Liar’s Poker
Michael Lewis’s classic book Liar’s Poker is much more like a novel about life at Salomon Brothers than a finance book. However, along with the compelling story and the humour, he manages to mix in some financial lessons. The overriding lesson is how little regard Wall Street firms have for their customers.
Summing up the attitude towards customers is “if it was a good deal, the bankers kept it for themselves; if it was a bad deal, they’d try to sell it to their customers.” To encourage one group of bond traders to sell more, they were blasted from a loudspeaker: “C’mon, people, we’re not selling truth!”
Salomon made a lot of money from mortgage trading at a time when sleepy thrift banks were transforming. At one point, the typical thrift manager “became America’s biggest bond trader. He was also America’s worst bond trader. He was the market’s fool.”
Success wasn’t necessarily glamorous. One very successful analyst was so hounded day and night for his opinions that “he regularly nipped into a bathroom stall during midday lulls and slept on the toilet.”
One exchange shines a humourous light on ethics: “‘I thought you spoke French,’ he said. ‘No, that was just on my résumé,’ I said.”
One financial lesson I learned was the purpose of splitting a collection of mortgages into tranches. In the early days of mortgage bonds, they were hard to sell because potential buyers didn’t like the uncertain maturities; homeowners sometimes pay off their mortgages early. The idea with tranches is that all payments initially go only to the first tranche investors. “Not until the first tranche holders were entirely paid off did the second tranche investors receive any payments.” Finally, the third tranche gets paid. “One could say with some degree of certainty that the maturity of the first tranche would be no more than five years, that the maturity of the second tranche would fall somewhere between seven and fifteen years, and that the third tranche would be between fifteen and thirty years.” More certainty lead to more buyers.
If you enjoy novels and like reading about money, Liar’s Poker is a great combination.
Summing up the attitude towards customers is “if it was a good deal, the bankers kept it for themselves; if it was a bad deal, they’d try to sell it to their customers.” To encourage one group of bond traders to sell more, they were blasted from a loudspeaker: “C’mon, people, we’re not selling truth!”
Salomon made a lot of money from mortgage trading at a time when sleepy thrift banks were transforming. At one point, the typical thrift manager “became America’s biggest bond trader. He was also America’s worst bond trader. He was the market’s fool.”
Success wasn’t necessarily glamorous. One very successful analyst was so hounded day and night for his opinions that “he regularly nipped into a bathroom stall during midday lulls and slept on the toilet.”
One exchange shines a humourous light on ethics: “‘I thought you spoke French,’ he said. ‘No, that was just on my résumé,’ I said.”
One financial lesson I learned was the purpose of splitting a collection of mortgages into tranches. In the early days of mortgage bonds, they were hard to sell because potential buyers didn’t like the uncertain maturities; homeowners sometimes pay off their mortgages early. The idea with tranches is that all payments initially go only to the first tranche investors. “Not until the first tranche holders were entirely paid off did the second tranche investors receive any payments.” Finally, the third tranche gets paid. “One could say with some degree of certainty that the maturity of the first tranche would be no more than five years, that the maturity of the second tranche would fall somewhere between seven and fifteen years, and that the third tranche would be between fifteen and thirty years.” More certainty lead to more buyers.
If you enjoy novels and like reading about money, Liar’s Poker is a great combination.
Michael, you have disappointed me: I thought I invented the idea that “if it was a good deal, the bankers kept it for themselves; if it was a bad deal, they’d try to sell it to their customers.” Well, at least I came up with it by myself :)
ReplyDelete@AnatoliN: In my youth I came up with many math-related ideas on my own just to find out later that the results were known. It can be disappointing, but you get to learn more thorough results in the area.
DeleteIt is a great book. The one thing I never figured out though is the game that it's named after. The vague descriptions in the book only told me that it involves cash, guesses, and bluffing.
ReplyDelete@Richard: Agreed. I couldn't figure out the rules until I read Wikipedia: http://en.wikipedia.org/wiki/Liar%27s_poker
DeleteAnd if one liked Liar's Poker, consider also reading Michael Lewis' "The Big Short", which follows some of the investors who made a killing with the early subprime bets.
ReplyDelete@Fernando: I've enjoyed a couple of Lewis's books so far. So it makes sense to find some more.
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