Liar's Poker Book Summary - Liar's Poker Book explained in key points

Liar's Poker summary

Name: Liar's Poker
Author: Michael Lewis

Michael Lewis

Rising Through the Wreckage on Wall Street

Table of Contents

Liar's Poker
Summary of 12 key ideas

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Key idea 1 of 12

A series of government regulations in the 1970s made firms in the bond market more profitable.

When a government or company wants to raise money by borrowing, they can issue bonds.

In return for receiving a loan, the government or company gives the lender a promise to pay interest on the loan for a fixed period. This promise – rather like an I.O.U. note – is the bond, and it can be traded; whoever owns the bond receives the interest.

Before the late 1970s, bonds were not prestigious or profitable products on Wall Street. Stocks, which give holders actual shares in companies, were much more profitable and sought after.

However, changes in government regulation began to make bonds a more profitable area of business.

The first of these changes happened in 1975, when the US government made regulations that reduced the profitability of stocks.

Before this change, stock trading was a highly lucrative business. Those who sold stocks could make huge amounts in fees or commissions from doing very little work, so naturally they concentrated their efforts on trading stocks rather than bonds. The regulation changed the way that these fees were determined, and the amount that one could charge for trading stocks massively declined.

Although this regulation lessened the amount of money you could make from stocks, they were still more profitable than bonds. But four years later, in 1979, another change in government regulation brought bonds closer to stocks in profitability.

In this year, the chairman of the US Federal Reserve, Paul Volcker, allowed interest rates – which had previously been fixed – to fluctuate. Bond prices have a strong relationship to interest rates. When interest rates go down, bond prices go up. This regulation, therefore, provided possibilities for bond prices to rise rapidly. This made them attractive as financial investments.

The Wall Street firm Salomon Brothers saw an opportunity in the much-neglected mortgage market.

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.

To take advantage of the new mortgage market, Salomon Brothers created a small but strong mortgage department.

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.

Salomon's mortgage department was catapulted into profitability by federal intervention and Ranieri's leadership skills.

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.

The Salomon Brothers' training program strongly resembled a high school classroom.

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.

The Salomon Brothers’ mortgage department often behaved like a university fraternity house.

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.

Tactics such as bluffing and taking risks made Salmon Brothers traders resemble gamblers.

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.

Salomon Brothers compromised customer relations and balanced books in its pursuit of money.

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.

Salomon Brothers' dominant position was eroded when many talented traders and salesmen were lured away to other firms.

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.

Salomon Brothers' ruthless pursuit of success helped to create the conditions for its downfall.

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.

Salomon's top management played a significant role in the company's decline.

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.

Final Summary

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.

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What is Liar's Poker about?

Liar's Poker tells the story of Salomon Brothers, a leader in the bond market in the 1980s. This tell-all account of the author’s experiences at Salomon Brothers explains how the firm became one of the most profitable investment banks on Wall Street through its role in establishing the mortgage bond market, and what it did once it reached the top.

Who should read Liar's Poker?

Anyone interested in the history of Wall Street
Anyone who wants to know how past events helped shape the present
Anyone who wants to know what mortgage bonds are and how they developed

About the Author

Michael Lewis started his career as a bond salesman at the London branch of Salomon Brothers but later left investment banking to pursue a career as a financial journalist. He published his first book, Liar's Poker, in 1989. Lewis has since written many bestselling titles, including Moneyball, The Blind Side and Boomerang.

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Economics Money & Investments

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