BOOK REPORT
In 1985, the most talented young trader in the most profitable division of Wall Street’s most profitable firm made a decision that would destroy the division and ultimately the firm. He decided to leave.
Howard Rubin, a former Las Vegas card shark, had been paid a $175,000 bonus the year before. It was the maximum allowed a second-year trader under the guidelines of his employer, Salomon Brothers. But while he had made a fortune--$30 million--for Salomon, as had his entire division, the firm as a whole had not done well. So, when Merrill Lynch (a happier, flusher vintage) promised him $1 million a year plus trading profits, he jumped ship. Over the next months, most of his shipmates did the same. Salmon never recovered.
Reading Rubin’s story earlier this year in Liar’s Poker, Michael Lewis’ two-decade-old account of his time playing “possibly the most absurd money game ever,” it was hard not to think of AIG. The companies’ situations are hardly comparable; Salmon was making a killing, AIG is smothering American taxpayers. Yet if a fresh initiate to the money culture was willing to leave the hottest department at the hottest firm on Wall Street (a firm that, according to Lewis, Rubin cared deeply about) for a few dollars more, then why should one expect anything else from the despised wretches at AIG.
There are a lot of comfortable truths in Lewis’ book. Wall Street’s herd mentality, rumor-mongering (in a two year span, he recalls, Chairman of the Federal Reserve Paul Volker resigned seven times and died twice), sexism, racism, and fundamental absurdity (“Why did investment banking pay so many people with so little experience so much money? Answer: When attached to a telephone, they could produce even more money”) are all well documented.
Lewis even decries the forgetfulness bred by bonuses, the receipt of which he likened to a meeting with the “divine Creator” to learn “your worth as a human being.” “On January 1, 1987”—the day of the meeting—“1986 would be erased from memory except for a single number: the amount of money you were paid. That number was the final summing up.” Hindsight can’t be monetized, it seems.
And, despite its vintage, the book provides some eerie echoes of the current crisis: the failure of ratings agencies, the biggest bonuses on the eve of the bust, and the separation of borrowers and lenders. The real shocker is his own firm’s role in the creation of most of today’s problems—mortgage bundling, mortgage securities, collateralized mortgage obligations, etc. But the less convenient implications of his tale are no less instructive.
Much of the book concerns the rise and fall of Salomon’s “marvelous money machine,” or mortgage department, which was responsible for the creations listed above. The division had made the bulk of the firms money for the better part of a decade, yet when it is dismantled near the end of Lewis’ short tenure there, we learn that upper management, including John Gutfreund, who at the time paid himself more than any other Wall Street CEO, needed a private seminar on mortgage-backed securities. If you believe Lewis on all other accounts, you have to believe him that sometimes management are a bunch of know-nothings.
This all gives no credit to Lewis’ writing itself, which deserves a post of its own, especially given this blog is dedicated to journalism, not financial matters. Suffice to say that the book is consistently funny, occasionally snarky, satisfying introspective without being solipsistic and always crystal clear. We don’t get MBA’s managing the capital flows and allocating resources, we get Big Swinging Dicks terrorizing geeks and waging war.
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