A book containing two stories: one which might have been revealing in its time, but which now simply confirms that what we already knew about Wall Street was still happening 30 years ago — and an insightful segment detailing the history of the mortgage-backed security and the people who made it, written long before the 2008 crash they indirectly caused.
There’s a bit in the Wolf of Wall Street (2013) where Matthew McConaughey tells Leonardo DiCaprio that, fundamentally, nobody really understands which way a stock is going to go — ‘least of all, stockbrokers’. It’s generally accepted as a truism now, but it’s a point driven home several times in Liar’s Poker by the author, and which ultimately forms one of the book’s two main points. Lewis worked in the bond market, not in stocks, but if anything the differences between the two exacerbate the problem — whereas (in theory) the stock market is open to the point that the only way to make a profit off someone else is to work with insider information, the bond market is almost entirely obscured. This causes investors who operate within the bond market to appear far more knowledgeable than they actually are — when they aren’t ‘blowing up’ their customers by offloading their own terrible positions onto them, they’re making what appear to be huge profits from simple arbitrage.
These profits pale in comparison, however, to those made by Lewis Ranieri’s mortgage bond department, the setting up of which is detailed across several chapters. Through the creation of mortgage-backed securities, Salomon Brothers not only held a near-absolute monopoly of an entire section of the bond market for several years, but also essentially produced financialisation approaches which totally changed the face of investment banking. We also get a glimpse into the culture of the mortgage bond department, which is essentially just an amped up version of the culture of the rest of the firm. Soon after we learn about the creation of the firm’s monopoly over the mortgage bond market, we almost immediately learn how they squander it — with some of the most dire mismanagement on that side of the turn of the century, promoted by battles of ego and a sheer lack of interest in developing the valuable human capital the firm managed to capture. The lack of a coherent plan for the business beyond encouraging an incredibly unhelpful workplace culture apparently leads to an incredibly short turnover of new recruits, who benefit greatly from the (very highly regarded) education program of Salomon, but who are then offered obscene salaries at other firms after a couple of years.
The culture of Salomon Brothers — and how it affected the author — is a theme which forms the core of the text; as a shorthand, you could describe it as a ‘men’s locker room atmosphere’, with individual speakers putting an emphasis on ‘the jungle’ and a perverted form of Darwinism where the ‘strongest’ survive (ironically, in true Darwistic fashion, some of the people who seem to generate a lot of profits for the firm — from the author’s descriptions — aren’t always loud and obnoxious, but seem often quiet and calculating). Perhaps it was shocking in its day for the extent of the machismo on display and how brutish the characters act, but in 2019 I can’t see how it could possibly come as a surprise. One section of the book mentions the rowdy behaviour of the ‘back row’ of trainees in a seminar, and ponders: ‘The [overwhelmingly WASP and male] back row had its share of expensively educated people. It had at least its far share of brains. So why were these people behaving like this?’. Why indeed, when these were precisely the traits which the firm selected for and encouraged.
And yet, none of this seems to be any different in any other corporation on Wall St, nor likely to be drastically different 30 years down the line. Sure, the banks try a lot harder to massage their image, and i’m sure outright sexual harassment is no longer acceptable in their workplaces, but ultimately there remain two things important to the investment banker: the bottom line of the firm, and their own bottom line (the two are, in some cases, mutually dependent — but can occasionally diverge). The struggle between these two priorities encapsulates most of the decisions in the book, and can be used to explain their attitudes towards clients (some of whom are encouraged to purchase bonds the company owns, which the company no longer feels a suitable investment), towards their colleagues (a whole section is dedicated to plagiarism, and the author’s experience of having the credit for a deal ‘stolen’ from them), and towards society as a whole.
I would recommend this book to anyone who was unaware of the ultra-machismo culture of investment banking, or to anyone looking for more context surrounding the creation of the mortgage-backed security (the collateralised mortgage obligation also gets namedropped at one point!), and the kind of thinking which (in retrospect, inevitably) lead to the events of 2008.
4/5
—
Originally posted on Goodreads, 8/1/19
