Liar's Poker By Michael Lewis

Liar’s Poker: Lies on Steroids 

Liar’s Poker was a game that Salomon Brothers’ traders engaged in on a daily basis. The insanity of the game captures the culture and excess wealth that dominated Wall Street in this era. 

The game is simple. Any trader could walk up to another bunch of traders and shout “Liar’s Poker, $100”. Each one was then compelled to pull up a hundred-dollar bill, and let the game begin. Each participant would take a look at his or her bill’s serial number, which might say “A12345678B”. You would then bet on how many of a ‘kind’, e.g. twos, fours or nines, there are on one’s own bill plus the others. At some point someone will say: “Nah, there are not that many sixes”, and thus pull the plug on the game. If there aren’t indeed that many sixes, he wins; if there are, he loose and thus opts out. The game continues as such until one lucky soul stands back with the other fools’ money. 

The most insane round of Liar’s Poker is narrated in chapter 1. The CEO, John Gutfreund, steps into the King of Liar’s Poker’s office, John Meriwether. “Liar’s Poker, $1 million dollars, no tears”, said Gutfreund. Meriwether, though a superior Liar’s Poker player, was frightened to death; he knew that Gutfreund weren’t kidding. In a high-risk gamble to opt-out of this proposed bet, Meiwether said: “If we’re going to play for that kind of money, we might as well do it properly. $10 million dollars.” Gutfreund, rich as he was, considered it for some time. But eventually, he surrendered:” You’re insane”, he said, and leaved the room. 

Inventing financial “products” (or trash, really) 

As mentioned, the bond market was booming. Yet, at some point there weren’t more bonds to trade, and volumes declined. As the traders and executives’ commissions were bound to the amount of bonds sold, this fact was unacceptable. Hence, they needed to create a marketplace by inventing financial products. 

hen Lewis Ranieris was hired at Salomon Brothers, he initiated an avalanche of misery. Briefly put, Lweis needed wanted to create a product that could be sold to investment banks and pension funds. Hence, he had to create large blocks of something that would ‘make a dent’ in funds with billions of dollars. He came up with the somewhat innovative idea of bundling a lot of terrible mortgages – which couldn’t be bought and sold otherwise – together, and thus making them “secure” (based on the logic that one substandard borrower is a risk while a lot of them aren’t). These derivative packages were called CMOs (collateralized mortgage obligations) 

These derivatives were indeed horrifically poor products, only designed to line Salomon Brothers’ own pockets. Yet, the naïve institutional investment managers took the bait – which they shouldn’t have. They ended up being the hot potatoes that were passed along to the next sucker. 

You know what’s the scariest thing? These derivatives were the essentially the exact same explosive that caused the 2007/2008 crash. The differences between the two era’s crises: the scale, and the name of the product. Rather than CMOs, they were re-labelled to CDO (credit default obligations), because it wasn’t only mortgages this time around, but all kinds of shady debt. However, that’s a tale for another time. 

What if? 

One of the more instructive episodes of the book is an exchange between Michael and his colleague, Alexander. Alexander was a top trader, one of the few Michael characterizes as intelligent in the Salomon Brothers madhouse. Alexander taught Michael to always ask the question: “What if?” For instance, when the Chenobyl catastrophe hit, Alexander dialed Michael up. He reasoned that if the demand for nuclear energy fell, the demand for oil had to increase. He thus hurried to purchase oil futures in the expectation that oil prices would spike. Minutes after, he called again, and shouted: “Buy potatoes!” Shortly thereafter, the media expounded that “European agriculture would be infested as a result of the incident”, hence driving up the demand for uninfected American vegetables. In both instances, Alexander was right, and he earned a small fortune. The morale? Think fast, think ahead. 

Liar’s Poker beautifully describes the egocentric culture that prevails on Wall Street. The way the book describes the complete lack of etiquette (for instance, one of the Salomon Brothers traders lit up a small fire in a sushi restaurant to cook his fish while having a business dinner with a Japanese trader) mixed with the Michael’s reflections on how the environment corrupted his soul convinces me of one thing: Watch out, and be very skeptical of what Wall Street is trying to convince you of. They usually have but one interest: themselves. 

Like many college graduates in recent years, Michael Lewis aimed at a career in investment banking. Unlike most of the others, Lewis did not take either himself or his ambitions with full seriousness. He majored in art history rather than economics at Yale; and, far from pursuing a career in the bond market with tenacity, he received his job as the result of an accidental meeting during a London dinner. The dinner in question, which Lewis describes with a sharp eye for the ridiculous, was one for the Queen Mother Elizabeth. 

Lewis found that his job at Salomon Brothers was paradoxical. On the one hand, as an analyst, he was the lowest of the low and often functioned as an errand boy for more senior members of the firm. On the other hand, he had the power to engage in trades that involved millions of dollars. The training program at Salomon Brothers was reputed to be the best in the world and virtually guaranteed its graduates a successful career in the market. Further, the lucrative bonuses available to the analysts meant that men (and a few women) in their mid-twenties might earn several hundred thousand dollars a year. 

Lewis soon discovered that the job contained many drawbacks. The workload was intense, and many of the analysts developed odd quirks, such as eating binges, as a result of stress. Competition led to frequent attempts to hijack the deals made by others. A veteran of business infighting deprived Lewis of the credit due to him for his most successful deal. One personality stood out among all the others. John Gutfreund, the controlling partner of Salomon Brothers, brought the company to unparalleled success by his shrewd measures of expansion. Gutfreund scorned science and relied on his innate psychological skill and toughness. His penchant for the game of Liar’s Poker, a game based on deception and bluff, exemplifies his unusual approach to business. 

Unfortunately for Gutfreund and his company, the firm overreached itself through its program of issuing junk bonds. It was eventually forced to make drastic cutbacks. Lewis, who had by this time seen enough, decided to get out of the market. He departed from Salomon Brothers a happier and richer man. His book offers interesting and amusing insights into the world of high finance which the customers never see. 

What are the main themes in Liar's Poker? 

Capitalism and masculinity are two major themes in Liar's Poker. Capitalism. This story thoroughly considers how the culture of Wall Street is both seductive and morally wrong. The story examines... 

What role does ethics play in the main characters' stories in Liar's Poker? 

I would argue that it is a lack of ethics, rather than the presence of ethics, that play a role in the life of the main character's stories. For example, Lewis gets robbed of the credit owed to him.

AUTHOR

ANKIT VERMA

ASSISTANT PROFESSOR