by Guy Lawson
The teenage Israel walked through the pandemonium for the "rst time in a state of awe. The #oor was chaotic, but the action was also choreographed. Brokers with numbers on their chests took orders from clerks, who worked banks of phones; runners known as “squads” sped the orders to specialists, who checked the trades and then posted them to the ticker tape on the big board. The noise and speed were bewildering.
Bu!eted by the mob, Sam slowly found his way to Graber’s booth, number 0020. The tiny space was crammed with a hundred telephones, each connected to a di!erent broker. There stood Graber’s trading clerk, a short, dark-haired, stout man twenty years older than Israel—Phil Ratner.
“Phil was a tough old bird who knew everything about trading,” Israel recalled. “By the time I made it to the #oor it was nearly lunchtime. I watched, but no one was really talking to me or telling me anything. Not that they were rude, they were just busy. So Phil sent me to get pizza. I went and bought eight large pies, with extra cheese, extra toppings. When I got back to the #oor, I was stopped at the door. The guy working security told me that food wasn’t allowed on the #oor. All the phones and wires in the systems would be damaged if people took food or drink onto the #oor. But I wasn’t to be denied. I started to argue. The governor of the #oor came over and started screaming at me for bringing pizzas into the exchange, asking me who the fuck I thought I was. I pointed at Phil and I said, ‘That man over there has the power to give me a job, and I’m not going to lose that chance. I’m bringing him these pizzas unless you knock me out.’ I was a kid. I still had zits. I shoved past the governor of the exchange. That was how determined I was to please those men.
“Phil and the guys started pissing themselves laughing. The governor was bent over double. It was all a setup—a prank. They wanted to see if I had the mettle. I was being hazed. I laughed along with them—I pretended to laugh. But I was very serious.
Nothing was going to stop me from becoming a trader. At the end of the day, I asked Phil if I could come back the next day. Just to watch, I said. I was scared he was going to say no. But he took pity on me, I guess. Or he thought I would be good for a laugh.
Being able to laugh at yourself, that was one of the most important things on the Street.
Phil said okay. From that day forward, I was in, and no one was going to get me out.”
Sam spent the rest of the summer as a runner on the #oor of the NYSE with Phil and his crew of clerks. Graber had an account at the members’ smoke shop in the NYSE, so Sam was sent to fetch cigarettes and snacks. In idle moments, Sam was taught “liar’s poker,” a game of chance, based on gambling on the serial numbers of dollars, that prized the ability to deceive. The #oor of the exchange was completely foreign to the well-heeled teenager, and he set about learning its ways with the attention to detail of an aspiring samurai. “Downstairs” was the name for the #oor. “Upstairs” was where Freddy Graber and the other traders made their decisions about buying and selling.
“All of the brokers downstairs came from Brooklyn and Staten Island—they talked in ‘dems’ and ‘dose,’ ” Sam recalled. “Lots of them had no college education, but they made a lot of money considering their backgrounds. A good broker could make a couple of hundred thousand a year, back when that was real money. The lead guys were like Ma"a dons. You had to pay your respects to them or you weren’t going to get into the specialists’ booth. Upstairs was completely di!erent. It was suits and ties. The guys on the #oor were real street guys. But I loved it on the #oor. I would stay late to do the work nobody else wanted to do, making sure the accounts were straight and all the tickets for the trades were clean and accurate. Everything was done on paper in those days, so it was tedious work, but it was a way for me to ingratiate myself. Just because my name was Israel, and I was known as a rich kid, I wasn’t above doing the grunt work.”
At home in Westchester on the weekends, Sam moved inside circles of enormous wealth and prestige. The Israels were "xtures at the Century Country Club, perhaps the single most exclusive golf club in the country. The crowd at the Century Club included many of the world’s most powerful people. Sam read about their exploits as he rode the train to the city every day. “They were the crème de la crème,” Israel recalled. “My father’s friends were captains of industry. Presidents of investment banks. The heads of major multinational companies. Alan Greenspan before he took over the Federal Reserve. Sandy Weill, who became the chairman of Citibank. Larry Tisch, who became a billionaire as the CEO of CBS.
“All of them were good friends with Larry Israel. Everybody loved my father. He was funny, smart, outgoing. He was overweight but a great athlete—nearly a scratch golfer.
He was like Jackie Gleason—a larger-than-life character with a loud voice and a bad temper. As a kid I thought my father was a trader, like his father and grandfather. As I got older I found out that he wasn’t a trader. He ran the business side of the company, not the trading side. His job was to schmooze and get along with people, and he was very good at it. The cats my father ran with had more money than anyone else. And I don’t mean in New York, or the stock market, or even the United States. I mean in the whole world.”
The dinner table at the Israel home was no place for the faint of heart. Conversation was fast-paced and barbed as Sam’s father led a sophisticated ongoing seminar on the realities and complexities of the commodities market. Sam was regaled with tales from the lore of the Israel family. Like the way his namesake grandfather and great uncles had cornered the cocoa market in the 1950s and 60s. The Israels had hidden barges loaded with cocoa along the Mississippi to create the impression there was a shortage in the market. When prices spiked, they sold their secret stockpile to a rising market and made a fortune, a subterfuge Goldman Sachs copied in the aluminum market as recently as 2011. Incredibly, Sam’s forebears had used deception to corner the cocoa market not once or twice, but three times.
The Israel clan had traded “actual” commodities for decades. But as the market changed, they’d become skilled at trading the complex and fantastical abstractions created by modern capitalism. ACLI and J. Aron, the company run by their "rst cousins, were two of the most admired "rms in the business. They would provide the world’s leading investment banks with many of their best minds, including future Goldman Sachs CEO and chairman Lloyd Blankfein. At the time, the family "rms operated at the nexus of power and politics. ACLI had more than a hundred o$ces scattered around the world, many opened by chairman of the board Larry Israel. The Israels and the Arons were traders, but they were also economic diplomats and insiders at the highest levels of commerce and government.
“My father traveled all over the Third World because that was where the commodities were,” Sam said. “He met with heads of state, top ministers, captains of industry. He dealt with Idi Amin in Uganda when he was importing co!ee from there. Manuel Noriega in Panama was another. Ferdinand Marcos was a close associate of my father.
The Philippines was huge for sugar. Marcos’s number one guy was named Don-ding Corleone Cojuangco. He had a monopoly on bananas and beer in the Philippines. Don-ding o!ered to take me there to work for a summer, but my old man said there was no way he was going to let me go because I’d end up dead. My father’s work was also very closely tied to the government of the United States. He was dealing with all the bad boys the CIA put in power. He knew how things really worked. When he came back from trips to places like the Philippines he would be debriefed by the CIA. Controlling commodities was how the dictators stayed in power—and that was how America kept power.”
On the train to the city each morning, Sam tried to divine larger meanings in Wall Street Journal reports about company earnings and takeovers. Graber had little to do with Sam, apart from getting him to run an occasional errand. He never o!ered to pay Sam, and Sam never asked about money. To make himself useful, Sam took every opportunity he could "nd to do favors, however small. Fetching lunch or running to the local o!track betting shop to place a bet on a horse was
a way to please Graber and get noticed.
As Sam gradually insinuated himself, he began to be trusted with more complex tasks. Despite his youth, Sam knew that discretion was crucial. He’d seen how his father worked. Sam knew to be careful about whom he asked questions of—and what he asked about. Good intuition was essential. One day, Graber called Sam from the #oor and told him to go uptown to the Pierre Hotel to collect a package. Sam knew better than to ask what he was going to get.
“Freddy told me to go to the third #oor of the hotel and knock on the door of a speci"c room,” Israel recalled. “A Swiss man would answer the door. I was supposed to say, ‘The weather is nice for this time of year.’ The man would say, ‘Yes, but today it looks like rain.’ It wasn’t going to rain. It was sunny outside. I was pretty naive, but I was learning. The Swiss guy gave me a satchel. I took the subway back down to Wall Street. But the subway stalled, like it used to do a lot in those days. The lights went out.
I sat in the dark in a packed subway car for three hours. When I "nally got to Freddy’s o$ce he was pacing around in the hallway. He screamed at me, asking where the fuck I had been. He pulled me into the bathroom and opened the satchel. It was "lled with one-hundred-dollar bills. There was easily one hundred grand in the satchel.
“I knew something was wrong with it, but I didn’t know what. I didn’t know about insider trading and how Wall Street really worked. I didn’t know about Swiss bank accounts. I didn’t know the secrets. I couldn’t believe he didn’t tell me to at least get a taxi. I could have been mugged on the subway. But Freddy wasn’t going to tell me—I was just the kid. He calmed down and saw it wasn’t really my fault. The important thing was that I didn’t snitch. I didn’t tell anyone about the cash. I didn’t talk to my father or mother about it. I said nothing to the guys working for Freddy. I was showing Freddy I could keep my mouth shut. I was showing Freddy I could be trusted.”
CHAPTER TWO
Upstairs
Sam Israel spent three years slacking o! at Tulane University in New Orleans, occasionally studying English literature, mostly smoking dope and carousing in the bars of the French Quarter. The only work Sam took seriously was his summer job in New York with Frederic J. Graber and Company. Finally, in December of 1981, in the middle of his senior year, Sam got a call from Graber. Phil Ratner, Graber’s clerk, was going to retire. Ratner had agreed to stay on for a year to train his successor, and Graber needed someone he could trust to take over. Sam could have the job, but he had to come to New York immediately.
“I dropped out of college that day,” Israel recalled. “I didn’t care about getting a degree. I knew this was my chance. I packed up my bong, put my TV in my car, and left. From then on, everything started moving in fast-forward.”
For a year, Ratner became Sam’s full-time mentor. Decades after he had retired to a gol"ng community in Arizona, Ratner recalled well, and with great a!ection, the young Sam Israel from the early eighties. “He was a sharp kid. He didn’t know what the hell was going on, but no one did at "rst. Everything went quickly on the #oor. It was scary.
But Sam behaved very well. He was a good student and he had no problem learning. He had an aptitude for the clerical work. You’d never know that his grandfather down in New Orleans was worth six hundred million.”
Ratner was a chain-smoking character drawn from the pages of Damon Runyon—short, tough, Brooklyn born and raised. In the early seventies, Graber had given Phil a $2,000 stake to start trading on his own account. By the early eighties, Phil had parlayed the money into more than $1 million in cash, a small sum to Graber’s way of thinking but more than enough for Phil.
“I never wanted to be rich,” Ratner said. “Rich people think about their money too much. They can’t sleep at night. I wanted just enough money to retire, and I "gured a million was enough. I was only forty years old, but I was ready to move someplace sunny and take it easy. I "gured a million bucks wasn’t bad for a working-class kid from Brooklyn.”
Ratner arrived at work every day at "ve-thirty and stayed until seven in the evening.
Sam began to shadow his movements. A street-level realist who was aware of the many temptations that can lead a trader astray, Phil had two axioms that he lived by. One was Never take a big loss, by which he meant that it was crucial to recognize a loss quickly and sell the position before it began to lose even more. Admit defeat and live to "ght another day, Phil told Israel. The other guiding principle was Never turn a winner into a loser. It was Phil’s way of saying that a trader should take a pro"t when it was available, not wait and hope for an even greater windfall.
“Discipline was the key,” recalled Ratner. “When I made a bad trade I would write the word discipline on my forearm so I wouldn’t forget it. I urged Sam to "nd a niche—to "nd what he was good at. My niche was buying and selling stocks in "fteen-, twenty-minute blocks of time. I usually never held a stock longer than that. I didn’t "ght the market. I used to say, ‘Let the trend be your friend.’ If the stock is going up, follow it. If it is going down, sell. I also specialized in the stocks I traded. Some stocks I couldn’t get a good feel for, so I didn’t trade them. That was part of the discipline, I told Sam over and over—"nd your strengths and stick to them. One morning Sam turned up at work and told me he had "gured out what he was good at. I asked what that was. ‘Inheriting money,’ he said. That was Sam. Always with the joke.”
Freddy Graber and Sam Israel had many characteristics in common. The similarity was the result of their dispositions but also Sam’s conscious e!ort to emulate Graber.
“Sam got his sense of showmanship from Freddy,” Phil recalled. “Sam modeled himself on Freddy. Both had very strong personalities. There was nobody that didn’t like Freddy. The same was true for Sam. They were both very lovable. Everything had to be the biggest for Freddy. He wanted to be his own man. Sam was the same way.”
For Graber, life was grand—even grandiose. In the upstairs o$ce, he worked behind a huge white marble desk that had all the modesty of King Tut’s golden throne. Sitting in his high-backed red leather swivel chair, Graber was surrounded by the latest trading gadgets, circa 1982—the Quotron and Instinet machines #ickering like the set of the "rst Star Trek series. Graber had gone to Princeton and then received an M.B.A. from Harvard. But he was not an Ivy League stu!ed shirt. The atmosphere was like a boys’
club—the days "lled with jokes, gambling, cursing, and smoking as a cassette player in the corner provided a Motown soundtrack.
In a decade as a trader, Graber had turned himself into a highly unconventional and inscrutable one-man "nancial institution. On Wall Street the perception was that Graber was running a large amount of money, perhaps more than $100 million. Because it was his money and hedge funds were unregulated, with no disclosure requirements, there was no way for outsiders to know. It was one of the myriad ways Graber was able to use leverage through deceptive appearances. The reality was that he traded far less than the market thought, $23 million at his peak. But Graber was a master of illusion. He also understood the venality lurking in the heart of Wall Street—the kickbacks, the self-dealing, the secret sweetheart deals. He knew how things really worked—and how to exploit every advantage.
“Freddy was the largest ‘two-dollar broker’ in the market,” Ratner said. “That meant Freddy traded more stock than anyone else. He traded for his own account and he traded for other accounts. In those days it wasn’t fashionable to have your own broker, so Freddy was the broker for Goldman and Lehman and the big "rms. The big "rms would charge their clients to make the trade and then get Freddy to execute the trade. It hid the order #ow so no one would know what Goldman was buying. In return, Freddy kicked back "ve or six million dollars’ worth of commissions to those "rms every year —which made him the biggest payer in the market. Brokers were only paid a nickel a share, but it added up over the years.
“The guys at those banks made a lot of money out of Freddy—he paid them to send him their business. That was h
ow Freddy wanted it. He wanted them owing him favors.
He wanted to be the "rst to get the call from Goldman or Lehman when they were going to buy or sell stock. He loved getting that "rst call—the one where he knew "rst what the big players were going to do. Once he knew how the big boys were going to trade, he could buy shares a few minutes ahead of Goldman and then sell into the rising market. He would only own the share for "fteen minutes and then get out with a tidy pro"t. Freddy was always ahead of the crowd. He was able to front-run the market all day.”
Over time, the distinction between “upstairs” and “downstairs” took on a new complexity for Sam. Upstairs was where the important decisions were made; downstairs was where traders kicked and scratched for every penny. At the time, an electronic program called Autex allowed buyers and sellers to identify potential counterparties, enabling a trader to measure liquidity in a stock before making a trade. Because of Graber’s reputation, and all the money he spread around, specialists running the di!erent listings didn’t mind giving Phil Ratner a sneak peek at pending orders. This was the miniature version of Graber’s foreknowledge of order #ow. Being ahead of the market by even a few seconds gave Ratner a crucial edge. It was a primitive form of the computer program trading that would dominate the market in decades to come.
“Once you know the orders and the liquidity, how smart do you have to be to buy that stock?” Phil recalled. “You buy and buy and buy, and then at the right time when the other buyers come into the market you turn into a seller. It all happens in a matter of minutes. This kind of trading I taught Sam. We traded like that all day, scalping points all the time. We didn’t give a shit about what the company did, or how it was run. We weren’t interested in what would happen three months later. We cared about the next eighth of a point—is it up or down? Are there more sellers than buyers?”