Thursday, 31 May 2012

Book Review - Liar's Poker by Michael Lewis

Liar's Poker Liar’s Poker is a fantastically written expose on Salomon Brothers, the powerhouse of sales and trading in the 1980s.  A cross between an autobiography and a contemporary history of the bond markets and Salomon’s place within them, the book gets to the heart of what it is to be a trader. I rate this book 4 / 5.

Lewis begins Liar’s Poker with his experience getting recruited into the firm and his experiences with the training programme.   He explains his experiences in trying to get recruited into a corporate finance (i.e. investment banking) job without success in a chapter aptly named ‘Never Mention Money’.   Lewis then walks the reader through his experiences in the Salomon training programme (though it was a bit strange that he dedicated the same amount of time describing this as he did his actual experiences on the trading floor). 

There is then a slightly awkward shift in the book to a history of the mortgage trading department at Salomon Brothers, the most profitable section on the trading floor at the time (though this seems to be contradicted in Roger Lowenstein’s When Genius Failed which gives the honour to The Arbitrage Group).   While the history of the mortgage trading department becomes fascinating as you keep reading through it (3 chapters), there is a real disconnect with the first section of the book. 
Liar’s Poker then, almost as suddenly, jumps back to Lewis’ experiences on the trading floor and his experience going ‘From Geek to Man’ and the information and insights contained from this chapter to the end of the book are what truly make this book a standout.  Lewis discusses many of the issues and problems that he saw while working at Salomon Brothers including:

·    The willingness of a multinational firm, and indeed at the time one of the bastions of Wall Street, to sacrifice clients and their well being in order for an inexperienced salesman/trader to get experience
·    The inherent conflicts of interest within a firm that deals with both external clients as well as on its own proprietary account
·    The politics of making money, including the need to constantly defend ones turf on the trading floor
·    Compensation: why
it is so high and how Salomon got it so disastrously wrong (this part of the book effectively mixes Lewis’ experiences with the broader compensation debate)
·    Hiring and firing policies: including how short term decision making cost Salomon a significant amount of goodwill and income

The epilogue is a short (3 pages) summary of the reasons Lewis eventually quit his job.  He leaves because he no longer needs to stay (an interest comparison with Monkey Business where the authors leave investment banking due to unbearable disillusionment). 
ü  A funny, easy to read book about sales, trading and Wall Street during the 1980s
ü  Lewis simplifies the book down so that everyone can understand it.  His explanation of quite complex financial instruments and situations are succinct and he does not subject the reader to an inordinate amount of useless financial information or jargon
û  The 3 chapters on the history of mortgage trading do not seem to go well with the rest of the book.  Even after several readings of the book, I still don’t understand why these sections are necessary
  • This book is an excellent read for anyone interested in sales and trading or for those just simply interested in the history of trading (especially that of mortgage trading)
  • While the book was definitely not written for this purpose, it is surprisingly good at explaining those mortgage instruments which caused so much havoc during the GFC
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