Liar's Poker

by Michael Lewis

  Now I admit, even for a geek, it was a little embarrassing to let investors believe their white magic. But as long as the chartists placed their bets with me, my jungle guide explained, the reasoning of our customers was not for me to question. Just the opposite. Only days after landing in my new job I found myself praising such statements from investors as “I was looking at the ten-day moving average last night, and it is a perfect reverse duck tail and pheasant. Let’s bet the ranch.” At this juncture my role was only to shout encouragement: Yeah! Do it!

  In need of a euphemism for what we did with other people’s money, we called it arbitrage, which was just plain obfuscation. Arbitrage means “trading risklessly for profit.” Our investors always took risk; high-wire act would have been more accurate than arbitrage. In spite of the responsibility implied by my job, I was ignorant and malleable when I advised my first customers. I was an amateur pharmacologist, prescribing drugs without a license. The people who suffered as a result were, of course, my customers.

  I couldn’t help noticing that they were different from the customers of established salesmen. Mine were small institutional investors, defined as those with less than one hundred million dollars each who, on each trade, would commit only a few million. The other three salesmen in my unit were speaking almost exclusively to insurance companies, money managers, and European central banks (including the Russians. There are, in fact, little bald men who sit in an office in Moscow and start market rumors, not to undermine capitalism but to make their bets come right) that could, if they liked a trade idea, commit fifty to a hundred million dollars in a matter of seconds. The largest of these controlled perhaps twenty billion dollars in investable funds.

  There was an excellent reason my jungle guide-manager didn’t let me lay my hands on the larger investors. He knew that soft-brained as I was, I was dangerous. His plan was for me to learn on the small clients so that if disaster struck, the effect on overall business of Salomon Brothers would be negligible. It was assumed that I might well put a customer or two out of business. That was part of being a geek. There was a quaint expression when a customer went under. He was said to have been “blown up.” Once I’d learned to do my job, once I’d stopped blowing up customers, I would be permitted to advise the big investors.

  A few days after I’d arrived, I was told by said jungle guide to start smiling and dialing. Cold calling, as I have pointed out, was not my idea of fun. I discovered immediately I was temperamentally unsuited to it; it made me feel like too much of a pest to do it well. And when he saw I was having no success, my jungle guide finally gave up the ghost and told me to phone a man named Herman at the London branch of an Austrian bank. This was convenient for everyone. Herman wanted to be sold to by Salomon Brothers. Because he had only a few million dollars to play with, no one else at Salomon Brothers wanted to sell to Herman. And in order to eat, I needed customers..

  Poor Herman never knew what hit him. I proposed lunch, and he accepted. He was a tall, gruff German with an incredibly deep voice and the distinct impression that he was born to trade. He thought he was very, very smart. It was my job to encourage him in this view, since the smarter he felt, the more he traded, and the more he traded, the more business he could give me. His bank had given him authority to risk twenty million dollars.

  In spite of his cunning, Herman didn’t know a geek when he saw one. I explained to him how with this twenty million dollars the two of us could make a fortune. Salomon Brothers was full of shrewd, knowing people, I said, and we would draw from their reservoir of ideas. I allowed how I myself was known to have an idea or two. And my advice was greatly valued by certain large European investors. At the end of the lunch, during which we examined lots of Salomon’s scientific graphs about bonds, talked a bit about head and shoulders patterns, and drank a bottle of wine, he decided he could do business with me. “But, Michael, remember,” he said several times, “we need gut ideas.”

  A large corporate bond trader was waiting for me, like an unfed house pet, when I returned to the office. He was glad to hear the lunch had gone well. And as it happened, he had a great idea for me and my new customer. He had been watching the Eurobond market all day and had noticed that AT&T’s thirty-year bonds had really become cheap, as measured against the benchmark thirty-year U.S. treasury bond. The $650 billion Eurobond market, it should be said, was one of the main reasons for Salomon Brothers’ presence overseas. A Eurobond is a bond issued in Europe and bought mainly by Europeans. Many large American companies issued Eurobonds, usually because they could borrow money more cheaply from Europeans than from Americans, but occasionally to advertise their names abroad. Salomon, with its network of contacts in corporate America, was a leader in the market.

  Anyway, the trader said the Street, meaning other Wall Street and London traders, was undervaluing AT&Ts. He knew where he could put his hands on a few AT&Ts. What I should tell my new client to do, he said, was to buy the AT&Ts and at the same time sell short thirty-year U.S. treasury bonds. The trick, he explained, was to avoid being long or short the bond market. Instead we would be making the esoteric bet that AT&T bonds would outperform U.S. treasury bonds. It sounded complicated. I wanted to be careful. I asked if the strategy was risky.

  “Don’t worry,” he said, “your guy will make money.”

  “I haf nefer done dis ding before, but it sounds like a gut idea,” said the still-tipsy Herman when I told him. “Do tree million.”

  My first order. I felt thrilled and immediately called the U.S. treasury trader in New York and sold him three million dollars’ worth of treasury bonds. Then I shouted over to the London corporate bond trader, “You can do three million of the ATTs,” trying, of course, to sound as if it really weren’t that big a deal, just another trade, like going for a walk in the park.

  There was in every office of Salomon a systemwide loudspeaker, called the hoot and holler or just the hoot. Apart from money, success at Salomon meant having your name shouted over the hoot. The AT&T trader’s voice came loudly over the hoot: “Mike Lewis has just sold three million of our AT and Ts for us, a great trade for the desk, thank you very much, Mike.”

  I was flushed with pride. Flushed with pride, you understand. But something didn’t quite fit. What did he mean, “Our AT and Ts”? I hadn’t realized the AT&T bonds had been on Salomon’s trading books. I had thought my trader friend had snapped them up from stupid dealers at other firms. If the bonds were ours to begin with…

  Dash was staring at me, disbelieving. “You sold those bonds? Why?” he asked.

  “Because the trader said it was a great trade,” I said.

  “Nooooooo.” Dash put his head in his hands, as if in pain. I could see he was smiling. No, laughing. “What else is a trader going to say?” he said. “He’s been sitting on that position for months. It’s underwater. He’s been dying to get rid of it. Don’t tell him I told you this, but you’re going to get fucked.”

  “How can I get fucked?” I said. “The trader made me a promise.”

  “You are going to get fucked,” Dash said again. “That’s all right because you’re just a geek. Geeks were born to be fucked.” He meant this in a nice way, to absolve me, as it were. He then replaced his pen in the corner of his mouth, gave it a thoughtful twist or two, and began to work the phones like a jockey.

  “What iss dee price of dee ATT bonds?” a familiar voice was shouting at me the next morning. No longer was he cool and self-assured. Herman had apparently been enlightened by some other trader in London. Everyone in London but Herman and I, it seemed, knew that Salomon Brothers owned AT&Ts and had been desperate to unload them. Herman was beginning to sense that he was going to get fucked.

  I held out hope. Not much. But I did think that if I went and stood over the trader, told him how upset my new customer was, told him that this did not bode well for our new relationship, showed him how awful I felt that he might buy the AT&T bonds back from my customer at the same price he had sold them to him the pr
evious day.

  “They aren’t doing real well,” said the trader when I asked him the price. “But they’ll come around.”

  “What’s the price?” I asked again.

  “I’ll have to get back to you on that,” he said.

  “No way,” I said. “I’ve got a boiling German on hold. I’ve got to know.”

  The trader pretended to shuffle through some complicated-looking sheets, to punch a few numbers into his Quotron machine. This, I learned, was standard practice when a customer was about to be sacrificed for the greater good of Salomon. The trader tried to transfer the blame to some impersonal, scientific force. It’s the numbers, don’t you see? I can’t do anything for you. It was painfully apparent the AT&T trader was stalling. Something was very wrong.

  “I could bid you ninety-five for them,” he finally said.

  “You can’t do that,” I said. “You sold the things to me at ninety-seven yesterday, and the market hasn’t moved. The treasuries are the same price. I can’t go tell my customer his AT and Ts have gone into a two-point free fall overnight. He’s out of pocket sixty thousand bucks.”

  “I told you they weren’t doing very well,” he said.

  “What do you mean?… You lied to me!” I started to shout.

  “Look,” he said, losing his patience, “who do you work for, this guy or Salomon Brothers?”

  Who do you work for? That question haunted salesmen. Whenever a trader screwed a customer and the salesman became upset, the trader would ask the salesman, “Who do you work for anyway?” The message was clear: You work for Salomon Brothers. You work for me. I pay your bonus at the end of the year. So just shut up, you geek. All of which was true, as far as it went. But if you stood back and looked at our business, this was a ridiculous attitude. A policy of screwing investors could lead to ruin. If they ever caught on, we’d have no investors. Without investors, we’d have no business raising money.

  The only justification—if you can call it that—I ever heard for our policy came unwittingly from our president, Tom Strauss, himself a former salesman of government bonds. At a lunch with one of my customers, apropos of nothing and everything, he offered this opinion: “Customers have very short memories.” If that was the guiding principle of Salomon Brothers in the department of customer relations, then all was suddenly clear. Screw ‘em, they’ll eventually forget about it! Right.

  However, you had to admire Strauss’s frankness. It was one thing to screw a customer. It was another to tell him in advance you were going to. The difference in style between the AT&T trader and Strauss was the same as between a sucker punch and a duel. Still, neither was great for business. One thing my customer never forgot was that Salomon Brothers thought he had a short memory.

  I had made the mistake of trusting a Salomon Brothers trader. He had drawn on the pooled ignorance of me and my first customer to unload one of his mistakes. He had saved himself, and our firm, sixty thousand dollars. I was at once furious and disillusioned. But that didn’t solve the problem. Bellyaching to the trader wasn’t going to get me anywhere. That much was clear. He’d just dock my bonus at the end of the year. Bellyaching would also make me look like a fool, as if I actually had thought the customer was going to make money on the AT&Ts. How could anyone be so stupid as to trust a trader? The best thing I could do was pretend to others at Salomon that I had meant to screw the customer. People would respect that. That was called jamming. I had just jammed bonds, albeit unknowingly, for the first time. I had lost my innocence.

  But what did I tell Herman the German? “Don’t let your sixty-thousand-dollar loss bother you too much, you have a short memory, and you’ll soon forget?… Sorry, I’m new at this, and guess what, ha-ha, you’ve just been had!”

  “Hi, sorry to take so long, it’s really busy here,” I said. Rifling through the range of tones I might adopt, I was unable to find anything exactly appropriate to the occasion and settled on sounding cheerful. I must have managed an expression halfway between a brave smile and the grin of an idiot. Dash was watching the charade and laughing. Now that was unnecessary. I flipped him the finger. I was more embarrassed for myself than I was concerned for Herman.

  “I just spoke with the trader,” I said to my new customer, “and he said that the AT and Ts didn’t do very well overnight, but they’ll definitely come around soon.”

  “What is dee price?” he asked again.

  “Oh… let me see… about… well… about… ninety-five,” I said and felt my face wince.

  “Aaaaaaaaahhhhhhhhhhhhhhhhh,” he shouted, as if he had been stabbed with a knife. He had lost all ability to articulate his feelings. His primal Teutonic scream captured for all time the collective pain felt by the valued customers of Salomon Brothers. What I didn’t know but soon learned was that he never imagined in his whole life losing sixty thousand dollars. His bank had given him twenty million dollars to trade but would not let him lose sixty thousand of it. If it knew he was down that much money, it’d fire him. Actually his story was more gruesome than that. He had a baby, a pregnant wife, and a new house in London with a large mortgage. This emerged only later, however. At the moment of impact all he could do was make noises. The agony. The horror.

  “Uuuuuhhhhhhhhh,” he continued, in a slightly different key. He began to hyperventilate into the phone.

  And you want to know how I felt? I should have felt guilty, of course, but guilt was not the first identifiable sensation to emerge from my exploding brain. Relief was. I had told him the news. He was shouting and moaning. And that was it. That was all he could do. Shout and moan. That was the beauty of being a middleman, which I did not appreciate until that moment. The customer suffered. I didn’t. He wasn’t going to kill me. He wasn’t even going to sue me. I wasn’t going to lose my job. On the contrary, I was a minor hero at Salomon for dumping a sixty-thousand-dollar loss into someone else’s pocket.

  There was a convenient way of looking at this situation. My customer did not like his loss, but it was just as much his own fault as mine. The law of the bond market is: Caveat emptor. That’s Latin for “buyer beware.” (The bond markets lapse into Latin after a couple of drinks. Meum dictum pactum was another Latin phase I used to hear, but that was just a joke. It means “My word is my bond.”) I mean, he didn’t have to believe me when I told him AT&T bonds were a good idea.

  Anyway, who was hurt besides my German? It is an important question, because it accounts for the detachment with which disasters were viewed at Salomon. The German’s bank had lost sixty thousand dollars. The bank’s shareholders, the Austrian government, were therefore the losers. To take it one step farther, the Austrian taxpayer was the loser. But compared with the assets of the nation as a whole, sixty thousand dollars was a ridiculously small sum. In other words, it was hard to generate sympathy for anyone but the man who had done the trade. And he was partly responsible.

  He shouldn’t blame me entirely, I might have thought had my capacity for rationalization been that of a man rather than a geek. But oh, how he did. For that is the customer’s privilege and the bond salesman’s burden. And he didn’t just blame me once. He blamed me hundreds of times. For having made the first mistake of doing the trade, we promptly made the second of holding on to it. Each morning and each afternoon for the next few weeks I awaited his bitterly sarcastic phone calls in a frozen state of dread. A thick German voice on the other end of the line would say, “Dis bond iss a really great idea, Michael. Haf you any more great ideas up your sleef?” As a matter of fact… Herman gave up hoping he would survive intact; he gave up hope that Salomon would restore his losses; his sole reason for calling was to shower abuse upon me.

  Till death did they part, my customer and his bonds. AT&T’s bonds got cheaper and cheaper. Finally, about a month after the ordeal had begun, my customer’s boss inquired into his activities. A loss of about $140,000 dutifully raised its hoary head, and my German was fired. Kaboom! He got another job, and as far as I know, his children are well provide
d for.

  It was not an auspicious start to my career. Within a month I’d blown up my first and only customer. There were, thankfully, plenty more where he came from. All met the two requirements to speak with a geek: first, that they be small investors and, second, that they be so awed by Salomon Brothers as to assume anything they were told was good advice. I passed a period of a few months on the phone with dozens of the least desirable clients in Europe. Among them there was a cotton trader in Beirut (“You may think times are not good down here, but they are, they are”), an Irish insurance company with a taste for speculating in currency options, and an American pizza mogul living in Monte Carlo. I blew up the insurance company, this time in an act of stupidity unassisted by traders. I was told not to do business with the man from Beirut by the Salomon Brothers credit committee, for fear that he might blow us up before I blew him up. And I lost the Monte Carlo pizza mogul when he decided to give up bonds and return to pizza, but not before he delivered for posterity the memorable line “The casinos down here are dull compared to the shit we do.” That was true.

  Perhaps my favorite encounter during these first couple of months, however, was with the head of an English brokerage firm. This man of minor distinction in the City of London somehow got my name and called me at Salomon. He said he wanted to hear all about options and futures, and for that purpose I should visit him in his office. The company he managed was one of hundreds of small European financial institutions that were competing with Salomon but at the same time had money to play with. They often masqueraded as potential customers in order to get information. They thought Salomon Brothers knew something other firms did not. I could have declined to meet him on the ground he might well use what information he gleaned from me to expand his business at the expense of mine. But he did have some funds to invest, and I was curious about old English moneyrnen. And anyway, at that point what I knew about options and futures was more likely to bankrupt than to help him.