A Time for Reflection

“WILLIAM SALOMON, FEBRUARY 22, 1994 Certainly at the time we were the largest risk-takers in the business. That wasn’t always necessarily out of choice. It was due to expediency. We didn’t have many people working for the firm who were members of the “right” clubs. Years ago, the old-time firms that became our major competitors had built-in business through family connections and college acquaintances. They were tied in because of who they were, while we were somewhat of a Johnny-come-lately with no Ivy League background and no tennis or other club memberships. We weren’t part of the “in” group in those days . . . So we had to fight our way in. The only way we knew how to fight was to take more risks than somebody else would take”

“No one could understand why anyone in his right mind would give up a $125,000-a-year job at a comfortable and respected firm like Weeden to take a $50,000 position—with the promise of “consideration of partnership,” but no guarantees—at a house like Salomon Brothers, a big leaguer in general but a minor player in my specialty, municipal bonds. But then, some people just don’t understand risk.”

“My son Pete often jokes that the secret to my success is that I always sell too early, and in a way he’s exactly right. You never go broke taking a profit.”

“Bill is obviously very decisive. He makes up his mind quickly. He has a very distinct set of beliefs. He believes in the free market economy, in individual freedom. He has a lot of energy and is very motivated to do things to carry out his beliefs. He is a unique person because he is so passionate about what he believes in, and so energetic about pursuing his beliefs. Bill is not a person who compromises easily”

“Our futures, as well as the success of the firm, were intertwined. Billy Salomon had wisely structured a unique compensation system. Salaries were actually quite low,4 but at the end of the year Salomon Brothers would distribute bonuses, based on how the firm as a whole had performed. However, we could draw only 5 percent of our capital, which meant the bonus money was invested with the firm. Consequently, the fate of the partners was directly linked to the success of Salomon Brothers, which fostered a clannish connection within that boiling cauldron of activity. It was understood that apart from our homes, insurance policies, and bank accounts, we didn’t have interests separate from the firm’s and we didn’t make investments outside the firm. All for one, one for all.”

“A half century ago, the great Harvard scholar Joseph A. Schumpeter predicted that capitalism, because of its very success in raising the standard of living to unprecedented heights, would weaken the institutions necessary for its survival, giving way to a centralized, socialized bureaucracy of intellectuals which would exploit the productive capacity created by private enterprise”

“when those policies trigger inflation and unemployment, it is the poor, the elderly, the sick, and the disadvantaged who suffer first, most, and longest. Ironically, inflation is foremost an attack on the poor, because it means that their few dollars can buy less and less.”

“I was reminded of—and perhaps haunted by—what the historian Gibbon said of Athens. “In the end,” he wrote in his epitaph for the ancient Republic, “more than they wanted freedom, they wanted security. They wanted a comfortable life and they lost it all—security, comfort and freedom. When the Athenians finally wanted not to give to society but for society to give to them, when the freedom they wished for most was freedom of responsibility, then Athens ceased to be free”

“The great gift that Bill has for people is he instills in them the faith in themselves that they can do something. Whether they can do it or not, they’re going to learn how to do it, because they think they can do it. And nine times out of ten, they can do it. I know he did that to me many times. He’d give me something to do that I thought, I can’t possibly do this—and then did it. And he must have thought I could do it or he wouldn’t have given it to me. I’ve seen him do that throughout his career. He’s very good at it.”

“Controls are the most structurally damaging thing that can be done to an economy and amount to nothing more than political window dressing that allows government leaders to present the image that they are doing something constructive, when they are actually exacerbating the problem. They distort the economy by eliminating natural, and necessary, price and wage fluctuations, which respond to the allocations of resources. The end result of controls is that competitive relations are disrupted, which causes domestic shortages and a concurrent increase in demand for exports. Government intervention merely suppresses underlying wage and price pressures; it does not in any way alleviate the normal market pressures. The moment the controls are eliminated, as eventually they must be, the mounting pressures push through the surface—not unlike volcanic action—and a surge of further inflation follows.”

“He took risks that other people shunned because he understood better than most how to take at least some of the risk out of risk”

“Aside from providing what seemed a celestial salary, the world of finance fascinated me, and appealed to my risk-taking, poker-playing nature. Do I feel lucky today? What are the odds? What is my opponent up to? Imagination, ingenuity, hard work, and luck determined whether you won or lost. I, of course, subscribe to the maxim that the harder I work the more luck I seem to have. But you have to be willing to take a risk. Even a turtle makes progress only when he sticks his neck out.”

“The secret of business success is precisely the same: You have to be where the action is heading. You have to anticipate and prepare and be there when the risk/opportunity (words I often use interchangeably) presents itself, even if—especially if—the crowd is focused elsewhere. You have to know when to count your blessings, take your profits, and avoid greed.”

“Trading demands total concentration and the ability to do several things at once while instantly recalling trading prices from the day, or week, before”

“The German poet Goethe once said, “What you have inherited from your forefathers, earn it over again for yourselves, so that you may truly possess it.”

“Billy was a gentleman of the highest order—a suave, dignified man and natural leader who, incidentally, made the best paper airplanes in the trading room and was deadly accurate with a spit ball. We hit it off immediately”

“We constantly had to illustrate we would pay more or sell cheaper. Our philosophy was taking chances . . . We were a risk-taking firm”

“We used to play a game called “Liar’s Poker.” The game consists of a group of people, each holding a dollar bill close to his chest, and trying to bluff and call the bluffs of the others in guessing the serial numbers. The object is to psyche out your opponents, and to avoid being psyched out. We were professional gamblers; and Liar’s Poker, as well as other games of chance, fit in perfectly with our corporate culture.”

“The game, of course, is to “make the market,” and to make the market, you have to be in the market, and sometimes you are going to lose. But one thing is absolutely certain: You can’t hit so much as a foul ball, let alone a grand slam, unless you are willing to step up to the plate and face whatever is thrown your way. You’ve got to be in the game to play—an obvious observation, but one that bench warmers fail to grasp”

“Was there a chance that our little gambit would backfire? You bet. Whenever you take a risk, there are going to be those doubts that haunt you at 3 a.m. and the voices around you saying, “Better not take a chance.” A good trader trusts his judgment, and doesn’t allow his failures to shake his confidence.”

“Keep in mind, that the above describes just a portion of what might be occurring on the Salomon floor. Simultaneously, there might be a government auction going off, and a corporate bond underwriting underway, and perhaps a block trade going down at the equity desk. It was boiling cauldron of barely contained chaos, and I loved every minute of it.”

“The more I worked with government and the more attention I paid to matters of politics and public policy, the more I became interested in political philosophy and the roots of the freedom that most of us take for granted. Still, I didn’t take seriously the collectivists and assorted academics who clamored endlessly for more government and less individual autonomy. To me, they and their philosophy was akin to the Tooth Fairy: Lots of people talk about the Tooth Fairy, but only children and imbeciles take it seriously. I assumed it was the same with leftists and did not yet fully appreciate the danger and threat that their ideas represented”

“That’s Dad in a nutshell. He loves the long-odds play. He loves to invest in entities that are down and out. He loves to bet on the team where he can get the odds. He feels a lot of compassion for the loser”

“Early in this century, the idea began to take hold in the United States that the problems of our society were growing so large that individuals could no longer cope with them. Instead, people began asking the government to assume responsibility for solving their problems—and to do the things for them that they once did for themselves. Government gradually became a beneficent protector against the evils of modern life. That trend accelerated during the 1960s as we were promised through the powers of government that we could fight a land war in Asia, abolish the business cycle, eradicate pollution, and put a man on the moon, all at the same time. The result of President Johnson’s “guns and butter” economy, broken promises, and an overbearing government, was predictable.”

“Young people soured on politics and politicians, and I can’t say I blamed them. Washington had become an elitist, self-absorbed city that cared little for the values of everyday Americans who believe deeply in the work ethic and in family, freedom, and faith in God. Behind those majestic monuments in the backrooms of Congress, self-serving politicians were busily spending and borrowing America ever deeper into debt. The country was at a critical juncture and I felt that, perhaps, I could make a contribution.”

“I would be interrupting a successful career, uprooting my family, and giving up a comfortable and relatively predictable lifestyle for the vagaries of Washington. But my country called, and I was raised in an era when if your country called, be it to fight a foreign enemy or serve in government, you answered the call—with pride and honor and gratitude and respect. If you truly love your country and if you fear for freedom, can you stand by and see the battle lost without joining the fight? Inconceivable.”

“He is always ready to make decisions, and to take responsibility for them. Bill is a risk taker and, if he feels he can do something, he’s not afraid to go do it. Many people are afraid to make a decision because they don’t want to stand up to the heat that comes with it,”

“No sooner did the rumor get out that I was to chair the Oil Policy Committee than I was bombarded with advice, demands, and warnings from an astounding number of constituencies—ranging from the fifty-five federal agencies that had been regulating the oil industry to the industry itself to refiners, brokers, dealers, jobbers, and, of course, the eight major oil companies”

“On one occasion, Henry publicly commented about our relationship and our respective roles in the administration: “I have a treaty of nonaggression with Secretary Simon. I will not speak about economic matters, he will take over foreign policy only slowly.””

“President Johnson’s “Great Society,” based on the fallacy of Keynesian economics, had assured an entire generation that they could have their cake and eat it too. Throughout the 1960s, politicians promised that we could wage war on foreign soil, control pollution, rebuild our medical system, overhaul our transportation network, guarantee the good life to the poor and elderly, provide a college education for everyone, feed the world, improve our weapon systems, and continue to increase everybody’s disposable income—all at the same time.”

“Deficit spending forces the Federal Reserve to increase the money supply, which decreases the value of the dollar, leading to higher and higher prices and lower and lower purchasing power. The tragedy of the misguided policies is that they were sold on the mistaken notion that they would help the poor, the elderly, the sick, and the disadvantaged.”

“ultimately, an attack on the freedom of the marketplace becomes an attack on other civil freedoms, under the end-justifies-the-means bromide.”

“We reminded the president that while nobody likes the results of inflation, everyone loves what causes it. Americans love the spending, the creation of money and purchasing power. They love government spending programs, but those programs lead to massive deficits—so we create more money to finance even larger deficits.”

“Simon is a believer, and his faith in the American system of private enterprise seems almost unlimited. “Government is a menace,” he says, asserting that the country would be much better off if businesses were permitted to operate unfettered in the market place . . .”

“The result was a remarkable report, “Blueprints for Basic Tax Reform,” which, then and now, is the seminal work on tax reform.2 Written primarily by deputy assistant secretary David F. Bradford, the report presented two specific model tax systems: a plan for broadening the base of the income tax and a plan for a consumption or “cash flow” tax.”

“For more than forty years, the power of central government was increasing in our daily lives. As our freedoms were chipped away, we had lost some of that glow that is particularly distinctive about the American experience. Our boldness and vitality were drained a bit; our ingenuity was being challenged by nations around the world. Some nations had even come to believe they could play us for patsies. Our free enterprise system, the greatest engine for social progress that the world has ever known, had slowed down perceptively, and was chugging along in second gear, far below potential.”

“I’m not sure where my life would have led had I declined President Nixon’s offer and stayed on the comfortable road I was following on Wall Street. But by listening to my instincts, taking a risk, and beginning a new journey on an unknown path, I learned more about life, discovered more about myself, stretched my horizons farther, and savored experiences far richer than I would otherwise have ever known. Some people might call it fate. Some might call it luck. But I would call it God’s plan.”

“In his seminal work, Capitalism, Socialism and Democracy, the Austrian-American economist and social theorist pessimistically predicted that the leaders of the free market would allow themselves to be converted to a creed hostile to their own existence because they would be unable to articulate a moral basis for free enterprise. In Washington, I became convinced that Schumpeter was right. America’s leading colleges and universities—the training ground for America’s leaders—were increasingly pro-socialist, pro-government regulation, and anti-capitalist in their philosophy, direction, and mission”

“Much more unsettling and disappointing was the general reaction of the business community. Perhaps like me before my Washington experience, some business leaders were too preoccupied with their immediate concerns to pay much attention to the intellectual assault on everything that makes their freedom and prosperity possible. Others, however, simply did not have the stomach to fight for it. Many, sadly, had lost their faith and hope in the competitive free-enterprise system. In the face of an enemy assault, they were willing simply to capitulate. They yearned to be accepted as “socially responsible” and feared they would be labeled “insensitive” or “conservative.” I was appalled and felt betrayed by those who should have been my philosophical brethren.”

“The American people must now decide whether they will sell the liberty that is the envy of the world for the empty promise of the welfare state, or whether they will restrict government to its proper functions: defense of the nation, protection of the helpless from the avaricious, and the creation of an environment for sustained economic growth through sensible fiscal, monetary, tax, and regulatory policies,” I told the delegates. “Let us never forget personal and political freedoms are inseparable from economic freedom.””