Liar's Poker

by Michael Lewis

  Guided by Alexander and Dash, I was equipped with sound moneymaking schemes, a persuasive sales voice, and the right trading floor look; business followed quickly, if haphazardly. A few small investors came to me in the manner of my unlucky German. I was able to persuade them to borrow large sums of money and speculate.

  With all the noise that is made about the danger of junk bonds and the leveraging of American industry, it is a wonder that more attention is not paid to the daily leveraging that occurs within investors’ portfolios. Say I wanted my customer to buy thirty million dollars’ worth of AT&T bonds. Even if he had no cash at his disposal, he could pledge the AT&T bonds as collateral and borrow the money from Salomon Brothers to buy the bonds. We were genuinely a full-service casino—a customer didn’t even need money to gamble in our house. This meant that even customers with small sums of money could be made to do large pieces of business. Since I had no large investors yet wanted to do big business and hear my name praised over the hoot and holler, I became adept at leveraging.

  Success bred success. Pretty soon Salomon management was leading me to the clients of other salespeople, in hopes that with larger customers I could do gargantuan pieces of business. By June 1986, six months into the job, I was plugged into several of the largest pools of money in Europe. On the other end of my telephone at my peak (when I left Salomon) the investors controlled, collectively, about fifty billion dollars. They were quick, aware, flexible, and rich. I had my own little full-service casino up and running, and it would, at its best, generate about ten million dollars a year in risk-free revenues for Salomon Brothers. We were told that each seat on the trading floor cost six hundred thousand dollars. If that was true, my business alone was generating more than nine million dollars in profits a year. I gradually ceased to worry about how much business I would do, for I was doing far more than I would ever be paid for.

  I soon had customers in London, Paris, Geneva, Zurich, Monte Carlo, Madrid, Sydney, Minneapolis, and Palm Beach. I was perceived within Salomon Brothers to be talking to the smartest money in the market apart from a few New York fund managers. With a good money-spinning idea I might be able to shuffle half a billion dollars or so around, by, for example, moving it out of the American stock market and into the German bond market. The markets in the long run are no doubt driven by fundamental economic laws—if the United States runs a persistent trade deficit, the dollar will eventually plummet—but in the short run money flows less rationally. Fear and, to a lesser extent, greed are what make money move. In watching the money move around, I began to anticipate its next move and maneuver a few of my fifty billion dollars in front of the next wave.

  I was, in short, doing pretty well. I stopped feeling like a geek the moment Salomon traders started asking my advice. And sometime in the middle of 1986, more by luck than by skill, I ceased to be a geek. I became a normal, established Salomon salesman. There was no one event that marked the change. I knew I was no longer a geek only because people stopped calling me geek and started calling me Michael, which I preferred. There is a difference between this, though, and being called Big Swinging Dick. A Big Swinging Dick, I was not. The journey from useless geek to Michael took about six months. The journey from Michael to Big Swinging Dick happened almost immediately thereafter and was occasioned by a single sale.

  There was a phenomenon known at Salomon as a priority. A priority was a huge number of bonds or stocks that had to be sold, either because selling them would make us rich or because not selling them would make us poor. When Texaco teetered on the brink of bankruptcy, for example, Salomon Brothers owned about one hundred million dollars’ worth of bonds in the company. There was a real danger that these bonds would become worthless. Unless sold to customers, they could cost Salomon a great deal of money. Sold to customers, of course, they would cost the customers a great deal of money. That, it was decided, was the best thing to do. Texaco bonds therefore became a priority for the Salomon sales force.

  One of the biggest priorities during my stay at Salomon was eighty-six million dollars’ worth of bonds in the property development company called Olympia & York. From mid-March to mid-August of 1986 the Biggest Swinging Dicks in the Salomon Brothers system did their best to sell these bonds and failed. Our failure was an embarrassment to everyone from President Tom Strauss to the lowest geek in London.

  One day Alexander and I were speaking on the phone. He had tried to sell the O&Ys and failed. But he genuinely believed they had merit. O&Y bonds were an unusual priority because they were owned not by a Salomon Brothers trader but by the single large Arab investor who ignored the blacklist and dealt with us. The Arab was desperate to sell the Olympia & Yorks, and not particularly knowledgeable about them, and would probably sell them cheaply.

  Second, attitudes toward bonds are subject to change for reasons not much more substantial than attitudes toward the length of women’s skirts. Simply because no one wanted the O&Ys now didn’t mean that no one would want them three months from now. O&Ys were a special case, because they were collateralized by a Manhattan skyscraper owned by Olympia & York rather than by the full faith and credit of the company. Many institutional investors hadn’t the expertise to evaluate real estate values. But as more bonds were backed by real estate, institutional investors were learning.

  Of course, Salomon Brothers could simply have bought the Olympia & Yorks for itself. But Salomon was not a long-term investor, and the thought of having eighty-six million dollars on the trading books for months, even years if the worst case happened and no one ever bought the bonds from us, didn’t delight our management. So we salesmen were searching for another buyer, and the stakes were high. The Arab investor had offered to buy another large block of bonds if and when we rid him of the Olympia & Yorks. The combination of that and the transfer of the Olympia & York bonds from the Arab to the next owner could net the firm as much as two million dollars.

  Now there was no one I trusted in quite the same way I trusted Alexander, so I decided to share my secret with him. My secret was that I knew a man who’d buy the Olympia & York bonds. I had known how to sell the Olympia & York bonds for a month but, remembering my experience with AT&Ts, kept the information to myself. The investor I had in mind, a Frenchman, wouldn’t want to hold them for long-only long enough for other investors to forget they’d ever turned them down. Then he’d sell them.

  Alexander helped me to persuade myself that if I went about selling the bonds in the right way, if I extracted promises from senior management that my customer would not get scalped, then everyone could win.

  Salomon would make a lot of money. My customer would make a little money (which, for a customer, was grand). And I would be a hero. If there was a single lesson I took away from Salomon Brothers, it is that rarely do all parties win. The nature of the game is zero sum. A dollar out of my customer’s pocket was a dollar in ours, and vice versa. But this was an unusual case. (I had to remind myself even as I sold the bonds. You see, part of selling bonds for Salomon was persuading yourself that a bad idea for Salomon was a good idea for a customer.) If management would promise to make the Olympia & Yorks a sales priority several months hence and remove them from my customer’s portfolio at a profit (i.e., stick someone else’s customer with them), then maybe we brave few could win. Alexander did the impossible every day, and talking to him occasionally made me feel I, too, could do the impossible: sell a priority and keep my customer happy.

  I walked across the London trading floor and spoke with the trader responsible for Olympia & York bonds. He sat next to the man responsible for the AT&Ts. He said, of course, that he’d promise to keep my customer happy. “Canyon really sell them, though?” he said. “Really? Really?” In his shifty eyes there was a mixture of disbelief that the bonds could be sold and greed at the thought of the profit he would make if they were. He was making promises, but he was thinking profits. I didn’t trust him. I changed my mind. I decided not to sell the bonds.

  But it was already t
oo late. Just making a simple inquiry about the bonds caused the Salomon empire to leap into action. Traders hung around my desk instinctually, like dogs trying to get at a bitch in heat. Over the next twenty-four hours I got calls from half a dozen salespeople in New York, Chicago, and Tokyo. They all said the same thing as the traders: C’mon pleeeease… Do it and you’ll be a hero. Salomon Brothers was speaking with one voice, and it was loud. None of these people, however, was in a position to make me the assurance I felt I needed. Then the phone rang at my desk. I picked it up. The voice on the other end of the line was vaguely familiar. It said, “Hey, slugger, how the fuck are you? You think you got a fuckin’ chance with these fuckin’ bonds?” It was the grand master of Fuckspeak, the Human Piranha.

  It was the first time we had spoken, and it turned out that responsibility for getting rid of the Olympia and York bonds fell ultimately to him. He promised that he would make sure my customer didn’t get hurt, and as meaningless as that would sound coming from others, from him it mattered. I knew him by having watched him and by his reputation. He was, as much as was possible in a world where the buck was almighty, a man of his word. He knew the bond markets better than any man at Salomon Brothers. I trusted him. I called Alexander and told him that I was about to sell the bonds. He quickly placed bets with managing directors on the forty-first floor that I would sell the bonds. He got odds of 10:1. This was insider trading at its most respectable.

  I then called my Frenchman and told him how a panicked Arab (dubbed “the camel jockey” by the Human Piranha) wanted to dump eighty-six million dollars’ worth of bonds cheaply; how the bonds were out of fashion and undervalued compared with other similar bonds in the marketplace; and how if he bought them and held them for a few months, a buyer in America might emerge. There was nothing spectacular about my sales pitch except the language in which it was couched. I used the language of the speculator. Most bond salesmen use the language of investment, analyzing the company and its prospects. I was vaguely aware that Olympia & York was involved in property. I was keenly aware that the whole world was lined up against its bonds. They were so out of fashion, I argued, they must be cheap.

  It was language my Frenchman understood. I knew that he, unlike most investors, would envision eighty-six million dollars’ worth of bonds as a quick trade. I considered him my best customer; he was easily my favorite. He trusted me, I think, even though we had known each other for only four months. And here I was, selling him something I probably wouldn’t touch with a barge pole if there hadn’t been such glory in it for me. I knew it was awful. But I feel much worse about it now than I did at the time. After thinking it over for maybe a minute, he bought the eighty-six million dollars’ worth of Olympia & Yorks.

  For two days messages of congratulations arrived from distant points in the Salomon Brothers system. Most of the bigwigs in the firm called to say how happy they were my Frenchman had bought eighty-six million dollars of O&Ys, and how bright my future was at Salomon Brothers. Strauss, Massey, Ranieri, Meriwether, and Voute each called separately, right on top of each other. I happened to be away from my seat. Dash Riprock fielded the calls and fumed, in a good-natured way, that they weren’t for him.

  But there was a trace of seriousness to his response. I was being blessed by the gods. Dash had done well, but he had never been blessed by the gods. I saw this ritual enacted several times in my time at Salomon Brothers, but never taken to such a ridiculous extreme as when I sold those godforsaken bonds. As a rule, the greater the praise lavished upon a salesman within Salomon, the greater the eventual suffering of the customer. I was delighted by the bits of sticky yellow notepaper on my desk that said, “Tom Strauss called to say great job,” but in the back of my mind I feared for my Frenchman.

  Finally, the sweetness of the moment dulled the pain of knowing I had just placed my most cherished customer in jeopardy. The most important call of all came. It was from the Human Piranha. “I heard you sold a few bonds,” he said. I tried to sound calm about the whole thing. He didn’t. He shouted into the phone, “That is fuckin’ awesome. I mean fuckin’ awesome. I fuckin’ mean fucking awesome. You are one Big Swinging Dick, and don’t ever let anybody tell you different.” It brought tears to my eyes to hear it, to be called a Big Swinging Dick by the man who, years ago, had given birth to the distinction and in my mind had the greatest right to confer it upon me.

  Chapter Nine

  The Art of War

  The supreme art of war is to subdue the enemy without fighting.

  —Sun-tzu

  I’M YELLING at the top of my lungs at the bellhop in my room at the Bristol Hotel in Paris: “What do you mean there is no bathrobe in my suite?” He’s backing toward the door shrugging his shoulders, as if he can’t do anything about it, the little shit. Then I notice. No fruit bowl. Where’s that bowl of apples and bananas that’s supposed to come with the suite? And hey, wait a minute. They’ve forgotten to fold the first tissue on the roll of toilet paper into a little triangle. I mean, can you believe this crap? “Goddammit,” I shout, “get me the manager. Now. Do you know what I’m paying to stay here? Do you?”

  Then I wake up. “It’s all right,” my wife is saying, “you were just having another hotel nightmare.” But it’s not just a hotel nightmare, and it’s not all right. Sometimes I dream I have been downgraded by British Airways from Club class to economy; other times it is even worse. The London restaurant Tante Claire has permitted someone else to sit at my favorite table. Or the driver is late in the morning. The things I go through. Investment banking nightmares have haunted me ever since I sold the Olympia & York bonds: spoiled rotten by a combination of too much luxury and the awesome stature of Big Swinging Dickdom. Imagine. No fruit bowl. Anyway, it’s over. And it’s 6:00 A.M. Time for work.

  Or is it? This day in August 1986 is special. I am about to have my first encounter with the sort of backstabbing and intrigue for which investment bankers are justifiably renowned. There are two kinds of friction within Salomon Brothers. The first is generated by people fighting to pin blame upon one another when money is lost. The second is generated by people fighting to claim credit when money is made. My first battle on the trading floor will be caused by profits rather than losses; this is good. I will win it; that is also good.

  There are no copyright laws in investment banking and no way to patent a good idea. Pride of authorship is superseded by pride of profits. If Salomon Brothers creates a new kind of bond or stock, within twenty-four hours Morgan Stanley, Goldman Sachs, and the rest will have figured out how it worked and will be trying to make one just like it. I understand this as part of the game. I recall that one of the first investment bankers I met taught me a poem.

  God gave you eyes, plagiarize.

  A handy ditty when competing with other firms. What I was about to learn, however, is that the poem was equally handy when competing within Salomon Brothers.

  At 10:00 A.M. that day in London, Alexander telephoned. He, of course, was in New York, where it was 5:00 A.M. He had been sleeping in his study, beside his Reuters machine, and rousing himself every hour to check prices. He wanted to know why the dollar was plunging. When the dollar moved, it was usually because some other central banker or politician somewhere had made a statement. (The markets would be far more peaceful if politicians kept their views on the future path of the dollar to themselves. In view of the high percentage of times they end up apologizing for, or modifying, their remarks, it is a wonder they don’t stifle themselves.) But there was no such news. I told Alexander that several Arabs had sold massive holdings of gold, for which they received dollars. They were selling those dollars for marks and thereby driving the dollar lower.

  I spent much of my working life inventing logical lies like this. Most of the time when markets move, no one has any idea why. A man who can tell a good story can make a good living as a broker. It was the job of people like me to make up reasons, to spin a plausible yarn. And it’s amazing what people will believe. He
avy selling out of the Middle East was an old standby. Since no one ever had any clue what the Arabs were doing with their money or why, no story involving Arabs could ever be refuted. So if you didn’t know why the dollar was falling, you shouted out something about Arabs Alexander, of course, had a keen sense of the value of my commentary. He just laughed.

  There was a more pressing matter to discuss. One of my customers was certain that the German bond market was due for a rise. He wanted to make a big bet on it. This Alexander found more interesting. If one investor felt strongly about German bonds, perhaps others did, too, and would drive that market higher. There are lots of ways to make the same bet. Up to that point my customer had simply bought hundreds of millions of deutschmarks’ worth of German government bonds. I wondered if there wasn’t a more daring play to be made in the market; this is a typical thought for a person who has becoming overly accustomed to betting other people’s money. Alexander and I sorted out my jumbled thoughts. And in the process we stumbled across a great idea, an entirely new security.