Liar’s Poker

Liar's poker

Michael Monroe Lewis is an American Non-Fiction author and financial journalist. His bestselling books include Liar’s Poker(1989), The New Thing (2000),Money-ball: The Art of Winning an Unfair Game(2003), The Blind Side Evolution of a Game (2006), Panic (2008), Home Game: An Accidental Guide to Fatherhood(2009),The Big Short: Inside the Doomsday Machine(2010),Boomerang: Travels in the travels in the New Third world(2011) and Flash Boys(2014). He has also been a contributing editor to Vanity Fair since 2009. His most recent book is The Undoing Project

Liar’s Poker is a non-fiction, semi- autobiographical book describing the author’s experiences as a bond salesman on Wall Street during the late 1980’s. Lewis was art history and economics student in reputed and prestigious Princeton university. He wanted to pursue his career in the field of investment banking. He attended the interview with Lehman brothers and didn’t get through it and failed other interviews for the jobs.One fine day he was invited by Queen Mother where his cousin worked for a banquet. He was lucky enough to meet wife of the managing director of Solomon brothers and managed to impress her.

Through an interview was arranged and finally got a job in one most profit making investment banking company Solomon brothers.We never know luck and fate take turn and sometimes in ways that is unexpected.They had 3 months training program before got into their core job and was shocked or taken over the varied behavior of the other trainees and corporate culture of the firm.The trick to survive is to retain your cool even under the pressure and give the best.This benefit the firm as well have growth of the person.The trading floor is on 41st floor of the building where people were always trading and mood of the floor was changing with respect to the changes in the market or any changes that US governments make.It became difficult for a trainee to distinguish between a salesman, trader and manager or manager director.Though salesman takes to investors to buy the bonds,traders took risk in bets that they played with in the market and manager took charge over them.But eventually each one of them irrespective of the role / position they were on 2 phones simultaneously.

The traders never had time to turn and pay attention to the trainees and they were made fun of.They had interaction with all main heads and bond traders of the firm and the hot heads of the company shared their tips to the trainees.Finally the department of equities who were addressing them for the week and the trainees never gave them much of the importance.Though Solomon brothers where one of the 2 or 3 companies who were underwriters for the stock,but within the firm it was the most ignored department and didn’t have much power.Solomon Brothers were mainly involved in Bond trading and sort of the only company that made major business through bond.They were in the beneficial position who could push the customers out.

The equity department head come put to talk about the history of the equities,the process of the company and was in the process of attracting few trainees to their department.They had selected 6 members including Lewis for this,to get to know about the department better. Let’s get back to floor 41 where bond trading was the core activity and lifeline of the company. The salesman has direct contact with institutional investors such as pension funds to whom the bonds are sold. The trader puts the bet over the bond and the salesman sells for that amount. Tradesman were efficient salesman as place bet and convinced the actual people to sell them at a better price. Salesman were better traders as they traded with the investors to sell the bond. Both play interchangeable, but the only difference is to the position and the advantage one has over the other. Traders are more closer to money than over salesman.

Finally the classroom training program was over and the trainers were allocated the respective department. He was bond salesman and was now working from London office. The team who was most notorious and known for bullying everyone around even the senior most person was the mortgage bond department. It was this department that made huge profits and was also avoided by most people for their notorious behavior. They took 6 new trainers into their team. The head of the team was role model in the company and she was taken as example if wanted to convey people to do different and achieve great heights.Wall street is place that brings borrowers of money and lenders together. Until the year 1978,the term borrowers referred to large corporations ,federal,state and local governments. But the fastest growing group was not anyone of them mention above but homeowners.The savings and loan grew and volume of outstanding mortgage loans grew from 55 million dollars in 1950 to 700 million in 1976.In the year 1980 it grew up to 1.2 trillion dollars which surpassed the combined US stock markets .Thrift was the word which was interchangeably used for saving and loans.Every year a skit was performed in Solomon brothers to create awareness among the employees as to how it works. Bob Dall main job in Solomon brothers was working for mortgage department and was also curious about how it works.He brought money at certain rate and sold at higher rate. On certain occasion he was a buyer as well.He has great passion for trading ,although he didn’t have official responsibility for Ginnie Maes, but began trading for him.The whole funda of mortgage bond is the bank gives loan to homeowner and the firm persuades the investors such as insurance company to buy mortgage bonds.The homeowner would pay back money to bank through installment and that money is given back to the bond owner.There is slight risk for default that the loan might not be paid at all.He started establishing a mortgage bond department and first recruit in the firm was Linnie who was working in back department.He started in the firm as postmaster department ,got promoted to clerical post and slowly moved in the trading department. And slowly they brought more resources into the team and Linnie became the head and Dall moved out due to health issues. But the team was mistreated by other team such as corporate and government department and the bonus given to them was lesser . But with change in few policies by the federal government, it changed the fate of mortgage department in Solomon department. Overnight from ignored department they became the most profitable department contributing to around 40% of the firm’s profits. They had the advantage of the fact that Solomon brothers where only one who were dealing with mortgage bond and were had no competitors in the Wall Street. Slowly Lonnie was not involved with the day to day activities and was mostly involved only in taking major decisions of the department.With the increase profits from mortgage department, it also started getting attention of the trainees who joined the firm.Some of the few best and smart traders were Andy stone, Howie Rubin and few others. Howie was considered the next Lewie. But the main disadvantage in Solomon brothers was the compensation benefits that the employee received. They didn’t match with profit got in by the traders which was also a major discouragement.The best traders slowly started getting offers from other firms as well. Simon Howie got a offer from Merrill Lynch, a 3 year contract with pay scale of 1 million per year.Before the Solomon could understand what was happening 2 other smart mortgage traders also left the firm as they received better offers. When Andy Stone got better offer from Merrill Lynch,a 2 year contract with 4 times the current pay scale. The few of them from higher comes tried to convince to not leave and hence Stone didn’t take the offer.But anyway left after few years.

Between 1981 to 1985 the only competition to Solomon brothers was First Boston.But others also slowly advertising that they were also into selling mortgage bonds. As a result of which Ranieri and Co was deteriorating so rapidly and there was so many factors contributing to it and attrition rate of the employees is one of the important factor. The inefficiency in the mortgage bonds was ruined with the establishment of CMO (Collateralize Mortgage Obligation). But it had achieved what Ranieri has hoped to achieve.With the establishment of CMO trading of Mortgage bonds became easier in limitless number of ways.They sliced and diced home mortgages to sold to investors. The terms such IO and PO were frequently used. Usually bond trading was heavily concentrated on the liabilities of the balance sheet, but with the mortgage bonds,the asset side of the sheet was also valued more.

But in Solomon brothers bad times were slowly starting and slowly rift among higher managers were begin to start. Ranieri , Strauss and other were shifted to higher roles so that they could help in increase in efficiency of Management.But the effect was bad and thereby resulting in chucking out Ranieri. Slowly the mortgage department in the firm started falling and many smart traders were in better position in other finance firms. Ranieri also started his own firm Ranieri & Co. On the other hand there were news about Howie doing its round. He had placed wrong bet and hence led to loss in huge millions. After this he left Merrill Lynch and joined First Boston.

Now let’s talk Mike Lewis and how he learnt and grew in the company. He got transferred to London office and he belonged to the Strauss dynasty. He learnt and was under the guidance of the two best traders. One was Alexander who positioned he took over in London and former shifted to the New York office. Also another person was his colleague who gave life lessons as well. The only difference between him and other were that he was just little smarter than others which gave him an edge over others. The main trait with Alexander was that he had the knack of identifying what was profitable and had the guts to take risk. He wasn’t like other salesmen who followed what others did and was afraid to risk. He would call Mike from New York give him a tip suddenly asking him implement them with the investors. These tips were market movements which help him to sell bonds to customers and I reap benefits for him as well.

This help him gain confidence among customers and it reached a point where they would call and want to speak with. Mike asking for suggestions and were to bet. It took 6 months to understand the trick and working of the department. He was initially working for small scale investors, later he was given large scale investors. He and Alexander came with a trick in warrants and entered into agreement with Germany to establish their firm and sell the new type of warrants that they formulated. They took help of the opportunist and took the entire credit to himself. In order to revenge for that Mike and Alexander entered into a deal in Japan and the opportunist was not kept in loop which effected his bonus and promotion. He later left the firm for other job. Despite him and many other traders had done a good job and brought business in billions, they were still paid less in bonus when compared to the work. There were people who did nothing in their current job, they got better bonus. Hence the attrition rate increases and went for a better opportunities. The head trader of British bonds left the firm for better pay and in Goldman sacs and was begged by Solomon Brothers to stay back. But he said screw loyalty and took up the better offer.

Then comes junk bonds into the market.The whole concept of junk bonds was conceived and created a market Milken. He was one who was also helping hand for all those falling bonds as well.Junk bonds are below the investment grade,but at same time the most volatile ones and earn more than the set standard rates or if at loss ,earning much lesser the existing market rates. Perelan was bidding to buy Solomon brothers with the help of Drexel and in fact created a lot of commotion. Lot of traders were leaving the firm and were joining the camp of Drexel and Milken. But Gruedfand entered in a deal with Warren Buffet and thereby prevented Perelan from takeover of the firm. This created another new market Mergers and acquisitions. But Solomon brothers,they rigid and were stuck with just bond trading and not ready to enter the money churning market such junk bonds and M&A.

Later company reached a phase where they were assessing the management of the firm and improving even further. In this process, they involved in the process of removing people out of firm. This news not only spread among Solomon globally and also to outside world. In usual scenario,no one from outside world knows what happens within the firm. Even the profits posted by the firm was worse than the previous years. But yet the bonus/Compensation benefits given were better off this year.Mike Lewis also received a better bonus than expected

The main lesson learnt by me if we have great idea ,strong belief in it ,we can create a history and whole world will remember them.But also important give the freedom to let employee to what they believe in and at same not acting as others do out of fear will help us in a long run. Sustaining your self through ups and downs and coming up through it also important. As employee in investment banking, we have be keen on details and understand the volatility of the market. With experience we transform ourselves from a geek to great achiever in our lives


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