his picture.11
As other areas of Salomon floundered, Arbitrage increasingly threw its weight around. Hilibrand pressed the firm to eliminate investment banking, which, he argued with some justification, took home too much in bonuses and was failing to carry its weight. Then he declared that Arbitrage shouldn’t have to pay for its share of the company cafeteria, because the group didn’t eat there. True to his right-wing, libertarian principles, Hilibrand complained about being saddled with “monopoly vendors,” as if every trader and every clerk should negotiate his own deal for lunch. The deeper truth was that Hilibrand and his mates in Arbitrage had little respect for their mostly older Salomon colleagues who worked in other areas of the firm. “It was like they were a capsule inside a spaceship,” Higgins said of J.M.’s underlings. “They didn’t breathe the air that everybody else did.”
Hilibrand and Rosenfeld continually pressed J.M. for more money. They viewed Salomon’s compensation arrangement, which liberally spread the wealth to all departments, as socialistic. Since Arbitrage was making most of the money, they felt, they and they alone should reap the rewards.
In 1987, the raider Ronald Perelman made a hostile bid for Salomon. Gutfreund feared, with ample justification, that if Perelman won, Salomon’s reputation as a trusted banker would go down the tubes (indeed, Salomon’s corporate clients could likely find themselves on Perelman’s hit list). Gutfreund fended Perelman off by selling control of the firm to a distinctly friendly investor, the billionaire Warren Buffett. Hilibrand, who weighed everything in mathematical terms, was incensed over what he reckoned was a poor deal for Salomon. The twenty-seven-year-old Wunderkind, though unswervingly honest himself, couldn’t see that an intangible such as Salomon’s ethical image was also worth a price. He actually flew out to Omaha to try to persuade Buffett, now a member of Salomon’s board, to sell back his investment, but Buffett, of course, refused.
J.M. tried to temper his impatient young Turks and imbue them with loyalty to the greater firm. When the traders’ protests got louder, J.M. invited Hilibrand and Rosenfeld to a dinner with William McIntosh, an older partner, to hear about Salomon’s history. A liberal Democrat in the Irish Catholic tradition, J.M. had a stronger sense of the firm’s common welfare and a grace that softened the hard edge of his cutthroat profession. He shrugged off his lieutenants’ occasional cries that Arbitrage should separate from Salomon. He would tell them, “I’ve got loyalty to people here. And anyway, you’re being greedy. Look at the people in Harlem.” He pressed Salomon to clean house, but not without showing concern for other departments. Thoughtfully, when the need arose, he would tell the chief financial officer, “We have a big trade on; we could lose a lot—I just want you to know.” In the crash of 1987, Arbitrage did drop $120 million in one day.12 Others at Salomon weren’t sure quite what the group was doing or what its leverage was, but they instinctively trusted Meriwether. Even his rivals in the firm liked him. And then it all came crashing down.
Pressed by his young traders, who simply wouldn’t give up, in 1989 Meriwether persuaded Gutfreund to adopt a formula under which his arbitrageurs would get paid a fixed, 15 percent share of the group’s profits. The deal was cut in secret, after Hilibrand had threatened to bolt.13 Typically, J.M. left himself out of the arrangement, telling Gutfreund to pay him whatever he thought was fair. Then Arbitrage had a banner year, and Hilibrand, who got the biggest share, took home a phenomenal $23 million. Although Hilibrand modestly continued to ride the train to work and drive a Lexus, news of his pay brought to the surface long-simmering resentments, particularly as no other Salomon department was paid under such a formula. As Charlie Munger, Buffett’s partner and a Salomon director, put it, “The more hyperthyroid at Salomon went stark, raving mad.”
In particular, a thirty-four-year-old trader named Paul Mozer was enraged. Mozer had been part of Arbitrage, but a couple of years earlier he had been forced to leave that lucrative area to run the government desk. Mozer had a wiry frame, close-set eyes, and an intense manner. In 1991, a year after the storm over Hilibrand’s pay, Mozer went to Meriwether and made a startling confession: he had submitted a false bid to the U.S. Treasury to gain an unauthorized share of a government-bond auction.
Stunned, Meriwether asked, “Is there anything else?” Mozer said there wasn’t.
Meriwether took the matter to Gutfreund. The pair, along with two other top executives, agreed that the matter was serious, but they somehow did nothing about it. Although upset with Mozer, Meriwether stayed loyal to him. It is hard to imagine the clannish, faithful J.M. doing otherwise. He defended Mozer as a hard worker who had slipped but once and left him in charge of the government desk. This was a mistake—not an ethical mistake but an error in judgment brought on by J.M.’s singular code of allegiance. In fact, Mozer was a volatile trader who—motivated more by pique than by a realistic hope for profit—had repeatedly and recklessly broken the rules, jeopardizing the reputation of Meriwether, his supervisor, and the entire firm. It must be said that Mozer’s crime had been so foolish as to be easily slipped by his superiors. Quite naturally, Meriwether, now head of Salomon’s bond business, hadn’t thought to inquire if one of his traders had been lying to the U.S. Treasury. But J.M.’s lenience after the fact is hard to fathom. A few months later, in August, Salomon discovered that Mozer’s confession to Meriwether had itself been a lie, for he had committed numerous other infractions, too. Though now Salomon did report the matter, the Treasury and Fed were furious. The scandal set off an uproar seemingly out of proportion to the modest wrongdoing that had inspired it.14 No matter; one simply did not—could not—deceive the U.S. Treasury. Gutfreund, a lion of Wall Street, was forced to quit.
Buffett flew in from Omaha and became the new, though interim, CEO. He immediately asked the frazzled Salomon executives, “Is there any way we can save J.M.?” Meriwether, of course, was the firm’s top moneymaker and known as impeccably ethical. His traders heatedly defended him, pointing out that J.M. had immediately reported the matter to his superior. But pressure mounted on all involved in the scandal. McIntosh, the partner who had first brought Meriwether into Salomon, trekked up to J.M.’s forty-second-floor office and told him that he should quit for the good of the firm. And almost before the Arbitrage Group could fathom it, their chief had resigned. It was so unexpected, Meriwether felt it was surreal; moreover, he suffered for being front-page news. “I’m a fairly shy, introspective person,” he later noted to Business Week.15 The full truth was more bitter: J.M. was being pushed aside—even implicitly blamed—despite, in his opinion, having done no wrong. This painful dollop of limelight made him even more secretive, to Long-Term Capital’s later regret. Meanwhile, within the Arbitrage Group, resurrecting J.M. became a crusade. Hilibrand and Rosenfeld kept J.M.’s office intact, with his golf club, desk, and computer, as if he were merely on an extended holiday. Deryck Maughan, the new CEO, astutely surmised that as long as this shrine to J.M. remained, J.M. was alive as his potential rival. Sure enough, a year later, when Meriwether resolved his legal issues stemming from the Mozer affair, Hilibrand and Rosenfeld, now the heads of Arbitrage and the government desk, respectively, lobbied for J.M.’s return as co-CEO.*
Maughan, a bureaucrat, was too smart to go for this and tried to refashion Salomon into a global, full-service bank, with Arbitrage as a mere department. Hilibrand, who was dead opposed to this course, increasingly asserted himself in J.M.’s absence. He wanted Salomon to fire its investment bankers and retrench around Arbitrage. Meanwhile, he made a near-catastrophic bet in mortgages and fell behind by $400 million. Most traders in that situation would have called it a day, but Hilibrand was just warming up; he coolly proposed that Salomon double its commitment! Because Hilibrand believed in his trade so devoutly, he could take pain as no other trader could. He said that the market was like a Slinky out of shape—eventually it would spring back. It was said that only once had he ever suffered a permanent loss, a testament to the fact that he was not a gambler. But his supreme conviction in his own Tightness cried out for some restraining influence, lest it develop a reckless