Difference between revisions of "Liar's Poker"
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Revision as of 12:18, 20 January 2010
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Liar's Poker contains in part an autobiographical account of Michael Lewis's own experience just before and during his time in Salomon Brothers. The book also followed the rise and fall of Salomon Brothers, mainly focusing on the mortgage bond department whose fortune closely traced the speculative bubble in various mortgage backed securities in the 80s. (The current subprime crisis indeed echoes some of the themes in that book.)
Chapter 1: Liar's Poker
Michael witnessed a classic bluff and re-bluff between John Gutfreund (chairman of Salomon Brothers) and John Meriwether (board member + bond trader). Gutfreund challenged Meriwether to "One million dollars. No tears", to which Meriwether replied, after seconds of thought, "No, I'd rather play for real money. Ten million dollars. No Tears!"
Chapter 2: Never Mention Money
Michael landed a job at Salomon Brothers through a chance encounter with two wives of Salomon MDs (managing directors) in 1984. He reflects on his previous job hunting experience after getting his undergrad degree 2 years earlier. Everyone wanted to work for Wall Street, and investment banking was a hot career. Michael interviewed with Lehman and failed to get the job. Ironically, "I'm in it for the money" is not a good reason to want a job on Wall Street.
Chapter 3: Learning to Love Your Corporate Culture
Salomon Brothers traded equities and bonds, but mainly the latter. The bond market exploded in the 80's due to two events:
- The Fed announced that the money supply would be fixed, and interest rates would float.
- America borrowed money at a faster pace in the 80s than ever before, from $323 billion in 1977 to 7 trillion in 1985.
The first year at Salomon is the training program. Class is segregated into first row (serious types, geeky) and back row (aloof, mischievous). Trainees sometimes abuse each other, but traders on the 41st floor abuse the trainees at will.
Chapter 4: Adult Education
The class involves lectures from various MDs and speeches given by upper management. Most were there to gloat about themselves and looking for ego-boosts. Rarely anything useful came out of these classes. Memorable speakers included:
- The Human Piranha - Perfect example of the fuckspeak culture on the trading floor.
- Sangroid - cold and intimidating, made a point that every trainee must live and breathe the financial world.
- Richard O'Grady - a young trader who started at Salomon as a lawyer. He told true, personal stories of various abuses at Salomon. Once walked out on an interview with the company but came back a year later.
Everyone wanted to be in the mortgage bond department because that is where the money is at, and no one wanted to be in equities. "Equity in Dallas" became the lowest of the low for a trainee to end up in.
Chapter 5: A Brotherhood of Hoods
1978-1981 Bob Dall proposed the establishment of a mortgage bond department based on his prediction that there will be an increase in demand for mortgage bond trading. Lewis Ranieri was tapped to lead the trading desks. He soon replaced Bob and was put in charge of the entire mortgage department. In the beginning, there was little trade and the department didn't make much money. It was viewed as the backwater of the company. There is tension between the departments (mortgage, corporate and government), but the mortgage department is essentially a separate entity with its separate support staff.
Chapter 6: The Fat Men and Their Marvelous Money Machine
1981-1986 Since the 1979 interest rate float, rates skyrocketed and banks who loaned out mortgages at low rates are losing money. In 1981, government passed a tax break to save the thrifts (savings and loans banks) from wide-spread bankruptcy. To benefit from these tax breaks, the thrifts can sell their mortgages at significant losses. The supply for mortgage bonds increased tremendously and so did trading. Salomon had the only fully staffed mortgage department so it made a killing. New traders are hired and they presented new ideas for making money, such as buying low yield mortgage loans at discount prices that are likely to see pre-repayment. As (mortgage) traders see more discrepancies between their contribution and pay, they started leaving the company, often poached by rival firms at staggering salaries.
Chapter 7: The Salomon Diet
1986-1988 The good times are coming to an end as talents left Salomons and mortgage bonds became commoditized (partly through Salomon's own invention of CMOs, or Collatorized Mortgage Obligations). New products are being invented such as IO/PO, which increased levels of speculation on mortgage bonds. Andy Stone lost 250 million at Merryl Lynch betting on PO. Ranieri was finally squeezed out in 1988.
Chapter 8: From Geek to Man
Michael started in the London office as a corporate bond salesman. It took sometime for Michael to master the special dynamics between salesmen and traders. His two mentors, Dash (across the desk) and Alexander (across the ocean) taught most of what he knew. Michael became a Big Swinging Dick when he managed to sell a priority (bond the firm wants all salesmen to push) of 86 millions of Olympia and York.
Chapter 9: The Art of War
Michael described the backstabbing incident when another MD took all the credit for the new German gov't bond warrant (call option) that he and Alexander created. He sought revenge by secretly doing a new Japanese gov't bond deal which the MD couldn't explain to his management and peers. MD threatened Michael which backfired when Michael told a syndicate manager (who manages these deals).
Chapter 10: How Can We Make You Happier?
In 1987, Salomon Brothers became a takeover target from Revlon, backed by Drexel Burnham, Salomon's long time rival on Wall Street. Drexel Burnham, under the leadership of Michael Milken, fostered an era of corporate takeovers by supplying a way to finance such take over with junk bonds collateralized by the assets of the target itself. In the author's view, the takeover attempt materialized because of the failure of Salomon's leadership to see it in the first place. John Gutfreund then made a deal with Warren Buffet to avoid the takeover, at the expense of Salomon shareholders. Michael painted a picture of Gutfreund's hypocrisy.
Chapter 11: When Bad Things Happen to Rich People
A huge round of firing and trimming of Salomon workforce proceeded one of the worst stock market crashes in history (winter of '87). Reflecting the gross failure and lack of vision from the top management, the company summarily closed down departments and fired a thousand employees. Michael escaped the cut and was instead rewarded with a surprisingly large year end bonus. Salomon did not go under, it continued to operate, but earning much, much less than in its heydays.
The main reason for Michael's departure from the firm was the belief that his reward ($$$) should have reflected his contribution to welfare of the society. He can't rationalize how his job of selling bonds to customers produced much goodness.