Liar's Poker

by Michael Lewis

Each Friday was “Food Frenzy” day, during which all trading ceased, and eating commenced. “We’d order four hundred dollars of Mexican food,” says a former trader. “You can’t buy four hundred dollars of Mexican food. But we’d try – guacamole in five-gallon drums, for a start. A customer would call in and ask us to bid or offer bonds and you’d have to say, ‘I’m sorry but we’re in the middle of the feeding frenzy, I’ll have to call you back.’”

The mortgage traders hopped into helicopters, spent the night gambling, and flew back to Salomon Brothers in time to trade the next morning. That’s the sort of thing you were meant to do – if you were a trader with iron balls.

Though Gutfreund wasn’t above having a little fun himself, he was, after all, running a large corporation. His vice-chairman was beginning to look more like his chairman of vice.

memorised every card that was dealt, Rubin engaged a neighbour in conversation and drank gin and tonics. At Salomon Brothers he traded bonds while being hollered at by six salesmen, eating a morning cheeseburger, and watching Ranieri hold a Bic lighter under the balls of a fellow trader.

By allowing dozens of able mortgage traders to fertilise the mortgage departments of other firms Salomon Brothers let slip through its fingers the rarest and most valuable asset a Wall Street firm can possess: a monopoly.

That month, April 1986, the mortgage trading desk lost more money than ever before, estimated by several traders to have been between 35 and 65 million dollars. The mortgage traders offset the losses with profits they had squirrelled away for a rainy day. They had done this by artificially understating the value of bonds on their books. The senior management of Salomon Brothers never knew.

“I have this theory,” says Andy Stone, seated in his office at Prudential-Bache Securities. “Wall Street makes its best producers into managers. The reward for being a good producer is to be made a manager. The best producers are cut-throat, competitive, and often neurotic and paranoid. You turn those people into managers and they go after each other. They no longer have the outlet for their instincts that producing gave them. They usually aren’t well suited to be managers. Half of them get thrown out because they are bad. Another quarter get muscled out because of politics. The guys left behind are just the most ruthless of the bunch. That’s why there are cycles on Wall Street – why Salomon Brothers is getting crunched now – because the ruthless people are bad for the business but can only be washed out by proven failure.”

“I have the ultimate expense story,” says a woman from the mortgage finance department. “One of the people in the department put through enough phoney expense reports from fictitious trips to visit clients to buy himself a Saab with the proceeds.” This irked the Strauss family.

The only memento of the origins of one of the most unusual and profitable businesses in the history of Wall Street is a picture. It hangs in Jim Massey’s office, and it shows Gutfreund, Ranieri and Bob Dall, crossing hands to signify the founding of their joint venture in 1978.

I’m now convinced that the worst thing a man can do with a telephone, without breaking the law, is to call someone he doesn’t know and try to sell that person something he doesn’t want.

Upon my arrival a trader told me that a geek was both a) “any person who sucks farts from swans”, and b) “a person immediately out of the training programme, and in a disgusting larval state between trainee and man”. I, he said, was a geek.

Tokyo was the obvious site for our rapid expansion because Japan’s trade surplus left her gorged with dollars she had either to sell or to invest. The Japanese were the Arabs of the 1980s.

It was easy for this man to fool himself that Europe was a lot like New York, because on two thousand dollars a day it was. So London became the key link in this drive for world domination; its time zone, its history, its language, its relative political stability, its large pools of dollar-hungry capital and Harrods (don’t underestimate the importance of shopping opportunities in all this) made London central to the plans of all American investment bankers. And the global aspirations of Salomon Brothers settled in London.

If you ever care to see how all the world’s most awful jokes spread, spend a day on a bond trading desk. When the Challenger Space Shuttle disintegrated, six people called me from six points on the globe to explain that NASA stands for Need Another Seven Astronauts.

When it came to speculation, European investors didn’t require a great deal of encouragement or instruction. They’d been doing crazy things with money for centuries.

He disapproved of work days longer than eight hours because, he said, “You then arrive at the office in the morning with the same thoughts you left with late the night before.”

A good example of this was the crisis at the US Farm Credit Corporation. It looked for a moment as if Farm Credit might go bankrupt. Investors stampeded out of Farm Credit bonds because, having been warned of the possibility of accident, they couldn’t be seen in the vicinity without endangering their reputations. In an age when failure isn’t allowed, when the US Government had rescued firms as remote from the national interest as Chrysler and the Continental Illinois Bank, there was no chance the Government would allow the Farm Credit bank to default. The thought of not bailing out an 80-billion-dollar institution that lent money to America’s distressed farmers was absurd. Institutional investors knew this. That is the point: the people selling Farm Credit bonds for less than they were worth weren’t necessarily stupid. They simply could not be seen holding them. Since Alexander wasn’t constrained by appearances, he sought to exploit people who were. (The occupational hazard of his role was an ugly élitism; you begin to think everyone else is stupid.)

Remember Chernobyl? When news broke that the Soviet nuclear reactor had exploded, Alexander called. Only minutes before, confirmation of the disaster had blipped across our Quotron machines, yet Alexander had already bought the equivalent of two tankers of crude oil. The focus of investor attention was on the New York stock exchange, he said. In particular it was on any company involved in nuclear power. The stocks of those companies were plummeting. Never mind that, he said. He had just purchased, on behalf of his clients, oil futures. Instantly, in his mind, less supply of nuclear power equalled more demand for oil, and he was right. His investors made a large killing. Mine made a small killing. Minutes after I had persuaded a few clients to buy some oil, Alexander called back. “Buy potatoes,” he said. “Gotta hop.” Then he hung up. Of course. A cloud of fallout would threaten European food and water supplies, including the potato crop, placing a premium on uncontaminated American substitutes. Perhaps a few folks other than potato farmers think of the price of potatoes in America minutes after the explosion of a nuclear reactor in Russia, but if so, I have never met them.

Whenever he emerged from the tuck position without having sold bonds, I knew he had been talking to his mother. It wasn’t cool to talk to your mother on the trading floor.

The markets in the long run are no doubt driven by fundamental economic laws; if the United States runs a persistent trade deficit the dollar will eventually plummet. But in the short run money flows less rationally. Fear and, to a lesser extent, greed are what make money move.

When Texaco teetered on the brink of bankruptcy, for example, Salomon Brothers owned about 100 million dollars-worth of bonds in the company. There was a real danger that these bonds would become worthless. Unless sold to customers, they could cost Salomon a great deal of money. Sold to customers, of course, they would cost the customers a great deal of money. That, it was decided, was the best thing to do. Texaco bonds therefore became a priority for the Salomon sales force.

He was making promises but he was thinking profits. I didn’t trust him. I changed my mind. I decided not to sell the bonds.

Finally, the sweetness of the moment dulled the pain of knowing I had just placed my most cherished customer in jeopardy. The most important call of all came. It was from the Human Piranha. “I heard you sold a few bonds,” he said. I tried to sound calm about the whole thing. He didn’t. He shouted into the phone, “That is fuckin’ awesome. I mean fuckin’ awesome. I fuckin’ mean fucking awesome. You are one Big Swinging Dick, and don’t ever let anybody tell you different.” It brought tears to my eyes to hear it, to be called a Big Swinging Dick by the man who, years ago, had invented the phrase and given birth to the distinction and in my mind had the greatest right to confer it upon me.

I recall that one of the first investment bankers I met taught me a poem: God gave you eyes, plagiarise.

They agreed to let us have our tombstone, on the condition 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.

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.

“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.”

Thinking like a bond trader, Milken completely reassessed corporate America. He made two observations. First, many large and seemingly reliable companies borrowed money from banks at low rates of interest. Their creditworthiness had but one way to go: down. Why be in the business of lending money to them? It didn’t make sense. It was a stupid trade: tiny upside, huge downside. Many companies that had once been models of corporate vitality subsequently went bust. There was no such thing as a riskless loan. Even corporate giants are felled when their industries collapse under them. Witness the entire US steel industry.

The forces interested in keeping a large company afloat, he argued, are far greater than those that wish to see it perish.