When the market resumed its decline, it fell famously, like the apple from the tree. Both Meriwether’s boys and the mortgage arbitrage department very quickly made tens of millions of dollars. Smith, however, began to lose even more millions of dollars. Estimates of his losses by four people close to the situation range between thirty-five and seventy-five million dollars. But it didn’t matter. Meanwhile, the mortgage arbitrage traders kept their IOs, and their profits were growing. That gave Smith, a veteran schemer, an idea for how to get his money back.
He began by telling people in high places that all along his bonds had been meant to be bundled together with the bonds held by the mortgage arbitrage group—Hawkins, Cornfeld, and Low. He said it often enough, and he was senior enough (a managing director) that the right people apparently chose to believe him. After all, he was effectively a boss of mortgage trading. He then informed the mortgage arbitrage traders that their profitable IOs actually belonged in his trading account. He said he had planned to package his POs at his purchase price with their IOs at their purchase price and sell them off to investors. So the mortgage arbitrage profits were swallowed up by Smith’s losses!
Smith was stealing profits from other traders. What was worse, in the view of the mortgage traders, Smith was a corporate trader. It was a signal to everyone that something was very rotten in Salomon Brothers. A member of the arb group recalls that “it got so we’d come in in the morning and say, ‘Oh, we made another two million dollars on the IOs. Guess Smith will take that, too.’ ” Later, much later, Smith would be severely reprimanded in Gutfreund’s office for what he had done. But that would be too little too late. Cornfeld quit and joined Shearson Lehman. Low quit and went to work for Bear Stearns. Even Larry Stein, whom Smith had introduced to the mortgage department, quit in disgust. For a brief time there were calls from around the firm for Smith’s head, but that ended when the rest of the mortgage trading department was fired. Where had Lewie been?
Although it was not widely known, while Smith was poaching profits from the mortgage arbitrage books, Ranieri was, in his mind anyway, no longer officially in charge of mortgage trading. “In December 1986 John came to me and said, ‘I want to dismantle the mortgage department. I want you to help manage the firm as a whole,’ ” says Ranieri. “The department didn’t exist as a separate entity. It was a part of fixed income trading,” he says.
In May 1987 John Gutfreund told Salomon’s 112 managing directors at the annual managing directors’ weekend in New York, “We created an Office of the Chairman because running Salomon Brothers is beyond the scope of any one man. As with any team, the challenge is to share the tasks, bring a diversity of opinions and insights, and yet work with a singularity of purpose. I am very pleased with how the group is gelling. Over time, the other three members will gravitate to fewer direct line responsibilities in order to have more time for Firm Management.”
Two months later, on July 16, 1987, he fired Ranieri. Ranieri had been on business on the West Coast when he heard from Gutfreund’s secretary that Gutfreund wanted to see him. He was told to meet Gutfreund in the midtown offices of Wachtell, Lipton, the prominent securities law firm. “We met up there in Marty’s [partner Martin Lipton] office when we didn’t want to create a fuss and there was an emergency,” says Ranieri. “I thought the South Africans—i.e., Minorco—wanted out of their shares. I had no idea what was up.”
The meeting lasted about ten minutes and left Ranieri stunned. When asked why he was fired, Ranieri says, “I still don’t know.” Gutfreund gave Ranieri three reasons at the time, all of which Ranieri (and others) found absurd. He started out by telling Ranieri, “No one likes you anymore.” Then he said that Ranieri was “a disruptive force” and that he’d became “too big for Salomon Brothers.” When Ranieri moved to adjourn the meeting and drive downtown to collect his belongings, Gutfreund told him he wouldn’t be permitted in the building. Clearly the thought of a coup or a general strike had crossed Gutfreund’s mind, as large numbers of Salomon employees owned their chief allegiance to Ranieri. Ranieri’s secretary was to be allowed to pack his personal effects in the company of a Salomon security guard.
“When news reached the mortgage desk that Lewie’d been fired, D’Antona was visibly shaking,” says one mortgage trader still at Salomon. It was clear to everyone—to Lewie; to Wolf Nadoolman, now at Dillon Reed; to Nate Cornfeld, now at Shearson Lehman; to Andy Stone, now at Prudential-Bache; to everyone left on the mortgage desk—what would happen next. The Ranieri family would be purged. Over a period of a few months the firm fired what was left of the old guard on the mortgage trading desk, beginning the next day with the head of training, Michael Mortara. Then John D’Antona, Ron Dipasquale, Peter Marro, and Tom Gonella. The lone trader of Italian descent left on the desk was Paul Longenotti, who appeared at work one day wearing a button that said, “Fire me, I’m Italian.”
The sole trace 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. Jeff Kronthal and Mason Haupt were allowed to stay, as co-heads of mortgage trading, presumably because no one else at Salomon Brothers knew enough to do the job. The following year, however, Kronthal quit to become vice-chairman of L. F. Rothschild, a New York investment bank recently purchased by, of all people, thrift manager Ernie Fleischer. That left Mason Haupt as the only man at Salomon Brothers expert in mortgage securities. The ignorance about mortgage bonds at the top of the firm was truly remarkable. After the purge Gutfreund, Voute, and Strauss arranged to have a private seminar given by the head of Salomon bond research, Marty Leibowitz. The subject: an introduction to mortgage securities. Voute was eventually named head of mortgage trading.
Ranieri had accomplished what he set out to do: put the mortgage department on equal footing with corporate and government bonds. The U.S. mortgage market is now the largest credit market in the world and may one day be the single largest bond market in the world. Ranieri’s creation signaled a shift in the focus of Wall Street. Wall Street, historically, had dealt with only one side of the balance sheet: liabilities. Mortgages are assets. If home mortgages could be packaged and sold, so could credit card receivables, car loans, and any other kind of loan you can imagine.
Salomon Brothers expertise fertilized the rest of Wall Street. Michael Mortara became the head of mortgage trading at Goldman Sachs—the leader in mortgage bond trading in the first half of 1988. Peter Marro heads mortgage trading at Morgan Guaranty. Andy Stone heads mortgage trading at Prudential-Bache. Steve Baurn heads mortgage trading at Kidder Peabody. Tom Kendall heads mortgage trading at Greenwich Capital Markets. Steve Joseph heads mortgage trading at Drexel Bumham Lambert. Jeff Kronthal heads mortgage trading at L. F. Rothschild. Wolf Nadoolman, Nathan Cornfeld, Nathan Low, Bill Esposito, Eric Bibler, and Ravi Joseph are senior mortgage traders for, respectively, Security Pacific, Shearson Lehman, Bear Stearns, Greenwich Capital markets, Merrill Lynch, and Morgan Stanley. That is a handful of the most visible Salomon mortgage traders on Wall Street. Beneath them in their corporations are thousands of people who now make their living in mortgage bonds.
Of course, the most curious of all former Salomon Brothers mortgage traders is Howie Rubin. Soon after being fired by Merrill Lynch, Rubin was hired by Bear Stearns. Rumor had it that Bear Stearns called him the morning that news of his $250 million loss hit the Wall Street Journal. Outside Merrill Lynch, Rubin’s loss was taken in stride, even with humor. A pair of Bear Stearns mortgage traders nailed shut his new desk drawers, so that he couldn’t “just put them in his drawer” again. A Salomon mortgage trader telephoned to suggest that Rubin volunteer for an American Express card commercial. “Hi, you don’t know me, but I lost more money trading than anyone in the history of Wall Street. So I know the meaning of credit. And when I get in trouble… I pull out this little card…”
Lewie Ranieri opened his own firm half a mile north of Salomon Brothers. (This one really is called Ranieri & Co.) Soon after his dismissal a confused Ranieri had lunch with the man who had dragged him kicking and screaming into mortgages, Bob Dall. Dall says, “I have two theories why John fired Lewie so soon after he had promoted him. One is that John realized all of a sudden he had made a huge error—that Lewie was too parochial and would put his department first, even if he was vice-chairman of the firm. The second theory is that the office of the chairman got sick of listening to Lewie. Lewie dominates a meeting. He’s not the kind of guy who likes to hear himself talk, but he has all these passionate beliefs. It’s too bad that Strauss, Voute, and Gutfreund couldn’t take it, because they could have benefited from listening to Lewie.”
Ranieri himself refuses to believe he was done in by the man who had protected him when times were tough, the man he called “my rabbi.” He believes that Tom Strauss managed to obtain control and that Voute was willing to bide his time, while giving Strauss enough rope to hang himself (as it happened, the truth, if anything, was the opposite. Voute quit Salomon in December 1988, leaving Tom Strauss as the sole pillar beneath the teetering Gutfreund). Ranieri has never relinquished his notion of the firm, formed when the faceless, nameless partner paid his wife’s hospital bills for no reason other than it was the right thing to do; when the firm was run by men who said, “It is more important to be a good man than a good manager,” and meant it. Ranieri prefers to think of Salomon Brothers as temporarily in the hands of strangers to its culture. “The only way you can understand what happened,” says Ranieri, “is that John Gutfreund was not in control. Strauss was in control. Tommy wanted absolute power. They managed to destroy a colossus in a year. John would have never done that to himself if he were making the decisions. I can’t imagine what they [Strauss and Voute] said to John to get him to do what he did. They never understood that the greatness of the firm was its culture. They shattered the culture. Or as the people say, they broke the covenant. They branded themselves for-evermore.” And with that, a nineteen-year journey from a Wall Street mailroom to a Wall Street boardroom ended.
Chapter Eight
From Geek to Man
Men in general judge more by the sense of sight than by the sense of touch, because everyone can see but only a few can test by feeling. Everyone sees what you seem to be, few know what you really are; and those few do not dare take a stand against the general opinion.
—Niccolo Machiavelli, The Prince
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. On my lap, as I began my young career in sales in London, sat a book full of funny French names I couldn’t pronounce. My boss, my jungle guide, a native of Bald Knob, Arkansas, named Stu Willicke, had told me to get my butt on the phone and start earning a living. “Call everyone in Paris,” he said. “And smile.”
He didn’t actually mean everyone in Paris. That was just for effect. I was meant to call only French money managers with fifty million dollars or more. That whittled the field down from the white pages of the Paris phone book. I had found another book for the purpose, called The Euromoney Guide. To get your name listed in something called The Euromoney Guide, I figured, you needed to have some money. The first name listed was F. Diderognon. What was that? Man or woman? I asked my American jungle guide how it should be pronounced.
“How should I know? I thought you spoke French,” he said. “No, that was just on my resume,” I said.
“Oh,” he said, and scratched his head for a minute, figuratively. “That’s all right, the frogs all speak English anyway.”
I was stumped. No choice but to dial. But that didn’t solve the problem: F. Diderognon. Might it not rhyme with onion? Was the first part like the name of the philosopher? I decided to try “Diderot’s Onion,” quickly. My jungle guide was staring at me, as if I must be some mistake. I dialed.
“Oui,” said a male frog.
“Uh, puis-jeparle a F. Diderognon?” I asked.
“Quoi? Qui?” said the frog.
“F. Diderognon. Di-der-o-onion,” said I.
The man on the other end covered the receiver with his hand. I heard only muffled background conversation, but it sounded suspiciously like “Frank, there’s some American broker who can’t pronounce your name on the phone. Do you want to talk to him?”
Then another voice: “Find out who he is.”
“Hey, who are you?” the man asked.
“My name is Michael Lewis, and I’m with Salomon Brothers in London,” I said.
Muffle. Muffle. “Frank, some new guy with Salomon.”
Frank Diderognon: “I don’t talk to Salomon. Bastards. Tell him to go away.”
“Frank says he’ll have to call you back.”
Fuck. Why did I take this job?
A geek is a carnival performer who bites the heads off live chickens and snakes. Or so says the red American Heritage dictionary. At Salomon Brothers in London, a geek meant whatever the traders said it meant, and they had two definitions, neither of which bore any resemblance to the dictionary’s. 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 program and in a disgusting larval state between trainee and man.” I, he said, was a geek.
By December 1985, having served my time as both a waiter and a punching bag for traders in New York, I was happy to stop being a trainee, even if it meant becoming a geek. I planned to drift away from the forty-first floor, from Ranieri, Gutfreund, Strauss, and Voute and their oppressive turf war. Don’t get me wrong. I liked the action as much as the next guy, but in New York, when you’re starting out, action comes at the price of freedom. I couldn’t stand the thought of being sat upon by fat mortgage traders until I learned to do my job. That could take a lifetime.
If you wished to detach yourself from the soul of Salomon Brothers, London was the only place to go. Everywhere else the standards were set by the forty-first floor—in the American branches and also in Tokyo. But the older Europeans who staffed the London office of Salomon were freedom fighters. The top six management positions in the office were held by Americans who had worked on 41. The Europeans nevertheless set the pace. You had only to compare the reaction of our office to a visit from Gutfreund with those of the other offices to see the difference between us and them.
When Gutfreund appeared in any American branch office, the employees put on a show. They affected a casual confidence. Although their stomachs churned and their pants moistened, young Americans jested with the wandering Gutfreund. They said nothing terribly adventuresome, you understand. Jokes about the latest bond issue were in. Jokes about Gutfreund’s wife were out. As long as the ground rules were properly observed, Gutfreund gave it right back.
When Gutfreund visited the Tokyo office, the Japanese employees bowed their heads at their desks and worked the phones furiously, as if playing charades and assigned to communicate “Men at Work.” The slumbering Japanese in our training program notwithstanding, the concept of playing cool apparently doesn’t exist in Japan. No young Japanese peered skyward to chat with cherubic Gutfreund-san. An American friend of mine happened to be in the Tokyo office on one of Gutfreund’s visits and was taken aside by the boss for a discussion. When my friend returned to the trading floor, he recalls, “All the Japanese were staring at me as if I had just had a personal conversation with God and he had made me a saint.”
In London Gutfreund was treated, quite simply, like a gauche American tourist. It would only have confirmed many people’s opinion of him if he had turned up wearing psychedelic Bermuda shorts and a T-shirt with a camera around his neck. People laughed behind his back, especially as the firm spiraled into decline.
“What’s he here for?” one European would ask another.
“Must be on his way to Paris to do some shop
ping,” the response would inevitably be. It was indeed often the case.
The next question was then: “Is Susan with him?” (In fact, wife Susan was with him about as often as Paris was his ultimate destination.)
There is, in short, no question that the Europeans took less heed of authority than Salomon’s Americans and Japanese. These free spirits were on average ten to fifteen years my senior and old hands in high finance. They were less interested in the latest financial gadget to come out of America than in establishing relationships with customers. There is a genus of European, species English, to whom slick financial practice comes naturally. The word for them in the Euromarkets is spivs. Oddly, we had no spivs. Our Europeans—especially our Englishmen—tended to be the refined products of the right schools. For them work was not an obsession or even, it seemed, a concern. And the notion that a person should subordinate himself to a corporation, especially an American corporation, was, to them, laughable.
The Europeans had a reputation, probably exaggerated, of sleeping late, taking long, liquid lunches, and stumbling through their afternoons. The source of this reputation was, as ever, the forty-first floor in New York. One New York trader referred to them as “Monty Python’s Flying Investment Bankers.” The colorful and loud clash between their culture and the culture of the imported American management was a dust cloud behind which a geek could hide and retain a measure of personal freedom.
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