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By Root 399 0

Bank for a few more years. But all of these people had been right; they'd been on the winning end of the bet. Wing Chau's CDO managing business went bust, but he, too, left with tens of millions of dollars--and had the nerve to attempt to create a business that would buy up, cheaply, the very same subprime mortgage bonds in which he had lost billions of dollars' worth of other people's money. Howie Hubler lost more money than any single trader in the history of Wall Street--and yet he was permitted to keep the tens of millions of dollars he had made. The CEOs of every major Wall Street firm were also on the wrong end of the gamble. All of them, without exception, either ran their public corporations into bankruptcy or were saved from bankruptcy by the United States government. They all got rich, too.

What are the odds that people will make smart decisions about money if they don't need to make smart decisions--if they can get rich making dumb decisions? The incentives on Wall Street were all wrong; they're still all wrong. But I didn't argue with John Gutfreund. Just as you revert to being about nine years old when you go home to visit your parents, you revert to total subordination when you are in the presence of your former CEO. John Gutfreund was still the King of Wall Street and I was still a geek. He spoke in declarative statements, I spoke in questions. But as he spoke, my eyes kept drifting to his hands. His alarmingly thick and meaty hands. They weren't the hands of a soft Wall Street banker but of a boxer. I looked up. The boxer was smiling--though it was less a smile than a placeholder expression. And he was saying, very deliberately, "Your...fucking...book."

I smiled back, though it wasn't quite a smile.

"Why did you ask me to lunch?" he asked, though pleasantly. He was genuinely curious.

You can't really tell someone that you asked him to lunch to let him know that you didn't think of him as evil. Nor can you tell him that you asked him to lunch because you thought you could trace the biggest financial crisis in the history of the world back to a decision he had made. John Gutfreund had done violence to the Wall Street social order--and got himself dubbed the King of Wall Street--when, in 1981, he'd turned Salomon Brothers from a private partnership into Wall Street's first public corporation. He'd ignored the outrage of Salomon's retired partners. ("I was disgusted by his materialism," William Salomon, the son of one of the firm's founders, who had made Gutfreund CEO only after he'd promised never to sell the firm, had told me.) He'd lifted a giant middle finger in the direction of the moral disapproval of his fellow Wall Street CEOs. And he'd seized the day. He and the other partners not only made a quick killing; they transferred the ultimate financial risk from themselves to their shareholders. It didn't, in the end, make a great deal of sense for the shareholders. (One share of Salomon Brothers, purchased when I arrived on the trading floor, in 1986, at a then market price of $42, would be worth 2.26 shares of Citigroup today, which, on the first day of trading in 2010, had a combined market value of $7.48.) But it made fantastic sense for the bond traders.

But from that moment, the Wall Street firm became a black box. The shareholders who financed the risk taking had no real understanding of what the risk takers were doing, and, as the risk taking grew ever more complex, their understanding diminished. All that was clear was that the profits to be had from smart people making complicated bets overwhelmed anything that could be had from servicing customers, or allocating capital to productive enterprise. The customers became, oddly, beside the point. (Is it any wonder that mistrust of the sellers by the buyers in the bond market had reached the point where the buyers could not see a get-rich-quick scheme when a seller, Greg Lippmann, offered it to them?) In the late 1980s and early 1990s Salomon Brothers had entire years--great years!--in which five proprietary traders, the intellectual forefathers