Friday, October 16, 1987:
Day Five • The first hurricane in a hundred years hit London squarely early in the morning. Huge trees snapped, power lines fell, and windows shattered from about 2:00 A.M. until dawn. Commuting into work was positively eerie. The streets were empty, and shops normally open were boarded shut. A crowd huddled beneath the awning of Victoria Station, going nowhere The trains did not run. It looked like an ABC miniseries on nuclear winter or perhaps a scene from The Tempest. Caliban could not have chosen a better day to roar.
It was a bad day for 170 people in our office. People struggled over fallen trees, treacherous roads, and water hazards to make their way into work only to find, at the end of the steeplechase, no job. Others suffered slow torture, waiting literally in the dark for hours before they learned of their unemployment. The storm had knocked out the electricity, and we had no lights on the trading floor. Most of us hovered near our desks. Phone calls came from managing directors, inviting people one by one to their doom. What was so awful was not the loss of income but the embarrassment of having failed. We had taken for granted the narrow sort of success we had achieved, thought it to be not just important but essential, like legs. Anyone fired seemed defective, and we all blushed at his deficiency. A few people took their first cold look at the situation and telephoned head hunters from their desks while they waited.
A few others were even craftier. Word spread that all the cuts were in the bond departments. This was true. The head of equities, Stanley Shopkorn, had taken a brave stand against Gutfreund; he said he’d rather resign than fire a single person. Seeing that the equity department was not firing anyone, the crafty few began to interview for equity jobs. (At last equities was enjoying its day in the sun! And, as we shall see, it was to be exactly one day.) Theirs was a race against the clock. They needed to be hired before they were fired. Once fired, they lost their right to remain on the trading floor! A security guard would take away their security passes as they emerged from the firing squad’s chamber and banish them from the building.
Management took the path of least resistance and fired the most recent additions to the office, until the day came to resemble the massacre of the innocents. This defeated the purpose of the cuts. Fire ten geeks and you reduced costs by about as much as if you had fired one elderly (mid-thirties) managing director. But young people had the advantage of being easy to sack because they had yet to build a web of connections within the firm. They had no voice. I was safe partly because I was considered, unbelievably, an old hand, partly because I had just enough friends in high places, and partly because I was one of the two or three biggest producers in the office.
A disproportionately large number of women in London were fired. They later compared notes and learned they had been given, almost verbatim, the same speech by the head of sales. To each he hemmed and hawed and said, “You’re a smart gal, and this is no reflection on your abilities.” Most of them didn’t like being called “gal.” Who are you calling “gal,” peckerwood? A few told the security guard to fuck off when he asked for their passes (and fuck off he did). As the firings progressed, the victims began to return to the trading floor. There was a good deal of weeping and hugging all around, which I wouldn’t mention except it was such an unusual sight. No one ever cried on the trading floor. No one ever showed weakness or vulnerability or need for human kindness. Early on Alexander taught me the importance of a strong exterior. “I learned awhile ago that there was no point to showing weakness,” he said. “When you arrive at six-thirty A.M., having had no sleep the night before, and having lost your best friend in a car accident, and some Big Swinging Dick walks over to your desk, slaps you on the back, and says, ‘How the hell are you?’ you don’t say, ‘I’m really tired and really upset.’ You say, ‘I’m great, how the hell are you?’”
There was a single upbeat note struck this day. A friend of mine, one of the few remaining older Europeans (long ago dozens had followed their noses out of Salomon Brothers and into greener pastures), stood at his desk from 8:00 A.M. until noon. He hopped about like a small child on Christmas Eve. What he wanted from Santa was the sack. He had already accepted a better job at another firm. He had intended to quit Salomon at the beginning of the week, but seeing he might be fired instead, he waited and held his tongue, hoping to receive a golden handshake. The severance payments were indeed generous and based on tenure. My friend had been with Salomon for seven years and, if fired, stood to receive several hundred thousand dollars. I rooted for him. I was sure he deserved the ax, but I was afraid that management might feel reluctant to jilt an employee of such long standing. Thankfully it swallowed its devotion, gathered its courage, and called him into the dining room. When the call came through, there was a rush on the floor to congratulate him and lots of smiles and laughter. He was going to a better afterlife.
A trader posted a notice in the men’s room near the end of the day. The men’s room doubled as a used-car auction room. Most days there was a BMW or a Mercedes on offer. This trader, however, was selling a Volvo. A bad omen.
Saturday, October 17, 1987:
Day Six • I flew to New York, for two reasons. Months before I had agreed to speak to the training program on salesmanship. My speech was scheduled for Tuesday, October 20. This now appeared to be a grim assignment, for the 250 trainees (the largest class ever) had little hope of keeping their jobs.
The other reason for my trip was to lobby with New York managing directors for a big bonus. This oleaginous practice was standard in the London office. During the last couple of months of each year most London salesmen and traders visited New York to be seen and to argue, very subtly, that they deserved a great sum of money at the end of the year. The argument took the form of wishing bosses a happy holiday season in a loud voice and looking poor when they asked how you were doing. My jungle guide virtually insisted that I make the journey; that was most kind of him. He was watching out for my interests. That made two of us.
Monday, October 19, 1987:
Day Seven • Because my speech wasn’t until Tuesday, I had the day free to roam the forty-first floor in New York. Normally I hated doing this. On 41, even after I had established myself, I always felt I was having an out-of-body experience. The place to me always felt as dumb as a football huddle. But this time it was different. The floor had been gelded. It was like a visit to a museum or to a ghost town, rather than a barroom brawl. There was a vast, empty space around John Gutfreund’s desk, which was where the money market people once sat. Where there once was noise and bustle there was now only eerie silence, much like the streets of London last Friday. The money market people had apparently left in a hurry. Inspirational signs still hung over their empty desks. EAT STRESS FOR BREAKFAST, read one. Pictures of boyfriends and private messages remained taped to the trading positions. Scribbled over the empty seat of a redundant saleswoman was her view that “Men who call women sweetheart, baby, or honey should have their tiny little peckers cut off.”
These were no ordinary victims, though victims they were. Here in New York, as in London, a conspicuously large number of women were canned. It’s not as if the women had been less astute in choosing their jobs; they just had less say in their destiny. For whatever reason, women coming out of the training program were usually assigned to loss leaders. For several years one of the sinkholes had been the money market department. Perhaps 10 percent of the trading floor professionals were women. But women were nearly half of money markets sales and, therefore, a large number of the sackees.
My New York rabbi and his congregation were moving into the seats vacated by the money market department. Whenever I returned to New York, I sat beside my rabbi, normally with a sigh of relief. But this time I shuddered at the thought. I wondered if the move wasn’t a trifle premature, like moving into a house while the previous owner is carried out in a coffin. It made me uneasy knowing what happened to those who once sat where I did. However, there was plenty to distract me. My rabbi was m
oving up in the world. The seat beside him happened also to be right next to John Gutfreund. So I plunked myself right beside our chairman and rode shotgun on the deathmobile. The public announcement of the sale of Salomon Brothers to Phillips Brothers in 1981 stood on his desk, beside a fuming cigar. Symbol! Metaphor! Ashes to ashes, and so on. From this lofty promontory, I watched the crash of 1987.
The stock market fell, of course. It fell as it had never fallen before in history, paused, then fell some more. I rushed back and forth between my seat on 41 and the equity department on 40. The stock market crash had huge and arbitrary wealth redistributionary effects, and the two floors had entirely different reactions to it. A lucky man in the equity department had gone short S&P stock index futures (meaning he made a large bet that the market would fall) on Friday, and by the time he had a chance to close out his bet on Monday the futures were sixty-three points lower, and he had cleared twenty-seven million dollars. His joy was unique. The rest of the equity department was tossed between despair and confusion. Early in the day there was trading. I heard the Brooklyn screams of a dozen men at once. “Yo, Joey!” “Hey, Alfy!” “Whaddya doin’, Mel!” “George Balducci, you can buy twenty-five thousand Phones [AT&T shares] at a half.” Later, however, trading dried up, a harbinger of the coming torpor in the stock market. Investors froze like deer in headlights. Time and time again someone stood up and shouted, for no particular reason, “Jeeee-Sas Christ!” They were helpless as they watched their beloved market die.
Of course, my customers in Europe were losing their shirts, but there, was nothing I could do for them. I thanked Mammon for the umpteenth time for making me a middleman. To a man my customers chose to hunker down and wait out the storm. Meanwhile, the bond market was shooting through the roof, and more than a few bond traders failed to conceal their glee. Once the stock market had fallen a few hundred points, investors began to consider the macroeconomic effects of an honest-to-God crash. The prevailing reasoning in the bond market went like this: Stock prices were lower; therefore, people were less wealthy; therefore, people would consume less; therefore, the economy would slow down; therefore, inflation would fall (maybe there’d even be depression and deflation); therefore, interest rates would fall; therefore, bond prices should rise. So they did.
One bond trader who had bet against the bond market stood up and screamed in the direction of the Statue of Liberty, “Fuck! Fuck! Fuck! Fuck! I bad-mouth the U.S. government, I short their debt, and they fuck me. That’s what I do for a living. Why fucking bother?” But most everyone else was long and getting longer. The bond traders were making a fortune. This one day made up for much of the year. As the stock market crashed, the forty-first floor of Salomon Brothers cheered.
And many of us asked our first questions about the wisdom of the firings of the previous week. The world of money was in upheaval. Funds were rushing out of the stock market and into safe havens. The conventional safe haven for money is gold, but this was not a conventional moment. The price of gold was falling fast. Two creative theories made their happy way around the trading floor, both explaining the fall in gold. The first was that investors were being forced to sell their gold to meet margin calls in the stock market. The second was that in the depression that followed the crash, investors would have no need to fear inflation, and since for many gold was protection against inflation, it was less in demand. Whatever the case, money was pouring not into gold but into the money markets—i.e., short-term deposits. Had we had a money market department, we could have made a killing presiding over this movement, but we did not and could not. The decline in business after the crash occurred mainly in the equity markets. And which was the one and only department not to cut a single employee? Equities. So the area most direly overstaffed was the one that had made no cuts.
Many of us also asked our first questions about the wisdom of entering the junk bond market. With the stock market crash the market in junk bonds, inextricably linked to the asset values of corporations, temporarily ceased to function altogether. The fickle stock market was saying that one day corporate America was worth $1.2 trillion, and the next only $800 billion. Junk bond investors dumped their holdings when they saw the wild behavior of their collateral. Our Southland junk bond deal collapsed on October 19. When the stock market crashed, the value of 7-Eleven stores and, therefore, junk bonds backed by 7-Eleven stores, crashed, too. From my seat on the trading floor I called my customers in Europe. When I reached my Frenchman, he thanked me for never having sold him junk.
Most of what happened to a big firm like ours during the crash was largely invisible to the outside world. But one important event was not. Along with other Wall Street firms, Salomon Brothers had agreed to purchase from the British government, and distribute worldwide, 31.5 percent of the shares in British Petroleum. We owned a chunk of the company at the time of the crash. We had lost more than a hundred million dollars on our stake. Who’d have imagined that our largest single equity underwriting would coincide with the largest drop in history in the stock market? Then who’d have imagined that our first big junk bond deal would coincide with the crash of the junk bond market? It was striking how little control we had of events, particularly in view of how assiduously we cultivated the appearance of being in charge by smoking big cigars and saying fuck all the time.
Throughout the crash John Gutfreund seemed in his element. He was, for the first time in ages, making trading decisions. It was a joy to see a man rediscover his youth. He spent little time at his desk. He sprinted back and forth across the floor and held brief strategy sessions with his head traders. At one point his attention drifted to his net worth, and he bought three hundred thousand shares in Salomon Brothers for his personal account. When I overheard him do this, my first reaction was that he was trading on inside information.
My second reaction was that as long as it was legal, I should do it too. Pretty greedy, huh? But also pretty smart. Salomon’s stock was crashing faster than the market as a whole; all brokerage stocks were getting hit because investors, who had no way to gauge the internal damage we had suffered, assumed the worst. We were losing small fortunes on both British Petroleum and Southland, our two visible risks. Gutfreund knew, however, that our losses were not what they seemed. We had lucked into twenty-seven million dollars in the equity department, and the bond departments were rolling in dough. A quick calculation showed that Salomon’s share price implied a value for the company less than its liquidation value. (If we had been a take-over play three weeks before at thirty bucks a share, we were a bargain now at eighteen. A false rumor spread that Lewie Ranieri had raised money and was returning to buy Salomon Brothers).
After checking with our legal department to make sure I wasn’t following Boesky’s footsteps, I followed Gutfreund’s and bought a bunch of Salomon shares with the bonus I was busy lobbying for. Many, many others on our trading floor were doing the same. Gutfreund would later say that it bespoke of a faith in the firm when employees bought Salomon shares and that he personally found it encouraging. Perhaps. But I for one wasn’t making a statement of faith when I made my purchase. My investment was raw self-interest, coupled with a certain abstract pleasure in having found a smart bet. Within a few months Salomon shares had bounced back, from a low of sixteen dollars to twenty-six dollars.
Tuesday, October 20, 1987:
Day Eight • The postmortem began. The credit committees convened in an emergency session in New York. Its stated purpose was to assess Salomon’s credit exposure to institutions that appeared bankrupted by the events of yesterday, such as E. F. Hutton and the entire community (if you can call it that) of equity arbitrageurs. Instead, for the first half hour the committee members squabbled. All but one man on the committee were American. The exception was a Brit, who flew in from London especially for the meeting. He became a punching bag for the Americans, who pinned blame for the crash squarely on the British government. Why were the limeys insisting on continuing their sale of the state-owned Bri
tish Petroleum? The traders, who thought pretty much exclusively in terms of short-term market forces, felt that the multibillion-dollar sale of BP shares imposed on the market a weight it could not bear. The whole stock-buying world was panicking at the thought of a new supply of stock. Never mind that the United States was running a trillion dollars’ budget deficit, or that the dollar was unstable, or that busts, like their better halves, booms, usually have a logic all their own. A few of the Americans were jumping all over the Brit for the behavior of his countrymen. One said, sneeringly, “You guys did just this sort of thing after the war too, you know.”
You would think that the battle lines on this day would be drawn along the borders of financial interest instead of the borders of nations. Everyone around the table at the credit meeting was on the same team, but people didn’t behave like it. The xenophobia was by no means limited to Salomon Brothers. An American partner of Goldman Sachs, a firm also stuck with a hundred-million-dollar loss on its shares in BP, called a senior Brit at Salomon and blamed him for the problem. But why? It turned out the Goldman partner wasn’t thinking of his Salomon counterpart as a representative of Salomon but as a Brit. “Your people damn well better pull it [the BP issue],” he shouted. “If it wasn’t for us, you’d all be speaking German.”
The shrewder players in our shop weren’t looking to affix blame but to find a way out: How could we avoid losing a hundred million dollars on our stake in British Petroleum? Or, to put a finer point on it, how could we persuade the British government to take back its shares at the price it had sold them to us? One of the managing directors from London, who happened to be in New York, actually took me aside to practice an argument he planned to put to the Bank of England. He had calculated the sum of the losses of the banks underwriting BP to be seven hundred million dollars. He said that the world financial system might not withstand this drain of capital from the system. Another panic could ensue. Right? Amazing. He was so desperate to avoid the loss that I think he actually believed his lie. Sure, why not? I said. It’s worth a try. Basically, it was an old ploy. My boss wanted to threaten the British government with another stock market crash if it didn’t take back its oil company. (Note to members of all governments: Be wary of Wall Streeters threatening crashes. They are tempted to do this whenever you encroach on their turf. But they can’t cause a crash any more than they can prevent one.)
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