Those words changed everything for me. I did as I was told, returned to London, and got right to work on investing Salomon Brothers’ $25 million. Unfortunately, since this was Russia, I couldn’t just call my broker. There wasn’t even a stock market in Russia yet. If I wanted to invest, then I was going to have to make it up as I went along.
On the Monday after I returned from New York, I sat at my desk in the bullpen and began cold-calling contacts to try to figure out how I was going to move forward. When I was on my fifth call, I noticed a serious-looking middle-aged man walking briskly toward me, two armed security guards flanking him. When he got closer, he barked accusatorily, “Mr. Browder, I’m head of compliance. Can you tell me what you’re doing?”
“Excuse me. Have I done something wrong?”
He nodded. “We’ve heard that you’re conducting securities trading from inside the investment bank. As I’m sure you know, that would be a violation of the employee code of conduct.”
For those who may be unfamiliar, investment banks are divided into two halves: the sales and trading division, which buys and sells stocks, and the investment banking division, which advises companies on such things as mergers and new-share issues. These halves are separated by what they call a Chinese wall so that the stock traders can’t trade on confidential information that the investment bankers have acquired from their clients. I worked in the investment bank and was, therefore, not allowed to trade stocks. In practical terms, this meant that when we finally figured out how to buy Russian stocks, I would have to move onto the trading floor. But that was still a long way off.
“I’m not buying any securities,” I explained timidly. “I’m just trying to figure out how it’s done.”
“I don’t care what you call it, Mr. Browder. You have to cease what you’re doing immediately,” the head of compliance commanded.
“But I’m not investing, I’m coming up with a plan to invest. It’s all been agreed to by senior management in New York. I’m not doing anything wrong,” I pleaded.
After the Treasury bond scandal that had nearly destroyed its business, Salomon wasn’t taking any chances. “Sorry. Pack your desk,” he said gruffly, nodding to the security guards. “You can no longer stay in the investment bank.”
As I packed up, the guards stepped forward and crossed their arms, enjoying a rare opportunity to be tough. They then escorted me through the door that separated the investment bank from the trading floor. On the way we passed one of the young guys from the Hungarian team. He winked at me before silently mouthing, Fuck you. No mystery about who turned me in.
Once we were on the trading floor, the security guards asked me to hand over my investment-banking entry pass and left me with my boxes on the floor. Traders walked by, staring at me. I was totally humiliated and felt like I did on my first day at boarding school. I had no idea what to do, so I pushed my boxes under a nearby desk, found a phone, and called Bobby.
“Bobby,” I said breathlessly. “Compliance just kicked me out of the investment bank! I’m on the trading floor with no place to sit. What should I do?”
He didn’t seem at all concerned by my dilemma, exhibiting the same total lack of empathy that he’d demonstrated when I’d presented the Russian idea the week before. “I don’t know. Find another place to sit, I guess. I’ve got another call.” He cut me off and hung up.
I gazed across the vast trading floor. It was as big as a football field. Hundreds of people sat at row upon row of desks, shouting into phones, waving their arms, and pointing at computer screens, all trying to eke out small discrepancies in the prices of every kind of financial instrument imaginable. Amid this beehive of activity were occasional empty desks, but you couldn’t just pick one and sit. You had to have permission from someone.
I tried to hide my discomfort and walked to the emerging-markets bond desk because I knew the head of that desk. I described my problem and he was sympathetic, but he simply didn’t have any room, so he referred me to the European equities desk. Same story.
I then tried the derivatives desk, since it had a few empty seats. I walked up to the head of the team as confidently as I could and introduced myself, dropping Bobby Ludwig’s name. The man didn’t even turn as I spoke. I had to address the back of his bald head.
When I was done, he swiveled around and leaned back. “What the fuck?” he blurted. “You can’t just walk over here and ask me for a desk. That’s fucking ridiculous. If you need a place to sit, go to management and sort something out.” He snorted as he turned his chair back to his screens and grabbed a call on his blinking phone.
I walked away in a daze. Traders aren’t known for their manners, but still. I called Bobby back. “Bobby, I’ve tried. Nobody will give me a desk. Can you please do something?”
This time, Bobby was annoyed. “Bill, why are you bothering me with this? If they won’t give you a desk, then just work from home. I don’t care where you work. This is about investing in Russia, not desks.”
“Okay, okay,” I said, not wanting to mess things up with Bobby. “But how can I get my travel authorized and expenses reimbursed and that kind of stuff?”
“I’ll sort that out,” he said gruffly, and hung up.
The next day an overnight package arrived at my home containing twenty presigned travel authorization forms. I filled in the details on one of them, faxed it to the Salomon travel department, and got a ticket to Moscow for two days later.
Once I arrived in Moscow, I set up a makeshift office in a room at the Baltschug Kempinski Hotel on the south bank of the Moscow River, across from Saint Basil’s Cathedral. The first step was to get the money to Russia, which meant we needed somebody who could receive the cash and help us buy the vouchers. Fortunately, we found a Russian bank that was owned by a relative of an employee at Salomon. Bobby thought that would be better than wiring our money into an unknown Russian bank, so he had someone from the back office organize the paperwork, and authorized the transfer of $1 million for a trial run.
Ten days later we began purchasing vouchers. The first step was to collect the cash at the bank. I watched as the clerks withdrew the cash from the vault in crisp $100 bills and loaded it into a canvas sack the size of a gym bag. This was the first time I had ever seen a million dollars in cash, and it was strangely unimpressive. From there, a team of security guards took it by armored car to the voucher exchange.
The Moscow voucher exchange was in a dusty, old Soviet convention hall across from the GUM department store1 several blocks from Red Square. It was organized in a series of concentric rings of picnic tables under an electronic trading board hanging from the ceiling. All transactions were done in cash, and, since it was completely open to the public, anyone could walk in with vouchers or cash and transact business. There was no security, so the bank kept its guards around at all times.
The way these vouchers found their way to Moscow was a story in itself. The Russian people had no idea what to do with the vouchers when they received them for free from the state and, in most cases, were happy to trade them for a $7 bottle of vodka or a few slabs of pork. A few enterprising individuals would buy up blocks of vouchers in small villages and sell them for $12 each to a consolidator in larger towns. The consolidator might then travel to Moscow and sell a package of a thousand or two thousand vouchers at one of the picnic tables on the periphery of the exchange for $18 each. Finally, an even bigger dealer would consolidate them into bundles of twenty-five thousand vouchers or more and sell them for $20 each at the center tables. Sometimes individuals would bypass the whole process and lurk around the outskirts of the exchange, trying to find good prices on small lots. In this profusion of cash and paper, there were hustlers, businessmen, bankers, crooks, armed guards, brokers, Muscovites, buyers and sellers from the provinces—all of them cowboys on a new frontier.
Our first bid was $19.85 per voucher for ten thousand. After we announced our bid, there was a commotion on the floor and a man raised a card with the number 12 printed on it. I followed the bank employees and guards to a picnic table with 12 displayed on it, where our team presented the cash and the people at the table presented the vouchers. The sellers took our $10,000 bricks of hundreds and put them one by one into the dollar counter. The machine whirred until it stopped at $198,500. At the same time, two people from our side inspected the vouchers, looking for forgeries. After about thirty minutes, the deal was concluded. We took the vouchers to our armored car and dealer number 12 took the cash to his.
This exercise was repeated over and over for a number of weeks until Salomon had bought $25 million worth of vouchers—but this was only half the battle. After that, we needed to get the vouchers invested in shares of Russian companies, which was done at so-called voucher auctions. These auctions were unlike any other, since the buyers didn’t know the price they were paying until the auction concluded. If only one person showed up with a single voucher, then the entire block of shares being auctioned would be exchanged for that one voucher. On the other hand, if the whole population of Moscow showed up with all of their vouchers, then that block of shares would be evenly divided among every single voucher that was submitted at that auction.
The scenario was ripe for abuse, and many companies whose shares were being sold would do things to prevent people from attending the voucher auctions so that insiders could buy the shares cheaply. Surgutneftegaz, a large oil company in Siberia, was rumored to have been behind the closure of the airport the night before its voucher auction. Another oil company supposedly put up a roadblock of burning tires on the day of its auction to prevent people from participating.
Because these auctions were so bizarre and hard to analyze, few people participated—least of all Westerners. This resulted in an acute lack of demand, which meant that the prices were remarkably low, even by Russian standards. Although Salomon was effectively bidding blind at each auction, I’d carefully analyzed every major voucher auction in the past, and in each case the price of the shares started trading at a significant premium to the price paid in the auction—sometimes double or triple. Unless something changed, the firm was essentially guaranteed to make a sizable return just for participating in the auctions.
Once we started accumulating vouchers, I watched the government’s announcements of auctions like a hawk. In the end, I recommended to Bobby that we participate in a half dozen auctions, including the sale of Lukoil, a Russian oil company; Unified Energy System (UES), the national electricity company; and Rostelecom, the national phone company.
By the time we were done, Salomon Brothers had used these auctions to become the owner of $25 million worth of the most undervalued shares that had ever been offered anywhere in history. Bobby and I were convinced that Salomon would make a fortune. We just needed to wait.
And we didn’t have to wait long. In May 1994, the Economist published an article entitled “Time to Bet on Russia?” This laid out in simple terms the same math regarding the valuation of Russian companies that I had learned on my first trip to Moscow. In the following days billionaires, hedge fund managers, and other speculators started calling their brokers asking them to look into Russian stocks. This caused the nascent Russian market to move, and move dramatically.
In a short time our $25 million portfolio was transformed into $125 million. We had made $100 million!
With this success I became a local hero on the Salomon Brothers’ London trading floor, where I had finally found a desk. The same “buddies” who had stopped inviting me for lunch and drinks were now lining up at my desk each morning before I arrived, hoping I might throw them a bone to help them make five times their money in the Russian stock market.
In the weeks that followed, Salomon’s top institutional salespeople started coming around too, asking if I would be willing to meet their most important clients. “Bill, it would be a great favor to me if you could come and brief George Soros.” “Bill, Julian Robertson2 would really love to hear about Russia from you.” “Bill, can you spare some time for Sir John Templeton?3”
Of course I could! It was ridiculous—here I was, a twenty-nine-year-old vice president,4 and the most important global investors wanted to hear what I had to say. I flew all over the world first-class on the Salomon Brothers expense account. I went to San Francisco, Paris, Los Angeles, Geneva, Chicago, Toronto, New York, the Bahamas, Zurich, Boston. After nearly every meeting I was asked, “Bill, can you manage some money for us in Russia?”
I didn’t have a ready answer. Our desk was set up to manage only the firm’s money at that point and couldn’t take outside capital. “I don’t know,” I said to them. “Let me go back to the bosses and see whether they’ll let us.”
This type of decision wasn’t in Bobby’s domain. He may have been the firm’s best investor, but he had no authority to decide these types of organizational issues. So once I was back in London, I went to the corner office of the head of sales and trading, and pitched him the idea. Unlike my previous experience when nobody wanted to know anything about Russia, he gave me a much warmer reception. “That’s a great idea, Bill. I like it a lot. I’ll tell you what. We’re going to form a task force to study it.”
A task force! I thought. What the hell? Nothing was ever simple with these people. Here was a golden opportunity staring them right in the face and they had to bring their organizational nonsense into the picture.
I went back to my desk, and ten minutes after I sat down my phone rang with an unidentified outside caller. I picked it up. It was Beny Steinmetz, a charismatic Israeli billionaire whom I’d met on my Salomon world tour. Beny was in his late thirties with intense gray eyes and close-cropped, wiry brown hair. He had inherited the reins of his family’s rough-cut-diamond business, and he was one of Salomon’s biggest private clients.
“Bill, I’ve been thinking a lot about the presentation you made in New York a few weeks ago. I’m in London and I’d like you to come over to the Four Seasons and meet some of my colleagues.”
“When?”
“Now.”
Beny didn’t ask questions, he made demands.
I had some meetings scheduled that afternoon, but they weren’t as important as a billionaire who wanted to invest in Russia, so I canceled them and hopped in a black cab up to Hyde Park Corner. I went into the hotel lounge and found Beny sitting with a group of people who worked for him in his diamond business. He made the introductions. There was Nir from South Africa, Dave from Antwerp, and Moishe from Tel Aviv.
We sat. Beny didn’t waste any time with pleasantries. “Bill, I think we should go into business together.”
I was flattered that someone as wealthy as Beny would react so strongly to my idea, but I looked at him and his diamond-dealer colleagues and thought there was no way I could be business partners with such a motley crew. Before I could say anything, Beny continued, “I’ll put up the first twenty-five million. What do you think?”
That gave me pause. “That sounds interesting. How do you see this business being set up?”
He and his people then launched into a rambling discourse that showed that they knew next to nothing about the asset management business. All they knew was that they had money and wanted more of it. At the end of the meeting, I was simultaneously excited and disappointed.
I walked out of the hotel thinking that this was exactly what I wanted to do, but exactly the type of people that I didn’t want to do it with. I spent the rest of that day and the whole night turning over this dilemma in my head. If I went out on my own, then I would need seed money, but there was no way a partnership with Beny and his guys would get off the ground because they had no asset management experience, and neither did I. Ultimately, I was going to have to turn Beny down.
I called him the next morning and braced myself for the difficult prospect of saying no to a billionaire. “Beny, I’m really tempted by your offer, but unfortunately I can’t accept. I’m sorry, but I need a partner who knows the asset management business. As accomplished as you are, this isn’t your field either. I hope you understand.”
People don’t turn down Beny Steinmetz, and without a trace of disappointment he said, “Sure I do, Bill. If you need someone with asset management experience, then I’ll bring in someone with asset management experience.”
I winced as he said this. I imagined him coming back to me with a cousin from some small brokerage firm and putting me in an even more awkward position as I turned him down a second time.
But twenty minutes later he called back. “How would you feel if Edmond Safra did the deal with us, Bill?”
Edmond Safra! Safra was the owner of Republic National Bank of New York, and his name was like gold in the world of private banking. If Edmond Safra was willing to join this venture, it would be like winning the lottery.
“Yeah, that would address the issue. I’m very interested, Beny.”
“Good. I’ll set up a meeting.”
The same afternoon he phoned back. “It’s all set. Fly to Nice and be on the Carlton pier in Cannes tomorrow at noon.”
But I have to work tomorrow, I thought. “Beny, can we do this next week sometime so I can—”
“Safra is ready to see you tomorrow, Bill,” Beny interrupted, irritated. “Do you think it’s easy to get a meeting with him?”
“Uh, of course not. Okay, I’ll be there.”
I bought a ticket, and when I woke up the next morning, I put on my suit, went straight to Heathrow, and checked in for the 7:45 a.m. flight to Nice. Before boarding I called the trading desk, faked a raspy cough, and said I needed the day off.
I arrived in Nice, and, following Beny’s instructions, I took a taxi to the Carlton Hotel in Cannes. The bellman thought I was checking in, but instead I asked how to get to the pier. He pointed across the Boulevard de la Croisette at a long gray pier that extended past the beach and into the blue Mediterranean. I crossed the street squinting against the sun (I’d forgotten my sunglasses in cloud-covered London) and stepped onto the pier. I walked over the planks passing beautiful, tanned people in their tiny swimsuits. I was completely out of place with my dark wool suit and my pasty-white skin. By the time I reached the end, I was sweating. I checked my watch. Five minutes to noon.
A couple minutes later, I noticed a bright speedboat approaching from the west. As it got closer, I realized that it was Beny. He pulled his boat—a forty-five-foot, white-and-blue Sunseeker—to a chortling stop at the edge of the pier and yelled, “Bill, get on!”
Beny was dressed like a Côte d’Azur playboy in a light apricot shirt and white linen pants. The contrast between us couldn’t have been starker. I unsteadily hopped aboard. “Take your shoes off!” he ordered. I did, revealing black socks pulled above my ankles.
Beny maneuvered the boat away, and as soon as we were free of the no-wake zone, he punched it. I tried to talk about the meeting and Safra, but the engine and the wind were so loud it was impossible. We rode east back toward Nice hard and fast for half an hour, rounding the Antibes peninsula and crossing the Baie des Anges before arriving at the port of Villefranche-sur-Mer.
Beny pulled into an empty slip, tied off the boat, and had a rapid-fire exchange with the harbormaster in French about mooring for the afternoon. When Beny was done, we made our way to the parking lot, where a pair of armed security guards ushered us to a waiting black Mercedes. The car climbed up through winding roads to one of the highest points above Villefranche. We eventually entered the grounds of a sprawling private residence, which I later learned was the most expensive house in the world. This was La Leopolda. It looked a lot like the Palais de Versailles, the difference being that here dozens of ex-Mossad bodyguards in black tactical gear patrolled the grounds with Uzis and SIG Sauer pistols.
We got out of the car and were escorted through a colorful garden with a splashing fountain surrounded by pointed cypress trees. We were shown into a vast and ornate living room overlooking the sea. The walls were covered with eighteenth-century oil paintings in gilt wooden frames, and a huge crystal chandelier hung high overhead. Safra wasn’t there, which was not surprising. I’d learned by then that standard billionaire etiquette was for guests to arrive, get settled, and be ready to start the meeting before the billionaire arrived so as not to waste his time. Since Beny was lower in the billionaire pecking order, he was subjected to this treatment as well.
Fifteen minutes later Safra entered. We stood to greet him.
Safra was a short, bald man with a pudgy face, rosy cheeks, and a warm smile. “Hello, Mr. Browder,” he said, speaking with a thick Middle Eastern accent. “Please, sit.”
I had never seen Safra before, even in pictures, and he looked nothing like the square-jawed, archetypal Master of the Universe that most people might have imagined. He was dressed casually in a pair of tan trousers and an elegant, handmade Italian shirt with no tie. The Chips and Winthrops of the world were playing dress-up in their pressed suits, red suspenders, and Rolexes. None of that stuff mattered to a man like Safra. He was the real deal.
Beny gave a short preamble and then I took Safra through my standard presentation. He had a short attention span, and every five minutes or so he would either take a call or make one that was completely unrelated to the topic at hand. By the end of our meeting, I had been interrupted so many times that I wasn’t sure if he had taken in any information.
When I was done, Safra rose, indicating that the meeting was over. He thanked me for my time and bid me farewell. That was it.
One of Safra’s assistants called a taxi to take me back to the airport, and as I waited in the gravel driveway, Beny said, “I thought that went well.”
“Really? I didn’t.”
“I know Edmond. That went well,” Beny said reassuringly.
The taxi pulled up; I got in and went home.
The following Friday was the day of the Salomon task force meeting. I went to work and made my way directly to the boardroom. I was surprised that they had booked such a large space. As 10:00 a.m. approached, the room began to fill and within a quarter of an hour forty-five people had arrived. Most I had never seen before. There were senior managing directors, managing directors, directors, senior vice presidents—and me. As the discussion got under way, a big argument broke out about who was going to get the economic credit for this new Russian business. It was like watching a cage fight, and it was impressive to see how people with absolutely nothing to do with this new business in Russia could make such persuasive arguments for why they were entitled to a share of any future earnings. I had no idea who would win this fight, but I was absolutely sure who would lose it, and that was me.
The meeting was so upsetting that I couldn’t sleep properly for several nights. I hadn’t made five times my salary for the firm, I had made five hundred times my salary, and I wasn’t going to let some empty-suited corporate hacks steal this business away from me.
I made my decision. The Monday after the meeting took place I went to work, sucked up my gut, walked into the head of sales and trading’s corner office, and quit. I told him I was going to Moscow to start my own investment firm.
I would call it Hermitage Capital.
1 GUM was a major department store like Macy’s.
2 The founder of Tiger Management Corp., one of the industry’s most successful hedge funds.
3 The founder of Templeton Asset Management, one of the largest mutual fund companies in the world.
4 If this sounds notable, there were probably more vice presidents than secretaries at Salomon.