And I thought again. When I had a moment to reflect, I decided I wasn’t so pleased. Weird, huh? This was Salomon Brothers, remember. These were the same people who had me blowing up customers with exploding AT&T bonds. They were perfectly capable of turning the same firepower on me as they used on my customers. I had done their dirty work for a year and had only a few thousand dollars to show for it.
Money out of my pocket was money in the pocket of the man who has sung my praises. He knew that better than I. Words were cheap. He knew that too.
I decided, in the end, I had been taken for a ride, a view I still think is strictly correct. I wasn’t sure how many millions of dollars I had made for Salomon Brothers, but by any fair measure I deserved much more than ninety thousand dollars. By the standards of our monopoly money business, ninety grand was like being on welfare. I felt cheated, genuinely indignant. How else could I feel? I looked around me and saw people getting much more when they hadn’t generated a penny of the revenues themselves.
“You don’t get rich in this business,” said Alexander when I complained privately to him. “You only attain new levels of relative poverty. You think Gutfreund feels rich? I’ll bet not.” Wise man, Alexander. He studied Buddhism, which he liked to use to explain his detachment. On the other hand, he was three full years out of the training program and no longer constrained by the band. The firm had just paid him a fantastic sum of money. He could afford his lofty sentiment.
He had, however, put his finger on the insatiable hunger for more felt by anyone who had succeeded at Salomon Brothers and probably at any Wall Street firm. The hunger or, if you will, the greed took different forms, some of which were healthier for Salomon Brothers than others. The most poisonous was the desire to have more now: short-term greed rather than long-term greed. People who are short-term greedy aren’t loyal. Salomon Brothers people in 1986 wanted their money now because it looked as if the firm were heading for disaster. Who knew what 1987 would bring?
Shortly after bonus time, London traders and salespeople—along with Ranieri’s people in New York—began to stream out the door for more money elsewhere. Big guarantees were still being made by other firms to Salomon traders and salesmen. The older employees, who were playing for real money, had been bitterly disappointed. They had expected, say $800,000 and had received only $450,000. There simply wasn’t enough to go around. It had been a terrible year for the firm, yet somehow each person individually felt he had done well.
A year after I arrived I was able to look around me and count on two hands and a foot the number of people who had been with the firm longer than I. All but three of the twenty or so older Europeans who had set the office pace in the age of the two-bottle lunch had left for greener pastures. Each was quickly replaced with half a dozen geeks, so that though people were quitting as fast as they could find other jobs, the firm expanded.
Finding the bodies was simply not a problem. By the end of 1986 traces of the American collegiate madness appeared in Britain. There was the same eerie popular feeling that no job was worth taking outside investment banking. I was called upon at the end of the year to give a talk to the Conservative Students Society at the London School of Economics. If there was a place on earth able to resist both a Conservative Students Society and the temptation of Salomon Brothers, it was the LSE, a traditional hotbed of left-wing sentiment.
The subject of my speech was the bond market. That, I figured, would keep them away in droves. Anything about the bond market promises to be long and dull. Yet in the event more than one hundred students turned up, and when one seedy-looking fellow who was guzzling a beer in the back shouted that I was a parasite, he was booed down. After the talk I was besieged not with abuse, and not with questions about the bond market, but with questions about how to get a job at Salomon Brothers. One young British radical claimed to have memorized the entire starting lineup of the New York Giants because he had heard the personnel director at Salomon was a Giants fan (true). Another wanted to know if it was a fact, as he had read in the Economist, that people at Salomon Brothers didn’t stab you in the back but came at you head-on with a hatchet. What was the best way to show that he was sufficiently aggressive? Was it possible to go too far, or should he just let it all hang out?
At its peak in mid-1987 Victoria Plaza contained nine hundred people and looked more like a day-care center than the flagship office of a global empire. The ever-apposite Dash Riprock looked up one day and said, “Just the managing directors and the kiddies.” By then I knew what he meant almost before he said it; I had an inbuilt Dash Riprock decoding device. The average length of service of my colleagues in London fell rapidly from six years to less than two years. Their average age, once well into the thirties, was about twenty-five.
Throughout early 1987 a tired old joke circulated that a sign was soon to be posted beside the exit from the trading floor: WILL THE LAST ONE OUT PLEASE TURN OUT THE LIGHTS? Then a fresh new joke (to me, at least) made the rounds. Only it turned out to be true. The head trader of British government bonds (called gilts) had quit. The managing directors of the London office fell to their knees (figuratively speaking) and pleaded with him to stay. He was the backbone of a new and fragile enterprise, they said. Screw backbones, he said, he had been offered much more money by Goldman Sachs, and he was going to get while the getting was still good. He was, after all, merely a trader trading his services. What did they expect? They expected, they said, for him to forget about trading for a moment and consider the importance of loyalty to the firm.
And you know what he said to that? He said, “You want loyalty, hire a cocker spaniel.”
Chapter Ten
How Can We Make you Happier?
HERE DEVELOPED a pattern to our existence. Each month began with an analysis of our small unit’s performance, each week with an office meeting, and each day with a series of phone calls to whoever we thought might like to roll the dice. Dash Riprock beat me to our desk each morning by at least an hour. He had this idea that his bonus might suffer if a boss caught him away from his telephone. He was quite mistaken. The bosses rightly cared far more about how much money we squeezed from our customers than how much time we spent squeezing. Nevertheless, Dash was shocked I had the audacity to arrive after 7:45 A. M. and would occasionally broadcast my arrival over the hoot and holler: “I’d just like to thank Michael Lewis for coming into work today. Give him a big hand, ladies and gentlemen.”
Then we’d lapse into what I can only describe as a stream of consciousness communication. When we weren’t talking about his future, or how to beat the market, or the fate of Salomon Brothers, or how to educate the three geeks who now worked for us, we jabbered at each other like Jewish mothers. It was typical of social conversation on the trading floor.
DASH: Saw a painting at Sotheby’s today. Might buy it.
ME: Where did you get that suit?
DASH: Where’s the yen?
ME: Can I borrow your Atlantic Monthly!
DASH: I bought it in Hong Kong. Four hundred bucks. Costs eight hundred here.
ME: Who’s the artist?
DASH: Yeah, but give it back. Or you’re dead.
ME: Are they going to pay us at the end of the year?
DASH: Michael, do they ever pay us at the end of the year?
On one day late in the second year, September 24, 1987, the pattern was unexpectedly broken. True, Dash huddled for privacy in his usual tuck position. True, I was waiting for him to emerge with his usual payload so I could tell him yet another tasteless joke about President Ronbo. But I never got my chance. For as I waited someone shouted, “We’re in play!”
Dash, finger in ear, absorbed in the art of selling bonds, didn’t hear a thing. I checked my news screens. If people still rubbed their eyes when they didn’t believe what they were seeing, that’s what I would have done. News was flashing across that Ronald O. Perelman, the rive-foot-four-inch husband of a New York gossip columnist, the notorious hostile raider who had la
tely conquered the cosmetic firm Revlon, was making a bid to buy a large chunk of Salomon Brothers. His financial backer was Drexel Burnham, and his advisers were Joseph Perella and Bruce Wasserstein from First Boston. It was the first time Wall Street had turned and attacked its own.
All of a sudden my telephone board looked like a clear night in the Rockies; lights twinkled and pulsed. The customers were calling, ostensibly to express their condolences that our firm was about to be stormed and mutilated by a heartless predator. Theirs was a hollow-sounding concern, however. They only wanted to gawk, the way people do who gather around the scene of an accident and stare at the twisted metal and trembling victims. More than a few were thinking that big, bad Salomon Brothers had finally met a force in the market that was bigger and badder still, amused that that force happened to be a leading purveyor of ladies’ cosmetics. My Frenchman was wittily unmoved. “Soon you’ll be offering free lipstick samples with every purchase of bonds more than a million dollars, which means I will own a lot of lipstick,” he said, then hung up.
Why was a lipstick merchant coming after us? The most intriguing answer was that it wasn’t his idea. Perelman’s bid could easily be seen as a hate bomb lobbed at John Gutfreund by Drexel’s junk bond king, and Perelman’s true backer, Michael Milken. Milken often lobbed hate bombs at people who treated him badly. And Gutfreund had treated him badly. In early 1985 Milken had visited our offices for a breakfast meeting with Gutfreund. It started with Milken growing angry because Gutfreund refused to speak to him as an equal. It ended in a shouting match, with Milken being escorted from the building by a security guard. Gutfreund subsequently cut Drexel out of all Salomon Brothers bond deals.
Then Drexel found itself at the center of the largest SEC investigation ever. Rather than send flowers, a Salomon Brothers managing director mailed to Milken’s clients copies of legal complaints (for extortion and racketeering) filed against Milken by three other clients. The relationship between Salomon Brothers and Drexel Burnham was, in September 1987, rightly regarded as the worst between any two firms on Wall Street.
Milken spooked Gutfreund. For all of his worldly ambition, Gutfreund remained remarkably parochial and introverted. That’s why, for example, it never occurred to him that anyone would manage his London office but Americans. We weren’t businesspeople, and we hadn’t seized the opportunity to diversify when we were strong. We really never knew how to do anything more than trade bonds. No one at Salomon had ever created a substantial new business with the exception of Lewie Ranieri, and he had eventually been buried for his troubles. Milken, on the other hand, had built the biggest new business on Wall Street directly adjacent to our own, and his goal was to usurp Salomon’s position in the bond markets.
“Whatever Gutfreund said,” said one of my colleagues much nearer to Gutfreund than I, “he always thought just one firm was capable of deballing Salomon Brothers, of taking over our franchise: Drexel. He wasn’t worried about the white shoes at Morgan Stanley because he thought our competitive drive was that much stronger. But Drexel is tough like us. And Henry [Kaufman] was predicting a long-term decline in the credit quality of corporate America. They were all turning to junk. That meant our client base was drifting toward Drexel.”
But it wasn’t only our clients. Our employees defected to Drexel at an alarming rate. At least a dozen former Salomon Brothers traders and salespeople staffed Milken’s eighty-five-man Beverly Hills junk bond trading floor, and many more worked for Drexel in New York. Every month or so another bond trader, salesman, or research analyst walked off the side of the New York trading floor and announced to management he was leaving for Drexel. How did Salomon management respond? “Put it this way,” says one who did, “you weren’t allowed back out on the trading floor to collect your jacket.”
The defections to Drexel were, not surprisingly, self-perpetuating. Reports of the magical sums of money to be made working for Michael Milken trickled back into Salomon and made us drool. One Salomon middle executive left to join Milken in Beverly Hills in 1986. In his third month on the new job he found an extra hundred thousand dollars in his weekly paycheck. He knew it wasn’t bonus time. He assumed Drexel’s accountants had made a mistake. He told Milken.
“No,” said Milken, “it is no mistake. We just want to let you know how happy we are with the job you are doing.”
Another former Salomonite told of his first bonus with Michael Milken. Milken handed him several million dollars more than he expected. He had grown accustomed to Salomon Brothers’ bonus sessions, where he had rarely got more than he expected. Now he was staring at a bonus that was bigger than John Gutfreund’s entire compensation package. He sat in his chair, stunned, like a character from the old television show “The Millionaire.” Someone had just handed him enough money to retire on, and he didn’t know how to express his gratitude. Milken watched him, then asked, “Are you happy?” The former Salomon employee nodded. Milken leaned forward in his chair and asked, “How can we make you happier?”
Milken drowned his people in money. The magnificent stories had many of us at Salomon hoping for a phone call from Milken. It also bred loyalty on his Beverly Hills trading floor. Milken, at times, seemed to preside over a cult. “We owe it all to one man,” one Drexel trader told author Connie Bruck. “And we are all extraneous. Michael has denuded us of ego.” Every ego has its price. One of my former fellow trainees who had gone to work for Milken told me that, of the eighty-five who staffed the Beverly Hills Office, “Twenty to thirty are worth ten million dollars or more, and five or six have made more than a hundred million.” Whenever a newspaper printed an estimate of Milken’s paycheck, apparently, the entire Beverly Hills office of Drexel had a chuckle at how low it was. My friend and others with him told me that Milken was worth more than a billion dollars. Still, you had to wonder what gave Michael Milken greater pleasure, making a billion dollars or watching Gutfreund squirm as one of his biggest clients, Ronald Perelman, stalked Salomon Brothers. “I know Michael, and I like Michael,” says Lewie Ranieri, who had been fired by Gutfreund two months before (and now appeared like the Ghost of Christmas Past). “His epitaph should read: He never betrayed a friend, and he never showed mercy towards an enemy.”
The second way to see Perelman’s bid was as retribution for the sins of our management. Dash and I decided that a take-over of our firm was not such a bad idea, not that anyone sought our views. We knew that Ronald Perelman, lipstick mogul, swashbuckler, and rogue, had no clue how to run an investment bank. But we also knew that if he succeeded in conquering Gutfreund, the first thing he would do would be to examine the firm as a business, instead of as an empire, which would be a new and refreshing approach to running Salomon Brothers. No question, a lot of corporate take-overs are shams, thinly disguised. The raiders claim that they are going to oust lazy, stupid managers when what they really want is to strip the assets from the company. But our take-over was a heartwarming exception. Our assets were our people; we had no land, no overfunded pension plan, no brand names to strip. Salomon Brothers was an honest target. Our management deserved the ax.
The only business plan on Wall Street more sensationally wrong than the one Salomon had already devised was the one Salomon was charting for the coming months. We had the temperament and wisdom of a Lebanese taxi driver: We had our foot slammed down either on the accelerator or on the brake; we knew no moderation and had no judgment. When we had decided we needed more space in New York, did we, like mortals, slip quietly across the street into larger offices? No. We began construction, with real estate developer Mort Zuckerman, of Columbus Circle, of the biggest, most expensive real estate project to date in Manhattan. Susan Gutfreund ordered a box of glass ashtrays with the design of our future palace etched into the bottoms. We would eventually bail out of the project at a cost of $107 million; she kept the ashtrays.
We had also set our sites on global domination and built the largest trading floor in the world above a London train station. Now London was
a glorious bust and overdue for consolidation, at an estimated loss of a hundred million dollars. The wits in the English press were referring to us as “Smoked Salomon.” We had built a giant and omnipotent mortgage department; then we let half of it leave and fired the rest. Lewie and his monopoly were gone, a loss of at least a few hundred million dollars more. We had unleashed some of the world’s largest egos to struggle for power on the forty-first floor. Now, New York was plagued with internecine strife; the price of this mistake might well be the loss of the firm. On or off. Buy or sell. In or out. Consistency was for little minds, not for us.
Still, our most severe misjudgments were not steps we had taken but steps we had neglected to take. It wasn’t as though investment banking in 1987 were no longer a profitable business. On the contrary, it was more profitable than ever before. Open any newspaper and you saw investment bankers raking in fees of $50 million and more for a few weeks of work. For the first time in many years other firms, not Salomon, were making the money. Ironically, the new winners were just those men helping Ronald Perelman in his bid to buy us: Milken, Wasserstein, and Perella. Drexel Burnham, thanks to Michael Milken, had replaced us as Wall Street’s most profitable investment bank in 1986. It had cleared $545.5 million on revenues of $4 billion, more than we had made at our best.
Drexel was making its fortune in junk bonds, and that stung. We were supposed to be Wall Street’s bond traders. We were in danger of losing that distinction, however, for our managers had failed to see how important junk bonds would become. They thought junk was a passing fad. That was easily their single most expensive oversight, for it precipitated not only a revolution in corporate America, and a giddy free-for-all Wall Street, but the take-over attempt of my firm, and for that final effect it is worth pausing for a moment to examine. I did.
Junk bonds are bonds issued by corporations deemed by the two chief credit-rating agencies, Moody’s and Standard & Poor’s, to be unlikely to repay their debts. “Junk” is an arbitrary but important distinction. The spectrum of creditworthiness that has IBM at one end and a Beirut cotton trading firm on the other has a break somewhere in the middle. At some point the bonds of a company cease to be investments and become wild gambles. Junk bonds are easily the most controversial financial tool of the 1980s; they have been much in the news.
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