A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation

CHAPTER 4

HOW SALOMON ROLLED THE DICE AND LOST

One of the dumber things I did in my Wall Street career occurred before I even got started. I turned down Marty Leibowitz in 1984 when he tried to recruit me to Salomon Brothers. He’d gotten wind of the effort by Lehman Brothers and Morgan Stanley to enlist me, and tried to sell me on Salomon. At the time he was well on his way toward his current stature of a legend for his prolific and wide-ranging research. I chose Morgan Stanley for reasons that turned out to be pretty stupid. Then again, I was an academic who was clueless about most of what was going on in industry. He and I would meet frequently over the next decade and he tried to find a place for me at Salomon, realizing more than I that Solly was a far better environment for me than was Morgan Stanley. Once I looked at a position on the client research side. Another time I had a dinner with Eric Rosenfeld, Greg Hawkins, and others about the fledgling proprietary trading group that would be the fabulously successful precursor to Long-Term Capital Management—an opportunity that for yet some other stupid reason I did not follow up on.

But when Marty called yet again to discuss the role of risk manager at Salomon, somehow I managed to say yes. In 1994, Salomon was the biggest risk-taking firm in the world. It was at the pinnacle of the bond market—even after having its wings clipped by a Treasury-auction scandal that had cost the jobs of Gutfreund, John Meriwether, and several ...