Liar's Poker

by Michael Lewis

  He was finally forced to request a loan from the one Salomon Brothers partner he knew vaguely. “You gotta remember,” he says now, “I was convinced, really convinced, he was going to fire me.” Instead the partner told Ranieri that the hospital bill would be taken care of. Ranieri thought that meant it would be deducted from his weekly paycheck, which he couldn’t afford, and he began to protest. “It will be taken care of,” the partner repeated. Salomon Brothers paid the ten-thousand-dollar bill racked up by the wife of its mailroom clerk with three months’ tenure. There was no committee meeting to discuss whether this was appropriate. The partner to whom Ranieri had addressed his request hadn’t even paused before giving his answer. It was understood that the bill would be paid, for no reason other than it was the right thing to do.

  One cannot be certain of the exact words spoken by a Salomon Brothers partner long since gone, but it is clear what Ranieri heard: Lewie Ranieri would always be taken care of. The act moved Ranieri deeply. When he speaks of loyalty, of the “covenant” between Salomon Brothers and the people who worked for Salomon Brothers, it is that single act of generosity he remembers. “From that point on,” says one of his mortgage traders, “Lewie loved the firm. He couldn’t understand it was only a business.” “The firm took care of its people,” says Ranieri. “There used to be all these expressions, like ‘It’s more important to be a good man than a good manager.’ And people really meant them. We were a band of brothers. There was, as the people say, a covenant.”

  It sounds sweeter than it was. A man does not get to where Ranieri was simply by being a cuddly bundle of trust and loyalty. “I believe in God, but I’ll never be nominated for saint,” Ranieri once told a reporter from Esquire magazine. It was not that he lacked values, but he had a keen sense that at times the ends justified the means and an equally keen sense of his own interests. There were signs of tension between him and the corporate bond department (which oversaw utility bond trading). In September 1977 his nemesis Bill Voute was made a partner while he was not. “Lewie went bullshit when he was passed over,” says Steve Joseph. A former Salomon corporate bond salesman from the 1970s remembers Ranieri as a corporate bond trader “bitching and moaning about pay. Lewie was sure he wasn’t being paid what he was worth to the firm. He said, and I remember his exact words, ‘If it weren’t for the fact that I can do anything I want around here, I’d quit.’”

  He was loose, loudmouthed, and brash. Back, office staff who worked for Ranieri remember him telling them what to do by screaming at them at the top of his lungs while standing on the top of a desk waving his arms, like a referee. Still, he had the charm of wanting to be loved. “I have no enemies,” he says. “Even my competitors like me which is amazing considering I never let them get any of the business.”

  When Ranieri came to Salomon Brothers, the mailroom was staffed largely by recent immigrants to America who did not speak English. Among their inefficiencies was the bad habit of placing too much postage on the outgoing mail. His first contribution was to cut costs; that is ironic since he never really cared about costs. He had no time for details. “I got the brilliant idea one day to put a map of the U.S. on the wall and outline the postage zones in Magic Marker. For that they made me supervisor.” He dropped out of St. John’s when they rnade him supervisor of the day shift. “Where I came from it didn’t take much to make that kind of decision,” he says. From supervisor of the mailroom he moved out to the clerical back office, which brought him directly in contact with trading and traders. By 1974 he was sitting where he wanted, in the utility bond trader’s seat on the corporate bond desk.

  By 1985, when Matty Oliva hopscotched from Harvard to the training program to the mortgage trading desk, a barrier had arisen between the back office and the front. The process by which one became a trader had become rigidly systematized. You needed a resume. You should have graduated from college. It helped to have gone to business school. It was important to look like an investment banker. In the mid-1970s this was plainly not the case because Ranieri hadn’t finished college, didn’t have a resume, and looked about as much like an investment banker as the average Italian chef. He was, in the words of one of his former partners, “a fat slob.” But it simply did not matter. “If somebody quit on the trading floor, they’d look at the nearest body and say, ‘Do the job,’ ” recalls Tom Kendall, who himself moved out of the back office to trade for Lew Ranieri’s mortgage department. “A trader would say, ‘Hey, kid, you’re a smart kid, sit here.” And if you were an extremely smart kid, like Ranieri, you took over.

  Up to the point of his transfer to the mortgage department, Ranieri had dominated every department he had joined. The firm encouraged both aggression and ability; it made a point never to interfere with natural jungle forces. In a matter of months after his appointment power over the new mortgage department consolidated in Ranieri’s hands. In view of Ranieri’s ambition, even Dall concedes a coup was inevitable. Dall fell ill and was often away. In his absence Ranieri started a research department (“Mortgages are about math,” he, the college dropout, insisted) by asking Michael Waldman, a top mathematician, to join him. The request came, Waldman recalls, “in Lewie’s usual forceful manner.”

  Then Ranieri persuaded the firm to give him a sales force to sell the godforsaken mortgages he was being asked to trade. All of a sudden a dozen salesmen learned they had to please Lew Ranieri, rather than whomever they had been pleasing before. Rich Shuster, who had been a thrift salesman in the Salomon Brothers Chicago office, now found himself a mortgage salesman working for Lewie Ranieri. “Once I mis-dialed the commercial paper department and got mortgages instead. Lewie happened to answer the phone and immediately realized what had happened. He started to shout at me, ‘What the fuck are you doing selling commercial paper? You are paid to sell mortgages!’ ” Salesmen began to focus on mortgages.

  Steve Joseph was the only other person who conceivably could have replaced Dall, but he was a corporate financier, not a trader. As he says, “At Solly at the time you didn’t take a major trading operation and put it under a corporate finance guy.” You did, however, take a major financial operation and put it under a trader. So Lewie took charge upstairs, too, and came to treat the finance department as an amusing overhead into which even women could be hired. (The mortgage department was never exactly a bastion of sexual tolerance. One women who wished to trade mortgages but was denied the chance says, “You were acceptable to the trading desk as long as you were relatively white and male.” No women traded mortgage bonds until 1986.)

  Bob Dall disappeared, although he didn’t leave Salomon until 1984. He found himself out of a job. He was squeezed out by Ranieri months after he had hired him. This sort of thing went on continually at Salomon. The challenger took, over by being a little more energetic, a little more popular with clients, a little more influential with colleagues until the man whom he was quietly challenging seemed to evaporate. He became almost quaintly obsolete, like the handle crank on the automobile. Management did not intervene. The loser eventually left.

  “Gutfreund never told me that I’d be replaced by Lewie Ranieri,” says Dall. “I was left hanging there, and it must have taken me six months to figure out it wasn’t my deal anymore.” To this day Ranieri calls the mortgage securities market “Bobby’s vision.” In 1984 Dall left to work first for Morgan Stanley and then for Steve Joseph, who had left Salomon for Drexel Burnham. “If I didn’t believe in the capitalist system I could never accept what happened. But I do believe in it: the fittest move ahead,” Dall told James Sterngold, a reporter from The New York Times, who was trying to discover what had become of the old partners of Salomon Brothers.

  In February 1979 Gutfreund placed Ranieri officially in charge of the entire mortgage operation. For the next two and a half years, to everyone except the people inside, the department was more comical than practical. Ranieri created a trading desk in his own image: Italian, self-educated, loud, and fat. The first traders had their origin,
like Lewie, in the back office. Among them there was a single college degree—M.B.A. from Manhattan College. The founding fathers of the mortgage trading desk, in addition to Ranieri, were John D’Antona, Peter Marro, and Manny Alavarcis. Close on their heels were Bill Esposito and Ron Dipasquale. They went by their first names: Lewie, Johnny, Peter, Manny, Billy, and Ronnie. They sounded more like an infield than a team of investment bankers. “All that stuff about me in the mailroom is true,” says Ranieri. “And when I ran mortgages, I religiously took people from the back office. At first I did it for moral reasons. But it worked. They appreciated it. They didn’t feel like the world owed them a living. They were more loyal.” But Ranieri also wanted vital young brains from the Salomon training program. So it happened that the desk took its first trainee, who was also its first M.B.A., first skinny person, and first Jew: Jeffery Kronthal.

  Kronthal recalls that he was the only trainee out of the Salomon Brothers training Class of 1979 to start his professional life as a clerk. The people placed on other desks were permitted to call themselves salesmen or traders. Kronthal wasn’t even head clerk. He was junior clerk under Peter Marro. As junior clerk, his primary responsibility was to keep track of the bond position run by John D’Antona.

  Kronthal had just graduated from the five-year Wharton combined undergraduate and M.B.A. program—the closest thing in America to a trade school for financiers—and he had more elevated interests than Johnny’s positions. This displeased Johnny. Johnny would lean back in his chair and ask, “Jeffery, what’s the position?”

  Jeffery would say, “I don’t know.”

  Johnny would scream at Lewie, “What the fuck’s going on? The clerk doesn’t know the positions.”

  Lewie would scream at Peter, “What the fuck is going on? Your clerk doesn’t know the positions.”

  Peter would scream at Jeffery, “Why don’t you know the positions?”

  And Jeffery would shrug.

  It was hard for Kronthal to take any of this seriously for two reasons. First, he knew Lewie was fond of him, and Lewie was the boss. Kronthal had done Lewie a favor by agreeing to join the mortgage department. As Kronthal recalls, members of his training class felt nothing but disdain for the fledging department. “Definitely not the M.B.A. set; mortgage traders were Donnie Green types,” he says.

  Donnie Green types were traders who made trainees miserable. They were deliberately nasty or rude to anyone who hadn’t made the firm a pile of dough.

  “A Donnie Green type wouldn’t say hello to you when you tried to sit with him, wouldn’t say good-bye when you left, wouldn’t look at you while you were there. No trainee ever dared sit next to Donnie Green,” says Kronthal. Donnie Green himself had been a trader at Salomon Brothers in the dark ages, when traders had more hair on their chests than on their heads. He is remembered as the man who stopped a callow young salesman on his way out the door to catch a flight from New York to Chicago. Green tossed the salesman a ten-dollar bill. “Hey, take out some crash insurance for yourself in my name,” he said. “Why?” asked the salesman. “I feel lucky,” said Green.

  “No one wanted to get anywhere near the mortgage department,” says Kronthal. Even Ranieri admits that “Jeffery’s decision to join the mortgage department was regarded as remarkably stupid.” So why did Kronthal join? “I looked at it and said one, I’m twenty-three years old, and it doesn’t matter if it doesn’t work out. I don’t have to support anything but my own drinking. And two, the firm must have faith in mortgages or they wouldn’t have Lewie doing it.”

  Another reason Kronthal wasn’t concerned that his many bosses spent so much time screaming at him was that Lewie didn’t take the clerk’s job seriously. “Lewie used to say that I was the second worst clerk he ever saw. The first one was himself,” says Kronthal. But there wasn’t much for a clerk to do. For that matter, there wasn’t much for anyone to do. The mortgage market was the financial equivalent of a ghost town: Nothing moved, nothing traded. It meant that they made no money. To get bonds to trade, Lewie realized he needed to hit the road and persuade Salomon’s customers to play. He would have to be the promoter of the casino and usher people in. But to free himself from the trading desk, Lewie needed to find a “head of trading.” He made a hasty search and came up with Mario, a small but amusing error in judgment, perhaps not his first, certainly not his last.

  “Mario came from Merrill Lynch, and he knew nothing,” says Samuel Sachs, who joined the mortgage department as a salesman in 1979. While all the other traders were slobs, Mario wore a three-piece polyester suit with a gold watch chain dangling down in front. Very slick. Every hair was in place. Says Sachs: “He’d lean across to Lewie and ask, ‘How do you like ‘em, Lewie?’ (referring to the bond market). Lewie would say, ‘Hike ‘em a lot!’ And Mario wouldsay, ‘Yeah, I like ‘em, too, I like ‘em, too.’ Fifteen minutes later he’d lean across again to Lewie and ask, ‘How do you like ‘em now, Lewie?’ Lewie would say, ‘Don’t like ‘em at all.’ And Mario would say, ‘I don’t like ‘em neither, I don’t like ‘em neither.’ Mario lasted about nine months at Salomon Brothers as the new head of mortgage trading.”

  There was still a perceived need for a head of trading. In May 1980 Michael (“Fat Ankles”) Mortara was recalled from the London office, where he had been a trader, to fill the void left by Mario’s departure. One of his former London colleagues recalls Mortara with his bags packed and a forlorn look saying he didn’t have any idea what he was going back to. Mortara claims now that he knew exactly what he was going back to. But he could not have been very pleased with it. After a year of making no money and being the butt of ridicule within Salomon Brothers, mortgage trading looked doomed. A rift was growing between this small group of uneducated Italians and the rest of the firm. The mortgage traders deeply resented the corporate and government traders.

  Partly it was a money problem. The Salomon compensation game, like the job placement game for trainees, has a political wild card in it. Year-end bonuses are not tied directly to one’s profitability, but rather to the perception of one’s value by the Salomon Brothers compensation committee. At the end of the year bonuses are highly subjective, and a well-placed friend can be as helpful as a good year’s trading. The mortgage department had neither friends nor profits. “I couldn’t get my people paid,” says Lewie. “They were regarded as second-rate. We were the black sheep squadron.” What really stung the traders, however, was not their absolute level of pay but their pay in relation to the other bond traders. “You got the sense the firm was doing you a favor [in paying you anything],” says former mortgage trader Tom Kendall.

  “Ask the guys,” says Ranieri, “they’ll tell you that the corporate traders got paid twice as much as them.” Bonus numbers were supposed to be a management secret. A trader wasn’t supposed to know the size of his neighbor’s bonus. Right. A big bonus was about as well concealed on the Salomon Brothers trading floor as the results of a hot date in a high school boys’ locker room. It took about an hour for a trader to discover what everyone else was paid.

  Had the source of the rift between the mortgage traders and the rest of the bond traders been money alone, however, it might eventually have been repaired. But there was a widening cultural gap between the two. In the late 1970s Jim Massey, the architect of Salomon’s recruitment policy, decided that Salomon needed to upgrade its personnel. “He came to the conclusion that we couldn’t have a bunch of schlepps from Podunk U on the trading floor,” says Scott Brittenham. Brittenham worked as a recruiter for Massey in 1980 before moving on to trade mortgages.

  Salomon Brothers began to resemble the rest of Wall Street. It recruited the same M.B.A.‘s as Goldman Sachs and Morgan Stanley. The effect was as much social as it was intellectual. Like the Goldmans, the Sachses, the Lehmans, the Kuhns, and the Loebs before them, the Salomons were feeling the pull of what the writer Stephen Birmingham called “our crowd,” though we weren’t quite to the stage of building new wings onto the Metropolitan Muse
um. The firm had always been run by Jews. It came to be controlled by a contingent of WASPs, wannabe WASPs, and social climbers. The face-lift coincided with the sale of the firm to the commodities dealer Phillips Brothers in 1981. Salomon ceased to be a partnership and became a corporation. The average partner received a lump sum of $7.8 million from the sale. It was as if they said, all at once, “We have our money now, what next?” An empire. Class. Weekends in Paris. Nights at St. James’s Palace.

  The mortgage department had a far richer and earthier culture to protect than did either governments or corporates. While the rest of the firm gradually acquired a new persona, mortgages remained more trenchantly the same. Ranieri welded a coherent departmental personality out of two separate but equally gamy ethnic groups. Nearly all the traders came from one of two backgrounds: There were the Italians who started the department, and there were the Jews with M.B.A.‘s who joined fresh from the training program. I’m not sure any of them had what you’d call genuine ethnic identity. But they were an oppressed minority. And they shed rather than acquired airs. They were back-row people to a man.

  By outside standards, the mortgage trading department was highly discriminatory: few blacks and Orientals; no women. Next to the rest of the firm, however, the mortgage department looked like the United Nations. The photographs from Salomon Brothers’ annual reports tell a tale in themselves. Those from the late 1970s look like advertisements for world peace. Picture afterpicture contains the obligatory mixture of black, yellow, and white people, men and women, working in peaceful harmony at shiny conference tables. By the mid-eighties, however, all things black, yellow, and female have disappeared from the photographs. There isn’t a trace of anything but white men in the annual reports.

  The mortgage department became a white brotherhood apart. The tacit agreement was that Lewie would do everything he could to get his traders paid and his traders would be loyal to Lewie. Their covenant was weaker than Ranieri’s. The traders had come from business school rather than the mailroom. Many of them were financially independent. It was hard for Ranieri to do favors. Ranieri liked to be surrounded by people he could do things for. He liked people, but he especially liked the concept of “his people.” He would have thriven on a steady stream of traders with medical bills they couldn’t meet. When Bill Esposito fell short nineteen thousand dollars on a house he wanted to buy, Ranieri had Salomon make up the difference. “He was apologetic he couldn’t give it to me out of his own pocket,” says Esposito.