Michael Lewis Chapter 03 Corporate Culture.docx

Michael Lewis Chapter 03 Corporate Culture.docx

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MichaelLewisChapter03CorporateCulture

ChapterThree.LearningtoLoveCorporateCulture.Hewhomakesabeastofhimselfgetsridofthepainofbeingaman.—SamuelJohnsonIREMEMBERalmostexactlyhowIfeltandwhatIsawmyfirstdayatSalomonBrothers.Therewasacoldshiverdoinglapsaroundmybody,which,softenedandcoddledbytheregimeofaprofessionalstudent,wasimaginingitwasstillasleep.Withreason.Iwasn'tdueatworkuntil7:

00A.M.,butIroseearlytowalkaroundWallStreetbeforegoingtotheoffice.Ihadneverseentheplacebefore.Therewasariveratoneendandagraveyardattheother.InbetweenwasvintageManhattan:

adeep,narrowcanyoninwhichyellowcabssmackedintoraisedsewerlids,potholes,andgarbage.ArmiesofworriedmeninsuitsstormedofftheLexingtonAvenuesubwaylineandmarcheddownthecrookedpavements.Forrichpeople,theydidn'tlookveryhappy.Theyseemedserious,atleastcomparedwithhowIfelt.Ihadonlyafewjittersthataccompanyanynewbeginning.Oddlyenough,Ididn'treallyimagineIwasgoingtowork,moreasifIweregoingtocollectlotterywinnings.SalomonBrothershadwrittenmeinLondontoannouncethatitwouldpaymeanM.B.A.'swage—thoughIhadnoM.B.A.—offorty-twothousanddollarsplusabonusafterthefirstsixmonthsofsixthousandmore.AtthattimeIhadn'thadtheeducationrequiredtofeelpooronfortyeightthousanddollars（thenequivalenttoforty-fivethousandBritishpounds）ayear.ReceivingthenewsinEngland,thelandoflimppaychecks,accentuatedthegenerosityofSalomon'spurse.AchairedprofessoroftheLondonSchoolofEconomics,whotookakeeninterestinmaterialaffairs,staredatmebug-eyedandgurgledwhenheheardwhatIwastobepaid.Itwastwicewhatheearned.Hewasinhismid-fortiesandatthetopofhisprofession.Iwastwenty-fouryearsoldandatthebottomofmine.Therewasnojusticeintheworld,andthankgoodnessforthat.Perhapsitisworthexplainingwherethismoneywascomingfrom,notthatIgaveitmuchthoughtatthetime.ManformanSalomonBrotherswas,in1985,theworld'smostprofitablecorporation.AtleastthatiswhatIwasrepeatedlytold.Ineverbotheredtocheckitbecauseitseemedsoobviouslytrue.WallStreetwashot.AndwewereWallStreet'smostprofitablefirm.WallStreettrafficsinstocksandbonds.Attheendofthe1970s,andthebeginningofbothsuperindulgentAmericanpoliticsandmodernfinancialhistory,SalomonBrothersknewmoreaboutbondsthananyfirmonWallStreet:

howtovaluethem,howtotradethem,andhowtosellthem.Thesolechinkinitscompletedominanceofthebondmarketsin1979wasinjunkbonds,whichweshallreturntolaterandwhichwerethespecialtyofanotherfirm,similartousinmanyways:

DrexelBumham.Butinthelate1970sandearly1980s,junkbondsweresuchatinyfractionofthemarketthatSalomoneffectivelydominatedtheentirebondmarket.TherestofWallStreethadbeencontenttoletSalomonBrothersbethebestbondtradersbecausetheoccupationwasneitherterriblyprofitablenorprestigious.Whatwasprofitablewasraisingcapital（equity）forcorporations.WhatwasprestigiouswasknowinglotsofcorporateCEOs.Salomonwasasocialandfinancialoutlier.That,anyway,iswhatIwastold.Itwashardtoproveanyofitbecausetheonlyevidencewasoral.ButconsiderthekickoffchuckletoaspeechgiventotheWhartonSchoolinMarch1977bySidneyHomerofSalomonBrothers,theleadingbondanalystonWallStreetfromthemid-1940srightthroughtothelate1970s."Ifeltfrustrated,"saidHomerabouthisjob."Atcocktailpartieslovelyladieswouldcornermeandaskmyopinionofthemarket,butalas,whentheylearnedIwasabendman,theywouldquietlydriftaway."Orconsidertheverylackofevidenceitself.Thereare287booksaboutbondsintheNewYorkPublicLibrary,andmostofthemareaboutchemistry.Theonesthataren'tcontainlotsofuglynumbersandbeartitlessuchasAllQuietontheBondFront,andLow-RiskStrategiesfortheInvestor.Inotherwords,theyaren'tthesortofpageturnersthatmoistenyourpalmsandglueyoutoyourseat.Peoplewhobelievethemselvesofsocialconsequencetendtoleavemoreofapapertrail,intheformofmemoirsandanecdotiana.Butwhiletherearedozensofanecdotesandseveralmemoirsfromthestockmarkets,thebondmarketsareofficiallysilent.BondpeopleposethesameproblemtoaculturalanthropologistasanonliteratetribedeepintheAmazon.Inpartthisisduetotheabsencefromthebondmarketoftheeducatedclasses,whichinturnreinforcesthepointabouthowunfashionablebondsoncewere.In1968,thelasttimeadegreecountwastakenatSalomonBrothers,thirteenofthetwenty-eightpartnershadn'tbeentocollege,andonehadn'tgraduatedfromtheeighthgrade.JohnGutfreundwas,inthiscrowd,anintellectual;thoughhewasrejectedbyHarvard,hedidfinallygraduate（withoutdistinction）fromOberlin.Thebiggestmythaboutbondtraders,andthereforethegreatestmisunderstandingabouttheunprecedentedprosperityonWallStreetinthe1980s,arethattheymaketheirmoneybytakinglargerisks.Afewdo.Andalltraderstakesmallrisks.Butmosttradersactsimplyastolltakers.ThesourceoftheirfortunehasbeennicelysummarizedbyKurtVonnegut（who,oddly,wasdescribinglawyers）:

"Thereisamagicmoment,duringwhichamanhassurrenderedatreasure,anddaringwhichthemanwhoisabouttoreceiveithasnotyetdoneso.Analertlawyer[readbondtrader]willmakethatmomenthisown,possessingthetreasureforamagicmicrosecond,takingalittleofit,passingiton."Inotherwords,Salomoncarvedatinyfractionoutofeachfinancialtransaction.Thisaddsup.TheSalomonsalesmansells$50millionworthofnewIBMbondstopensionfundX.TheSalomontrader,whoprovidesthesalesmanwiththebonds,takesforhimselfaneighth（ofapercentagepoint）,or$62,500.Hemay,ifhewishes,takemore.Inthebondmarket,unlikeinthestockmarket,commissionsarenotopenlystated.Nowthefunbegins.OncethetraderknowsthelocationoftheIBMbondsandthetemperamentoftheirowner,hedoesn'thavetobeoutstandinglyclevertomakethebonds（thetreasure）moveagain.Hecangeneratehisownmagicmicroseconds.Hecan,forexample,pressureoneofhissalesmentopersuadeinsurancecompanyYthattheIBMbondsareworthmorethanpensionfundXpaidfortheminitially.Whetheritistrueisirrelevant.ThetraderbuysthebondsfromXandsellsthemtoYandtakesoutanothereighth,andthepensionfundishappytomakeasmallprofitinsuchashorttime.Inthisprocess,ithelpsifneitherofthepartiesoneithersideofthemiddlemanknowsthevalueofthetreasure.Themenonthetradingfloormaynothavebeentoschool,buttheyhavePh.D.'sinman'signorance.Inanymarket,asinanypokergame,thereisafool.TheastuteinvestorWarrenBuffettisfondofsayingthatanyplayerunawareofthefoolinthemarketprobablyisthefoolinthemarket.In1980,whenthebondmarketemergedfromalongdormancy,manyinvestorsandevenWallStreetbanksdidnothaveacluewhowasthefoolinthenewgame.Salomonbondtradersknewaboutfoolsbecausethatwastheirjob.Knowingaboutmarketsisknowingaboutotherpeople'sweaknesses.Andafool,theywouldsay,wasapersonwhowaswillingtosellabondforlessorbuyabondformorethanitwasworth.Abondwasworthonlyasmuchasthepersonwhovalueditproperlywaswillingtopay.AndSalomon,tocompletethecircle,wasthefirmthatvaluedthebondsproperly.ButnoneofthisexplainswhySalomonBrotherswasparticularlyprofitableinthe1980s.MakingprofitsonWallStreetisabitlikeeatingthestuffingfromaturkey.Somehigherauthoritymustfirstputthestuffingintotheturkey.Theturkeywasstuffedmoregenerouslyinthe1980sthaneverbefore.AndSalomonBrothers,becauseofitsexpertise,hadsecondandthirdhelpingsbeforeotherfirmsevenknewthatsupperwason.OneofthebenevolenthandsdoingthestuffingbelongedtotheFederalReserve.Thatisironic,sincenoonedisapprovedoftheexcessesofWallStreetinthe1980ssomuchasthechairmanoftheFed,PaulVolcker.AtarareSaturdaypressconference,onOctober6,1?

79,Volckerannouncedthatthemoneysupplywouldceasetofluctuatewiththebusinesscycle;moneysupplywouldbefixed,andinterestrateswouldfloat.Theevent,Ithink,marksthebeginningofthegoldenageofthebondman.HadVolckerneverpushedthroughhisradicalchargeinpolicy,theworldwouldbemanybondtradersandonememoirthepoorer.Forinpractice,theshiftinthefocusofmonetarypolicymeantthatinterestrateswouldswingwildly.Bondpricesmoveinversely,lockstep,toratesofinterest.Allowinginterestratestoswingwildlymeantallowingbondpricestoswingwildly.BeforeVolcker'sspeech,bondshadbeenconservativeinvestments,intowhichinvestorsputtheirsavingswhentheydidn'tfancyagambleinthestockmarket.AfterVolcker'sspeech,bondsbecameobjectsofspeculation,ameansofcreatingwealthratherthanmerelystoringit.Overnightthebondmarketwastransformedfromabackwaterintoacasino.TurnoverboomeratSalomon.Manymorepeoplewerehiredtohandlethenewbusiness,onstartingsalariesofforty-eightgrand.OnceVolckerhadsetinterestratesfree,theotherhandstuffingtheturkeywenttowork:

America'sborrowers.Americangovernments,consumers,andcorporationsborrowedmoneyatafasterclipduringthe1980sthaneverbefore;thismeantthevolumeofbondsexploded（anotherwaytolookatthisisthatinvestorswerelendingmoneymorefreelythaneverbefore）.Thecombinedindebtednessof