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How hard was it being a bond trader in the 1980s? How did Salomon Brothers take over Wall Street?
Salomon Brothers investment bank was founded in 1910 by Arthur, Herbert, and Percy Salomon. It wasn’t until the 1980s that the firm found its niche within the growing bond market.
Keep reading to learn how the Salomon Brothers controlled the bond market, according to Liar’s Poker by Michael Lewis.
The Rise of the Salomon Brothers
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 a bond trader at the firm took was either full-throttle or nothing at all.
(Shortform note: Lewis’s history of Salomon Brothers begins after Gutfreund had already become a Wall Street tycoon, but his position wasn’t the result of a lifelong ambition. Gutfreund was born in 1929, studied English and acting at Oberlin College, and served in the US Army during the Korean War. His hometown was Scarsdale, New York, where he was introduced to the Salomon family via connections at the local country club. Gutfreund joined Salomon Brothers in 1953 and worked his way up to become a full partner by the age of 34.)
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.
(Shortform note: Lewis isn’t the only one to suggest that frequent trading enriches investment banks at the expense of individual investors. In The Essays of Warren Buffett, Buffett makes clear his dislike of Wall Street traders, brokers, and salesmen. Instead of serving the best interests of their clients, they work to create a transfer of wealth away from investors and into the coffers of investment firms. Buffett says that investment banks do this by encouraging investors to trade as often as they can while claiming that their clients’ frequent trades will allow their investments to outperform the market. During each transaction, firms charge fees that Buffett describes as financial “friction” curtailing investors’ ability to make money.)
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.
(Shortform note: While Lewis depicts the posturing of Wall Street traders in a negative light, others in the financial industry see some of these attributes as essential skills to master. In The Way of the Wolf, former stockbroker Jordan Belfort explains his tactics for landing sales, which include asserting your authority over that of the buyer, using tone and body language to influence the buyer’s decisions, and increasing any fears the buyer might have about what might happen if you don’t make the sale. While Belfort was a highly successful stockbroker, it must be noted that in 1999 he pled guilty to defrauding his investors of over $200 million.)
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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
