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

CHAPTER 5

THEY BOUGHT SALOMON, THEN THEY KILLED IT

With the purchase of Salomon in 1997, U.S. fixed income arbitrage, the crown jewel of the Salomon trading machine, passed inauspiciously into Travelers’ realm. Deryck Maughan, now co-CEO of Travelers with Jamie Dimon, called me up to his office to offer me a continuing role in risk management at the combined firm. Dimon sat with a single sheet of white paper in his hand, a to-do list with several columns of minuscule handwritten notes. As we discussed various issues, he vigorously crossed out one line here and another line there, then folded the paper when we concluded. I would learn more over time about his remarkable appetite for detail and his penchant for condensing things onto one sheet of paper, as we would construct a risk report with an almost unreadably tiny type size to compress all the relevant risks of the firm onto one 8½ by 11 inch page.

Despite his assurances to the contrary, Sandy Weill was not enamored with the high-stakes proprietary trading embodied by this group. That antipathy did not stop him from buying Salomon, the biggest trading house in the world—a firm that, even after many attempts to broaden its revenue base, still made all of its earnings through proprietary trading. To try to control the unit, he first pushed to have both the head of U.S. fixed income arb, Rob Stavis, and his European counterpart, Costas Kaplanis, report to his son, Mark Weill. Both men made it known to Sandy that they were not particularly ...