I read Liar's Poker a few years ago, a really good book about what happens inside Wall Street. Very educational and very entertaining. My favorite part was the first chapter, which I am posting verbatim here, a little lengthy but demonstrates high stakes, b*lls of steel, ice cold personality and calculated risk taking. The rest of the book is great also.
IT WAS sometime early in 1986, the first year of the decline of my firm, Salomon Brothers. Our chairman, John Gutfreund, left his desk at the head of the trading floor and went for a walk. At any given moment on the trading floor billions of dollars were being risked by bond traders. Gutfreund took the pulse of the place by simply wandering around it and asking questions of the traders. An eerie sixth sense guided him to wherever a crisis was unfolding. Gutfreund seemed able to smell money being lost.
He was the last person a nerve-racked trader wanted to see. Gutfreund (pronounced Good friend) liked to sneak up from behind and surprise you. This was fun for him but not for you. Busy on two phones at once trying to stem disaster, you had no time to turn and look. You didn't need to. You felt him. The area around you began to convulse like an epileptic ward. People were pretending to be frantically busy and at the same time staring intently at a spot directly above your head. You felt a chill in your bones that I imagine belongs to the same class of intelligence as the nervous twitch of a small furry animal at the silent approach of a grizzly bear. An alarm shrieked in your head: Gutfreund! Gutfreund! Gutfreund!
Often as not, our chairman just hovered quietly for a bit, then left. You might never have seen him. The only trace I found of him on two of these occasions was a turd-like ash on the floor beside my chair, left, I suppose, as a calling card. Gutfreund's cigar droppings were longer and better formed than those of the average Salomon boss. I always assumed that he smoked a more expensive blend than the rest, purchased with a few of the $40 million he had cleared on the sale of Salomon Brothers in 1981 (or a few of the $3. 1 million he paid himself in 1986,more than any other Wall Street CEO).
This day in 1986, however, Gutfreund did something strange. Instead of terrifying us all, he walked a straight line to the trading desk of John Meriwether, a member of the board of Salomon Inc. and also one of Salomon's finest bond traders. He whispered a few words. The traders in the vicinity eavesdropped. What Gutfreund said has become a legend at Salomon Brothers and a visceral part of its corporate identity. He said: "One hand, one million dollars, no tears. "
One hand, one million dollars, no tears. Meriwether grabbed the meaning instantly. The King of Wall Street, as Business Week had dubbed Gutfreund, wanted to play a single hand of a game called Liar's Poker for a million dollars. He played the game most afternoons with Meriwether and the six young bond arbitrage traders who worked for Meriwether and was usually skinned alive. Some traders said Gutfreund was heavily outmatched. Others who couldn't imagine John Gutfreund as anything but omnipotent-and there were many梥aid that losing suited his purpose, though exactly what that might be was a mystery.
The peculiar feature of Gutfreund's challenge this time was the size of the stake. Normally his bets didn't exceed a few hundred dollars. A million was unheard of. The final two words of his challenge, "no tears, " meant that the loser was expected to suffer a great deal of pain but wasn't entitled to whine, bitch, or moan about it. He'd just have to hunker down and keep his poverty to himself. But why? You might ask if you were anyone other than the King of Wall Street. Why do it in the first place? Why, in particular, challenge Meriwether instead of some lesser managing director? It seemed an act of sheer lunacy. Meriwether was the King of the Game, the Liar's Poker champion of the Salomon Brothers trading floor.
On the other hand, one thing you learn on a trading floor is that winners like Gutfreund always have some reason for what they do; it might not be the best of reasons, but at least they have a concept in mind. I was not privy to Gutfreund's innermost thoughts, but I do know that all the boys on the trading floor gambled and that he wanted badly to be one of the boys. What I think Gutfreund had in mind in this instance was a desire to show his courage, like the boy who leaps from the high dive. Who better than Meriwether for the purpose? Besides, Meriwether was probably the only trader with both the cash and the nerve to play.
The whole absurd situation needs putting into context. John Meriwether had, in the course of his career, made hundreds of millions of dollars for Salomon Brothers. He had an ability, rare among people and treasured by traders, to hide his state of mind. Most traders divulge whether they are making or losing money by the way they speak or move. They are either overly easy or overly tense. With Meriwether you could never, ever tell. He wore the same blank half-tense expression when he won as he did when he lost. He had, I think, a profound ability to control the two emotions that commonly destroy traders, fear and greed,and it made him as noble as a man who pursues his self-interest so fiercely can be. He was thought by many within Salomon to be the best bond trader on Wall Street. Around Salomon no tone but awe was used when he was discussed. People would say, "He's the best businessman in the place," or "the best risk taker I have ever seen," or "a very dangerous Liar's Poker player."
Meriwether cast a spell over the young traders who worked for him. His boys ranged in age from twenty-five to thirty-two (he was about forty). Most of them had Ph.D.'s in math, economics, and/or physics. Once they got onto Meriwether's trading desk, however, they forgot they were supposed to be detached intellectuals. They became disciples. They became obsessed by the game of Liar's Poker. They regarded it as their game. And they took it to a new level of seriousness.
John Gutfreund was always the outsider in their game. That Business Week put his picture on the cover and called him the King of Wall Street held little significance for them. I mean, that was, in a way, the whole point. Gutfreund was the King of Wall Street, but Meriwether was King of the Game. When Gutfreund had been crowned by the gentlemen of the press, you could almost hear traders thinking: Foolish names and foolish faces often appear in public places. Fair enough, Gutfreund had once been a trader, but that was as relevant as an old woman's claim that she was once quite a dish.
At times Gutfreund himself seemed to agree. He loved to trade. Compared with managing, trading was admirably direct. You made your bets and either you won or you lost. When you won, people all the way up to the top of the firm admired you, envied you, and feared you, and with reason: You controlled the loot. When you managed a firm, well, sure you received your quota of envy, fear, and admiration. But for all the wrong reasons. Vou did not make the money for Salomon. You did not take risk. You were hostage to your producers. They took risk. They proved their superiority every day by handling risk better than the rest of the risk-taking world. The money came from risk takers such as Meriwether, and whether it came or not was really beyond Gutfreund's control. That's why many people thought that the single rash act of challenging the arbitrage boss to one hand for a million dollars was Gutfreund's way of showing he was a player, too. And if you wanted to show off, Liar's Poker was the only way to go. The game had a powerful meaning for traders. People like John Meriwether believed that Liar's Poker had a lot in common with bond trading. It tested a trader's character. It honed a trader's instincts. A good player made a good trader, and vice versa. We all understood it.
The Game: In Liar's Poker a group of people as few as two, as many as ten form a circle. Each player holds a dollar bill close to his chest. The game is similar in spirit to the card game known as I Doubt It. Each player attempts to fool the others about the serial numbers printed on the face of his dollar bill. One trader begins by making "a bid." He says, for example, "Three sixes." He means that all told the serial numbers of the dollar bills held by every player, including himself, contain at least three sixes.
Once the first bid has been made, the game moves clockwise in the circle. Let's say the bid is three sixes. The player to the left of the bidder can do one of two things. He can bid higher (there are two sorts of higher bids: the same quantity of a higher number [three sevens, eights, or nines] and more of any number [four fives, for instance]). Or he can "challenge" that is like saying, "I doubt it."
The bidding escalates until all the other players agree to challenge a single player's bid. Then, and only then, do the players reveal their serial numbers and determine who is bluffing whom. In the midst of all this, the mind of a good player spins with probabilities. What is the statistical likelihood of there being three sixes within a batch of, say, forty randomly generated serial numbers? For a great player, however, the math is the easy part of the game. The hard part is reading the faces of the other players. The complexity arises when all players know how to bluff and double-bluff.
The game has some of the feel of trading, just as jousting has some of the feel of war. The questions a Liar's Poker player asks himself are, up to a point, the same questions a bond trader asks himself. Is this a smart risk? Do I feel lucky? How cunning is my opponent? Does he have any idea what he's doing, and if not, how do I exploit his ignorance? If he bids high, is he bluffing, or does he actually hold a strong hand? Is he trying to induce me to make a foolish bid, or does he actually have four of a kind himself? Each player seeks weakness, predictability, and pattern in the others and seeks to avoid it in himself. The bond traders of Goldman, Sachs, First Boston, Morgan Stanley, Merrill Lynch, and other Wall Street firms all play some version of Liar's Poker. But the place where the stakes run highest, thanks to John Meriwether, is the New York bond trading floor of Salomon Brothers.
The code of the Liar's Poker player was something like the code of the gunslinger. It required a trader to accept all challenges. Because of the code which was his code john Meriwether felt obliged to play. But he knew it was stupid. For him, there was no upside. If he won, he upset Gutfreund. No good came of this. But if he lost, he was out of pocket a million bucks. This was worse than upsetting the boss. Although Meriwether was by far the better player of the game, in a single hand anything could happen. Luck could very well determine the outcome. Meriwether spent his entire day avoiding dumb bets, and he wasn't about to accept this one.
"No, John," he said, "if we're going to play for those kind of numbers, I'd rather play for real money. Ten million dollars. No tears."
Ten million dollars. It was a moment for all players to savor. Meriwether was playing Liar's Poker before the game even started. He was bluffing. Gutfreund considered the counter proposal. It would have been just like him to accept. Merely to entertain the thought was a luxury that must have pleased him well. (It was good to be rich.)
On the other hand, ten million dollars was, and is, a lot of money. If Gutfreund lost, he'd have only thirty million or so left. His wife, Susan, was busy spending the better part of fifteen million dollars redecorating their Manhattan apartment (Meriwether knew this). And as Gutfreund was the boss, he clearly wasn't bound by the Meriwether code. Who knows? Maybe he didn't even know the Meriwether code. Maybe the whole point of his challenge was to judge Meriwether's response. (Even Gutfreund had to marvel at the king in action.) So Gutfreund declined. In fact, he smiled his own brand of forced smile and said, "You're crazy."
No, thought Meriwether, just very, very good.
This is most interesting. But the part that I found most interesting is quoted below;
ReplyDelete"IT WAS sometime early in 1986, the first year of the decline of my firm, Salomon Brothers. Our chairman, John Gutfreund, left his desk at the head of the trading floor and went for a walk. At any given moment on the trading floor billions of dollars were being risked by bond traders. Gutfreund took the pulse of the place by simply wandering around it and asking questions of the traders. An eerie sixth sense guided him to wherever a crisis was unfolding. Gutfreund seemed able to smell money being lost.
He was the last person a nerve-racked trader wanted to see. Gutfreund (pronounced Good friend) liked to sneak up from behind and surprise you. This was fun for him but not for you. Busy on two phones at once trying to stem disaster, you had no time to turn and look. You didn't need to. You felt him. The area around you began to convulse like an epileptic ward. People were pretending to be frantically busy and at the same time staring intently at a spot directly above your head. You felt a chill in your bones that I imagine belongs to the same class of intelligence as the nervous twitch of a small furry animal at the silent approach of a grizzly bear. An alarm shrieked in your head: Gutfreund! Gutfreund! Gutfreund!
Often as not, our chairman just hovered quietly for a bit, then left. You might never have seen him. The only trace I found of him on two of these occasions was a turd-like ash on the floor beside my chair, left, I suppose, as a calling card. Gutfreund's cigar droppings were longer and better formed than those of the average Salomon boss. I always assumed that he smoked a more expensive blend than the rest, purchased with a few of the $40 million he had cleared on the sale of Salomon Brothers in 1981 (or a few of the $3. 1 million he paid himself in 1986,more than any other Wall Street CEO).
This day in 1986, however, Gutfreund did something strange. Instead of terrifying us all, he walked a straight line to the trading desk of John Meriwether, a member of the board of Salomon Inc. and also one of Salomon's finest bond traders. He whispered a few words. The traders in the vicinity eavesdropped. What Gutfreund said has become a legend at Salomon Brothers and a visceral part of its corporate identity. He said: "One hand, one million dollars, no tears. "
One hand, one million dollars, no tears. Meriwether grabbed the meaning instantly. The King of Wall Street, as Business Week had dubbed Gutfreund, wanted to play a single hand of a game called Liar's Poker for a million dollars. He played the game most afternoons with Meriwether and the six young bond arbitrage traders who worked for Meriwether and was usually skinned alive. Some traders said Gutfreund was heavily outmatched. Others who couldn't imagine John Gutfreund as anything but omnipotent-and there were many梥aid that losing suited his purpose, though exactly what that might be was a mystery.
The peculiar feature of Gutfreund's challenge this time was the size of the stake. Normally his bets didn't exceed a few hundred dollars. A million was unheard of. The final two words of his challenge, "no tears, " meant that the loser was expected to suffer a great deal of pain but wasn't entitled to whine, bitch, or moan about it. He'd just have to hunker down and keep his poverty to himself. But why? You might ask if you were anyone other than the King of Wall Street. Why do it in the first place? Why, in particular, challenge Meriwether instead of some lesser managing director? It seemed an act of sheer lunacy. Meriwether was the King of the Game, the Liar's Poker champion of the Salomon Brothers trading floor.
On the other hand, one thing you learn on a trading floor is that winners like Gutfreund always have some reason for what they do; it might not be the best of reasons, but at least they have a concept in mind. I was not privy to Gutfreund's innermost thoughts, but I do know that all the boys on the trading floor gambled and that he wanted badly to be one of the boys. What I think Gutfreund had in mind in this instance was a desire to show his courage, like the boy who leaps from the high dive. Who better than Meriwether for the purpose? Besides, Meriwether was probably the only trader with both the cash and the nerve to play.
The whole absurd situation needs putting into context. John Meriwether had, in the course of his career, made hundreds of millions of dollars for Salomon Brothers. He had an ability, rare among people and treasured by traders, to hide his state of mind. Most traders divulge whether they are making or losing money by the way they speak or move. They are either overly easy or overly tense. With Meriwether you could never, ever tell. He wore the same blank half-tense expression when he won as he did when he lost. He had, I think, a profound ability to control the two emotions that commonly destroy traders, fear and greed,and it made him as noble as a man who pursues his self-interest so fiercely can be. He was thought by many within Salomon to be the best bond trader on Wall Street. Around Salomon no tone but awe was used when he was discussed. People would say, "He's the best businessman in the place," or "the best risk taker I have ever seen," or "a very dangerous Liar's Poker player."
Meriwether cast a spell over the young traders who worked for him. His boys ranged in age from twenty-five to thirty-two (he was about forty). Most of them had Ph.D.'s in math, economics, and/or physics. Once they got onto Meriwether's trading desk, however, they forgot they were supposed to be detached intellectuals. They became disciples. They became obsessed by the game of Liar's Poker. They regarded it as their game. And they took it to a new level of seriousness.
John Gutfreund was always the outsider in their game. That Business Week put his picture on the cover and called him the King of Wall Street held little significance for them. I mean, that was, in a way, the whole point. Gutfreund was the King of Wall Street, but Meriwether was King of the Game. When Gutfreund had been crowned by the gentlemen of the press, you could almost hear traders thinking: Foolish names and foolish faces often appear in public places. Fair enough, Gutfreund had once been a trader, but that was as relevant as an old woman's claim that she was once quite a dish.
At times Gutfreund himself seemed to agree. He loved to trade. Compared with managing, trading was admirably direct. You made your bets and either you won or you lost. When you won, people all the way up to the top of the firm admired you, envied you, and feared you, and with reason: You controlled the loot. When you managed a firm, well, sure you received your quota of envy, fear, and admiration. But for all the wrong reasons. Vou did not make the money for Salomon. You did not take risk. You were hostage to your producers. They took risk. They proved their superiority every day by handling risk better than the rest of the risk-taking world. The money came from risk takers such as Meriwether, and whether it came or not was really beyond Gutfreund's control. That's why many people thought that the single rash act of challenging the arbitrage boss to one hand for a million dollars was Gutfreund's way of showing he was a player, too. And if you wanted to show off, Liar's Poker was the only way to go. The game had a powerful meaning for traders. People like John Meriwether believed that Liar's Poker had a lot in common with bond trading. It tested a trader's character. It honed a trader's instincts. A good player made a good trader, and vice versa. We all understood it.
The Game: In Liar's Poker a group of people as few as two, as many as ten form a circle. Each player holds a dollar bill close to his chest. The game is similar in spirit to the card game known as I Doubt It. Each player attempts to fool the others about the serial numbers printed on the face of his dollar bill. One trader begins by making "a bid." He says, for example, "Three sixes." He means that all told the serial numbers of the dollar bills held by every player, including himself, contain at least three sixes.
Once the first bid has been made, the game moves clockwise in the circle. Let's say the bid is three sixes. The player to the left of the bidder can do one of two things. He can bid higher (there are two sorts of higher bids: the same quantity of a higher number [three sevens, eights, or nines] and more of any number [four fives, for instance]). Or he can "challenge" that is like saying, "I doubt it."
The bidding escalates until all the other players agree to challenge a single player's bid. Then, and only then, do the players reveal their serial numbers and determine who is bluffing whom. In the midst of all this, the mind of a good player spins with probabilities. What is the statistical likelihood of there being three sixes within a batch of, say, forty randomly generated serial numbers? For a great player, however, the math is the easy part of the game. The hard part is reading the faces of the other players. The complexity arises when all players know how to bluff and double-bluff.
The game has some of the feel of trading, just as jousting has some of the feel of war. The questions a Liar's Poker player asks himself are, up to a point, the same questions a bond trader asks himself. Is this a smart risk? Do I feel lucky? How cunning is my opponent? Does he have any idea what he's doing, and if not, how do I exploit his ignorance? If he bids high, is he bluffing, or does he actually hold a strong hand? Is he trying to induce me to make a foolish bid, or does he actually have four of a kind himself? Each player seeks weakness, predictability, and pattern in the others and seeks to avoid it in himself. The bond traders of Goldman, Sachs, First Boston, Morgan Stanley, Merrill Lynch, and other Wall Street firms all play some version of Liar's Poker. But the place where the stakes run highest, thanks to John Meriwether, is the New York bond trading floor of Salomon Brothers.
The code of the Liar's Poker player was something like the code of the gunslinger. It required a trader to accept all challenges. Because of the code which was his code john Meriwether felt obliged to play. But he knew it was stupid. For him, there was no upside. If he won, he upset Gutfreund. No good came of this. But if he lost, he was out of pocket a million bucks. This was worse than upsetting the boss. Although Meriwether was by far the better player of the game, in a single hand anything could happen. Luck could very well determine the outcome. Meriwether spent his entire day avoiding dumb bets, and he wasn't about to accept this one.
"No, John," he said, "if we're going to play for those kind of numbers, I'd rather play for real money. Ten million dollars. No tears."
Ten million dollars. It was a moment for all players to savor. Meriwether was playing Liar's Poker before the game even started. He was bluffing. Gutfreund considered the counter proposal. It would have been just like him to accept. Merely to entertain the thought was a luxury that must have pleased him well. (It was good to be rich.)
On the other hand, ten million dollars was, and is, a lot of money. If Gutfreund lost, he'd have only thirty million or so left. His wife, Susan, was busy spending the better part of fifteen million dollars redecorating their Manhattan apartment (Meriwether knew this). And as Gutfreund was the boss, he clearly wasn't bound by the Meriwether code. Who knows? Maybe he didn't even know the Meriwether code. Maybe the whole point of his challenge was to judge Meriwether's response. (Even Gutfreund had to marvel at the king in action.) So Gutfreund declined. In fact, he smiled his own brand of forced smile and said, "You're crazy."
hehe ;-)
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