitations arrived. Four of the six went to back-row people. So there was rough justice in the world. One went to Myron Samuels, who could afford to laugh about it because the municipal bond department had already promised to save him. The sixth came to me.

  I was as helpless as the female victim of an arranged marriage who, upon first seeing the horrible visage of her chosen mate, shrieks in vain. I had only so much say in my future at Salomon Brothers. My influence could be only weak and indirect, using managing directors as my mouthpiece. The way out of this developing snare was to play frigid with the equity department and, at the same time, encourage a managing director from another department to pursue me. The risk was that I would offend the equity department, which would then try to have me fired.
True, it didn’t have a great deal of power. But firing me did not require a great deal of power.

  The boat floated off the southern tip of Manhattan. The men from equities tried to corner us and rhapsodize about their market. The trainees danced and weaved like boxers. Three minutes in the front of the boat, then to the back of the boat, then to the engine room, around and around we went, and the boat seemed to get smaller and smaller. An hour into the cruise and the boat seemed like a dinghy. Soon someone would begin to recite “Memoirs of a Trader” as the sea washed against the side of the Circle Line cruiser.

  Their mating ritual was brutally straightforward. Once they had cornered you on the boat, they poured a few whiskeys into you, waited until the moon rose over the canyons of Wall Street, and positioned the Circle Line in view of the Stock Exchange. Then a managing director put his arm around you and told you that you were an especially talented trainee, and wouldn’t you like to put that talent to work in a sure-to-be-successful career in equities. Think of the History! Think of the Culture! I thought instead of a good rule for survival on Wall Street: Never agree to anything proposed on someone else’s boat, or you’ll regret it in the morning. I was extraordinarily agile and found a way to avoid trouble. Myron Samuels described the morning following the boat ride as a “coyote morning.” After an ill-considered one-night stand you wake up and see for the first time the face of the woman you’ve slept with; your arm is pinned to the bed by her head, and rather than wake her, like an entrapped coyote, you chew off your arm and scram. By the cruel light of morning, the equity department indeed appeared once again to be pimply and gross.

  Still, the hunters pursued. We were invited to play in a softball game between the Salomon equity department and one of its largest clients. The managing director who the night before had whispered soothing words into my ear now didn’t even remember my name. He was too busy falling all over himself to please his customers to worry about anything else. It was apparent that we, the team from Salomon, were not supposed to win. Also, we were to laugh whenever the other team made a joke, however awful. I muffed a few grounders at shortstop for the cause and chuckled like a fool—such humorous fellows were our customers!—but knew I had done the right thing the night before by locking myself in the bathroom.