Liar's Poker

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by Michael Lewis


  Between the time I arrived at Salomon Brothers in London in December 1985 and the time I left in February 1988 a great deal changed. The staff grew from 150 to 900. We overhauled our image and moved into shiny, new offices. Tens of millions of dollars were poured into our operation by the men on the forty-first floor in New York who were intent on transforming Salomon Brothers into a “global” investment bank.

  John Gutfreund and Tom Strauss (who oversaw our international operations) shared the conventional wisdom of Wall Street that there would one day be just a few truly global investment banks and that the losers would, presumably, stay home. Those few global banks would form an oligopoly that could lift the price of its capital raising services and prosper. The firms regularly mentioned as likely to form the global club were the Japanese investment bank Nomura, the American commercial bank Citicorp, and the American investment banks First Boston, Goldman Sachs, and Salomon Brothers. And the European banks? I don’t think we even knew their names.

  Tokyo was the obvious site for our rapid expansion because Japan’s trade surplus left it gorged with dollars it had either to sell or to invest. The Japanese were the Arabs of the 1980s. But because American firms felt unwelcomed by Japan’s financial establishment, and because financial regulation was labyrinthine in Japan, the Japanese offices of Wall Street firms tended to be small and tentative.

  Meanwhile, there was no obvious barrier to entry in Europe. There was little financial regulation. And the Atlantic cultural divide seemed less daunting than the Pacific to native New Yorkers. When a kid from Brooklyn disembarked at Heathrow Airport, he didn’t need an interpreter to hire a limousine. When he sat down to dinner in his expensive hotel (Claridges and the Berkeley were favorites), he wasn’t served raw fish (there was at Salomon an oft-repeated story about an American managing director in Japan who tossed his sushi on top of a small bonfire he ignited at the table) but stuff that looked pretty much like American food. It was easy for this man to fool himself that Europe was a lot like New York because on two thousand dollars a day it was. So London became the key link in this drive for world domination; its time zone, its history, its language, its relative political stability, its large pools of dollar-hungry capital and Harrods (don’t underestimate the importance of shopping opportunities in all this) made London central to the plans of all American investment bankers. And the global aspirations of Salomon Brothers settled in London.

  I was a geek salesman, one of twelve from my training class airmailed business class to London. Our offices when I began occupied two small doughnut-shaped floors in a building owned by Morgan Guaranty in the City. Trading is meant to require a vast hangar in which everyone can see and shout at everyone else. Our building had been effectively cored, by the placement of too many elevators and staircases at its center. The trading floor wound around the core. Fully extended, it might have stretched fifty yards, but sitting on it, you could see only a short way. Still, there was a cramped, commercial feel about the place. We sat elbow to elbow. Everyone knew what everyone else was doing. It was loud and, with the exception of its postcard view of the river Thames and the dome of St. Paul’s Cathedral, unpleasant.

  The twelve sales units in the London office were merely extensions of the New York parent operations. One unit sold corporate bonds, a second mortgage bonds, a third government bonds, a fourth American equities, and so on. What I would sell had been decided for me while I was in the training program. The man to whom I was now committed, for better or for worse, for richer or for poorer, was named Dick Leahy. He ran Salomon Brothers’ bond options and futures sales department, a rogue offshoot of the government department. That made me, by birth as it were, a member of the Strauss family.

  Leahy and his right-hand woman, Leslie Christian, formally assumed responsibility for me in the final days of the training program, over turkey sandwiches. This was a lucky break, first because no one else wanted me except the equity department and second because I liked them. Being their geek was an unusual assignment. Unlike most managers who had an obsessive concern with moving their products out the door, Rabbi Christian and Rabbi Leahy told me to find any way I could to make money and not to worry too much about pushing options and futures. They, rightly, aligned their self-interest with the interests of the firm as a whole. This made them highly unusual. It made me, in a firm of specialists seeking to please their bosses, an unofficial generalist with a license to roam the entire firm.

  On my first day in London I introduced myself to Leahy’s London manager, Stu Willicker. Before I arrived, his unit consisted of three other salesmen. Willicker was another lucky break. He hadn’t caught the Salomon disease. He’d been in London four years but refused to forget that Bald Knob was his birthplace; that was refreshing. More to the point, he had taken one look at the mass of written and unwritten rules that governed the behavior of most Salomon employees and chose to have nothing to do with them. He valued his liberty. He paid almost no attention to what he was told to do and encouraged his charges to intransigence.

  Paradoxically, he suffered from bouts of tyranny. Every so often he would issue orders, such as “Call everyone in Paris.” But these were rare and well worth what he gave in return. He let us cut office meetings and work our own hours. He led by example, by arriving at work each morning an hour after the rest of the sales force had made its first phone calls. This, I think, was an inspired gesture. His was the most profitable unit in the office, year in and year out, and I am sure it was because its members were left with room to think for themselves.

  Thinking, as yet, was a feat beyond my reach. I had no base, no grounding. My only hope was to watch the salesmen around me and gather what advice I could. Learning what to do meant learning an attitude: how to sound on the telephone, how to deal with traders, and, most important, how to spot the difference between a financial opportunity and a rip-off.

  Two days after I’d found a seat on the London trading floor, with the phones going berserk with Frenchmen and Englishmen wanting to gamble in the great American bull market, I received my first piece of advice. The young man directly across from me, a member of my unit whom I’d spend the next two years gazing upon in wonderment, leaned over and whispered, “Wanna know a lay-up? Short the stock of Salomon Brothers.” A lay-up, it should be said, was jargon for a gamble that was sure to succeed. To sell short, or to short, is to sell a security that you don’t own, hoping that it will decline in price and you can buy it back later at a lower price. To short our own stock would be to bet on its taking a nose dive.

  I should have gasped and recoiled in horror. First, shorting the stock of your own company is illegal. And second, it didn’t sound like such a great idea, though perhaps it wasn’t a bad hedge, to bet against Salomon Brothers. The firm was having the second most profitable year in its, and Wall Street’s, history. My friend, who goes here by his chosen pseudonym of Dash Riprock, didn’t mean I should actually do the deed. He was simply making a point, stating a fact, in his inimitably succinct style. He had sized me up, he later explained, and had decided to take me under his wing. This meant he would occasionally cast in my direction the pearls of wisdom he had accumulated in nine months on the job. He was American, and only twenty-three, two years younger than I. Still, in the way of the world he was light-years ahead of me. Dash Riprock was a proven moneymaker.

  I soon grew used to him. Dash often made remarks I didn’t understand, such as “Buy two-year notes and short old tens,” or “Short Salomon’s stock,” or “Save a client, shoot a geek” and expect me to figure out why on my own. Often I hadn’t aclue what he meant. But Dash, for all his pithiness, had a kind heart. And eventually, after he’d sold four different money managers in three different countries on whatever new scheme he was promoting, he’d elaborate. In this way I learned about trading, selling, and life.

  Dash’s point on this occasion was that Salomon Brothers was a poor investment in spite of all the vital signs of the company’s being healthy.

&n
bsp; This, I was to learn, is the best time to short: the moment before business turns sour. But how did he know that the time had come for Salomon?

  As a geek, you see, I was like a newly elected president. I wasn’t expected to know anything except that I didn’t know and that it wasn’t my fault. So I asked, “Why?”

  Of course, I didn’t expect him to come right out and explain. That would have been too easy. Dash spoke in cryptic sentence fragments. He just waved his hand in the direction of the rest of the trading floor and said, “It’s a corporation.”

  Strictly speaking, this was a truism. Salomon Brothers was a corporation: Phibro Salomon Incorporated. But I knew what he meant. We liked to think we were free from most of what that terrible word implies: superfluous meetings, empty memos, and stultifying hierarchy. Dash had looked up from his phone one day and seen a growing bureaucracy, and it disturbed him. To support his case, Dash raised his index finger, like a Roman orator, and said, “Consider the book and the bowl.”

  That said, he wheeled around in his swivel chair and picked up a blinking light. Soon he was well into a sales rap… “Fed’s doing reverse, I don’t know, market might soften a touch overnight, we’re seeing supply, you might put on twos to tens… ” All of which meant nothing whatever to me. I scribbled a note to ask about it later.

  The book and the bowl. Salomon was then celebrating its seventy-fifth anniversary. To commemorate the great day, all employees received two gifts: a large silver-plated bowl, with the name of the company inscribed on its side, and a book. The bowl was good for putting Doritos in. The book, called Salomon Brothers: Advance to Leadership, was a selective history of the company that had as its sole purpose the glorification of the people on top. It accomplished the task in a nice enough way. Gutfreund, Ranieri, Horowitz, Voute, Strauss, and Massey were quoted as if following a script. They were modest about themselves and thoughtful about the world. The author then filled in the blanks about how wise, handsome, brave, and team-spirited they were. The book was a fine little specimen of clumsy fascist propaganda. Those in future training programs were made to memorize its contents.

  Even to a trainee, the book was a ridiculous cover-up job. The firm had advanced to leadership, but not as one big happy family. At that point there were more skeletons in the firm than there was closet space to hold them. The son of the founder, William Salomon, otherwise reserved and dignified, marched about the place calling Gutfreund a disgrace to any reporter who’d listen. The flowers were still fresh on the grave of former Chairman David Tendler, whom Gutfreund had muscled aside in ascending to the chairmanship of Phibro Salomon Inc. The struggle between Ranieri, Strauss, and Voute was nearing its bloody climax. Bond traders were streaming out of the door for better offers elsewhere. Of course, little of the firm’s dark past and present appeared in the official, sanitized history.

  In explaining the birth of the mortgage department, for example, the author unearthed old newspaper quotes from the likes of Bob Dall, saying, “What Salomon has that no other major firm has is a tremendous flexibility to let your skills end up where they are most productive.” The most interesting thing about this statement is what was going on behind the speaker’s back when he made it. The quote was recorded six months before Dall was shoved aside by Ranieri to be left twisting in the wind by Gutfreund.

  Gutfreund is the book’s hero. He is cast as a kind of Isaiah figure, an unworldly suffering servant of Salomon. He describes making his transition from trader to manager, for example, with this passage: “While I enjoy the management role,” he said, “it’s because I feel a challenge, not because I think it’s the most gratifying job in the world. The world of finance can, on occasion, involve us in the highest calling. From time to time we have had the opportunity to influence society in a favorable way.”

  “He sounded like an elder statesman,” coos the accompanying text.

  But the disinformation was not what bothered Dash about the book and the bowl. Once you knew the truth about the firm, you realized it was far better to disinform than to inform. And if our leaders were going to lie about their methods, they were almost by necessity going to tell a whopper. What bothered Dash was that Salomon Brothers had actually spent money to make these things. A book and a bowl? Who gave a shit, he said, about a book and a bowl? He’d rather have the money. What’s more, he added, the people who worked at Salomon in the old days would never have done such a thing; they, too, would rather have had the money. The book and the bowl violated what Dash considered to be the Salomon ethic. And that’s why he told me to short the stock.

  I made a careful note of this exchange in the slim volume in which I stashed anything that sounded like wisdom. Early on, my notes indicate, I was made aware of the possibility that my seemingly robust employer was in fact in a state of decay. Otherwise I don’t trust myself when describing my first few months on the job because the memory of how I arrived was very quickly obscured by what I became.

  For an honest appraisal of my early self I must rely, to an extent, on others. Plenty of people at Salomon Brothers made a hobby of brutally frank character analysis. For example, Dash later often amused himself between phone calls by reflecting on my early career, usually with a pen in the corner of his mouth. He was fond of saying that as a geek I bore the stamp of whomever I had last spoken with. I was, he felt, uncommonly soft-brained upon my arrival. If I had last spoken to the mortgage bond trader, I would be on the phones to people to say what a good deal mortgage bonds were. If I had last spoken to a corporate bond trader, I would think that the latest issue of IBM bonds was a gold mine.

  Unfortunately Dash did not make real-time observations about my character. He let me know of my flaws only after they had wrought a great deal of damage. In fairness to him, he had no choice. Like all of us, he lived by the law of the jungle, and the law of the jungle said geek salesmen are red meat for traders. No exceptions. If the corporate trader had managed to dupe me into thinking that IBM bonds were hot, that was my problem. Had Dash disabused me of the notion, the corporate trader would have tried to take whatever it cost him out of Dash’s next bonus. Dash liked me, but not that much.

  Still, I relied heavily on Dash and on the other members of our unit, a woman and two men. We sat at a single desk, divided artificially to accommodate five. We had a hundred telephone lines; each line was a channel through which money, tasteless jokes, and rumors flowed. If you ever care to see how all the world’s most awful jokes spread, spend a day on a bond trading desk. When the Challenger space shuttle disintegrated, six people called me from six points on the globe to explain that NASA stands for “Need Another Seven Astronauts.”

  Rumors were far more relevant than bad jokes because rumors moved markets. It was widely believed that a small, bald man in a grubby room in Moscow started all rumors to wreak havoc on our Western market-based economy. The rumors bore an uncanny resemblance to whatever people feared most. Often the most unlikely of rumors caused panic in the markets. In two years, for example, Paul Volcker resigned from his post as chairman of the Federal Reserve seven times and died twice.

  We had, on our desks, three telephone receivers each. Two were standard phones; the third enabled you to shout directly at any person in any office in the Salomon empire. Several dozen phone lights flashed continually on our telephone boards. European investors (I shall refer to them collectively as “investors” or “customers” even though most were pure speculators and the rest not-so-pure speculators) wanted to place their bets on the American bond market from eight in the morning until eight at night.

  There was good reason for their eagerness. The American bond market was shooting through the roof. Imagine how crowds would overwhelm a casino in which everyone who plays wins big, and you’ll have some idea of what our unit was like in those days. The attraction of options and futures, our specialty item, was that they offered both liquidity and fantastic leverage. They were a mechanism for gambling in the bond markets, like superchips in a casino that
represent a thousand dollars but cost only three. In fact, there are no superchips in casinos; options and futures have no equivalent in the world of professional gambling because real casinos would consider the leverage they afford imprudent. For a tiny down payment, a buyer of a futures contract takes the same risk as in owning a large number of bonds; in a heartbeat he can double or lose his money.

  When it came to speculation, European investors didn’t require a great deal of encouragement or instruction. They’d been doing crazy things with money for centuries. The French and the English, in particular, shared a weakness for get-rich-quick schemes. And like a crap-shooter who has a pretty lady to blow on his dice, the speculators in both countries had an amazing array of irrational systems to help them win money. They had to guess which direction the American bond market would take: up or down. The systems usually involved staring for hours at charts showing the history of bond prices. As in Rorschach ink blots, an unlikely formation, such as a human head and shoulders, made itself privately known to the viewer. The chartist—for that is what such a person called himself—would then use his ruler and pencil to draw the future of bond prices based on the assumption that the historical pattern could be projected forward. Miraculously, in a bull market, the resulting forecast was usually that the market was going up.

  Actually there was one good reason for using the charts: Everyone else did. If you believed that large sums of money were about to be invested on the basis of a chart, then, as dumb as it made you feel, it made sense to look at that chart; perhaps it would enable you to place your bet first and get in front of the coming wave. Many of our French and English speculators, however, honestly believed the charts contained the secrets of the market. They are aboriginal chartists. They would have used the charts even if no one else did. They communed with their charts as if they were Ouija boards. The charts were speaking to them.

 

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