Liar's Poker

I ordered Liar's Poker book shortly after having blogged The End of Wall Street's Boom having enjoying Michael Lewis's writing style. I was also intrigued to read his story given how long the boom actually lasted - I guess in an attempted to better understand the booms origins.

Within Liar's Poker, Lewis provides his account of his four years with Salomon Brothers from 1984 through the crash of October 1987. This includes his rather interesting (but not unique) hiring, the training program and years as a bond salesman in London.

It's an hilarious story and it will have you shaking your head in disbelief - unless you've worked in sales or on a trading floor: both of which I've done. If you enjoyed Enron: The Smartest Guys in the Room, you'll love this book for successfully combining history, behavioral science and humour. It also serves to explain the current sub-prime mortgage mess that was the catalyst of the GFC we are living through.

The backdrop to the drama was the economic decisions made by the US Federal Reserve in October 1979, chaired by Paul Volcker, whereby they announced that money supply would no longer fluctuate with the business cycle: money supply would be fixed and interest rates would float. As bond prices move inversely with rates of interest, this set the wheels in motion for the events that created the gold rush Lewis shares with us.

The title of the book refers to the game of deceit that many of the best traders (or "Big Swinging Dick's" as Lewis refers to them) played and the relationship the game had to their success as bond traders. According to Lewis, "In any market, as in any poker game, there is a fool. Warren Buffet is fond of saying that any player unaware of the fool in the market, probably is the fool in the market. Knowing about markets is knowing about other people's weaknesses. And a fool, they would say, was a person who was willing to sell a bond for less or buy a bond for more than it was worth".

To illustrate the "iron testicle, market whipping" behaviour at work, Lewis shares the example (amongst many others) whereby a trader attempts to buy on the money market as prices were rising against him. The trader explains to his boss that "He couldn't buy money as all the sellers were running like chickens". His boss responds "Then you be the seller". The trader then sells a hundred million dollars and the market collapses to the price he was originally trying to buy at. He buys back the hundred million dollars plus the fifty million he wanted, and books a tidy profit on the trades.

Having had it pointed out in the book that "Blackjack is the only nonindependent outcome game in the casino" and knowing that when you have the statistical advantage you need to bet big, I'll be reading up on card counting!

It's worth re-reading (or reading for the first time) Michael Lewis' article titled The End of Wall Street's Boom on Portfolio.com from December 2008 - it provides a great footnote to the book. I particularly loved the story about Danny Moses:
When a Wall Street firm helped him get into a trade that seemed perfect in every way, he said to the salesman, “I appreciate this, but I just want to know one thing: How are you going to screw me?”. Heh heh heh, c’mon. We’d never do that, the trader started to say, but Moses was politely insistent: We both know that unadulterated good things like this trade don’t just happen between little hedge funds and big Wall Street firms. I’ll do it, but only after you explain to me how you are going to screw me. And the salesman explained how he was going to screw him. And Moses did the trade.
It also serves to punctuate the point: one man's misfortune is another's opportunity. Whilst most of us were watching our investments plummet, someone was on the other end of the trade enjoying the short sell.

Finally, this book provides an interesting counter-point to Who Says Elephants Can't Dance? in the sense that Liar's Poker shows us the dark side (just as Enron did) to 'culture'.

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posted by Lee Gale @ 5:24 PM,

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