Liar's Poker summary

Prior to the late 1970s, the driving force in the US financial sector, Wall Street, had absolutely no interest in trading or issuing mortgages.

This was partly because mortgages were too small to bother with. It was also because the loans had no fixed term; borrowers could pay them back at any time. This limited the potential amount of money that could be earned by investors through interest.

By 1978, Salomon Brothers’ new mortgage department was up and running.

To lead it, they appointed a talented trader named Lewis Ranieri. Ranieri was a go-getter who had worked his way up from the bottom of the company. He had first worked in the mailroom and then in the back office before ending up on the trading floor. In the years following, he was to become an instrumental force in the mortgage department's development and success.

Entering the 1980s, the recently deregulated bond market was growing and the mortgage department established by Salomon Brothers was up and running. In the beginning, however, the department did not produce desirable results. Investors were still wary of mortgage bonds due to the risk of prepayment, and there was also few banks willing to follow Bank of America’s lead of pooling their mortgages into bonds.

But this situation was soon to change when two elements helped Salomon Brothers’ mortgage department become very profitable. The first was a couple of important government actions, and the second was the dynamic and highly innovative leadership of Lewis Ranieri.

American high schools tend to be places of social hierarchy and subcultures. Prestige and status are often awarded to the "cool" kids, who assert themselves over their peers.

The same was true in Salomon Brothers' training program, which was set up to transition graduates into successful trading and sales positions within the firm.

In the same way that the training program was like a high school classroom, the mortgage department was like an American university fraternity house. It had a less than professional attitude and was characterized by childlike pranks and the bullying of employees.

This behavior came to the mortgage department partly because of the department’s unique origins and partly because of its enormous success.

In their spare time, traders at Salomon Brothers gambled their wages in a game called Liar's Poker.

The game involved making statements about the serial numbers on dollar bills. It went like this: The first player would make a statement based on all of the serial numbers in the game; for example, he might say, “The serial numbers contain three sixes.” His opponents’ aim was to determine whether he was bluffing about the number of sixes on his own bill. If they believed he was, then they could challenge his statement. If he was lying, they won; if he wasn’t, they lost.

During the 1980s, money reigned as king of Salomon Brothers’ culture, and the company's management, traders and salesmen did whatever they could to bring in more of it. Revenues were pursued above all else, even if they came with significant costs such as angry customers or books left unbalanced.

The way the company dealt with its own customers reflected its single-minded pursuit of revenue.

By the mid-1980s, Salomon had the strongest and most dominant mortgage department on Wall Street. It also invested a lot of time and money in its training program, thereby turning trainees into talented traders. This didn’t go unnoticed on Wall Street.

Not wanting to be left behind, other firms started to poach Salomon's top talent, who were easily lured away by attractive compensation packages.

Sometimes, great success can cause oversights that lead to great weakness.

This was definitely the case for Salomon Brothers by the mid-1980s. Many of the policies and practices that had initially brought in high revenues later ushered in its downfall.

Although Salomon attracted many highly talented employees, its upper management was less than savvy when it came to running the business. It was often clueless about new trends in the bond industry, and about the inner workings of the firm itself.

This was partly because top traders often got promoted to management positions, but these employees did not always make good managers. They were often competitive and ruthless and had no idea how to run a company or manage people.

The main message of this book:

The bond market became a huge star on Wall Street during the 1980s. One of the biggest players in this market was Salomon Brothers, which gained its prominence by almost single-handedly creating mortgage bonds. However, Salomon was the creator of its own demise, and its single-minded pursuit of revenue and inability to keep up with the market brought on its downturn.