Liar's Poker

by Michael Lewis

  My client loved risk. Risk, I had learned, was a commodity in itself. Risk could be canned and sold like tomatoes. Different investors place different prices on risk. If you are able, as it were, to buy risk from one investor cheaply and sell it to another investor dearly, you can make money without taking any risk yourself. And this is what we did.

  My client wanted to take a big risk by wagering a large sum of money on German bonds rising. He was therefore the “buyer” of risk. Alexander and I created a security, called a warrant or a call option, which was a means of transferring risk from one party to another. In buying our warrant, risk-averse investors from around the world (meaning most investors) would be, in effect, selling us risk. Many of these investors would not know they wanted to sell risk on the German bond market until we suggested it to them with our new warrant, just as most people didn’t know they wanted to plug their ears all day and listen to Pink Floyd until Sony produced the Walkman. Part of our job was to fill needs that investors never knew they had. We’d rely on Salomon’s sales force to generate demand for our new product, which, because it was unique, was pretty sure to succeed. The difference between what we paid cautious investors for the risk and what we sold it to my customer for would be our profits. We estimated these would come to about seven hundred thousand dollars.

  The idea was a dream. Salomon Brothers, which sat in the middle of this transfer of risk, would take no risk whatsoever. Seven hundred thousand risk-free dollars was a refreshing sight for Salomon management. But even more important, as far as Salomon was concerned, was the novelty of our deal. A warrant on German interest rates was new. The publicity of being the first investment bank ever to issue them was the sort of thing that drives investment bankers mad with desire.

  As we hashed out the deal, people on the trading floor began to grow curious. A vice-president from another area of the trading floor, a salesman usually responsible for talking with large corporations, started to sniff around. I’ll call this man the opportunist. He decided that it was his mission to play a part in our deal. I voiced no objection. He had worked at Salomon for six years, twice as long as Alexander and I combined, and we could use his experience. The opportunist, for his part, had nothing else to do. Bonus time was fast approaching. He desperately wanted to distinguish himself and saw our deal as his chance.

  To be fair, the opportunist was not entirely without purpose. We had overlooked the need to obtain the approval of the German government, and the opportunist saved us from embarrassment. The German government had no say in the Euromarkets. The beauty of the Euromarket was that it fell under no government’s jurisdiction. We could, in theory, have ignored the Germans. But we had to be polite. Salomon Brothers hoped to open an office in Frankfurt, and the last thing the firm needed was angry German politicians.

  So the opportunist became our emissary to the German Finance Ministry. He persuaded the authorities that our deal would neither undermine their ability to control their money supply (true) nor encourage speculation in German interest rates (false; the whole point was to facilitate speculation). You had to give him credit for playing to the sensibilities of his audience. He wisely wore camouflage on his trips to Frankfurt: long-term investor brown. Brown suits, brown shoes, and brown ties. No red suspenders with gold dollar signs. No gold cuff links. Playing his part of a sober burgher, he won the confidence of senior officials at the ministry, right up, I believe, to the minister of finance himself.

  In several weeks of talks there were only small hiccups. In one of the meetings, it was reported, the Germans were upset at the media attention the deal might attract. Not fully understanding all the implications of our warrant, they feared having their good name too closely associated with it. We said we would keep publicity to a minimum. They asked about the tombstone, the public announcement that would appear in the financial press at the end of the deal. We said that we wanted a tombstone (just as a souvenir) but that we wouldn’t advertise it in the press. They agreed to let us have our tombstone on the condition that we didn’t print upon it the symbol of the Federal Republic of Germany, the eagle. We jokingly suggested a swastika as a substitute. Apparently they didn’t find that as funny as I did. That was our one break with sobriety.

  When the deal finally went through, it was a smashing success. Salomon Brothers and my customer made out like bandits. It was clear that Alexander and I were in for a bit of local fame. The opportunist, too, deserved applause. Then the trouble began. The afternoon on which the deal was launched, a memo was circulated in London and New York, describing how the deal had been done (the novel structure was regarded as clever and therefore a boasting matter). No mention of the memo was made of Alexander, my client, or myself. The memo was signed: the opportunist.

  It was a subtle but effective stunt. As incredible as it may sound to those unfamiliar with the business, none of the bosses in either New York or London fully understood what we had done. Anyone who has been in the business knows that this is the norm. And by explaining the deal to senior management, the opportunist made it seem as if he were entirely responsible for it.

  It was so clearly unjust, so wildly deceitful (how did he think he was going to get away with it? I still wonder) that I should have laughed. At the time, however, it didn’t seem funny. I headed toward his desk to do him violence. Throwing phones was OK. Shouting abuse was OK. Pounding a colleague to mush was not OK. I hoped I wouldn’t hit him, but if I did, I hoped he’d hit me back. Then we’d both be fired.

  The opportunist, it turned out, was one step ahead of me. He had raced to catch the first Concorde to New York the moment his memo hit the Xerox machine. Not that he was trying to avoid me. I don’t think it ever crossed his mind to worry about me. As far as he knew, I didn’t know anybody in the firm important enough to interfere with his fun. Anyway, if he were simply trying to disappear, a first-class ticket on a standard commercial airline would have done.

  At the very moment I was staring at his empty chair on the London airline opportunist was doing what Alexander aptly described as a “victory lap” around the forty-first floor in New York. On his jog around 41, he stopped and told people like Strauss and Gutfreund how well the deal had gone. Of course, he didn’t say, “I did the deal, and I am truly deserving of a large bonus when the time comes,” although that is what he meant. He had no need to be so blatant. His memo had preceded him. That he did the deal was implicit in his return to New York to tell everyone about it and that he mentioned no other name but his own.

  Probably everyone knows how infuriating it is to be robbed by another person. But you don’t know bitterness until you’ve been screwed by an entire system. And that was happening. No senior person seemed to know the truth. The chairman of Salomon Brothers International passed by my desk holding the evil memo. “I just want to thank you for your help,” he said. “The opportunist couldn’t have done his deal without your relationship with your customer.”

  His deal? “You moron,” I wanted to scream, “you have been duped.” I smiled and said thank you.

  People in New York, Alexander told me, were saying how smart the opportunist was. Alexander had every right to be at least as angry as I. He was philosophical. “Don’t worry,” he said. “He’s done it before. It happens.” At least I had been credited with a minor assist. Alexander wasn’t even that fortunate. His contribution to Salomon financial history had been completely ignored. We had a choice, Alexander and I. We could either get mad or get even. I put the matter to Alexander for consideration. We were both in a position to scream bloody murder. What was the point of being a Big Swinging Dick if you stood stoically as sand was kicked in your face by scumbag vice-presidents? But screaming in a corporation, even in a corporation as Neanderthalish as Salomon, was counterproductive. We might have had the opportunist’s head, but at a cost. He was a member of the Voute family. We were members of the Strauss family. If we made a stink, it would smell all the way to high heaven, or at least to the office of the chairman. The is
sue would be obscured by family loyalties. Mafia wars were messy. So how did we nail the opportunist without resorting to high-level warfare? How did we zap the cancer without killing healthy cells?

  Alexander listened to my tirade and decided, instead, to be an adult and ignore the whole thing. Alexander’s view was that a man doesn’t progress in a corporation by stepping on top of others; if the opportunist had stepped on us;, we should wipe ourselves off and forget about it. He was right no doubt. But I broke ranks with him. I decided to be a child and get even. I was in the jungle now and developing a taste for guerrilla warfare.

  My degree in art history finally served my career. I knew all about frauds. Ask yourself: What would a painter do if a rival stole his work and put his name on it? He’d paint a replica and issue a challenge for the rival to do the same. And that’s what I did. The analogy obviously isn’t perfect because for most people a warrant is easier to fake than a Rembrandt, or even a Jackson Pollock. But I didn’t need to prove him a complete fraud; I just had to cast doubt on his assertions. The opportunist had represented himself as the sole source of warrant wisdom, and if that could be disapproved, he would, to an extent, be discredited. We (for I enjoyed Alexander’s mischievous support, if not his approval) conceived another deal, similar enough to the first as to be unmistakably from the same hand. It involved government bonds of Japan, not Germany, and had a slightly different underlying structure, the details of which, for my pressent purposes, are irrelevant.

  With the deal sstructured, I didn’t go to the opportunist and ask him to play emissary to the relevant government. The opportunist was told what he deserved to know: nothing. Then, before the deal came off, I did my own lap off the forty-first floor of New York. Call it a warm-up lap. A warm-up lap, unlike a victory lap, could be done by telephone.

  I made several calls. The opportunist, though he liked to claim that he reported directlly to John Gutfreund, had a boss. His boss sat on the forty-first floor and was still basking in the reflected glory of his minion. Suddenly the boss found himself in an awkward situation. Several men of his rank ribbed him about the new Japanese deal, saying in effect, “It seems that the brains of this operation may have been somewhere other than in the head off your employee.” The opportunist’s boss called the opportunist to ask why he (the boss) hadn’t been informed of this new deal. The opportunist did not know about the deal either, nor did he convincingly demonstrate that he understood it. My phone bombs had found their target.

  I was willing to stop being a pig and leave the matter at that. He wasn’t. About an hour after I had completed my warm-up lap, the opportunist was stamding over me, glaring. I was surprised by how huffy he was. It was all I could do to stifle a chuckle. He looked the way I felt when I first read his memo. He had convinced himself, I think, that the German warrant had been his idea all along. I gave him the closest I could manage to a smile, which I’m afraid must have seemed like a cheese-eating grin.

  “Come with me for a minute,” he said.

  “Sorry, I’m busy,” I lied, “we’ll have to do it another time.”

  “I’ll be here at eight o’clock tonight. You should be, too,” he said.

  I would have skipped out, but as it happened, I was required to be in my seat at eight o’clock that night for other reasons. So, unfortunately, we met.

  “Come into Charlie’s office,” said the opportunist at precisely eight o’clock. Charlie was our chairman. One of the opportunist’s more charming habits was that, though he was but a mere dime-a-dozen vice-president, he used the office of our chairman as if it were his own. As expected, he took the seat behind the desk. I took the chair on the other side and felt like a schoolboy about to be scolded. He was the thief, I reminded myself.

  Perhaps I give Salomon Brothers too much credit, and myself too little, but I think that what crossed my mind next would never have done so before I set foot on the trading floor. In short, I decided to do him in. For the purpose, I found Machiavellian resources I hadn’t known I possessed, which is saying something. The joy of having the upper hand swept over me. Instead of being uneasy or anxious or angry, I suddenly relished the thought of calculated confrontation. It was clear how to do maximum damage: to say as little as possible and give him the chance to say something he shouldn’t.

  The opportunist had had a chance to calm down. He was painfully deliberate as he began to speak. He was sane in every respect but one, and that was his stratospheric sense of self-importance. He was smart, I’ll give him that. What he didn’t realize was that everybody else was smart, too. He had one foot up on the desk and was looking down at an object—a pen, I think—he held in his hand. He jiggled the object in his palm, Queeg-like. He wouldn’t look me in the eye.

  “I gave you more credit,” he said. “Most of the people around here are stupid. I thought you were smarter than that.”

  Most of the people around Salomon were distinctly not stupid, but it was the sort of thing he would say. “What do you mean?” I asked.

  “I got a call from [his boss], and he said you’ve been spreading the word about a Japanese warrant,” he said.

  “So what?” I asked.

  “So why didn’t you tell me? What do you think you’re doing?” he asked. He paused for a moment, then continued. “You can’t do a deal without my help. I can stop your deal from happening with a single phone call… ” He then listed several billion dollars’ worth of deals in the past that were or weren’t done by Salomon Brothers because of him.

  “Why on earth would you interfere with my deal if it is going to be a profitable piece of business?” I asked.

  I knew precisely why he would interfere with a profitable piece of business. If he wasn’t going to get the credit, he didn’t want to see it happen. It would shatter the illusion he was trying to create of having a unique grasp of this new warrant business. If he succeeded in creating the illusion, the firm would pay him more money at the end of the year. Of all this, I was aware. He knew I was aware. That made him angry. And getting angry was his biggest mistake.

  “I can get you fired,” he said, “with a single phone call [there was drama in his phone calls]. All I’ve got to do is call [his boss] or John [Gutfreund] and you are out of here.”

  That was it. I had just drawn a fourth ace. The opportunist was bluffing, and it was written all over his face. Sitting on a trading floor all day makes you that much more sensitive to people’s little bluffs. They were almost always transparent. And once you caught them, you owned them, like a fish well hooked. You could let them off the hook, or you could reel them in. In this case I had already made up my mind what to do. The opportunist was way out of line. He couldn’t get me fired. Not even close. What is more, a lot of people would be angry when they learned of his threat. He had stepped, albeit in a way I didn’t expect, into trouble. I’d never had a plot to destroy someone work out so well before. Come to think of it, I’d never before had a plot to destroy someone.

  There was no point in continuing. I feigned concern. I told him that I was sorry, that I would never do it again, and that whenever I had a good idea in the future, I would be sure to run straight away and give it to him. Somehow he believed me.

  What the opportunist had neglected to consider in his scheme was the omniscient, omnipotent, omnivorous Presence. No, not God. A person on the trading floor known as a syndicate manager. Syndicate managers on Wall Street and in the City of London are charged with the job of coordinating all deals; the London syndicate manager of Salomon, one of the few powerful women within the firm, had coordinated our German warrant. Syndicate managers are the investment banking equivalents of chiefs of staff in the White House or general managers of professional sports teams. John Gutfreund had made his reputation as a syndicate manager. The role produces masters of realpolitik, Machiavellian in the original sense of the word. They see all. They hear all. They know all. You don’t cross a syndicate manager. If you do, you get hurt.

  The next day I told the London
syndicate manager of my conversation the previous night. She knew the truth of the German warrant deal because she had played a role in its success. She was even angrier than I had hoped. She was also extremely plugged in at Salomon Brothers, in a way that the opportunist was not. I mercilessly left his fate in her hands; it was like leaving a goldfish in the care of an alley cat. Only then, after it was too late to reverse the process, did I feel remorse. But not much. Even my conscience was becoming calculating, permitting me to feel just enough guilt to live with myself but not enough to prevent me from doing in creeps.

  I didn’t learn until much later the end of the story. The woman I had spoken with was directly responsible for deciding what the opportunist was paid. The opportunist was expecting a lot of money and a promotion from vice-president to director. The promotion was critical to his future. This woman made five or six phone calls and squashed his plans. I had to wait until bonus time, the end of December, to see the effect. Promotions were announced a week before the money was passed out. The opportunist remained a vice-president. Once his bonus had landed in his bank account, he quit the firm.

  At this point in the story, in the fall of 1986, my fortunes and the fortunes of my firm diverge. The money poured in through my telephone, but it didn’t seem to register on the bottom line of Salomon Brothers. The bull market in bonds finally lost its head of steam. In November the market plunged briefly, and financial Darwinism prevailed. Many weak Salomon traders, along with a few customers, blew themselves up. Fewer customers and nervous traders meant that the volume of deals declined. Most salesmen spent less time answering phone calls from frenzied gamblers and more time trying to seem busy. At the end of the year bonuses would be paid. For the first time in many, many years at Salomon Brothers, Christmas looked to be a time of sadness.