The one that made the most sense was the risk role - which I did at Morgan Stanley before I made the switch. In the years before I joined, Marty and I would have lunch together periodically, and he would suggest open positions at Salomon for which he thought I was suited. In the years before I joined, Salomon had invented or played a huge role in the development of mortgage-backed securities, interest rate swaps, third-party repo, and triple-A-rated derivative product companies. Henry Kaufman and Marty Leibowitz were pre-eminent in market economics and fixed income research and in developing that foundation. The first aspect of Salomon that impressed me was its intellectual foundation, which translated into practical research and innovative financial products. I had an ideal position to understand Salomon’s business and witness Salomon’s culture as it existed 1994 through 1998. Earnings fluctuated in a much smaller range and never fell below $112 million in any quarter. After our firm-wide risk management system was in place, we never lost money in any quarter, from mid-1995 onwards. The year I joined, 1994, was a horrible year for Salomon, with the firm losing money in three of four quarters and losing $399 million over the year. But if you receive high quality information and lever technology, you don’t need an army to get this stuff done.Īnd we did get the job done. Salomon was the largest trading firm in the world at the time, so the idea that you could do risk management with a small team like that might seem crazy. I was able to put my risk system in place and evaluate desks’ risk management with a very small group six or seven people at our peak. We called this process risk audits, although it was a collegial and joint effort to make sure things were right. Even though each desk was responsible for managing its own risk, it made sense to have an independent and objective party, someone not affected by the desk’s profit and loss, take a look and give senior management a second opinion. Then we could take steps to cut positions or hedge these risks.Īnother aspect of my job was assessing the desks’ risk management. We could then see where the firm as a whole was building up risk exposures through the independent actions of autonomous desks. I put in place a structure where each desk calculated and reported their sensitivity to different market risks in a format where I could aggregate results. When I arrived at Salomon, each desk managed its risk independently and Salomon had no system in place to measure and manage market risk on a firm-wide basis. One part of my job was to put in place a system to aggregate the market risks to which individual desks were exposed, for example, their profit and loss sensitivity to changes in interest rates, credit spreads, or exchange rates. Salomon was famous for the scope and profitability of its proprietary trading operations. These desks operated in New York, London, and Tokyo. These hedge-fund-like entities put on long and short positions, often in huge quantity, and often holding onto positions for weeks or months. I also oversaw market risk at Salomon’s proprietary trading desks. There were about 50 such desks around the world, such as the New York corporate bond desk, the London government bond desk, and the Tokyo equities desk, among many others. I oversaw market risk at Salomon’s customer desks, which bought and sold securities to institutional investors. I joined Salomon Brothers in 1994 as chief risk officer, which meant I was in charge of assessing the firm’s market-related risk. He describes the resulting clash of cultures. Richard Bookstaber was Salomon Brothers’ chief risk officer in 1997 when the firm was bought by Travelers and merged with Smith Barney, Travelers’ retail brokerage.
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