This article is an excerpt from the Shortform book guide to "Liar's Poker" by Michael Lewis. Shortform has the world's best summaries and analyses of books you should be reading.
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What are the best Liar’s Poker quotes that detail the wealth-chasing culture of the 1980s? What does the book say about ethics in investing?
In Liar’s Poker, Michael Lewis discusses the events that led to a boom in the bond market around 1980. Additionally, he details how the Salomon Brothers investment firm was ideally poised to make the most of that market, and what the internal culture of Salomon was like.
Below are quotes from Liar’s Poker that share all you need to know about the book.
Quotes From Liar’s Poker
The cynical view of the financial world says that Wall Street is run by a special breed of traders who exploit investors’ collective fear and greed to enrich themselves however they can, without any care for the havoc they might wreak. In Liar’s Poker, Michael Lewis backs up this opinion with a first-hand account of the pursuit of ill-gotten riches at the Salomon Brothers investment firm during the 1980s. As a Salomon employee, Lewis took part in its wealth-chasing culture and witnessed the start of its downward spiral.
Let’s look at a few Liar’s Poker quotes to get the main ideas.
“The men on the trading floor may not have been to school, but they have Ph.D.’s in man’s ignorance.”
Originally founded as a private partnership, Salomon Brothers became a publicly traded corporation in the ’70s before being acquired by Phibro in 1981, with chairman John Gutfreund personally making $40 million on the deal. Lewis writes that Salomon Brothers’ profits weren’t as important to Gutfreund as the power and prestige he received as CEO. Under Gutfreund’s leadership (or lack thereof) there was absolutely no oversight of what the company’s traders were doing or how they did it. All that mattered was that they made the firm money. Neither was there any sense of moderation from Gutfreund or his fellow executives. According to Lewis, every action they took was either full-throttle or nothing at all.
At the start of the ’80s, the all-or-nothing approach paid dividends, because when the bond market began to take off, Salomon Brothers had already fought for a controlling monopoly of bond trades on Wall Street. They’d been allowed to do so because other trading firms had always disparaged bonds as second-class investments. Once the tide turned, Salomon cornered the market, and its dealers encouraged all of their clients to leverage debt in the form of more bonds, which they’d trade from investor to investor while charging a fee on every transaction. Bond traders used every sales trick in the book to hike up the number of transactions their clients made, always increasing Salomon’s cut of the pie.
Salomon’s bond traders saw themselves as financial entrepreneurs and viewed everyone else in the banking world as timid, cowardly sheep. The trading floor was very much a boys’ club. Women were allowed to sell products to clients, but only men were allowed to join the upper echelons where trading took place. Lewis recounts that bond traders constantly fought to prove their alpha-male status by aggressive trading, excessive self-indulgence, and elaborate pranks that bordered on abuse. Their chief entertainment was a game called “Liar’s Poker”—a version of “I Doubt It” played with dollar bills instead of cards. The point of the game was to read other people, call out bluffs, and learn how to lie—all useful skills in the world of high finance.
“Warren Buffett is fond of saying that any player unaware of the fool in the market probably is the fool in the market.”
When one of Salomon’s chief investors wanted to sell their shares, Perelman swooped in and made an offer to buy them with funding provided by Michael Milken. Ronald Perelman usually fired the managers of the companies he took over, so Gutfreund scrambled to find another buyer to keep his position in the firm. The buyer he found was investor Warren Buffett, but Buffett saved Salomon to make a profit for himself, and he didn’t want shares in the business. Instead, Lewis writes that Buffett loaned Salomon Brothers $800 million so it could buy back its stock, a loan that Salomon would have to repay at 9% interest. Gutfreund’s job as CEO was secure, but the price would be paid by the firm’s shareholders until their debt to Buffett was cleared.
Perelman’s takeover attempt may have been motivated by more than simple greed. Lewis suggests that Milken may have urged the takeover because of his animosity toward Salomon’s CEO Gutfreund, a dislike that Gutfreund reciprocated. Milken’s Drexel Burnham had lured away many of Gutfreund’s former employees, and the rivalry between their two firms was one of the biggest on Wall Street.
“I’m now convinced that the worst thing a man can do with a telephone without breaking the law is to call someone he doesn’t know and try to sell that person something he doesn’t want.”
The trends that led to Salomon Brothers’ meteoric rise in the ’80s began long before Lewis joined the firm. Salomon’s embarrassment of riches didn’t come from traditional government or corporate bonds but from its willingness to experiment in the fledgling mortgage bond market. Lewis explains how mortgage bonds work, how Salomon Brothers capitalized on the market, and how they turned the mortgage lenders—the savings and loan industry—into the primary customers of the mortgage bonds they created.
Lewis writes that in the 1970s, the largest and most rapidly expanding group of borrowers were homebuyers, not investors. What’s more, since home loans were insured by the government, they were safe bets for lenders to make since the risk was deferred to the American taxpayer. By 1980, the mortgage industry was handling over $1 trillion in loans, more money than in the entire US stock market, but from Wall Street’s perspective home loans were viewed as worthless. They were tiny compared to the huge transactions Wall Street banks dealt in, and on an individual basis, they were logistically difficult to trade. Instead, home loans were the bailiwick of small, local bankers whom Wall Street institutions thought of as ignorant country bumpkins.
To make home loans worth Wall Street’s time and energy, bankers had to find a way to trade and profit from them in bulk. The solution is to bundle large groups of mortgages into pools. Within each pool, only a fraction of the loans should default while the pool as a whole remains a net positive investment. That pool can then be converted into a bond through which dealers can buy and sell mortgages in bulk. The bondholder receives the interest payments homeowners make on their loans while he’s also able to shop the bond around like any other financial equity. Lewis points out that all through this process, the bondholder and the homeowners are completely blind to each other’s existence—all that matters is the financial product.
The main problem with mortgage bonds (as compared to corporate or government bonds) is that they don’t have a fixed maturity date. Homeowners have the option to pay off their loans early, which they usually do via refinancing when interest rates are low. When homeowners pay out, the bond turns to cash at what is generally the worst time (because of low interest rates) for the bondholder to reinvest his money. Despite this, Lewis recounts that Salomon Brothers believed the mortgage bond market would be hot in the 1980s. The housing business was expanding too quickly, and local banks didn’t have enough money to finance all the loans they wanted to make. Mortgage bonds would act as a tool for Wall Street to provide that funding.
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Like what you just read? Read the rest of the world's best book summary and analysis of Michael Lewis's "Liar's Poker" at Shortform.
Here's what you'll find in our full Liar's Poker summary:
- A first-hand account of the pursuit of ill-gotten riches at the Salomon Brothers
- The boom and burst of the mortgage bond market
- Where there is room for ethics and level-headed investing
