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Liar's Poker

by Michael Lewis

Dates Covered: 1970 - 1990
ISBN: 0393027503
HH Rating: 5stars

Our Take

There's a seminal moment in the beginning of Michael Lewis' Liar's Poker when a spectacular bet is made. The immensely rich chairman of Salomon Brothers, John Gutfreund, pulls aside his chief trader and challenges him to a game of Liar's Poker -- a complex game of bluffing. He quietly whispers to the trader, John Meriwether, "One hand, one million dollars, no tears." That outlandish sum of money might well beggar Meriwether. He could wallow in penury or worse, which was bad. Alternately, he could play his best, and beat his boss, which might be what is today called a Career Limiting Move, also bad. And it was a single game, so, despite Meritwhether's skill, anything might well happen. To play this game was a lose-lose situation, and Meriwether knew it. Yet he also knew he couldn't back down and lose face. What to do?

A gambler with steely nerves, Meriwether returned, "No, John, if we're going to play for those kind of numbers, I'd rather play for real money. Ten million dollars. No tears."

He was gambling that Gutfreund couldn't stomach the risk, despite the chairman's deep pockets. And he was right: Gutfreund declined, calling Meriwether "crazy". And in that moment, author Lewis manages to distill the ethos of the trader: a compulsive gambler with an absurdly quick mind. It was all about making acceptable risks, and in this case Meriwether took the risk before the game was ever played. Turns out such skills made men very wealthy in the in 1980s while trading that most lowly of securities, the mortgage bond.

While this book describes, with a keen insider's eye, the disastrous fall of Salomon Brothers, it also functions as a memoir of Lewis' early twenties. The postmortem of Salomon Brothers is interesting, but not nearly as compelling as the author's misadventures in trader school:

The back row, from about the third day of classes on, teetered on the brink of chaos. Even when they felt mildly ambivalent about a speaker, back-row people slept or chucked paper wads at the wimps in the front row ... they rewarded the speakers of whom they approved by standing and dong the Wave across the back of the class.

In an industry where the highest accolade is the sobriquet Big Swinging Dick (something Penguin felt obliged to put on the back cover of the book), one quickly realizes that brilliant, malicious little boys are in charge. The mortgage traders at Salomon, for example, are renowned for their bottomless stomachs. Various traders indicate in the Salomon training program that the only way to get things done is to swear loudly, "lift weights or take karate." Of course, many of the trainees were milquetoast graduates from Harvard thrust into a world of kindergarten bullies, and had to adjust themselves accordingly. They reinvented themselves into the most ignominious of creatures, the smug bully. Lewis, finding a Salomon vice-president taking credit for a deal he had constructed, engineers the VP's vocational demise with a single well-placed phone call.

With such egregious displays, any schadenfreude one may have lingering from watching rich investment bankers crash into penury in the 1980s is swiftly rekindled. Lewis ably describes the somewhat Byzantine bond market and calls attention to certain legislative actions that allowed for the creation of absurd wealth. Almost certainly unintentionally, Congress opened up a new universe of rules and loopholes in the 1980s; traders slowly figured them out and exploited them to the hilt. It turned out to be a game where one was constantly pushing the envelope of legality and risking hundreds of millions of the firm's money in an effort to win, to become a Big Swinging Dick, and to become filthy rich. It was one of the biggest bubbles in history. And then it burst.

The crash, while hinted at and anticipated for the bulk of the book, comes in a fairly rapid denouement that lasts about eleven pages. There is so little detail it almost seems as though Lewis, while paying attention to the history and development of trading, had quit his job six months before the crash actually came and had to fill in the blanks later. (He actually worked through the crash and stuck around for two more years.) He is also alternately arrogant and self-effacing, which makes for a charming combination. In acknowledging his wildly inappropriate background for the job (art history) and noting that the only real preparation one might have made for the transition into effective trader is bald-faced lying and schoolyard tactics, he creates an image of bickering children who eventually receive a dashing comeuppance. And, as we've all felt a little dark glee watching the dot-com kids fail and flail after living high on the hog, watching these traders plummet is oddly comforting.

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