Liar's Poker
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| Liar's Poker | |
 Front Cover |
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| Author | Michael Lewis |
|---|---|
| Country | United States |
| Language | English |
| Genre(s) | Economics |
| Publisher | Penguin |
| Publication date | October 1, 1990 |
| Media type | paperback |
| Pages | 256 |
| ISBN | 0-14014-345-4 |
Liar's Poker is a non-fiction, semi-autobiographical book by Michael Lewis describing the author's experiences as a bond salesman on Wall Street during the late 1980s. First published in 1989, it is considered one of the books that define Wall Street during the 1980s, along with Bryan Burrough and John Helyar's Barbarians at the Gate: The Fall of RJR Nabisco, and the fictional The Bonfire of the Vanities by Tom Wolfe. The book captures an important period in the history of Wall Street. Two important figures in that history feature prominently in the text, head of mortgage department Lewis Ranieri and firm CEO John Gutfreund.
The book's name is taken from liar's poker, a high-stakes gambling game popular with the bond traders in the book.
Contents |
[edit] Overview
Liar's Poker follows two different story threads, though not necessarily in chronological order.
The first thread is autobiographical, and follows Lewis through his college education and his hiring by Salomon Brothers (now a subsidiary of Citigroup) in 1984. This part of the book gives a first-person account of how bond traders and salesmen truly work, their personalities, and their culture. The book captures well an important period in the history of Wall Street. Important figures in that history feature prominently in the text, John Meriwether, Lewis Ranieri, head of mortgage department and firm CEO John Gutfreund.
The second thread is a sort of history of Salomon Brothers and overview of Wall Street in general, especially how the firm single-handedly created a market for mortgage bonds and made the firm wealthy, only to be outdone by Michael Milken and his junk bonds. This thread is less dependent on Lewis' personal experience and features quotes apparently drawn from interviews with various relevant figures.
Lewis jumps back and forth between these two threads in the book.
[edit] Biographical section
Lewis was an art history student at Princeton University who nonetheless wanted to break into Wall Street to make money. He describes his almost pathetic attempts to find a finance job, only to be roundly rejected by every firm to which he applied. He then enrolled in the London School of Economics to gain a Master's degree in economics.
While in England, Lewis was invited to a banquet hosted by the Queen Mother, where he was accidentally seated next to the wives of two Salomon Brothers managers. While the managers and their wives proved to be extremely uncouth and rude, especially in the presence of royalty, Lewis managed to get a job interview through them and land his first job.
For his job, Lewis moved to New York City for Salomon's training program. Here, he was appalled at the sheer bravado of most of his fellow trainees, and indoctrinated into the money culture of Salomon and Wall Street in general.
After New York, Lewis was shipped to the London office of Salomon Brothers as a bond salesman. Despite his lack of knowledge, he was soon handling millions of dollars in investment accounts. In 1987, he witnessed a near-hostile takeover of Salomon Brothers but survived with his job. However, growing disillusioned with his work, he eventually quit to write this book and become a financial journalist.
[edit] Wall Street culture
The book's main contribution to literature and history is its unflattering, but accurate, portrayal of Wall Street traders and salesmen, their personalities, their beliefs, and their work practices.
During the training sessions, Lewis was struck by the infantilism of most of his fellow trainees. Examples include, but were not limited to: yelling and insulting financial experts who talked to them, calling phone sex lines and then broadcasting them over the company's intercom, gambling on every perceivable thing (including how long it took certain trainees to fall asleep during lectures), and their incredible lust for money and contempt for any position or job that didn't make that much.
Lewis attributed their behavior to the fact that the trading pit required neither finesse nor advanced financial knowledge, but rather, the ability and desire to exploit others' weaknesses, intimidate other people into listening to you, and generally the ability to spend hours a day screaming orders under high pressure situations. He referred to their worldview as "The Law of the Jungle."
He also noted that, although most arrivals on Wall Street studied economics, this knowledge was never used—in fact, any academic knowledge was frowned on by traders.
Lewis also attributed the Saving and Loans Scandal to the inability of small-time, provincial bank managers to compete with Wall Street. He noted that people on Wall Street are experts at fleecing and taking advantage of ignorant people, which the Savings and Loan banks provided in abundance.
[edit] Overall economic climate of the 1980s
Lewis portrays the 1980s as an era where government deregulation allowed less-than-scrupulous people on Wall Street to take advantage of others' ignorance, and thus grow extremely wealthy.
He traces the rise of Salomon Brothers through mortgage trading, when deregulation by the U.S. Congress suddenly allowed Savings and Loans managers to start selling mortgages as bonds. Lewis Ranieri, a Salomon Brother's employee, had created the only viable mortgage trading section, so when the law passed, it became a windfall for the firm.
However, Lewis believed that Salomon Brothers became too complacent in their newly-found wealth and took to unwise expansion and massive displays of conspicuous consumption. When the rest of Wall Street wised up to the market, the firm lost its advantage.
Another problem Lewis noticed was a large disconnect between what Salomon Brothers mortgage traders were paid, and what they believed they should have been paid. Ranieri and his fellow traders felt that, since their department generated so much money to the firm, that they ought to receive much higher salaries and compensation. Gutfreund and other managers, on the other hand, argued that the traders were not risking their own money, but the firm's, and noted that the mortgage department spent years losing money before succeeding. Because of this disagreement, many traders were easily lured away by other firms offering higher salaries, and Salomon Brothers lost many of its traders.
Likewise, Lewis argued that Salomon Brothers tried to "professionalize" itself. As he notes, Ranieri and his fellow traders lacked college degrees (one of the traders hadn't even passed the eighth grade). Despite this lack of credentials, the group was extremely successful financially. However, the firm, in order to improve its "image," began to hire graduates of prestigious business and economics programs (a group which included Lewis himself). Because of his uncouth manners, Ranieri (along with many of his Italian colleagues) was eventually fired.
However, Lewis argued that Salomon Brother's mortgage-bond success was based not on intelligence or trading skill, but pure luck. Lewis noted that, although Ranieri was often hailed as a "visionary" for creating a mortgage department before a mortgage market existed, he was caught completely by surprise when deregulation occurred. The firms that lured away Salomon's traders with higher salaries ended up losing money, as it soon became clear that the traders lacked any special skills, but just happened to be working in mortgages during the windfall. After enough firms got involved with mortgage bonds, prices stabilized, and they were eventually traded like any other bond.
After mortgage bonds, Lewis examined junk bonds and how Michael Milken built junk bonds from nothing to a multi-trillion-dollar market. Because the demand for junk bonds was higher than its supply, Lewis argues that corporate raiders began to attack otherwise sound companies in order to create more junk bonds.
In conclusion, Lewis remarked that the 1980s marked a time where anyone could make millions, provided they were at the right place at the right time, as exemplified by Ranieri's success.
[edit] Catch phrases
- Big Swinging Dick — A big-time trader or salesman. ("If he could make millions of dollars come out of those phones, he became that most revered of all species: a Big Swinging Dick." p.52) The opposite of this term is Geek, used to describe a just-hired trainee.
- Equities in Dallas — A particularly undesirable job within a finance firm ("He belonged to the dreaded equity department, the sleepy backwater in which lurked such career stoppers as Equities in Dallas." p.49).
- Blowing up a customer — Successfully convincing a customer to purchase an investment product which ends up declining rapidly in value, forcing the client to withdraw from the market.
- Feeding Frenzy — Term used to describe the Friday-morning meal shared by a certain clique of bond traders. At this meal, traders would order astounding quantities of take-out food. The traders would then compete with each other to see who could display the most gluttony, and always bought far more food than they could eat (e.g., insisting on five-gallon tubs of guacamole with an order of Mexican food).
- The Human Piranha — Nickname for an employee at Salomon Brothers who constantly used the word "fuck" and its variants in his speech. Referenced by Tom Wolfe in Bonfire of the Vanities.
- Shorting Salomon — Steps taken by a Salomon Brothers' employee to ensure a future job if something bad happened at the home firm. Term taken from the process of selling short, or investing on the premise that the equity in question will soon decline in value.
- The Arabs — A catch-all explanation for unexpected swings in capital markets. Traders blamed "the Arabs" for any trend they could not explain. As there was no reliable way to determine what Arab investors were doing at any particular time, any explanation for market behavior that mentioned them was as likely to be true as any other.
