by Bill Browder
A few hours later, Prutkov returned and drove me to the docks for a tour of the fleet. We walked up a rusting gangplank to one of the trawlers. It was a huge oceangoing factory that stretched hundreds of feet long, boasted a crew of more than a hundred men, and was capable of holding thousands of tons of fish and ice. As we descended into one of the subdecks, I was hit by the overpowering odor of rancid, spoiled fish that hung in the air. I felt like throwing up the whole time Prutkov spoke. Remarkably, he was unfazed by the smell. I pitied the poor guys who worked on these ships for six months at a stretch without any reprieve.
We toured the vessel for twenty minutes, then made our way to the fleet’s offices at 12 Tralovaya Street. These were just as decrepit and tumbledown as the boats, but thankfully they didn’t smell. The lighting in the hall was weak and green, and the walls of the reception area looked as if they hadn’t been painted in decades. I couldn’t help but think that everything about this operation was an insult to the senses, but then, as we settled down to a cup of lukewarm tea, we started to discuss the financial situation of the company and my perceptions started to shift.
“Tell me, Mr. Prutkov—how much does one of those boats cost?” I asked, Irina still translating.
“We got them for twenty million dollars new out of a shipyard in East Germany,” he answered.
“How many do you have?”
“About a hundred.”
“And how old are they?”
“Seven years on average.”
I did the math. A hundred trawlers at $20 million each meant that they had $2 billion worth of ships. I figured that if the fleet was seven years old, then it was about half-depreciated, meaning that they had $1 billion of ships at the current market value.
I was amazed. These people had hired me to advise them on whether they should exercise their right under the Russian privatization program to purchase 51 percent of the fleet for $2.5 million. Two and a half million dollars! For a half stake in over a billion dollars’ worth of ships! Of course they should! It was a no-brainer. I couldn’t understand why they needed anyone to tell them this. More than anything, I wished I could have joined them in buying the 51 percent.
As I went over all this with Prutkov, I felt the release of that familiar chemical in my stomach—the one I’d felt after my ten bagger in Poland. I wondered, Is this deal unique to the Murmansk Trawler Fleet, or is the same thing happening all over Russia? And if it is, how can I get involved?
I was scheduled to return to London the following day, but I was so excited and agitated that I bought a one-way ticket to Moscow instead. I had to find out if the shares of every other Russian company were just as cheap as this one. Nobody would miss me in London, anyway—they barely knew I existed.
After arriving in Moscow and collecting my bags, I went to an airport kiosk and bought a small, English-language business-phone directory. I’d never been to Moscow, didn’t speak a word of Russian, and hardly knew a soul. I got in an airport taxi and told the driver that I wanted to go to the Metropol Hotel on Red Square (he must have known that I was easy pickings because I later learned that he charged me four times the normal rate). We sat in snarled traffic on Leningradsky Prospekt, a boulevard that was wider than a football field, slowly passing hundreds of identical Soviet-era apartment blocks and billboards advertising strange-sounding companies.
The cab pulled up to the Metropol two hours later, across from the Bolshoi Theatre. When I got to my room, I called a friend in London who had worked in Moscow and he gave me the numbers of a driver and a translator, each of whom charged $50 a day. The next morning I went through the phone directory and started cold-calling anyone who seemed relevant to see if they would be willing to discuss the Russian privatization program with me. I ended up seeing officials from the US embassy, some people at Ernst & Young, a junior Russian official at the privatization ministry, and a Stanford alum who worked at American Express, among others. Over four days, I arranged a total of thirty meetings, and from them I pieced together the full story of what was going on with the Russian privatization program.
I found that to transition from communism to capitalism, the Russian government had decided to give away most of the state’s property to the people. The government was going about this in a number of ways, but the most interesting was something called voucher privatization. In this part of the program, the government granted one privatization certificate to every Russian citizen—roughly 150 million people in total—and taken together these were exchangeable for 30 percent of nearly all Russian companies.
One hundred and fifty million vouchers multiplied by $20—the market price of the vouchers—equaled $3 billion. Since these vouchers were exchangeable for roughly 30 percent of the shares of all Russian companies, this meant that the valuation of the entire Russian economy was only $10 billion! That was one-sixth the value of Wal-Mart!
To put this in perspective, Russia had 24 percent of the world’s natural gas, 9 percent of the world’s oil, and produced 6.6 percent of the world’s steel, among many other things. Yet this incredible trove of resources was trading for a mere $10 billion!
Even more astonishing was that there were no restrictions on who could purchase these vouchers. I could buy them, Salomon could buy them, anyone could buy them. If what had happened in Poland was profitable, then this was off the charts.
I returned to London a man possessed. I wanted to tell everyone at Salomon that they were giving money away for free in Russia. I started by going to one of the guys on the East European investment banking desk with my discovery. But instead of congratulating me, he frowned and asked, “Where are the advisory fees on this?” How could he not understand that this could easily go up a hundred times? Advisory fees? Was he serious? Who gave a shit about advisory fees?
I then went to someone in the investment-management division, expecting him to hug me since I was sharing the most jaw-dropping investment opportunity he would ever see in his life. Instead he looked at me as if I were suggesting that the firm invest in Mars.
After that, I went to one of the traders on the emerging-markets desk, but he looked at me quizzically and asked, “What’re the spreads and trading volumes on these vouchers?” What? Who cares whether they’re 1 percent or 10 percent? I’m talking about making 10,000 percent!
Nobody at Salomon could divorce themselves from their own narrow mind-set. Perhaps if I had been more subtle and clever I could have found a way to pierce their myopia, but I wasn’t. I had no political skills, and for weeks I just kept presenting my idea over and over, hoping that by repetition I would eventually get through to someone.
Instead, I completely ruined my reputation inside Salomon Brothers. No one wanted anything to do with me because I was that “crazy fuck who wouldn’t shut up about Russia.” The other associates I used to hang out with stopped inviting me for lunch and after-work drinks.
It was now October 1993, and I’d been at Salomon Brothers for just over a year. I was an object of ridicule throughout Salomon, and worst of all I’d made the firm only $50,000 in total, meaning I was sure to be fired at any moment. As I despaired over my impending dismissal, my phone rang. I didn’t recognize the New York extension: 2723. I answered. The man on the other end had a deep Southern drawl, like a Georgia lawman. “Hey, there. This Bill Browder?”
“Yes. Who’s calling?”
“Name’s Bobby Ludwig. I heard you got something going on in Russia.”
I’d never heard of this guy before and wondered who he was. “Yeah, I do. Do you work for the firm?”
“Yep. In New York. I was wondering if you might do me a favor and come tell me about what you’re up to?”
“Uh, sure. Can I check my schedule and get back to you?”
“ ’Course.”
We hung up. I immediately called someone I knew on the emerging-markets desk who had worked in New York and asked him about this Ludwig person.
“Bobby Ludwig?” he asked, as if I were stupid not to kno
w who he was. “He’s one of the top producers at the firm. Weird guy, though. Some people think he’s crazy. But he makes money year after year, so he kind of does whatever he wants. Why do you want to know?”
“No reason. Thanks.”
Bobby was exactly the person I needed to get me out of my rut. I phoned him back immediately. “Hi, this is Bill again. I’d love to come to New York and give you a presentation on Russia.”
“Friday work for you?”
“Sure. I’ll be there. See you then.”
I stayed up two nights in a row, putting together a PowerPoint presentation on Russian equities. That Thursday, I took a 6:00 p.m. British Airways flight to New York, skipping the on-board movies and reviewing the presentation over and over. I couldn’t blow this opportunity.
I arrived at Salomon Brothers headquarters at 7 World Trade Center on Friday morning. The Twin Towers glistened in the bright morning sun just to the southwest. I was sent up to the thirty-sixth floor and met by Bobby’s secretary. She greeted me and swiped us through the door to the trading floor. It was huge—desks went as far as the eye could see—and the energy was palpable. This was raw, aggressive capitalism to the core.
We walked along the side of the floor, passing a dozen rows of desks, and then through a short hallway that led to Bobby’s office. Bobby’s secretary announced me and left. Bobby was behind his desk staring out the window toward New York Harbor. He was around fifty but looked much older with his unkempt red hair and a stringy mustache that fell over the corners of his mouth. Except for a bunch of messy stacks of reports, his office was spartan, and aside from his desk and chair, the only furniture was a small, round table and two other seats. As Bobby asked me to sit, I noticed that he wore a pair of beat-up leather slippers and that his red tie was stained. I later learned that this was his lucky tie, which he’d worn nearly every day since he’d made $50 million on a single trade. Bobby settled behind his desk and I got out my presentation, put a copy in front of him, and started to talk.
Normally when one gives presentations, audiences indicate that they’re interested or bored or curious, but Bobby didn’t do any of that. He just stared vacantly at the charts and graphs as I flipped through them. There were no Uh-huhs or nods or anything else to give me an indication that I was getting through—just a blank stare. It was unsettling. Then, when I was about halfway through the slides, Bobby abruptly stood and, without saying a word, walked out of his office.
I didn’t know what to think. This was my final chance to save my career at Salomon and I was blowing it. What have I done wrong? How am I going to salvage this meeting? Should I speed up the presentation? Slow it down? What the hell should I do?
For nearly forty minutes I stewed in panic and uncertainty, but then I saw Bobby returning. He stopped to say something to his secretary and then, slowly, came back in. I stood, ready to beg if that’s what it was going to take.
But before I could even get a word out, Bobby said, “Browder, that story’s the most amazing thing I’ve ever heard. I just went down to the risk committee and got twenty-five million for us to invest in Russia. Don’t waste time doing anything else. You get back to Moscow and let’s put this money to work before we miss out, you hear?”
Yes. I did. I heard loud and clear.
7
La Leopolda
Those words changed everything for me. I did as I was told, returned to London, and got right to work on investing Salomon Brothers’ $25 million. Unfortunately, since this was Russia, I couldn’t just call my broker. There wasn’t even a stock market in Russia yet. If I wanted to invest, then I was going to have to make it up as I went along.
On the Monday after I returned from New York, I sat at my desk in the bullpen and began cold-calling contacts to try to figure out how I was going to move forward. When I was on my fifth call, I noticed a serious-looking middle-aged man walking briskly toward me, two armed security guards flanking him. When he got closer, he barked accusatorily, “Mr. Browder, I’m head of compliance. Can you tell me what you’re doing?”
“Excuse me. Have I done something wrong?”
He nodded. “We’ve heard that you’re conducting securities trading from inside the investment bank. As I’m sure you know, that would be a violation of the employee code of conduct.”
For those who may be unfamiliar, investment banks are divided into two halves: the sales and trading division, which buys and sells stocks, and the investment banking division, which advises companies on such things as mergers and new-share issues. These halves are separated by what they call a Chinese wall so that the stock traders can’t trade on confidential information that the investment bankers have acquired from their clients. I worked in the investment bank and was, therefore, not allowed to trade stocks. In practical terms, this meant that when we finally figured out how to buy Russian stocks, I would have to move onto the trading floor. But that was still a long way off.
“I’m not buying any securities,” I explained timidly. “I’m just trying to figure out how it’s done.”
“I don’t care what you call it, Mr. Browder. You have to cease what you’re doing immediately,” the head of compliance commanded.
“But I’m not investing, I’m coming up with a plan to invest. It’s all been agreed to by senior management in New York. I’m not doing anything wrong,” I pleaded.
After the Treasury bond scandal that had nearly destroyed its business, Salomon wasn’t taking any chances. “Sorry. Pack your desk,” he said gruffly, nodding to the security guards. “You can no longer stay in the investment bank.”
As I packed up, the guards stepped forward and crossed their arms, enjoying a rare opportunity to be tough. They then escorted me through the door that separated the investment bank from the trading floor. On the way we passed one of the young guys from the Hungarian team. He winked at me before silently mouthing, Fuck you. No mystery about who turned me in.
Once we were on the trading floor, the security guards asked me to hand over my investment-banking entry pass and left me with my boxes on the floor. Traders walked by, staring at me. I was totally humiliated and felt like I did on my first day at boarding school. I had no idea what to do, so I pushed my boxes under a nearby desk, found a phone, and called Bobby.
“Bobby,” I said breathlessly. “Compliance just kicked me out of the investment bank! I’m on the trading floor with no place to sit. What should I do?”
He didn’t seem at all concerned by my dilemma, exhibiting the same total lack of empathy that he’d demonstrated when I’d presented the Russian idea the week before. “I don’t know. Find another place to sit, I guess. I’ve got another call.” He cut me off and hung up.
I gazed across the vast trading floor. It was as big as a football field. Hundreds of people sat at row upon row of desks, shouting into phones, waving their arms, and pointing at computer screens, all trying to eke out small discrepancies in the prices of every kind of financial instrument imaginable. Amid this beehive of activity were occasional empty desks, but you couldn’t just pick one and sit. You had to have permission from someone.
I tried to hide my discomfort and walked to the emerging-markets bond desk because I knew the head of that desk. I described my problem and he was sympathetic, but he simply didn’t have any room, so he referred me to the European equities desk. Same story.
I then tried the derivatives desk, since it had a few empty seats. I walked up to the head of the team as confidently as I could and introduced myself, dropping Bobby Ludwig’s name. The man didn’t even turn as I spoke. I had to address the back of his bald head.
When I was done, he swiveled around and leaned back. “What the fuck?” he blurted. “You can’t just walk over here and ask me for a desk. That’s fucking ridiculous. If you need a place to sit, go to management and sort something out.” He snorted as he turned his chair back to his screens and grabbed a call on his blinking phone.
I walked away in a daze. Traders aren’t known for thei
r manners, but still. I called Bobby back. “Bobby, I’ve tried. Nobody will give me a desk. Can you please do something?”
This time, Bobby was annoyed. “Bill, why are you bothering me with this? If they won’t give you a desk, then just work from home. I don’t care where you work. This is about investing in Russia, not desks.”
“Okay, okay,” I said, not wanting to mess things up with Bobby. “But how can I get my travel authorized and expenses reimbursed and that kind of stuff?”
“I’ll sort that out,” he said gruffly, and hung up.
The next day an overnight package arrived at my home containing twenty presigned travel authorization forms. I filled in the details on one of them, faxed it to the Salomon travel department, and got a ticket to Moscow for two days later.
Once I arrived in Moscow, I set up a makeshift office in a room at the Baltschug Kempinski Hotel on the south bank of the Moscow River, across from Saint Basil’s Cathedral. The first step was to get the money to Russia, which meant we needed somebody who could receive the cash and help us buy the vouchers. Fortunately, we found a Russian bank that was owned by a relative of an employee at Salomon. Bobby thought that would be better than wiring our money into an unknown Russian bank, so he had someone from the back office organize the paperwork, and authorized the transfer of $1 million for a trial run.
Ten days later we began purchasing vouchers. The first step was to collect the cash at the bank. I watched as the clerks withdrew the cash from the vault in crisp $100 bills and loaded it into a canvas sack the size of a gym bag. This was the first time I had ever seen a million dollars in cash, and it was strangely unimpressive. From there, a team of security guards took it by armored car to the voucher exchange.
The Moscow voucher exchange was in a dusty, old Soviet convention hall across from the GUM department store1 several blocks from Red Square. It was organized in a series of concentric rings of picnic tables under an electronic trading board hanging from the ceiling. All transactions were done in cash, and, since it was completely open to the public, anyone could walk in with vouchers or cash and transact business. There was no security, so the bank kept its guards around at all times.