Liar's Poker

by Michael Lewis

He had an ability, rare among people and treasured by traders, to hide his state of mind.

Foolish names and foolish faces often appear in public places.

No good came of this.

The English think corgis are cute. The British royals, I was later told, never go anywhere without them.

crude, rude, and socially unacceptable.

He who makes a beast of himself gets rid of the pain of being a man. —Samuel Johnson

anecdotiana.

qow

on October 6, 1979, Volcker announced that the money supply would cease to fluctuate with the business cycle; money supply would be fixed, and interest rates would float.

the shift in the focus of monetary policy meant that interest rates would swing wildly.

After Volcker’s speech, bonds became objects of speculation, a means of creating wealth rather than merely storing it.

governments, consumers, and corporations borrowed money at a faster clip during the 1980s than ever before:

The American bond market, for example, lurches whenever important economic data are released by the U.S. Department of Commerce.

“Those who say don’t know, and those who know don’t say.”

money invested in mortgage bonds is normally returned at the worst possible time for the lender.

Stephen Birmingham

For a thrift manager to make a thirty-year home loan, he had to accept a rate of interest of 10 percent. Meanwhile, to get the money, he was paying 12 percent. He ceased, therefore, to make new loans, which suited the purpose of the Federal Reserve, which was trying to slow the economy.

In 1980 there were 4,002 savings and loans in America. Over the next three years 962 of those would collapse.

The complexity arose entirely out of the option the homeowner has to prepay his loan;

collateralized mortgage obligation (CMO).

when the managers—Lewie and Michael Mortara—turned up, they would invariably dabble in the traders’ affairs. They’d tell the traders what they should or should not do; they’d want to know exactly why the traders had bought this or that bond. As one of the traders now says, “You didn’t necessarily have a good reason for every position. Sometimes you bought bonds just to find out what was going on in the street. You didn’t want someone hanging around asking you why you did such and such.”

The owner of a portfolio of fallen angels, by Milken’s analysis, almost always outperformed the owner of a portfolio of blue-chip bonds. There was a reason: Investors shunned fallen angels out of a fear of seeming imprudent.

“Mike’s difficulty was that he simply didn’t have the patience to listen to another point of view,” a former Drexel executive told Bruck. “He was terribly arrogant. He would assume he had conquered a problem and go forward. He was useless in a committee, in any situation that called for a group decision.

rating services, like the commercial banks, relied almost exclusively on the past—corporate balance sheets and track records—in rendering their opinions. The outcome of the analysis was determined by the procedure rather than by the analyst. This was a poor way to evaluate any enterprise, be it new and small, or old, large and shaky.

better method was to make subjective judgments about the character of management and the fate of their industry.

The forces interested in keeping a large company afloat, he argued, are far greater than those that wish to see it perish.

when the company makes money, its junk soars, in anticipation of the windfall. And when the company loses money, its junk sinks, in anticipation of default. In short, junk bonds behave much more like equity, or shares, than old-fashioned corporate bonds.

They’d use junk bonds to finance raids on undervalued corporations, by simply pledging the assets of the corporations as collateral to the junk bond buyers.

(The mechanics are identical to the purchase of a house, when the property is pledged against a mortgage.)

invading corporate boardrooms appealed mainly to men of modest experience in business and a great deal of interest in becoming rich.

“If you don’t inherit it, you have to borrow it,”

I was taught that stock markets were efficient. Broadly this means that all outstanding information about companies is built into their share prices—i.e., they are always fairly valued. This sad fact was hammered home to students with a series of studies demonstrating that stock market brokers and analysts, people with the very best information, fared no better in their stock market picks than a monkey drawing a name from a hat or a man throwing darts at the pages of the Wall Street Journal. The first implication of the so-called efficient markets theory is that there is no sure way to make money in the stock market other than trading on inside information. Milken, and others on Wall Street, saw that this simply was not true.

For Lent, I had given up my New Year’s resolution.

I, like a golfer, needed to improve my lie.

The prevailing reasoning in the bond market went like this: Stock prices were lower; therefore, people were less wealthy; therefore, people would consume less; therefore, the economy would slow down; therefore, inflation would fall (maybe there’d even be depression and deflation); therefore, interest rates would fall; therefore, bond prices should rise. So they did.

The price of gold was falling fast.

investors would have no need to fear inflation, and since for many gold was protection against inflation, it was less in demand.

The best decisions he has made in his life, he said, were completely unexpected, the ones that cut against convention. Then he went even further. He said that every decision he has forced himself to make because it was unexpected has been a good one.