Liar's Poker: a timely moment to revisit 20-year-old memoir of the rise and fall of a financial bubble

I've just read (finally!) Michael Lewis's Liar's Poker: Rising Through the Wreckage on Wall Street, the classic 1989 memoir of life at Salomon Brothers investment bank in the run-up to the Wall Street crash of 1987. Lewis was hired to trade mortgage bonds (yes, the mortgage bonds that precipitated the crash of 2008) fresh from the London School of Economics, dispatched to Salomon's legendary training program in NYC, then shipped back to London.

Lewis was a gifted salesman who made millions for the firm, but he was also deeply skeptical of the whole enterprise. This is an unbeatable combination, as it situated him perfectly to critically examine the culture, economics and ethics of the overheated bubble as it expanded, expanded, and, finally burst.

It doesn't hurt that Lewis is a fantastic writer with a particular talent for explaining the minutae of investment banking without making you want to gouge your own eyes out. Through vivid portraits of the movers and shakers on Wall Street, Lewis recounts the origin stories of junk-bonds, corporate raiding, mortgage bonds, the S&L crisis, and the founding of Fannie Mae and Freddy Mac (both founded at the behest of Salomon in order to backstop the mortgage bond market).

It's been 20 years since this was published, but there's never been a better time to read it. The hairy-knuckled, hyper-competitive, pirahnoid Wall Street and City traders he describes here could be the same hedge fundies who're poised over the tub with razors at their wrists today. Liar's Poker: Rising Through the Wreckage on Wall Street

• [Cicada]

  Why do people think that bubbles and the like are somehow an aberration or mistake, which should be corrected by increased regulation? Why not just accept that any economic field is subject to boom and bust cycles, and let that happen often enough that people account for it in their investing patterns.

  Bluntly, a major boom ‘n bust every century isn’t a good learning experience, but one every four or five years might actually sink in and teach people not to bet the farm (or house) on a boom lasting forever.

• [winkybb]

  Read also Lowenstein’s “When Genius Failed – The Rise and Fall of of LTCM”.

  Taleb, whilst a bit of an arrogant prat, is worth a look too. “Fooled by Randomness” and “Black Swan”. It would be painful to sit next to this guy at a dinner party right now. “I told you so” wouldn’t even come close.

  Lewis also scored a hit with “Moneyball”. A great read for those interested in markets and true value Vs price.

• [aftercancer]

  For those of you who can’t imagine reading a book about finance and economics let me guarantee you Lewis makes it readable. High Praise indeed!

• [boing_x]

  This isn’t a young adult novel. Was this a mistake?

• [Anonymous]

  Hi, I will strongly second this recommendation of Liar’s Poker. It is funny and accurate in its description of the innovations in the mortgage trading industry, and how parts of wall street took advantage of the new, deregulatory era that Reagan brought in. It is also accurate at describing the rates of change: the small-town bankers thought they understood the changes, but they were raped by the folks who really did understand them.

  It is somewhat less accurate if you think of it as a single picture of “what folks on Wall Street are like”. Yes, it does do a good job of talking about the intense pressures and culture on trading desks. Yet it was describing a particular time and place. Solomon Brothers in the late 80s was well-known for its hyper-aggressive behavior, especially towards its own employees. However, I’ve worked for Goldman, Morgan Stanley, and Barclays, and I can tell you that it’s easy and wrong to put a label on a very large number of heterogenous, unique people.

  I started work at Goldman on a trading desk not long after the book was written, and I was definitely terrified that people would scream at me, throw phones at my head, as depicted in the book. That never happened, but I did see legendary bouts of profanity, traders kicking trashcans to pieces, and all the other human vices one can imagine. Imagine a junior trader staring wide-eyed at his screen as he loses, in real time, 18 million dollars on a single, irreversible trade . It took about 30 minutes.

  A good match for this book would be “Bonfire of the Vanities”. It was also written at the same time about the trading star of Liar’s Poker, the man who was also presiding over the debacle at LTCM. Not a bad portrayal of New York at that time, either.

  For those of you who are angry about this crisis and looking for someone to kick in the head: look to the mania for deregulation and look to the comfortable, lazy relationship between the different regulatory agencies, who also form a crazy quilt of overlapping responsibilities. The government should have been looking out the whole system, but it didn’t — didn’t even try. The lobbyists we pay for made the legislators stay sleepy and far away — and of course, very few of the lawmakers understand this stuff.

  Yes, the borrowers and the lenders behaved idiotically, but that’s the point of a regulated system. Like a five year old with chocolate, they’ll keep doing what feels good until they’re violently ill. That’s human nature, and not some recent innovation or failing. If you want a single thing to focus on with incandescent anger, look at the increased leverage that was allowed by the SEC in 2004, when borrowing ratios were allowed to double:
  http://www.parapundit.com/archives/005558.html
  That single change raised the risk level that everyone is now enduring the pain — but you weren’t profiting from that decision, were you? It helped them raise their profits by letting them bet more with less.

  Although I’m very angry about the leverage decision, there’s no smoking gun in a goverment/industry clusterfuck like this. Many individual people didn’t do what they should have done, all out of a irresponsible infatuation with the glories of an unfettered free market.

  Posted anonymously for obvious reasons. My boss don’t give a shit what I say. In fact, we’re having arguments now about who is going to get axed first, him or me. But I have a very identifiable name and my company has twitchy lawyers.

• [winkybb]

  Concur with #3. Lewis very readable. He really writes stories about the people not about the industry. The finance concepts are accurately but clearly articulated. You may even feel like you’ve learnt something!

• [ibdense]

  Boing_X … #10

  What made you think this was a young adult novel?

• [Metlin]

  Taleb, whilst a bit of an arrogant prat, is worth a look too. “Fooled by Randomness” and “Black Swan”. It would be painful to sit next to this guy at a dinner party right now. “I told you so” wouldn’t even come close.

  NNT is a genius; and folks ignored him and everyone else like him for the longest time (all the while praising Greenspan as being the greatest economist of our times etc).

  Well, guess who’s having the last laugh?

• [Anonymous]

  The traders who bankrupted their companies by misunderstanding (or misrepresenting) risk aren’t poised over the tub with razors in hand. The surviving financial institutions are scrambling to hire them. The same guys will be presiding over the _next_ financial crisis. They’ll be in the business until they can’t maintain the requisite aggressive, hyperconfident manner anymore, and then they will be replaced by younger kids who can.

• [userw014]

  I just recently re-read “Top Dog” and “Dog eat Dog” by Jerry Jay Carroll. An amusing yet topical escapist read strangely current.

  — Deregulation for Wall Street is the same as taking the cops off city streets. —-

• [pstarr]

  sorry to say but those guys are far from suicidal – they are out hunting around for the next batch of suckers they can sell vats of snake oil to.

• [JayHavvic]

  Funny connections,
  Was listening to a huge collection of 78 record mp3s; as I code away at work and the random pick was — Lo! and Behold!

  Will Rogers addresses the present day crisis and vice presidents!

  Find “Will Rogers Talk to the Bankers” VICTOR_45374-A (1924)
  It is in the collection @ http://78records.cdbpdx.com

  “Whatever is old is new again”

• [Thinkerer]

  Sorry but the hedge fundies were smart enough to get while they still could and have moved to Greenwich, among other places.

  http://www.nytimes.com/2008/09/28/opinion/28wolfe.html?scp=1&sq=wolfe&st=cse