Liar's Poker

by Michael Lewis

  And now he was about to tell us what we wanted to know. “So you want to know how to deal with those assholes, don’t you?” he said. Trainees sort of nodded their heads. O’Grady said he had discovered the secret earlier than most. When he was just starting out, he said, he had an experience that taught him a lesson.

  He had been a flunky for a senior bond salesman named Penn King, a tall blond Big Swinging Dick if ever there was one. One day King told him to find prices on four bonds for a very large customer, Morgan Guaranty. O’Grady therefore asked the relevant trader for prices. When the trader saw him, however, he said, “What the fuck do you want?”

  “Just a few prices,” said O’Grady.

  “I’m busy,” said the trader. Oh, well, thought O’Grady, I’ll see if I can find the prices on the Quotron machine.

  As O’Grady fiddled with the keyboard of the Quotron—it resembles a personal computer—Penn King demanded the prices for his customer. “I told you to get the prices, goddammit,” he said. So O’Grady race-walked back to ask the trader again. “Fuck it,” said the trader, “here, read it off the sheets,” and handed O’Grady a sheet listing bond prices. O’Grady returned to his desk only to find that while there were plenty of prices on the sheet, they weren’t the prices he needed.

  “Where are the goddamn prices?” asked Penn.

  O’Grady explained what had transpired between himself and the trader to that point.

  “Then this is what you do, you hear me,” said a completely pissed-off Penn King. “You go over to that asshole and you say, ‘Look, asshole, since you were so fucking helpful the first time I asked, maybe you could give me the goddamn prices for Morgan Guaranty.’”

  So O’Grady went back to the trader. He figured he could edit the request, you know, take out the part about the asshole and being fuckin’ helpful. He had his sanitized version in his mind.

  “Look, I’m really sorry to be such a pain in the neck,” he was planning to say, “but Morgan Guaranty is one of our biggest customers, and we need your help…”

  But when he reached the trader, the trader rose to his feet and screamed. “What the fuck are you doing back here? I told you: I… am… busy.”

  “Look, asshole,” said O’Grady, forgetting the sanitized version, “since you were so fucking helpful the first time I asked, maybe you would be so kind to give me the goddamn prices now.” The trader fell back in his chair. O’Grady was, conveniently, about twice the size of the trader. He stood over the trader and stared for about a minute. “Asshole,” he shouted again, for effect.

  All of a sudden the trader looked spooked. “Pennnnn!” he half screamed, half whined across the floor to O’Grady’s boss. “What the fuck is it with this guy?”

  Penn gave an innocent little shrug as if to say he didn’t have the faintest idea.

  O’Grady walked back to his seat, to a standing ovation from three or four other bond salesmen who had watched the scene develop and a big grin from Penn. Sure enough, not two minutes later, the trader came to him with the prices.

  “And after that,” said O’Grady to a spellbound training program, “he didn’t fuck with me again.”

  As you might imagine, this threw the back row into frenzied delight; it had them stomping on the floor like bleacher bums after a grand slam. It drove a lump into the throats of the front row. O’Grady was by training and disposition a refined and relaxed man. True, he had a rogue streak of Irish in him, but if anyone was going to sidestep the Neanderthal approach to life on 41, it would have been O’Grady. What was the moral of the story? Easy. There was no getting around having to knock someone down to win a seat on 41, even if you graduated Phi Beta Kappa from Amherst and the Harvard Law School, were a star athlete, and got laid a lot. What was the secret to dealing with the assholes? “Lift weights or learn karate,” said O’Grady.

  As if to confirm this impression, following on the heels of O’Grady came the mortgage trading department. With the possible exception of John Meriwether, the mortgage traders were the firm’s Biggest Swinging Dicks. The mortgage department was the most profitable area of the firm, and the place trainees most desperately wanted to work. It could afford to be nasty. It concluded the classroom stage of our training.

  The mortgage trading desks on 41 were between the elevators and the corner in which I had chosen to hide. I had selected my corner with care. It housed a friendly managing director and his small team of mostly nonviolent persons. This managing director had, in effect, promised to save me from Equities in Dallas. He also gave me temporary shelter. Each day as I leaped off the elevator onto 41 and sprinted head down for the cover of my MD, I had to decide whether to walk through the mortgage trading desks. And each day I decided I had better not. The mortgage traders emitted such evil vibes that I carved a wide loop around them every afternoon. Even then I felt uneasy. They were known for hurling phones at the heads of trainees and were said to have installed extra-long cords to increase their range. I later found out that they were just as likely to use the phone bombs on seasoned professionals and that people who had been with Salomon Brothers for years and had weathered every kind of abuse still refused to walk through the mortgage department. Every firm on Wall Street has its baddest dudes, and these were ours.

  In spite of my craven panic in the presence of mortgage traders I was curious about their business and their boss, Lewie Ranieri. All Salomon trainees were curious about Ranieri. Lewie Ranieri was the wild and woolly genius, the Salomon legend who began in the mailroom, worked his way onto the trading floor, and created a market in America (and was starting a similar one in Britain) for mortgage bonds. Ranieri was Salomon, and Salomon was Ranieri. He was constantly being held out as an example of all that was special about our firm. He was evidence that the trading floor was a meritocracy. At Salomon Brothers, because of what Ranieri had achieved, a great deal seemed possible that otherwise might have not. I had never seen the great man himself. But I had read about him. We had been told he would speak to us.

  He didn’t show. Instead he sent three senior mortgage traders to represent his department. The three of them together could have easily weighed nine hundred pounds. They stood together at the front of the room in formation, the one in the middle smoking the biggest cigar I’ve ever seen. Cheap, but large. He’s the one I remember.

  He didn’t say anything, just grunted and laughed when a trainee asked a question. Dozens of trainees wanted to trade mortgage bonds. So they asked plenty of questions, but they got no answers. When once a trainee asked something stupid, the man with the cigar gave the only response in English I recall. He said, “So, you wanna be a mortgage trader.” Then all three of the traders laughed together and sounded like a fleet of tugboats blowing their horns.

  The sad student had wanted to be a mortgage trader. So had thirty-five others. In the end, five were chosen. I was not, which was fine by me. I was shipped to London to become a bond salesman. In due course I shall return to my private education on the London trading floor. But here it is time to follow the story of the mortgage traders, for not only were they the soul of the firm, they were a microcosm of Wall Street in the 1980s. The mortgage market was one of two or three textbook cases that illustrated the change sweeping the world of finance. I followed our mortgage traders closely from my seat in London, mostly because I was intrigued that such awful-looking people could do so well for themselves. I was fascinated by Ranieri. For several years running he and his traders made more money than anyone on Wall Street. I didn’t like them one bit, but that was probably a point in their favor. Their presence was a sign of the health of the firm, just as mine was a sign of the illness. If the mortgage traders left Salomon, I figured, we’d had it. There would be nothing remaining but a bunch of nice guys.

  Chapter Five

  A Brotherhood of Hoods

  I don’t do favors. I accumulate debts.

  —Ancient Sicilian motto

  IT WAS January 1985, and Matty Oliva was fresh from Harvard Universi
ty and the Salomon Brothers training program. The good news was he had landed a plum job on the mortgage trading desk. The bad news was that for his first full year on the desk he would be an object of abuse. The senior mortgage traders maintained that abuse led to enlightenment. It purged trainees of pretension and made them realize they were the lowest of all God’s creations. The traders were to blame for the awful thing about to happen to Matty Oliva.

  A couple of traders regularly asked Matty to fetch their lunch. They’d holler at him, “Hey, geek, how about some food!” In their less ornery moments they said, almost politely, “About that time, ain’t it, Matty?” There was no need to be polite to Matty because Matty was a slave. There was no need to tell him exactly what to get because as every trainee knew, mortgage traders ate anything at any time.

  Just as some people are mean drunks, mortgage traders were mean gluttons. Nothing angered them more than being without food, unless it was being interrupted while they ate. In other words, they were not the sort of hyperthyroid fat people who meekly sip Diet Cokes all day and prompt one to ask, “So how did he get fat, he never eats?” Nor were they the sort of jolly fat people, like Ed McMahon, who are loved because they don’t threaten anybody. Mortgage traders were the sort of fat people who grunt from the belly and throw their weight around, like sumo wrestlers. When asked to find food, a trainee on the mortgage desk simply brought back as much of everything as he could carry.

  On that fateful January day the beleaguered Matty climbed the five flights of stairs from the trading floor to the cafeteria. It was demeaning to be seen by one’s fellow trainees as a total mortgage slave. The other trainees enjoyed the status of almost free men. Matty quickly filled as many plastic trays as he could carry with fries, burgers, Cokes, candy, and a couple of dozen chocolate chip cookies, products of a kitchen known throughout Wall Street for the regular warnings it received from the health inspectors of New York City. Then he sneaked past the security guard without paying. Call it a small triumph. Call it an assertion of self. Call it a little cry of freedom from a much abused soul. Or simply call it economical. Dining and dashing was not unusual in the Salomon Brothers cafeteria. Stealing food wasn’t Matty’s big mistake. His big mistake was to brag to one of the fat traders how he had done it.

  That afternoon Matty received a phone call from a man who claimed to work for the “special projects division of the Securities and Exchange Commission.” The SEC, this man explained, had been granted jurisdiction over Wall Street’s cafeterias, and he was investigating a reported theft of three trays of food from the Salomon Brothers cafeteria. Would Matty know anything about that?

  Ha-ha-ha, said Matty. Very funny.

  No, said the officer, we’re very serious. The ethical standards of Wall Street have to be monitored at all levels.

  Matty chuckled again and hung up.

  Matty arrived the next morning to find Michael Mortara, a Salomon Brothers managing director, waiting for him. Mortara was the head of mortgage trading. It was Mortara who had spoken to our training program. Wits on the Salomon trading floor did imitations of Mortara. They ranged from sounding like Marion Brando in The Godfather to sounding like Marion Brando in A Streetcar Named Desire.

  Mortara looked upset. He asked Matty into his office. “Matty, I just got a call from the special projects division of the SEC, and I don’t know what to do about it. Is it true that you have been stealing food from our cafeteria?” he asked.

  Matty nodded.

  “What were you thinking? I really don’t know what is going to happen now. Look, go back to your desk, and I’ll get back to you. This is a problem,” said Mortara.

  The rest of the day Matty looked as frantic as a lottery winner who had lost his ticket. Although he was a young, much abused trainee trader, he was nevertheless on the verge of Big Swinging Dickhood. The American mortgage market was growing faster than any other capital market in the world, making trading mortgages the best job in the firm. As it was the best job on the Salomon Brothers trading floor in 1985, it was also quite possibly the best job on Wall Street since the Salomon trading floor dominated Wall Street.

  After two years of trading at Salomon, a young mortgage trader basked in a steady flow of offers from Merrill Lynch, Bear Stearns, Goldman Sachs, Drexel Burnham, and Morgan Stanley, all of which were desperate to bottle the Salomon Brothers mortgage magic. These offers guaranteed at least a half million dollars a year plus a cut of trading profits. Matty was a first-year trader. By his fourth year, if he were good at his job, he would be making a million dollars before taxes. It was a good time and a great place to be twenty-two years old, and Matty, through luck and effort, had put himself precisely where he wished to be. Now this: busted by the SEC in the cafeteria. How serious could it be? The other mortgage traders watched him fret, allowed him for a day to mull over life’s reversals.

  The next morning Matty was told to report to Gutfreund’s office. Matty had never met John Gutfreund, nor should he have. “Gutfreund,” one mortgage trader explained to Matty, “doesn’t fool around with low people.” If Gutfreund wished to see him, the theft was scandalous. Gutfreund’s office was about twenty yards away from Matty’s seat. It was normally empty. In the course of a long and happy career with Salomon a person might never set foot inside. Bad things happened in the darkness of that office, to people far more able to defend themselves than Matty. Any hope Matty nourished about the reason for the meeting died when he saw Mortara seated beside Gutfreund in the office. Matty entered.

  Gutfreund went on for some time about how unfunny it was to steal cheeseburgers from the cafeteria. Then he said, “Matthew, I have just concluded a long and painful meeting with the Salomon Brothers executive committee, and we’ve decided”—long pause—“to let you stay for now. All I can say now is that there are further issues we need to iron out with the SEC in Washington. We’ll be back to you.”

  All a man has in the markets is his word, his honor. The training program heard that message each year from John Gutfreund. As Matty was new to the business, he might even have believed it. In any case, Matty figured his career was ruined. The theft would haunt him for as long as he remained on Wall Street. Whenever the SEC came snooping for insider traders or food snatchers, Matty would be a suspect. He’d have a record. People would whisper his name.

  When Matty returned to his seat on the mortgage desk, he appeared to have witnessed the end of the world. For the twenty or so other mortgage traders the sight was too much to bear. They tried to hide their snickers behind their Quotron machines. Matty looked around him, however, and saw not only that everyone was laughing but that everyone was laughing at him. He had been made the victim of what was known in the department as a goof. It had been Mortara’s idea, but Mortara persuaded Gutfreund to lend a touch of credibility to the ruse. Matty had rejected a priori the possibility that such an unlikely prankster as John Gutfreund would play such tricks. “One of the greatest goofs of all time!” one mortgage trader shouted. It was once again proved that the credulity of trainees knew no bounds. Think of it: the SEC busting people in the cafeteria!

  Matty failed to see the humor. His face assumed the short-circuited look of someone who has been made to endure a mock execution, and he began to cry. He then bolted from the trading floor and down an elevator. He planned never to come back. Yet no one stopped him. Traders were convulsed with laughter. Gutfreund and Mortara roared together in Gutfreund’s office. Finally, more out of duty than compassion, a senior mortgage trader named Andy Stone left to find Matty. He felt responsible because Matty was his assigned slave. Stone had always been one of the more humane traders anyway. Stone bought Matty a beer in the lobby of One New York Plaza and tried to persuade him that what had happened was a sign people liked him; you had to command a certain amount of respect before you were goofed on. After several hours pacing the streets, Matty decided to return.

  I can only imagine what went through Matty’s mind as he steamed around southern Manhattan. Once he
had calmed down, it must have occurred to him that there was no other place to go. He was bound by golden handcuffs to the Salomon Brothers mortgage trading department. The handful of traders who made life miserable for graduates of Harvard completely dominated a third of the bond market. They were perhaps the most profitable corporate employees in America. They alone could teach Matty how he, too, could dominate a market. It wasn’t true, as Stone had said, that the traders bothered to be cruel only to the people they liked. They were cruel to everyone. Some of the cruelty, however, wasn’t personal but ceremonial. Goofs were a rite of initiation. Anyway, after a year Matty would be on the other side of the goof. He’d be the trader snickering behind the Quotron while some other slave-trainee wept. No, there was no finer place to be in January 1985 than with Michael Mortara’s righteous few, that rich band of brothers, the mortgage traders of Salomon Brothers.

  1978-1981

  Wall Street brings together borrowers of money with lenders. Until the spring of 1978, when Salomon Brothers formed Wall Street’s first mortgage security department, the term borrower referred to large corporations and to federal, state, and local governments. It did not include homeowners. A Salomon Brothers partner named Robert Dall thought this strange. The fastest-growing group of borrowers was neither governments nor corporations but homeowners. From the early 1930s legislators had created a portfolio of incentives for Americans to borrow money to buy their homes. The most obvious of these was the tax deductibility of mortgage interest payments. The next most obvious was the savings and loan industry.

  The savings and loan industry made the majority of home loans to average Americans and received layers of government support and protection. The breaks given savings and loans, such as deposit insurance and tax loopholes, indirectly lowered the interest cost on mortgages, by lowering the cost of funds to the savings and loans. The savings and loan lobbyists in Washington invoked democracy, the flag, and apple pie when shepherding one of these breaks through Congress. They stood for homeownership, they’d say, and homeownership was the American way. To stand up in Congress and speak against homeownership would have been as politically astute as to campaign against motherhood. Nudged by a friendly public policy, savings and loans grew, and the volume of outstanding mortgages loans swelled from $55 billion in 1950 to $700 billion in 1976. In January 1980 that figure became $1.2 trillion, and the mortgage market surpassed the combined United States stock markets as the largest capital market in the world.