Liar’s Poker

“One hand, one million dollars, no tears.”

Salomon Brothers chairman John Gutfreund challenges his best bond trader, John Meriwether, to a game of Liar’s Poker, and the bet is the unheard-of amount of $1 million. “No tears” means the loser must suffer without complaint.

“The game has some of the feel of trading, just as jousting has some of the feel of war.”

Liar’s Poker is a test of smarts, daring, coolness under pressure, ability to bluff, and aggressiveness. These traits are what players must possess in the real world of buying and selling stocks and bonds. Liar’s Poker is the practice sport; trading is the war.

“I mean, few people would claim they actually liked studying economics; there was not a trace of self-indulgence in the act. Studying economics was more a ritual sacrifice.”

As more and more college students major in economics during the 1980s, Wall Street begins to see it as a requirement for employment. It demonstrates the applicant’s belief in practicality and the power of theory; it proves a willingness to tackle long, dull work projects; and it makes simple the task of comparing the school records of graduates, as they all come from the same area of study.

“Many of my classmates had sacrificed the better part of their formal educations for Wall Street. I had sacrificed nothing. That made me a dilettante, a southern boy in a white linen suit waltzing into a war fought mainly by northeastern prep school graduates.”

Lewis resists the common urge to major in economics at Princeton, opting instead to sample different courses of study and ending up with an art history degree, which ill-prepares him for the coming battles on Wall Street.

“Knowing about markets is knowing about other people’s weaknesses.”

Knowledge is power, and in a competitive business where profits must be wrested from the other players—including one’s own customers—knowing more about them than they know about you can make the difference between winning and losing. Investors can be superstitious, overconfident, panicky; they can follow blindly the crowd; they can choose an investment for any number of arbitrary reasons. The bond trader or salesman, knowing these traits, learns to profit from the foolishness of others.

“It might be more important to choose a jungle guide than to choose your product.”

The speaker, lecturing the trainees at Salomon Brothers, makes clear that bond trading at Salomon is less about what product you sell than how you sell it. In such a cutthroat business, a mentor is vital.

“Join equities and kiss ass like Willy Loman; join bonds and kick ass like Rambo.”

Salomon stock traders, caught up in a highly competitive market, make much less money than Salomon bond traders “because Salomon was nearly a monopolist in certain bond markets” (79). The trainees quickly catch on to the fact that the real money, and the real prestige, is in bond trades.

“A trader placed bets in the markets on behalf of Salomon Brothers. A salesman was the trader’s mouthpiece to most of the outside world.”

The salesman—or woman, as women trainees graduate to sales rather than trading—must convince the institutional investor (from a pension fund, savings and loan, or insurance company) to put money in securities. The trader then executes the trade outside the view of the customer. Thus the salesperson is the face, while the trader is the force, of Salomon.

“The place was governed by the simple understanding that the unbridled pursuit of perceived self-interest was healthy. Eat or be eaten.”

Bond traders and salesmen are judged strictly by how much money they generate for Salomon. Whether they are cutthroat or kindly makes no difference, as long as they bring in the money. And that money must be wrested from the other players in the markets.

“What was the secret to dealing with the assholes? ‘Lift weights or learn karate,’ said O’Grady.”

Richard O’Grady, a former lawyer now working as a trader, learns quickly that his fancy law degree and Phi Beta Kappa key are useless in a confrontation on the trading floor. Loud, angry curses and intimidation are the weapons of choice.

“The firm encouraged both aggression and ability; it made a point never to interfere with natural jungle forces.”

Salomon Brothers values the traits, friendly or cruel, most needed by traders. It doesn’t matter if the staff get along or hate one another; what matters are any behaviors that generate sales and profits. The clever and cunning often do the best, so Salomon gives them free rein.

“Paying out 14 percent on deposits while taking in 5 percent on old home mortgage loans was a poor way to live, but this is precisely the position thrifts were in.”

Consumer prices are rising so quickly that thrifts pay more interest on savings accounts than they receive on mortgages. The savings and loan meltdown forces these banks to sell off underperforming mortgages, sometimes at bargain discounts. Salomon traders take gleeful advantage of this situation.

“Salomon Brothers mortgage traders rode roughshod over both the largest capital market in the world and their own firm, which was far and away the most profitable on Wall Street.”

In the mid-1980s, Salomon dominates the mortgage-securities market, which generates up to half the firm’s entire revenue stream. Its traders, aggressive and freewheeling, begin to assume that “as a mortgage trader you didn’t make a lot of money in your market, you made all the money in your market” (138). Their needs come first, and they tend to lord it over their salesmen.

“It was enjoyable to make more money than the rest of the firm, but it was sheer delight to make more money than the rest of the firm at the same time you spent half your day playing practical jokes on your employees and smoking big fat cigars.”

Salomon bond traders—buoyed by their outsize talent and encouraged by their boss, Lewie Ranieri—display a macho, adolescent arrogance and regard themselves as Wall Street royalty. They are kings; they can do as they please.

“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.”

This is the essential ethical dilemma of the securities salesperson, who must navigate the gulf between the need for revenues and the desire to do well by one’s customers. The route to profit often causes clients to founder; this bothers Lewis, who regrets his own callous behavior at Salomon.

“You are proof that some people are born to be customers.”

A trader thus scolds a trainee, but his words generate gales of laughter, which hints at the contempt Salomon bond traders feel toward their own clients. Traders are encouraged to make decisions that benefit the company, not the customer; the bottom line is prioritized over human well-being.

“[A]ttitudes toward bonds are subject to change for reasons not much more substantial than attitudes toward the length of women’s skirts.”

Bond prices rise and fall as fashions change in the marketplace. Investors tend to act as a crowd, and a rumor can cause a stampede. Salomon salesmen and traders know this and take advantage of it when they can.

“If there was a single lesson I took away from Salomon Brothers, it is that rarely do all parties win. The nature of the game is zero sum. A dollar out of my customer’s pocket was a dollar in ours, and vice versa.”

Salomon buys and sells securities for its clients, and any profits are split between them, but Salomon knows how to manage transactions so they get most of the split. Sometimes the customer even loses money while Salomon profits.

“As a rule, the greater the praise lavished upon a salesman within Salomon, the greater the eventual suffering of the customer.”

Lewis is lauded by Salomon’s top brass for arranging the sale of $86 million in dubious bonds to his top client. Effectively, he is rewarded for cheating customers. This reinforces the idea of revenue being prioritized above all else.

“A man who can tell a good story can make a good living as a broker.”

Fiction and lies have a lot in common, and the best practitioners know how to make either one seem real. A terrific story about a bond’s prospects will appeal to the investor who wants to believe in a sure thing.

“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.”

Lewis tries and fails to live up to his own standards in a business where standards are few and those who survive must be proficient liars. Mistreated customers call and hammer him for his bad advice, but pressure from Salomon traders is even worse—if an important bond deal flops, they can lose their jobs—and Lewis needs to stay in their good graces.

“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.”

One of the main causes of Salomon’s troubles is its executives’ isolation from consequences. In Salomon’s culture, staff work overtime to protect the men at the top, who become unrepentant, their decisions increasingly disconnected from the realities of the changing marketplace.

“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.”

In a business as risky as securities trading, a certain amount of attitude is useful, but now and then supremely bad things can happen, and cigars and curses won’t save the day. The traders are at the mercy of the stock market, despite their displays of power.