Liar’s Poker

“I was flushed with pride. But something didn’t quite fit. What did he mean:our AT&T’s? I hadn’t realised the AT&T bonds had been on Salomon’s trading books. I had thought my trader friend had snapped them from stupid dealers at other firms. If the bonds were ours to begin with….”(Lewis on making his first trade)

Liar’s Poker, a book written by Michael Lewis who was a bond trader at the now defunct Salomon Brother Inc, provides an insight to readers on the happenings of trading firms during the “Roaring 80’s.” Since Liar’s Poker, Mr. Lewis has written multiple books including The Moneyball, Big Short, Boomerang and Flash Boys.

Mr. Lewis entered Salomon Brothers as a young trainee in 1985, fresh out of the London School of Economics, ultimately he became a bond salesman with the London office of the company, fairly successful one, before leaving the firm in 1988. Salomon Brothers at that time was probably the most influential investment bank in business, it had a near monopoly in bond trading and was the pioneer in Mortgage Backed Securities through the vision of its employees such as Robert F. Dall and Lewis S. Ranieri.

The book talks of the culture which existed within the firm during the boom years of the 80’s, the concept of a “Big Swinging Dick” which every trader in the firm aspired to be one day. Backstabbing was common within the firm, one such instance was when the “opportunist” who stole credit for the creation of a “Warrant of a Call Option” from Mr. Lewis and his colleague. There was also a huge conflict of interest which existed within the firm, this he explains through to concept of a “Priority” i.e. when the firm tried to dump shares and bonds of a collapsing company onto its clients.

The book then goes into the downfall of Salomon Brother, how its compensation structure caused most of its traders to leave the firm and join competitors, effectively causing the firm to lose it first mover advantage in the creation of mortgage backed securities. The existence of “families” within the firm caused a great deal of damage due to constant bickering among them. One such instance was the bickering between the mortgage department and the junk bond department which ultimately caused the firm to completely miss the boom in junk bonds during the 1980’s.

A firm which had the likes of John Gutfreund, Lewis Ranieri, John Meriwether, Myron Scholes and more ultimately lost its hold over the investment banking business and was bought over by Travelers Group (now Citigroup) in 1998.

For me personally, having been written in a humorous way, this book has been a highly enjoyable read. Due to my interest in the world of money, the book has taught me a lot, the book showed me how traders on Wall Street make profits not only on the basis of fundamentals of the market but also on how well they can exploit the ignorance of their clients.

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