THE JUDGMENT OF SALOMON
Michael Lewis on the
fall of the man that he once worked for
WE MAY never be told the truth about what happened at Salomon Brothers over the past few years. I'm not even sure that it matters. The firm has admitted to breaking the rules in five separate US Treasury auctions, to fraudulently using the names of its customers, and to submitting an illegal bid for $1 billion worth of US Treasury bonds as a 'practical joke'. The firm's management first pleaded total ignorance of the deeds, and then, a few days later, altered their story, and confes- sed they had known of the violations since April. They now say that they simply forgot to inform the relevant officials. Last weekend, facing growing outrage and cer- tain dismissal, Salomon Brothers' three most senior executives, John Gutfreund, Thomas Strauss, and John Meriwether, resigned. They did not accept blame. They denied any serious wrongdoing. Gutfreund — the most famous figure on Wall Street — and Strauss sounded less like disgraced executives than a pair of tongue-tied mar- tyrs. 'We cannot let our unfortunate mis- take of not taking prompt action,' they said, 'when in April we learned of one unauthorised bid at a February Treasury auction, harm the firm. We are taking this action to protect the firm, its 9,000 people, and its clients.'
I would be surprised if many Salomon employees actually believe that their su- periors had no idea that the traders who sat a few yards from them were routinely breaking the rules. I certainly don't. In my time at Salomon Brothers I watched sever- al US Treasury auctions, and never were either Strauss or Gutfreund far from the action. They would often discuss the bids with the traders. What is more, the top management of Salomon Brothers receives reports daily on the firm's bond holdings; so that even if they somehow were blind to all five of the auctions in which Salomon has admitted wrongdoing, they could hard- ly have failed to notice the larger than legal holdings on the Salomon balance sheets. And if they knew, as they have admitted, of a single violation in April, how did they permit the occurrence of another, larger violation in May?
American financial scandals are seldom what they pretend to be. The securities laws have always been used to punish financiers for perfectly legal activity. This was true of the legendary US Senate investigation of 1934, when J.P. Morgan Jr was dragged before the Senate to discuss his role in the financial collapse, only to be ridiculed for having paid no income tax in the previous three years. His real crime was being rich. This was also true in the recent trial of Michael Milken, in which the defendant was convicted of breaking tech- nical laws few people understood. His real crime was creating junk bonds, leveraged buyouts, and loitering in the vicinity of the savings and loan crisis. I think it's fair to assume that most of the people who are angry at Salomon Brothers neither know nor care about the laws it has broken. The firm's real crime was its curious attitude towards the truth.
This is worth trying to explain. The chairman of Salomon Brothers has always had a gift for disinformation. Not long ago I was treated to a trivial dose of this when I published a book about my three years at the firm, called Liar's Poker. In it I described the ritual Salomon office game of betting on the serial numbers of hidden banknotes that gave the book its title. The description included a story of a million-dollar hand, in which John Meriwether masterfully bluffed John Gut- freund. I had been told the story by among others Meriwether himself. I had no reason to doubt him. I had watched with my own eyes on the trading floor as John Gut- freund gambled away enormous sums of money at liar's poker, and viewed the million-dollar hand as no more than an extension of his daily routine.
Salomon Brother's response to the pub- lication of this story boggled my mind and inflated my royalties. Acting under instruc- tions from Gutfreund, the Salomon Brothers public relations man told repor- ters that the game occurred, but that it had been a practical joke. He was, of course widely disbelieved. A few weeks later the Salomon spokesman mysteriously changed his story: the game had happened, and was presumably serious, but it had not involved Mr Gutfreund. It had involved another managing director, who had recently died, and was, therefore, unavailable for com- ment. He was again ridiculed. Months later I opened a newspaper to find Mr Gut- freund himself claiming that the story was pure fiction. The point of all this is not that you should believe my story, agreeable as that would be to me; but that you couldn't logically believe all of theirs.
People who haven't worked on Wall Street have trouble understanding that the market often values lies more highly than the truth. I offer this less as criticism than as simple observation; to see how such intelligent people could get caught in such silly lies you have to understand the peculiar rules of their daily game. Traders spend a large part of their day pretending to their rivals to be selling when they want to buy, and buying when they want to sell. Salesmen spend an even larger part of their day overpraising mediocre investments to their clients. This is less venal than it sounds. Everyone who deals with financial intermediaries knows better than to be- lieve everything he hears. Anyone who does is regarded as a fool.
This history of Salomon Brothers is littered with the broken dreams of people stupid enough to believe what they were told by their superiors. One small example: young people who entered Salomon in the mid 1980s were told by Mr Gutfreund to trust the firm to decide how they should be employed; that no one would ever suffer for working in a dying market. As a result, hundreds of perfectly capable but trusting people ended up selling municipal bonds and money market instruments. One day in October 1987 they arrived at Salomon Brothers to learn that Mr Gutfreund had fired their entire departments; he took no notice whatsoever of how loyal or success- ful or long-serving the individuals in them had been. Like any good bond trader, Mr Gutfreund was able to put a price on anything, including his word. When the cost of keeping it became too high, he sold.
Only I don't believe that he was always as cynical as that. Throughout his brilliant career Mr Gutfreund had a natural ability to confuse his self-interest with high princi- ple. He was less cynical than carefully self-deluding. In 1987, for example, he used several hundred million dollars of shareholders' monies to pay Warren Buffet to save himself from the wrath of Ronald Perelman, the corporate raider; he did this, he claimed, only because Perelman was not the sort of person who should run an investment bank. I think he really believed it. That same year he loudly declined to accept a bonus, while awarding himself stock options worth far more; and at the same time he persuaded himself and others that he was making a genuine sacrifice. If you read the press cuttings, you'll find that in most cases John Gut- freund was taken at his word. The current scandal may well have occurred because the chairman thought he would be believed once again. This time Mr Gutfreund sug- gested that his firm's service to the govern- ment outweighted any small infractions it might commit. For the first time in his career, he fooled only himself.
Michael Lewis's account of life at Salomon Brothers, Liar's Poker, is published in the UK by Hodder & Stoughton.
`Hungry? At Joe's we have a menu simply packed with young, slow-moving, injured or defenceless creatures.'
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