40 pages • 1 hour read
Michael LewisLiar’s Poker
Nonfiction | Book | Adult | Published in 1989A modern alternative to SparkNotes and CliffsNotes, SuperSummary offers high-quality Study Guides with detailed chapter summaries and analysis of major themes, characters, and more.
Themes
The Market as Casino
The securities industry performs two basic functions: (1) it raises cash for businesses by offering to sell ownership in those firms (i.e., stocks), and (2) it raises cash for businesses by selling ownership in loans to those firms (i.e., bonds). Once companies are thus endowed, they move forward with their operations, while investors trade the stocks and bonds of the companies back and forth. Stocks of profitable firms tend to rise; bonds pay principal and interest at maturity.
These securities rise and fall in value; investors, buying and selling them, essentially are placing bets on those values. In that respect, the stock and bond markets behave somewhat like a casino, except that the underlying values are not cards in a deck or numbers on a table but companies that create products and services for sale. The game of investing thus generates economic value by financing the corporations that do the business of a society.
The function of an investment bank like Salomon is to act as the casino; its traders and salesmen are the dealers and croupiers in the investment game, taking a small percentage of each trade in much the same way a casino takes a small percentage of every bet. The amount of the return to the dealers varies with each trade, however, and depends on many factors, which gives the banks plenty of room to maneuver customers into paying more per gamble than they otherwise might. Much of the drama in Liar’s Poker swirls around this principle; most of the rest of the action involves the invention of new ways for investors to gamble with securities.
The Pressure to Abandon One’s Principles for Profit
Salomon is the dominant bank in the bond business, having traded aggressively and successfully for years. Its new instrument, the mortgage bond, takes the investment world by storm, and Salomon uses its monopoly in that market to reap huge profits. Encouraged by management to make daring, fearless trades and trained to compete for the title of “Big Swinging Dick” within the macho atmosphere on the trading floor, salesmen and traders pressure one another to make deals that are as lucrative as possible. This includes “jamming” the customers—pushing sales that benefit the firm at the expense of clients—to increase revenues.
The principle of caveat emptor (“let the buyer beware”) shields Salomon from most criticism: Investors are expected to know that securities can be risky, and in the rough-and-tumble marketplace, it’s hard to fix blame on any one party.
Lewis finds himself at odds with this easy attitude toward ethics, but he feels cornered by intense pressures, not only from managers but from traders, who labor under similarly high expectations. Salomon selects for hire people who evince an intense desire for wealth, and they are expected to be loyal to the company’s goals at all times, even if this means casting aside scruples. Everyone at Salomon strives to do deals that put as much money into the company’s coffers as possible.
The most that angry clients can do is walk away, and in the Wall Street of the early 1980s, there are few alternatives to the Salomon trading floor. That said, it is also true that the customers themselves often share the same avaricious yearnings ingrained into the staff at Salomon. The firm, however, has superior knowledge of the marketplace, which enables it to take advantage of its clients even as both sides struggle to win the wealth game.
The Incentive to Develop New Products
The first person to invent a useful product can reap huge rewards. This is as true in the securities industry as anywhere else, and Salomon knows it: “By increasing the number of products, they increased the number of shoppers” (173). During the 1980s, Salomon and Drexel Burnham create imaginative new types of securities out of the staid and struggling mortgage business. These products free up stranded wealth that can now flow toward more useful projects. A bonanza of profit erupts and pours into both companies.
The first firm to securitize a financial instrument can use its head start to dominate the fledgling market, and Salomon does so with gusto. The clock is ticking, though, because competitors will soon copy their idea and give it new twists to attract customers away from the originators. For this reason, Salomon’s corner on the new mortgage bond market will crumble unless it can develop follow-up features or entirely new securities to help protect its market share.
It’s hard enough to develop brand-new products in a highly competitive industry and harder still to nurture them within a corporate culture that rewards cutthroat competition between departments. While Salomon’s older bond desks busy themselves trying to marginalize or eliminate the new mortgage desk that has stolen their thunder, outsiders—especially Michael Milken at Drexel Burnham—move relentlessly onto new pathways opened for them by Salomon’s innovations. By the time the smoke clears from internecine battles at Salomon, it’s too late to fight back, and the territory is lost to others.
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