Liar's Poker

by Michael Lewis

I had recently read John Gutfreund’s now legendary comment that to succeed on the Salomon Brothers’ trading floor a person had to wake up each morning “ready to bite the ass off a bear”.

Also I had blond hair. I’d never met anyone with blond hair who had a business career.

Glass-Steagall was an act of the US Congress, but it worked more like an act of God. It cleaved mankind in two. With it, in 1934, American lawmakers had stripped investment banking out from commercial banking. Investment bankers now underwrote securities, such as stocks and bonds. Commercial bankers, like Citibank, took deposits and made loans. The act, in effect, created the investment banking profession, the single most important event in the history of the world, or so I was led to believe.

I had thought that investment bankers made money for a living, the way Ford made cars.

He went on line almost immediately. If he could make millions of dollars come out of those phones, he became that most revered of all species: a Big Swinging Dick.

Salesmen talked to investors, traders made bets, and managers smoked cigars.

Best of all, he gave us a rule of thumb about information in the markets that I later found useful: “Those who say don’t know, and those who know don’t say.”

We knew that, in general, the quality of treatment we received in the training class varied inversely with the desirability of the job held by the speaker. In this there was a lesson: to get the best job you had to weather the most abuse.

Whenever calculus is brought in, or higher algebra, you could take it as a warning signal that the operator was trying to substitute theory for experience.” This sounded ridiculous to the eighty MBAs and fifteen PhDs in the training class. What was the point of owning a bazooka if the law made you hunt with a bow and arrow?

The CEOs of home mortgages were Savings and Loan presidents. The typical Savings and Loan president was a leader in a tiny community. He was the sort of fellow who sponsored a float in the town parade; that said it all, didn’t it? He wore polyester suits, made a five-figure income, and worked one-figure hours. He belonged to the Lions or Rotary Club, and also to a less formal group known within the “thrift”* industry as the 3–6–3 Club: he borrowed money at 3 per cent, lent money at 6 per cent, and arrived on the golf course by 3 in the afternoon.

Not surprisingly, homeowners prefer to repay their mortgages when interest rates fall, for then they may refinance the house at the lower rate of interest. In other words, money invested in mortgage bonds is normally returned at the worst possible time for the lender.

He disapproved of work days longer than eight hours because, he said, “You then arrive at the office in the morning with the same thoughts you left with late the night before.”

First, when all investors were doing the same thing, he would actively seek to do the opposite. The word stockbrokers use for this approach is contrarian. Everyone wants to be one, but no one is, for the sad reason that most investors are scared of looking foolish. Investors do not fear losing money as much as they fear solitude, by which I mean taking risks that others avoid. When they are caught losing money alone, they have no excuse for their mistake; and most investors, like most people, need excuses.

We were genuinely a full-service casino

People responded in one of three ways when they heard how much richer they were: with relief, with joy, and with anger. Most felt some blend of the three. A few felt all three distinctly: relief when told, joy when it occurred to them what to buy, and anger when they heard that others of their level had been paid much more.

“You don’t get rich in this business,” said Alexander when I complained privately to him, “you only attain new levels of relative poverty.

The gist of Milken’s pitch to them was this: build a huge portfolio of junk bonds and it does not matter if a few turn out to be lemons – the higher pay-off on the winners should more than offset the losses on the losers.

So the takeover advisory business was all of a sudden shot through with the same conflict of interest I faced every day selling bonds: if it was a good deal, the bankers kept it for themselves; if it was a bad deal, they’d try to sell it to their customers.

Billy Salomon thought the partnership was the key to the health of the firm, and the sole mechanism for securing the loyalty of its employees. (“It locked them in, like family,” he says.)