Book of the Week: Liar's Poker
28 Nov 2015
Before Michael Lewis wrote Flash Boys, he was a bond salesman for Salomon Brothers in London. Salomon Brothers was described in When Genuis Failed, but Liar’s Poker goes into more depth inside the company. Fools
The astute investor Warren Buffett is fond of saying that any player unaware of the fool in the market problem is the fool in the market.
Salomon Brothers liked to screw their customers, because that helped them make money. This strikes me as a conflict of interest, but investment bankers don’t have ethics, so it is fine. As long as it in brings in more revenues. Revenues were more important than profit since you can point to revenues for your bonus. Mortgages Collateralized mortgage obligation (CMO) were financial instruments to make mortgages look more like bonds. The problem with mortgages is that the borrower has the option to pay back ahead of time, so there is a lot of uncertainty with the return of the mortgage. To decrease this uncertainty a CMO aggregates mortgages bonds in a trust and hands out certificates representing ownership. The certificates are created in a way that divides the returns into several tranches. In the event of a prepayment, the first tranche’s owners get paid off first. Then the second and so forth. The first tranche certificates had shorter lifetimes than the second tranche. The second tranche has a shorter lifetime than the third, etc. This gave more certainty over the time frame of returns. Mortgage back securities didn’t take off until the government gave subsidies in the form of tax breaks. Changes in what saving and loan banks could invest in caused a wave of interest into mortgage backed securities. Salomon Brothers had a monopoly on mortgages, but Merrill kept hiring away people. This broke their monopoly and ended up being more costly than matching the pay that Merrill offered. Men and Women and Power
the firm tolerated sexual harassment but not sexual deviance
Asking a senior female executive to engage in a ménage à trois is probably not the best career choice then you’re a trainee.
At Salomon Brothers men traded. Women sold. No one ever questioned the Salomon ordering of the sexes. But the immediate consequence of the prohibition of women in trading was clear to all: It kept women farther from power.
The power you wield was related to the amount of money you brought to the firm. The traders made the money, so they held the power. Everyone on the trading floor hoped to they could millions of dollars in sales through the phone for the company and become a Big Swinging Dick. People wanted to avoid equities, because it made the least for the company. You wanted to be in New York trading bonds. Leaving Salomon Brothers
You might say I left the trading floor of Salomon Brothers in search of risk, which was as stupid a financial decision as I hope I’ll ever make.
After Michael lost his need to stay at Salomon Brothers, he left to write this book. If he stayed, he would have been on his way to making a million a year. Purchase Liar’s Poker on Amazon.com or check it out from your local library.