Liar's Poker

by Michael Lewis

  There was ample evidence in Gutfreund’s past to justify a cynical interpretation of his offer of resignation. Years before, in a similar situation, Gutfreund had made a similar move. In a partnership meeting in the mid-1970s a strange exchange occurred. William Simon (who was neck and neck with Gutfreund to succeed Billy Salomon as chairman) mentioned how rich Salomon Brothers partners could become if they sold their stakes and transformed Salomon from a privately held concern into a publicly held corporation.

  Billy Salomon thought the partnership was the key to the health of the firm and the sole mechanism for securing the loyalty of its employees (“It locked them in, like family,” he says). When Simon quit talking, Gutfreund rose and bravely echoed the opinion of his boss. He said that if the firm were ever sold, the partners could have his resignation; he, John Gutfreund, would quit because the key to the success of Salomon Brothers was its partnership. “That’s one of the main reasons I picked him to succeed me,” says William Salomon, “because he said he deeply believed in the partnership.”

  Once he gained control and had the largest stake in the company, however, Gutfreund had a change of heart. In October 1981, three years after the reins had passed into his hands, he sold the firm for $554 million to the commodity dealer Phibro. As he was chairman, he made the most money from the sale, about $40 million. He said the firm needed the capital. William Salomon disagrees. “The firm had more than enough capital,” he says. “His materialism was disgraceful.” (In a way, Gutfreund was now paying for it. Had Salomon remained a partnership, there could have been no possibility of a take-over.)

  Nevertheless, Gutfreund’s threat to resign swayed the board members of Salomon Inc. It diverted their attention from the simple economics of the situation, which weighed overwhelmingly in Perelman’s favor, and toward the social responsibility of Salomon Brothers. Besides, most of them had been appointed to their posts by Gutfreund and were his friends. After two hours they decided to accept Gutfreund’s proposal. Warren Buffett made his investment, Gutfreund kept his job, and Perelman kept his money in his pocket.

  Life in our firm almost returned to normal, for a few weeks. But a fundamental question about Salomon Brothers had been raised. We all knew our firm was badly managed. But was it so badly managed that even a buccaneer like Perelman could hope to improve its condition? Actually, another question was more likely on the minds of the Big Swinging Dicks of the forty-first floor. People who for so long had viewed money as the measure of success were bound to envy not only Perelman but Wasserstein, Perella, and Milken. Especially Michael Milken. The question of the day on 41 was: How come he makes a billion dollars and I don’t?

  This question drives us right to the center of what has happened in financial America over the past few years. For Milken, not Salomon Brothers, had made the biggest trade of the era. That trade was, of course, the buying and selling of corporate America. Salomon had missed the grand shift in its own business from trading bonds to trading entire industries.

  Chapter Eleven

  When Bad Things Happen to Rich People

  ONE OF MY favorite sinners, Edwin Edwards, the former governor of my home state of Louisiana, was fond of saying that hell’s hottest fires burn for hypocrites. But Lord, how I hope it isn’t so. No more than two weeks after Ronald Perelman’s take-over bid, I was informed, no, instructed, that junk bonds were the new priority of Salomon Brothers. Amazingly, we had a deal to sell. The Southland Corporation, owners of 7-Eleven food stores throughout the United States, had been bought in July 1987 by its own management with 4.9 billion borrowed dollars. Salomon Brothers and Goldman Sachs had extended a short-term loan for the purpose, known as a bridge loan. Like all bridge loans, our loan was supposed to be quickly replaced by junk bonds in the name of the Southland Corporation. The junk was to be sold to investors, and the money from that sale would remit to us. The only hitch was that investors, for whatever reason, shied away from the junk. We salesmen were blamed for not trying hard enough.

  Dash Riprock had shrewdly isolated himself by persuading his superiors long ago that his customers bought only U.S. government bonds. As a result of his foresight, he wasn’t expected to peddle junk. I, on the other hand, was in the deal up to my eyeballs. I had the same problem as the man who gives a million dollars to a charity only to find himself inundated with demands for more. My sale of Olympia & York bonds had taken place more than a year before, but it—and other, similar sales—continued to haunt me. It was assumed, not unfairly, that anyone who could con his customers into buying eighty-six million dollars’ worth of Olympia & York bonds should also be able to sell a large number of bonds in the Southland Corporation. I was paying for my past by being sentenced to repeat it. I had no ability whatsoever to evaluate Southland’s bonds on their merits, but since ignorance hadn’t stopped me before, it was not expected to stop me now.

  Salomon’s junk bond specialists insisted that Southland was a good investment, but then they would. They had the most to gain if the deal succeeded (thirty million dollars in profits to the junk bond department) and the most to lose if it failed (their jobs). If the bonds were dog meat, no one would have said it. Bonus time was soon upon us, and honesty about the quality of our merchandise was trading at a discount.

  My gut feeling was that Salomon Brothers knew nothing about junk bonds and that, as a result, any junk we underwrote deserved its name. Salomon Brothers was, I thought, making a trading mistake typical of a rank beginner: leaping into a crowded, frenzied marketplace and buying whatever is for sale at the top. I had no choice but to trust my instincts, as there was no one who knew anything about Southland whom I could trust at Salomon Brothers. And my instincts said that these bonds were doomed.

  As my last New Year’s resolution, I had stopped selling people things I didn’t think they should buy. For Lent, I had given up my New Year’s resolution. I still felt dishonest about my small role in the world’s capital markets, even if the rule governing those markets was caveat emptor. And I wasn’t the only one. Dash was an expert on the ethics of bond salesmanship. “You shneak!” he’d shout whenever anyone jammed bonds. Then he’d go and jam a few himself. More to the point, each time I jammed bonds into an investor’s portfolio they came back to haunt me, usually in the form of a tenaciously pissed-off customer calling each morning with some variant on Herman the German’s bitter refrain, “Michael, haf you any more great ideas up your sleef?” I did not sleep well at night or enjoy falling out of bed in the morning, imagining, as I did, investors across Europe sticking pins into miniatures of me.

  The question concerning the bonds of the Southland Corporation, then, was how to steer my customers around them. This was more easily said than done. Not selling bonds was a tricky affair, much trickier than selling bonds, more like playing squash with your boss, because you had to appear to want to win at the same time you intended to lose. Southland was especially tricky because it was Gutfreund’s bid to show that Salomon Brothers was a force to be reckoned with in junk bonds. I received telephone calls from several New York managers, whose job it was to pester salesmen and who were galvanized by Gutfreund’s interest in their project. They asked what luck I was having. I lied. I said that I was giving Southland my best shot when in fact I had not placed a single sales call. Still, they would not let me be.

  It seemed that I, like a golfer, needed to improve my lie. Either it sounded unconvincing, or more likely, other salesmen were telling much better ones (“My customer is away for a week on vacation.” “My customer is dead”). One of the junk bond specialists insisted on actually watching me place a sales call to my biggest client, my Frenchman. Mercifully he did not insist on listening in. He only wanted to be able to say that he saw me try. We sat at the corner of the trading desk, he beside me, while I did the dirty work.

  “Oui,” said my Frenchman.

  “Hi, it’s me,” I said.

  “But who else?”

  “There is a deal you should have a look at,” I began, mea
suring each word. “It’s extremely popular with American investors.” (My Frenchman was intensely suspicious of anything popular.)

  “Then we shall let them buy it all,” he said, having caught on.

  “I’m sitting here with one of our high-yield bond specialists, who thinks Southland bonds are cheap,” I continued.

  “But you don’t,” he said, and laughed.

  “Right,” I said, and then launched into a long-winded sales pitch that greatly pleased both the junk bond man from Salomon and my customer, though for different reasons.

  “No, thanks,” said my Frenchman at the end of it.

  The junk bond specialist praised me for a job well done. He didn’t know how right he was, but he’d soon find out, for Southland was indeed doomed. In the middle of October 1987 Salomon Brothers, still retching from its brief encounter with Ronald Perelman, underwent the most concentrated trauma in its history. Over a period of eight days, event followed event like too many hairy rides in an amusement park. I watched the firm take blow after blow, each more confusing and disorienting than the last. Hundred of not particularly innocent victims were crushed in the avalanche of misery.

  Monday, October 12, 1987:

  Day One • The eight days that shook Salomon began, appropriately, with what appeared to be a misjudgment at the very top of the firm. An unnamed board member of Salomon Brothers, sometime during the weekend, told a New York Times reporter that the firm was planning to fire a thousand people. The news was completely unexpected. We all knew Salomon Brothers had been conducting a review of its business. But we had been assured that absolutely, under no circumstances, would the review put anyone’s job at risk. Either the bosses who peddled this line were lying or they were ignorant, and I don’t know which I’d prefer to believe. This morning the head of the London office called us together in our auditorium (which, though less than a year old, we have already outgrown) and said that “no decisions have been made” regarding personnel, implying that no one was to be fired.

  In that case, someone in New York made some pretty quick decisions, because later today two entire departments on 41, municipal bonds and money markets, consisting of around five hundred people, were summarily dismissed. It was as much a shock to them as it was to me. The boss of the money market sales department on 41, a nice, soft-spoken man, walked into the midst of his troops at 8:30 A.M. and said, “Well, boys, it looks as though we’re history.” Then his boss, the head of all sales on 41 and a card-carrying Big Swinging Dick, came rushing over beside him and shouted, “Stay where you are, goddammit. Nobody’s going anywhere, nobody’s losing his job.” Then, just as the whole money market department was settling back into their seats, an internal memo flashed across their Quotron machines that said, in effect, “You are fired. Anyone who still wishes to work at Salomon let us know and maybe we’ll be in touch. But don’t hold your breath.”

  Neither municipal bonds nor money markets were profitable. Does that mean we should have dropped them completely? The firm could, at little expense, have kept a small staff in both markets. That would have appeased the customers who had come to depend on us in these areas and were now furious with us. And it would have enabled us to profit in the event that either of the two markets recovered. Why dump whole businesses? Why not, at the very least, sift through the people and keep the best for other jobs? A star municipal bond salesman could easily become a star government bond salesman. Salomon Brothers was the nation’s leading underwriter of municipal bonds and among the leaders of the money markets; the people employed by these departments were by no means losers.

  The men who made the decision were practicing their favorite anatomical trick of thinking with their balls. In other words, they weren’t thinking at all but trading. Bill Simon used to shout at his young traders, “If you guys weren’t trading bonds, you’d be driving a truck. Don’t try to get intellectual in the marketplace. Just trade.” When a trader is long and wrong he cuts and runs. He drops his position, cuts his losses, and moves on. He only hopes he hasn’t sold at the bottom, which is what people do who buy at the top.

  What jarred the intellect even more than the treatment of fully formed businesses as trading fodder was the excuse Gutfreund gave for the bailout. He told the firm, and the press, that he had intended to prune intelligently but had been forced by events outside his control to take quick action. Once the news hit the papers, he said, he had to get out immediately. The New York Times, in other words, affected policy at Salomon Brothers. Either that, or the chairman was using The New York Times as an excuse for what he had done.

  That made the biggest mystery of the day even more mysterious: Who leaked? From his first day as a trainee to his last day as a Big Swinging Dick, a Salomon Brothers employee believes it is a cardinal sin to speak to the press. In general our people kept clear of reporters. As a result, nothing of what went on in our firm ever made it into the newspapers. It was inconceivable to me that the leak was a mere indiscretion; it must therefore have been a conscious act of sedition. But by whom? All we knew was that it had come from a member of the board. The board included John Gutfreund, Tom Strauss, Bill Voute, Jim Massey, Dale Horowitz, Miles Slater, John Meriwether, and about a dozen other, lesser players. They were said to be searching frantically for Deep Throat. At first I thought the obvious place to start was by asking who among them had the most to lose from the cuts. Easy. Horowitz, the head of the municipal bond department. He lost everything. After the cuts he became a minister without portfolio.

  But then again, if the motive was to save the municipal bond department, it clearly backfired. As Gutfreund said, it resulted in even more people being cut than was planned. So perhaps the source was not engaged in a last-minute rescue mission. What if one assumed that the source got exactly what he wanted? Who gained from the leak? Unfortunately, unless the motive was revenge on Horowitz, no one. And revenge was too weak a motive to justify the risk of being caught leaking. Whoever leaked put his job on the line. The entire board of directors would have been petrified at the thought of being discovered and humiliated by John Gutfreund. Fear is perhaps the key to the riddle: Who had the least to fear from John Gutfreund? Elementary. John Gutfreund.

  I know; it begins to sound crazy. And when a Salomon Brothers colleague put the theory to me that Gutfreund had contrived the leak in order to expedite the firings, I laughed. But I was unable to shake the notion, for I saw how eagerly Gutfreund clung to the leak as an excuse for what he had done. The leak became his life raft. Once we had read about them in the newspaper, the cuts assumed an odd air of inevitability. “There, you see,” he could say, “it was in The New York Times and goddamn the bastard who told them.” Still, the hypothesis was weak. For surely Gutfreund would have realized that such a leak discredited, ultimately, himself.

  Whoever the source, his anonymity had the effect of spreading the guilt of one man (that is, if it was just one) across the entire board of directors; they all were thought to be guilty by the rest of us. Salomon Brothers had a Deep Throat. A few managing directors who were not on the board refused to discuss anything requiring discretion in the presence of board members. The divisiveness at the top of the firm was more apparent to us peons than ever before. One crusading managing director (with big brass balls) told each board member, “I’m sorry, but until we find out who leaked, we feel we can’t trust any of you.” Such a true tale of valor spread quickly across the trading floor.

  I felt a welling frustration. There was nothing I could do but watch. Did corporate heads ever take responsibility for their actions or the actions of their subordinates? Was there no honor left? A similar leak in the British government would precipitate a flurry of resignations. But our chiefs never seemed to suffer for their mistakes. They applied a kind of marginal analysis to each new screwup and said that what had been done was behind us and that no good would come from further shock to the firm (such as their resignations). My feeling was that our woes were caused, at least in part, by the feeling
among the men at the top of the firm that they had no personal exposure if their empire collapsed.

  What was perhaps most disturbing of all, however, was that the only promise made to all new Salomon Brothers employees had been broken. Most people had been assigned to municipal bonds and money markets without having had much say in the matter. I’m glad I hadn’t believed Jim Massey when he told us, as he told every training class, to relax and let the firm decide which department you joined. Performance will always be rewarded, he had said. Many had trusted him. If the firm broke the covenant when it fired Lewie Ranieri, it scattered the shards with this decision.

  At the end of the grisly day there were as many nervous people as there had been at the beginning, especially in London. Deep Throat had told The New York Times that Salomon planned to fire a thousand people. Five hundred were gone. It clearly wasn’t over yet. But who, pray tell, was next?

  Wednesday, October 14, 1987:

  Day Three • President Tom Strauss came to tell us that we had been earmarked as the branch office most in need of cuts. That diagnosis had been made a month ago, when a London managing director had botched a presentation in our defense to a business review committee in New York. Instead of justifying our levels of staffing or mapping a plan, he had spent his time explaining why our failure wasn’t his fault. Gutfreund had been justifiably upset by his posturing, of which we had now all learned. The review committee members had assumed the worst about us. You couldn’t fault them. We weren’t doing very well.

  The waiting part was the worst. People on the London trading floor seemed to have no clue whether they had been targeted by management or not, but all knew that a lot of us, as many as a third of the bond people, would be liquidated. Each person considered himself essential to the future of Salomon Brothers. I, too, considered myself essential to the future of Salomon Brothers, but that in itself was no assurance when everyone else felt the same way. I began to wonder: What will I do if they fire me? Then: What will I do if they don’t fire me? All of a sudden Salomon Brothers seemed more leavable than before. Each unit manager—a jungle guide—submitted a list of his employees in order of their usefulness to him. The London managing directors convened beneath an imitation Canaletto in one of the Gone with the Wind dining rooms and chopped from the bottom of each list. I eyed my jungle guide with suspicion.