Liar's Poker

by Michael Lewis

  He was a portly, middle-aged figure in an ill-fitted suit, scuffed black shoes, and the sort of sagging thin black socks I came to recognize as a symbol of Britain’s long economic decline. There were other features incongruous with his station in life. Cowlicks standing high on the back of his head took on lives of their own; his clothes were as rumpled as if he had slept in them. He was the boss of an operation of several hundred people, and he looked like a bum or as if he had just awakened from a long nap.

  We sat in his poorly lit office surrounded by more unfinished work than I’ve ever seen in one place and talked for an hour. More accurately, he talked for an hour about world events. I listened. Finally he tired and called a car to take us to lunch. But before leaving his office, he paged through his Times with a sharp pencil in his hand and said, “I must make a bet.” He dialed what I gathered to be his bookie and placed two bets of five pounds each on horses racing that day. As he put down the phone, he said, “I view the bond market as an extension of horse racing, you know.” I didn’t, of course. I got the feeling I was supposed to be impressed. I didn’t have the heart to tell him that the boys on my trading floor would have laughed him out of the casino at the suggestion of a bet as small as five pounds. And I couldn’t help remembering a snide remark made by a seasoned trader to one of my fellow trainees while we were in the classroom. The trainee had tried to impress the trader and failed. The trader had said, “You are proof that some people are born to be customers.” Born to be customers, the back row had thought it was the funniest thing they had heard all day.

  Anyway, we then took one of those two-hour lunches for which the London office was fairly renowned in New York. Again he talked. Again I listened, about how the bond market rally was overdone, about how absurdly diligent he felt American bankers were, and about how his small firm was going to cope with giants like Salomon invading the City of London. He disapproved of workdays 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.”

  On the heels of a few drinks, this sounded wise enough to note on a napkin. We ordered a second bottle of white wine to go with the fish. At the end of the lunch, as our speech slurred and the blood rushed from our brains to our stomachs, he remembered why he’d asked me out. He said, “We haven’t had the chance to discuss options and futures. We’ll have to do this again sometime.” Before that could happen, however, his firm, like so many small English financial firms, was bought by an American bank for an enviably large sum of money. He bailed out at just the right time and floated the short distance to earth in a golden parachute. I never heard from him again.

  It was all new, all fresh. Early on I made my first business trip to Paris. Once I’d escaped the trading floor, I was no longer a geek, or at least no one needed to know that I was a geek. I was an investment banker, with an investment banker’s expense account. For four hundred dollars a night I stayed in the finest hotel in Paris, the Bristol. This was not an unusual extravagance on my part. All traveling Salomon salesmen stayed at the Bristol. I would have had to plead for cheaper lodging with Salomon’s secretaries to prevent the expense. And when I first passed through the Bristol’s gold doors, onto its long marble floor, and glimpsed the Pater pastoral scenes and Gobelin tapestries; when I saw the pharmacy of toiletries in my bathroom and the gilded luxury of my suite, I was glad that I had just taken what was my due. If Willy Loman had only had it so good, his kids might have turned out better.

  None of my activities in the first couple of months made so much as a dent on the bottom line of Salomon Brothers, but all were highly entertaining. What was more important than immediate results, I figured, was my education. I was niggled during those first few months by the feeling of being a charlatan. I kept blowing people up. I didn’t know anything. I had never managed money. I had never made any real money. I didn’t even know anyone who had made any real money, only a few heirs. Yet I was holding myself out as a great expert on matters of finance. I was telling people what to do with millions of dollars when the largest financial complication I had ever encountered was a $325 overdraft in my account at the Chase Manhattan Bank. The only thing that saved me in meeting after meeting in the early days at Salomon was that the people I dealt with knew even less. London is, or was, a great refuge for hacks.

  It was only a matter of time before I embarrassed myself horribly. I scrambled to learn more and managed to keep a half step ahead of humiliation. I was impressionable, as Dash Riprock delighted in pointing out, and that was a great weakness in the hands of shifty Salomon traders. But in my educating myself it proved to be a great strength. I had the ability to imitate. It enabled me to get inside the brain of another person. To learn how to make smart noises about money, I studied the two best Salomon salesmen I knew: Dash Riprock himself and a man on the forty-first floor of Salomon New York whom I shall call, at his request, Alexander. My training amounted to absorbing and synthesizing their attitudes and skills. Lucky for me, they turned out to be two of the best bond men in the business.

  Dash and Alexander were as opposite as individuals as their respective choice of pseudonyms suggests, and their respective skills differed also. Dash did what most salesmen did, only better. He kept his nose pressed up against the green screens on which the market in U.S. government bonds was trading and looked for small discrepancies in price. To anyone but a born bond salesman (they do exist), his daily routine was painfully dull. There are several hundred different U.S. government bonds, ranging in maturity from a few months to thirty years. Dash knew what their prices should be, which large investors owned which bonds, and who was the weak hand in the market. If a price was off by an eighth of 1 percent, he’d pile half a dozen institutional investors into a trade to make that eighth of 1 percent. He called his technique nips for blips, blips being the little green numbers that represent bond prices on the screens. I never learned what nips meant, but the expression became a pun as an increasing number of Dash’s customers were Japanese. Tens of billions of dollars worth of U.S. government bonds passed through his phone in a year, en route from the U.S. government to Japan. Dash was doing his patriotic bit to fund the U.S. trade deficit. Salomon took a tiny slice out of each trade. Dash expected at the end of each year to be paid a tiny slice of Salomon’s cut.

  Alexander was unique, the closest thing I met to a master of the markets, which, I’m now convinced, no man really is. He was twenty-seven, two years older than I, and had been with Salomon Brothers for two years when I arrived. He had grown up trading a portfolio of securities. He recalls making a killing in the stock market while in the seventh grade. At the age of nineteen he lost ninety-seven thousand dollars on U.S. treasury bill futures. He was not, in other words, a normal child. Once he learned to ride his gains and cut his losses, he never looked back. What he lost in t-bills, he made back several times over in gold futures.

  Alexander knew how to exploit the world’s financial market. What’s more, as a salesman he knew how to sound as if he knew how to exploit the world’s financial markets, and he had the same effect on other men in our little world as sirens have on sailors. Within months after he moved from London and onto the forty-first floor in New York, he had been discovered by a handful of managing directors who wanted to know what to do with their own money. You’d have thought they’d be comfortable making their own investment decisions, but they weren’t. Each day they’d ask Alexander for advice. To get it, however, they had to stand in line behind Alexander’s clients and me. Alexander was a salesman, but like all the very best salesmen, he had the instincts of a trader. For all intents and purposes he was a trader. His customers—and his bosses—simply did whatever he told them to.

  Alexander had a knack for interpreting events around him. The most impressive aspect of this was its speed. When news broke, he seemed to have already planned his response. He trusted his nose completely. If he had a flaw, it was that he lacked the ability to question his
own immediate reactions. He saw the markets as a tightly woven web. Yank on one filament in the web, and the other filaments had to move, too. He therefore traded in all markets. The bonds, currencies, and stocks of France, Germany, the United States, Japan, Canada, and Britain; the markets in oil, precious metals, and bulk commodities—all interested him.

  The luckiest thing that happened to me during the period I spent at Salomon Brothers was having Alexander take me into his confidence. We met when I replaced him in London. For two years prior to my arrival, he had worked for Stu Willicker and beside Dash Riprock. When we met, he was returning to New York, to be a bond salesman on the forty-first floor. There was no reason for him to watch over me. Except for the mango tea which he required me to smuggle in bulk to him from Paris, there was nothing in it for him. It was a genuinely selfless act, which I recount only because at the time it seemed so incredible. It was as if he had bought shares in my future and were determined to make the trade come right. We spoke at least three times each day and as often as twenty. The conversations during the first few months consisted of his talking and my asking questions.

  My job was a matter of learning to think and sound like a money spinner. Thinking and sounding like Alexander were the next best thing to being genuinely talented, which I wasn’t. So I listened to the master and repeated what I heard, as in kung fu. It reminded me of learning a foreign language. It all seems strange at first. Then, one day, you catch yourself thinking in the language. Suddenly words you never realized you knew are at your disposal. Finally you dream in the language. It seems odd now to think of dreaming of moneymaking schemes. But it didn’t seem terribly out of the ordinary when I woke up one morning thinking that there was an arbitrage available in Japanese bond futures. That morning I looked into the Japanese market, saw that it was indeed the case, and wondered why I had dreamed of it, since I couldn’t recall having ever spoken of the subject. Gobbledygook to you, perhaps. A second language to me.

  Many of the trades that Alexander suggested followed one of two patterns. First, when all investors were doing the same thing, he would actively seek to do the opposite. The word stockbrokers use for this approach is contrarian. Everyone wants to be one, but no one is, for the sad reason that most investors are scared of looking foolish. Investors do not fear losing money as much as they fear solitude, by which I mean taking risks that others avoid. When they are caught losing money alone, they have no excuse for their mistake, and most investors, like most people, need excuses. They are, strangely enough, happy to stand on the edge of a precipice as long as they are joined by a few thousand others. But when a market is widely regarded to be in a bad way, even if the problems are illusory, many investors get out.

  A good example of this was the crisis at the U.S. 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 U.S. 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 eighty-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 elitism; you begin to think everyone else is stupid.)

  The second pattern to Alexander’s thought was that in the event of a major dislocation, such as a stock market crash, a natural disaster, the breakdown of OPEC’s production agreements, he would look away from the initial focus of investor interest and seek secondary and tertiary effects.

  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 supertankers 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 equaled 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 uncon-taminated 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 I have never met them.

  But Chernobyl and oil are a comparatively straightforward example. There was a game we played called What if? All sorts of complications can be introduced into What if? Imagine, for example, you are an institutional investor managing several billion dollars. What if there is a massive earthquake in Tokyo? Tokyo is reduced to rubble. Investors in Japan panic. They are selling yen and trying to get their money out of the Japanese stock market. What do you do?

  Well, along the lines of pattern number one, what Alexander would do is put money into Japan on the assumption that since everyone was trying to get out, there must be some bargains. He would buy precisely those securities in Japan that appeared the least desirable to others. First, the stocks of Japanese insurance companies. The world would probably assume that ordinary insurance companies had a great deal of exposure, when in fact, the risk resides mainly with Western insurers and with a special Japanese earthquake insurance company that’s been socking away premiums for decades. The shares of ordinary insurers would be cheap.

  Then Alexander would buy a couple of hundred million dollars’ worth of Japanese government bonds. With the economy in temporary disrepair, the government would lower interest rates to encourage rebuilding and simply order the banks to lend at those rates. Japanese banks would comply as usual with their government’s request. Lower interest rates would mean higher bond prices.

  Also, the short-term panic could well be overshadowed by the long-term repatriation of Japanese capital. Japanese companies have massive sums invested in Europe and America. Eventually they would withdraw those investments, turn inward, lick their wounds, repair their factories, and bolster their stock. What would that mean?

  Well, to Alexander, it would suggest buying yen. The Japanese would buy yen, selling their dollars, francs, marks, and pounds to do so. The yen would appreciate not just because the Japanese were buying it but because foreign speculators would eventually see the Japanese buying it and rush to join them. If the yen collapsed immediately after the quake, it would only further encourage Alexander, who sought always to do the unexpected, that his idea was a good one. On the other hand, if the yen rose, he might sell it.

  Each day Alexander called and explained something new. After several months of struggling I began to catch on. When Alexander hung up, I would call three or four investors and simply parrot what Alexander had just said. They would think me, if not a genius, then at least astute. On the basis of what I told them, they put money on the line. They made handsome profits, just like the investors to whom Alexander spoke. Soon they were calling me. Before long they wouldn’t speak to anyone else but me. That would do whatever I, meaning Alexander, told them to do. This would soon prove very valuable.

  While Alexander taught me an attitude toward markets, Dash showed me style. Much of our time was spent on the telephone. By style, I mean phone technique. Dash had a lot of phone technique. He placed his social c
alls to clients in the upright seated position. He placed his sales calls hunkered over, head under his desk. He used the space beneath his desk as a kind of soundproof booth. His taste for privacy had been acquired as a geek, when he didn’t want the seasoned salespeople to overhear the stupid things he was telling his customers.

  Now it was habit. I could tell when Dash was about to sell a few hundred million dollars of government bonds because his torso would jackknife in his chair so that his chest was almost in his lap and his head went into the sound booth. Just before consummating the trade, he’d plug his empty ear with a finger on his free hand and speak rapidly in a low voice. (One of his customers nicknamed him the Whispering Dash.) Then suddenly, he’d pop up, hit the silencer button on his receiver, and shout into the hoot, “Hey, New York… New York… you’re done on October ninety-two to September ninety-threes, one hundred by one hundred ten… yeah, one hundred million by one hundred ten million.” 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.

  I was only as conscious of miming Dash’s movements on the phone and the trading floor as a child who acquires the mannerisms of a parent. I had no other point of reference. I, too, soon found myself jackknifed in my chair, twirling pencils in the corner of my mouth, plugging my ear with my fingers, talking too fast and quietly for my customers to follow, and generally looking much like Dash. A phenomenon, in fact, swept across the trading floor as more and more geeks came on board: Small units of inexperienced people adopted the gestures and habits of their most successful members. As our unit grew from five to ten, it began to look more and more like Dash Riprock.

  Dash was Dash. Alexander was Alexander. I was a fraud, a composite of traits I felt rightfully belonged to these two. In my defense I can say only that I was a very good fraud. Also, that I had one useful quality possessed by neither of my teachers: a detachment from the business and the firm. It comes, I suppose, from getting your job at a fund raiser at St. James’s Palace or perhaps from having another source of income (I was a journalist at nights and on weekends while I was at Salomon Brothers). Anyway, it is extremely helpful in a young career because it leaves you fearless. I had the same advantage of recklessness as a driver in a traffic jam with a rent-a-car. The worst anyone could do to my rent-a-career was take it away, and though I did not actively court that fate, the thought of losing my job didn’t trouble me as much as it troubled lifers such as, say, Dash Riprock. That is not to say I did not care; I cared immensely. I thrived on praise more than most and thus sought to please. But I was willing to take greater risks than if I had felt deeply proprietary about my career. I was, for instance, willing to disobey my superiors, and that caused them to sit up and take notice far more quickly than if I had been a good soldier.