Book: Liar’s Poker
Author: Micheal Lewis (also wrote Moneyball which got turned into a movie starring Brad Pitt)
Publication: 1989
Pages: 310
Completion Date: 4/25/25
The book is about the author’s own life and how he got a job at Solomon Brothers investment bank after graduating Princeton with an art history degree in 1982 and a degree in London School of Economics in 1985. He started working in their New York office, but first had to go through a six-month training program. His salary was $42,000 with a 6-month bonus of $6,000. There is a significant part of the book that relates to the training program, how it is conducted, who leads it and how the trainees act during it (badly).
In 1985, Solomon Bros. (SB) was the most profitable company in the US on a per-capita basis. There was some detailed information about the history of SB and some of its most well known traders, US mortgages, bonds, CMO’s (collateralized mortgage obligations), Ginnie Mac, Savings & Loans and a great deal about Lew Rainieri – the SB trader who started the mortgage trading desk. By 1983, 40% of SB’s revenue was coming from his division. As a result of this, the company grew from 2,000 employees in 1982 to 6,000 in 1987. They opened offices in Tokyo, London, Frankfurt and Zurich. Because they were by far the first ones to develop a mortgage trading operation, many of their traders were poached to help other investment banks set up their trading desks.
Michael started trading on the London desk in December 1985. Those starting trading are known as “geeks” until they can get enough experience to call themselves “SB salesmen/traders.” A select few of these men can grow enough business to be known as BSD’s – Big Swinging Dicks. Michael ceased being a geek in June of 86 and had become a BSD in August by pulling off the sale of ~$86 million of specialized bond that SB drastically needed to unload. In late 1986, he co-created a specialized type of call option on German bonds, but one of his opportunistic co-creators took all the credit. He quickly created a new copycat bond on Japanese bonds, thereby discrediting the opportunist and causing him to get a smaller bonus than what he was expecting (he quit the firm). By late 1986, Michael was making lots of money for SB, but SB was not making money itself. This caused them to pay lower bonuses than usual, causing an exodus of senior traders & management to other firms.
From 1986-88, the disintegration of SB began. They grew too fast and until then, essentially had a very lucrative monopoly on bond trading. They were foregoing equities, mergers & acquisitions, junk bonds, etc – while other investment banks were aggressively moving into these areas. Part of the reasons for this was SB was the king of bonds & mortgages and were doing about 90% of the business, so they saw no reason to branch out. Meanwhile, other companies could easily expand into these markets by hiring traders away from SB to instantly set up a mortgage/bond trading desk.
There was a chapter on Michael Milken and how he developed the very financially lucrative junk bond market. Pages 272-278 become somewhat technical and I elected not to try to summarize it here. But, it was very interesting and I learned a fair amount from it. In September of 1987, he led a takeover bid of SB, which the vigorously defended. First they completely closed down the municipal bond and money market desks, allowing them to shed 1,000 jobs. They fired 170 people from the London desk. One week later, the famous October 20, 1987 stock market crash occurred. A portion of SB made lots of money from the crash and others did not. This was the beginning of the end. On 12/17/87 (bonus day), Michael got a $240K bonus even though SB was only contractually obligated to pay him $140K and this was their worst financial year ever. They were essentially attempting to purchase his loyalty and get him to stay. He left SB early in 1988, which was the end of the book.
There was not much in this book that could help me with my success after prison, but I enjoyed learning about SB and the investment banking business, as well as how junior traders are trained as they progress up the ladder. The history of how various traders & trading desks developed was also interesting & educational.
