Liar's Poker

by Michael Lewis

  Little local wars were breaking out across the London trading floor. A couple of hitherto quiet types with Prussian names were now keeping copies of Clausewitz’s On War on their desks. Investment bankers usually read On War secretly not because they are embarrassed to be caught with it but because they don’t want to let anyone in on their technique. I recommended Sun-tzu, an ancient Chinese war genius, to one of my Prussian colleagues, and he looked at me with suspicion, as if I were going to fool him into believing that a Chinaman knew something about war.

  When the money goes away on a trading floor, it feels very like when the music stops in musical chairs. A few people close to their chairs amuse themselves by watching the others engage in mortal combat to secure a seat. Thoughts around Salomon Brothers turned away from the greater glory of the firm and focused on self-preservation. Who was fucking up? was the question most often asked.

  The salesmen blamed the traders, and the traders blamed the salesmen. Why couldn’t we sell their bonds to stupid European investors? the traders wanted to know. Why couldn’t they find bonds that weren’t so embarrassingly awful? the salesmen wanted to know. I was told by one trader, who was trying to off-load an AT&T style rip-off onto one of my customers, that I needed to be more of a team player. I was tempted to ask, “What team?” I could probably have sold his bonds and saved him some money, but it would have come at the expense of a relationship. Telling traders to live with their mistakes, which I did on rare brave occasions, was not a moral but a business judgment. In my view, the solution to AT&T nightmares was not to dump them into the portfolios of my customers but to sack the traders who got us into the problems in the first place. The traders, of course, didn’t agree.

  The plain fact was that a combination of market forces and gross mismanagement had thrown Salomon Brothers into deep trouble. At times it was as if we had no management at all. No one put a stop to the infighting; no one gave us a sense of direction; no one put a halt to our rapid growth; no one wanted to make the hard decisions that businessmen, like generals, simply have to make.

  Taking place on the trading floor was a strange inversion that became more apparent the longer management failed to grasp events. The grunts were better able to diagnose the problems of our business than the generals. Ordinary salesmen were on the telephone all day every day with the source of our revenues: European institutional investors. And Salomon salespeople in December 1986 heard a new tone in their customers’ voices and saw a couple of coincidental changes at once to which management was blind.

  First, investors were increasingly irritated with the slash-and-burn approach Salomon Brothers and other American investment banks took to customer relations. People who controlled enormous pools of capital (investors in France and Germany, for example) were refusing to buy their stocks and bonds from us. “You must understand,” a weary French female investor told me one day as she fended off a Salomon Brothers priority, “we are tired of being ripped off by Drexel Burnham and Goldman Sachs and Salomon Brothers and the other Americans.”

  There is, or was, a fundamental difference between European institutional investors and their American counterparts, noticed by every New York trader who spent any time in our office. Investment banking in America is a long-standing oligopoly. A small number of “name” investment banks compete to raise capital. American investors (the lenders of money) have been trained to think that they can only do business with a handful of large investment banks. And very generally, the interests of lenders in New York take a back seat to the interests of the corporate borrowers. So, in New York, bond and stock deals are driven not by whether investors (lenders) want to buy them but by whether companies want to raise the money.

  I was never sure why this happened. I mean, you’d think that the borrower of money would be just as likely to be screwed by the middleman as the lender. But he isn’t. The Wall Street oligopoly that cost lenders so dearly doesn’t seem to affect the borrowers, perhaps because they are smart enough to play the few investment banks off against one another, perhaps because they are less dependent on Wall Street in the first place; after all, if they don’t like the terms on a bond deal, they can always take a loan from a bank. Anyway, no one dreams of trying to fool, say, IBM into issuing cheap stocks or bonds. IBM is regarded as too important to anger and therefore always issues its stocks and bonds dear. Wall Street salesmen then try to fool investors into buying the overpriced merchandise.

  European lenders (my customers) didn’t know how to roll over and play dead. You could sucker them once, but if you did, they’d never come back. Unlike their American counterparts, they didn’t understand that they couldn’t live without the services of Salomon Brothers. A Salomon trader in New York once told me, “The problem with the London office is that the customers aren’t trained.” But why should they be? If they didn’t like us, they could simply deal with an English or a French or a Japanese competitor. Whether the foreign banks were more user-friendly than we, I do not know. What was clear, however, is that hundreds of firms could do most of what we did.

  One could not and I would not attempt to persuade our management of this sad fact. Its response would have been to shoot the messenger. (“Whaddya mean we’re no different from anyone else? If it’s true, then you are not doing your job.”) But I recall at the time a short trip to Geneva, where I met with a man in control of a mere eighty-six million dollars, who put the matter in a nutshell for me. As we sat in his office speaking, one of his accountants barged in, waving a sheet of paper.

  “Two hundred eighty-five,” he said, then left.

  The figure 285, it turned out, was the number of different investment bankers he had dealt with in the previous year. If the episode was staged to psych me out, it worked. I didn’t know, I gulped, that there were 285 investment bankers in the whole world.

  “There aren’t,” he said. “There are more. And they are all the same.”

  In other words, the whole idea of globalization was a canard. The brave new world of advanced communications and a single worldwide market for capital did not necessarily imply that a small handful of investment banks such as Salomon would dominate the world. It meant that money bounced more freely around the globe. But there didn’t seem to be the same economies of scale in handling that money as in, say, frozen green beans.

  Debt issuance and bond trading were no longer the domain of a single firm, but of hundreds. Many of the new players didn’t share our exalted sense of self-worth. Japanese banks such as Nomura, American commercial banks such as Morgan Guaranty, and European monoliths like Credit Suisse all were willing to do the same job as Salomon Brothers in Europe, and for far less pay. Even tiny firms of six men in dingy offices with low overheads were able to compete by slashing prices to the bone. They had the same information we did. Information, with communications, was becoming cheaper and easier to obtain. We were being driven from our markets by lower-cost foreign producers just as American steel and automobile companies were before us.

  Our poor management had been saddled with an impossible task. The orders received from the New York war room bore no relation to conditions in the field. The London office had been charged by John Gutfreund and Tom Strauss with implementing a flawed strategy. Gutfreund and Strauss were still enamored with the notion of global domination. They were inclined to blame their lieutenants for poor execution of a brilliant plan rather than question the plan itself. The lieutenants responded with a resounding chorus of the Salomon Brothers in Europe theme song, called “It’s Not My Fault, I Only Just Got Here!”

  That was true. The London managers, like the geeks, were too new to the market to question the strategy. Miles Slater, our chief executive officer, was a forty-three-year-old American who hadn’t arrived in London until June 1986, six months after I did. Bruce Koepgen, the head of sales, was a thirty-four-year-old American who arrived in London for the first time in 1985, six months before I did. The chairman of the operation, Charlie McVeigh, was a forty-five-year-old A
merican who had a great deal of experience but was more the firm’s diplomat than its manager. At no time had there been a managing director of Salomon Brothers in London who spoke any language but English.

  In November 1986 our offices moved from the doughnut in the heart of London’s financial district into the airspace immediately above Victoria Station, now named Victoria Plaza. The new office was nearly as large as the station itself and more a sign of our optimism than our needs. “When I saw the opening of the London office,” says William Salomon, “with a trading floor twice as big as New York’s, I saw excess to the greatest degree.”

  Our grand new place was only a short walk down Buckingham Palace Road from that saintly creature the queen mother. A long escalator ran from the street of kings through a passage of chrome and mirrors to the dizzy heights of our trading floor. The trading floor wasn’t at the top of the escalator. That would have been too economical. At the top of the escalator was a massive space with the feel of a Hyatt Regency lobby, filled with sofas, plants, and an enormous bronze statue of a sprinting rabbit. The rabbit was a non sequitur. Its design did not suggest a Wall Street firm bravely speeding into the future so much as Bugs Bunny scampering between holes one step ahead of Elmer Fudd. At Christmastime the traders hung huge silver ornaments from the rabbit’s tail to give it balls; later an umbrella served as what the British call a willy.

  Clearly as much time had been spent on how the new office should look as on how it should function. The space age escalator and exposed metal piping of the foyer segued into a spiraling wooden staircase and crinkly old master prints. This wasn’t an office so much as a Hollywood set in transition, with 2001: A Space Odyssey coming down and Gone with the Wind going up. To British clients coming off the street, the place was simply amusingly American. They’d whisper to each other that it looked like some god-awful mistake they had once seen in New York, and that was before they saw the flocked wallpaper, the fuzzy-wuzzy stuff New Yorkers associate with Tad’s Steak House and Londoners with about a thousand Indian restaurants.

  One day my Frenchman, by this time a skeptical owner of eighty-six million dollars of Olympia and York bonds (he eventually escaped with a small profit and never forgave me for the hell I put him through), came to lunch and ran his critical hand along our carved oak banister. He then examined the nearby red and cream wallpaper as if it were a vast furry zit. “I suppose we paid for this, didn’t we?” he asked. The tone in his voice suggested not so much disapproval of our high commissions as dismay at the use to which the proceeds had been put.

  The new trading floor, once you found it, seemed more than twice the size of the forty-first floor in New York and was equipped with all the latest gadgetry. Four men could (and did) use it to pass and punt a Nerf football unconstrained in any direction by space. The vastness was otherwise a hindrance, however, like shoes five sizes too big. The place had none of the high-strung tension of the New York trading floor. What little energy we generated dissipated in the rafters. The silence made us feel lazy and enabled people to hide. Hiding is what people did when they weren’t doing business. I had the urge to walk out into the center of the trading floor and shout, “Allialliincomefree,” just to see who had bothered to show up for work. The empty feeling of the place niggled management. Having spent years in New York before being sent to London, the managers associated noise with profits and silence with losses.

  Quick, just give me my money while there is still some left. That was the general sentiment in the air at the end of 1986 for the aforementioned reasons. As we moved into Victoria Plaza, a jury of managing directors was forming in New York to divide the spoils. The money was handed out on December 21, and till that time people thought and spoke of nothing but bonuses. The way our business froze was fascinating but, I suppose, predictable. This is the moment we had all been waiting for.

  By edict from Gutfreund, a floor and a ceiling were set each year around the bonuses of first-and second-year employees irrespective of their achievements. It was a tradition for first-and second-year Salomonites to speculate about the likelihood of the band’s being lifted. Much of my time during the last six weeks of the year was therefore spent fielding phone calls from and placing phone calls to my former training classmates, now spread throughout the Salomon system. We spoke of nothing but the band. There were two sorts of conversations. First, we discussed the band as it applied to us all.

  “Last year it was sixty-five to eighty-five [thousand dollars],” one or the other would say.

  “I heard it was fifty-five to ninety.”

  “No way they would make the band that wide first year out.”

  “How else are they going to pay the producers?”

  “You think they give a shit about the producers? They’re out to keep as much for themselves as they can.”

  “Yeah, guess you’re right, oops, gotta hop.”

  “Later.”

  And, second, we discussed the band as it applied to one of us specifically:

  “If they don’t pay me eighty, I’m going to Goldman,” one or the other would say.

  “Aw, they’ll pay you eighty. You’re one of the biggest producers in the class. Fuck, they’re already ripping you off.”

  “Goldman would guarantee at least a hundred and eighty. These people are screwing us.”

  “Yeah.”

  “Yeah.”

  “Yeah!”

  “Yeah!”

  “Gotta hop.”

  “Later.”

  Bonus day, when it arrived, was a enthralling reprieve from my daily routine of chatting with investors and placing bets in the markets. Watching the faces of other people as they emerged from their meetings was worth a thousand lectures on the meaning of money in our small society. People responded in one of three ways when they heard how much richer they were; with relief, with joy, and with anger. Most felt some blend of the three. A few felt all three distinctly: relief when told, joy when it occurred to them what to buy, and anger when they heard that others of their level had been paid much more. But the look on their faces was always the same no matter what the sizes of their bonuses: They looked sick to their stomachs. It was as if they had eaten too much chocolate pie.

  Being paid was sheer misery for many. On January 1, 1987, 1986 would be erased from memory except for a single number: the amount of money you were paid. That number was the final summing-up. Imagine being told you will meet with the divine Creator in a year’s time to be told your worth as a human being. You’d be a little edgy about the whole thing, too, wouldn’t you? That’s roughly what we endured. People felt a wave of pure emotion waft over them immediately on the heels of a year of single-minded pursuit of success, and it made their stomachs churn. Worse, they had to hide it. The game had to be played. It was rude to gloat too soon after being paid and embarrassing to show anger. The people who had it best felt unpunctuated relief. They had been paid pretty much what they had expected. No surprise. No reaction. Good. That made it easier to seem impassive. It was over.

  My own compensation meeting was late in the day. I met with my jungle guide, Stu Willicker, and the sales manager of the London office, Bruce Koepgen, in one of the Gone with the Wind dining rooms. My jungle guide simply listened and smiled. Koepgen, said to be destined for greatness in Salomon Brothers, spoke for the organization.

  I’d like to say I was as cold and calculating as a hit man facing a Mafia don after the job has been done. But that just wouldn’t be true. I was more on edge than I had expected. All I—or anyone else—really wanted to know was the size of my bonus. But I had to sit through a much longer speech, for reasons I didn’t at first understand.

  The managing director shuffled some papers in front of him, then began. “I have seen a lot of people come through here and shoot the lights out in their first year,” he said, then named a few young managing directors as examples. “But I have never seen anyone have the kind of year that you have had.” He began to list names again. “Not Bill, not Rich, n
ot Joe,” he said. And then: “Not even [the Human Piranha].” Not even the Human Piranha? Not even the Human Piranha!

  “What can I say,” he said, “but congratulations?” He spoke for about five minutes and achieved the desired effect. When he finished, I was prepared to pay him for the privilege of working at Salomon Brothers.

  And I thought I knew how to sell. The boss put my small abilities to shame. He pushed all the right buttons. Most of the cynicism and bitterness I was developing for the organization melted. I felt deeply reverent about the firm, my numerous bosses, John Gutfreund, the AT&T trader, and everybody who had ever had anything to do with Salomon Brothers except perhaps the opportunist. I didn’t care about money. I just wanted this man to approve of my performance. I began to understand why they gave you a talk before they give you the money.

  Like priests, paymasters in the Salomon empire followed a time-honored pattern. The money always came as an afterthought and in a knot you had to disentangle. “Last year you made ninety thousand dollars,”he said.

  Forty-five was salary. So forty-five was bonus.

  “Next year your salary will be sixty thousand dollars. Now let me explain those numbers.”

  While he was explaining that I was paid more than anyone else in my training class (I later learned that three others were paid as much), I was converting ninety thousand dollars into British pounds (fifty-six thousand) and putting that into perspective. It was certainly more than I was worth in the abstract. It was more than I had contributed to society; Christ, if social contribution had been the measure, I should have been billed rather than paid at the end of the year. It was more than my father had made when he was twenty-six, even factoring in inflation, which I did. It was more than anyone else my age I knew made. Ha! I was rich. I loved my employer. My employer loved me. I was happy. Then the meeting ended.