SPECIALS
Book Review: Liar's Poker

By Alan Oscroft
June 20, 2001

Liar's Poker, by Michael Lewis.

Think "finance". Think "City". What images do they conjure up? If you see mental pictures of pigs at troughs, you'll enjoy this book.

Michael Lewis was a bond trader at Salomon Brothers during the high-powered boom years of the eighties when greed was all that counted and morals were things that losers suffered from. Liar's Poker tells the story of how Lewis started out from relatively humble beginnings with a degree in Art History, how a chance encounter while dining with the Queen Mother (well, sort of) got him started at Salomon Brothers, how he made it into the ranks of the "Big Swinging Dicks", and how he finally ended up quitting the egotistical bond trader's life in a cloud of disillusionment.

In his early years, Lewis learned some rude lessons. Attempting to nurture his very own first client, Lewis innocently passed on a hot recommendation from a colleague. The hot tip was bogus and ruined his customer, and was only intended to offload some rubbish that might otherwise have hurt the accounts of Salomon Brothers themselves. But that was Wall Street.

The Boom Years

At the end of the seventies, and heading into the Wall Street boom years of the eighties, Salomon Brothers knew more about bond trading than anybody else. How to value bonds and how to trade them were not widely held skills. And anyway, bond trading was neither very profitable or prestigious, and so the rest of Wall Street left Salomon Brothers to get on with it. Or at least, that was the conventional wisdom, as Lewis's recounting of a speech made by Salomon Brothers' Sidney Homer (who was considered the leading Wall Street bond analyst of his day) made clear...

"I felt frustrated," said Homer about his job. "At cocktail parties lovely ladies would corner me and ask my opinion of the market, but alas, when they learned I was a bond man , they would quietly drift away."

So how did bond dealing become so profitable during the eighties? The biggest myth concerning bond traders, we are told, is that they make their money through taking large risks. In reality, they are just toll collectors. Lewis quotes Kurt Vonnegut (who was actually describing lawyers)...

"There is a magic moment, during which a man has surrendered a treasure, and during which the man who is about to receive it has not yet done so. An alert lawyer [read bond trader] will make that moment his own, possessing the treasure for a magic microsecond, taking a little of it, passing it on."

Knowledge is Money

The trick is to find someone (a pension fund, say) who wants to sell a good few million dollars' worth of corporate bonds. You sell them for a commission of an eighth of a percentage point. If you can then persuade someone else that the seller is making a mistake and they're worth a fair bit more than the sale price, you can get another eighth, extending that magic microsecond. Whether the bonds are cheap is irrelevant. The point is simply that you're selling to people who don't know how to value the treasure, and they have to take your word for it.

Most financial writers have quoted Warren Buffett at some stage, and Michael Lewis is no exception. By using Buffett's "greater fool" theory ("if you don't know who the fool is in any game, it's probably you"), he reckons that through Salomon Brothers' domination of the bond market, everybody else was the fool.

A Mortgage Monopoly

Another area in which Salomon Brothers cleaned up in the early eighties was in mortgage trading. To help ease a growing crisis in the American Savings and Loan industry, mortgage lenders were given a tax break allowing them to sell on their mortgage loans and invest the cash for better returns. By getting in as early as possible on the huge amount of mortgage trading business that ensued, Salomon Brothers managed to create another of those wonders that companies only rarely achieve: a monopoly.

But with the growing success of the company's mortgage traders came growing egos, and growing demands for more and more money. When Salomon Brothers refused to match a $3 million dollar a year offer that had been made to one of their top traders, off he went. And with him went that precious monopoly. Soon, trading spreads had narrowed dramatically through competition. There were other pigs at the trough.

The Beginning Of The End

Other episodes followed, and the demise of Salomon Brothers' previously unassailable empire became inevitable. Clashes of hugely inflated egos, and clashes between the crusty old culture at the top and demands of the younger people at the bottom became more common. Stories of abuse of company expense accounts abounded, with one trader even allegedly siphoning enough from his expense account to buy a new Saab (a car, presumably, not a fighter aircraft).

There's plenty more, and the rest of the book is a chronicle of excess, the proportions of which would make a Roman orgy look like a Salvation Army outing.

If there is one criticism of this book, Michael Lewis tends to portray himself rather as an innocent victim of the whole eighties greed culture, and remains aloof from those he perhaps rightly scorns. So he sold some poor sucker a bum deal that ruined him? Well, he wasn't to blame, he was just following orders. He had to do it or lose his job. It was all the others who were greedy, manipulative and unscrupulous, not him. It was with a wry smile that I greeted the revelation of Lewis's new hero towards the end of the book, but to tell would be to ruin a great story.

What's In A Title?

But what exactly is "Liar's Poker"? It is a game played by a group of people. Each conceals a dollar bill and, in turn, makes a "bid" along the lines of "three sixes", betting that the serial numbers of all of the dollar bills together would contain at least three sixes. The game continues with higher bids until the last bidder is challenged. Liar's Poker was a popular game amongst Salomon Brothers managers and traders.

An innocuous game, perhaps, but it passed into Salomon Brothers' folklore in dramatic fashion. One day in 1986, chairman John Gutfreund left his office and walked straight to the desk of John Meriwether (later of hedge fund LTCM), a board member and the company's finest bond trader. He whispered a few words:

"One hand, one million dollars, no tears."

If you want to know the answer he got, you'll have to read the book.

Conclusion: One of the best books I've ever read.

Ratings (out of 5)

Content: 5
Readability: 5
Foolishness n/a

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