Thursday, April 13, 2017

Liar's Poker by Michael Lewis (Book Review #7 of 2017)


Liar's Poker: Rising Through the Wreckage on Wall Street

I finished Liar's Poker (1989) and Boomerang (2011) consecutively; I'd read some of Lewis' other works years ago (The Big Short, Moneyball, The Blind Side) and several of his articles. It is interesting to observe Lewis' progression as a commentator on Wall Street and the financial system over the years. Liar's Poker has a rather humorous feel written from a more innocent time, but by Boomerang the choices of Wall Street traders were no longer funny as they contributed to a massive economic crisis and backlash against government institutions and the Western capitalist-democratic system itself. If Lewis is forgiving in Liar's Poker, he is quite caustic and ominous in Boomerang.

Lewis lucked into a job at Salomon Brothers by striking up conversation with the CEO's wife at a posh dinner party in England. Lewis had earned an economics degree from the London School of Economics, and apparently in the early 80's everyone did that to become a trader. Lewis describes the job interview and the long orientation process. Supposed geniuses from Princeton and Harvard didn't seem to know much about finance but they wanted to be part of the culture that was Salomon Brothers. It had less to do about what you knew and more about who you knew and the attitude with which you carried yourself.

The reader is introduced to people like the "Human Pirahna," and the inner workings of a rather dysfunctional management style where roles are driven more by personalities than skills. Salesman have to sell, while traders do the math or know score. Everyone plays off of one another's ignorance in order to sell their junk. Lewis is played as a fool in one of his first deals, being praised by the company bosses for "jamming" (offloading) junk at the expense of a poor sap client. Lewis relies heavily on another man for info while selling and trying to build business for Salomon, something Lewis was apparently skilled at. Everyone is faking it until they make it, maybe never understanding the global financial market and how it affects bond prices, and skill is obviously an illusion.

The 1980s was the real estate boom and bust era and the invention of the junk bond. Lewis describes well the frathouse culture of Salomon, where most women didn't have a chance and the greatest compliment for traders and salesmen was to be a "big swinging dick." There is a bizarreness to the culture, Lewis describes "freeding fenzies" where traders would order and consume massive amounts of food-- an image of Wall Street excess where there was no such thing as "too much." Liar's Poker is the name of a game the big-shots play that is about being willing to raise the stakes, bluff heavily, and hope you're lucky.

Salomon pioneered trading in the mortgage-backed security and the implications of securitizing American home loans, even if they were made up of bad loans, seemed apparent to Lewis in 1989. This experience certainly helped him write The Big Short decades later. The 1980s featured leveraged buyouts and Salomon wasn't immune to rumors of corporate raiding. The author chronicles the downfall of Michael Milken, the junk bond market, and the 1987 crash leading to layoffs at the firm. Warren Buffet was called on to bail out the firm at one point. Lewis writes of the betrayal many felt in the company as management battled on what businesses Salomon should pursue or shut down. Lewis apparently kept his job but left voluntarily in 1988.

I listened to Lewis interviewed recently on a podcast and he briefly summed his time at Salomon and the disconnect he saw between prices--the earnings of traders and their firm-- and the actual value added to the economy. He was from New Orleans and had been taught values from working people-- he knew who was earning his money and who was a fraud. It's clear the financial largess and prowess bestowed upon Wall Street chafed at Lewis, and following this book up with Boomerang really gives one an impression on how much more chafed Lewis has become as the world refuses to learn from crises and just repeats them.

In all, I give this book four stars out of five. I assigned The Big Short as required reading in a Money and Banking course I taught in 2011; I wanted to inoculate students from any rosy visions they had of Wall Street corporate culture or anyone who claimed to be a financial expert. This book serves just as well in that capacity, maybe better since it's of the perspective of someone who was just out of school at the time. 4 stars out of 5.

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