Book SummaryLiar's Poker, by Michael Lewis

1-Page Summary1-Page Book Summary of Liar's Poker

Many business experts would have you believe that investing is a rational, thoughtful, and mathematical process. Others think the economics of high finance are much like the weather, subject to forces beyond anyone’s control. There’s a third view that’s a little more cynical—that much of the behavior of the investment marketplace is driven by a special breed of Wall Street traders who exploit investors’ collective fear and greed to enrich themselves however they can, without any sense of ethics, moderation, or care for the potential havoc they might wreak.

In Liar’s Poker, published in 1989, Michael Lewis gives a first-hand account of the unchecked pursuit of ill-gotten riches on the trading floor of Salomon Brothers, which for a brief time was the world’s most profitable investment banking firm. How it rose and fell from those heights is a story of financial swindles, high-stakes speculation, toxic machismo, and unfettered excess.

Before becoming a best-selling author, Lewis was a seller of bonds at...

Liar's Poker Summary Wall Street in the 1980s

The 1970s were a turbulent time of high unemployment and crippling inflation, and in the financial boom that followed, people dove into investing as a means to get rich quickly. This created a fertile hunting ground for unscrupulous traders looking to take advantage of investors. Lewis discusses the events that led to a boom in the bond market around 1980, 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.

Lewis traces the roots of Wall Street’s financial trading culture to the Glass-Steagall Act of 1934, which separated investing and commercial banking. A firm could do one or the other, but not both. This created investment banking as its own profession, and investment brokers became the superstars of finance and were often characterized by the scale of their ambitions. For a long time, their profits came from trading stocks, until the practice of charging fixed commissions for each trade was halted in 1975. Stock brokers dropped their rates to undercut each other, and profits bled out of the stock trading business. Traders had to find a new way to make money off of the investors in...

Liar's Poker Summary The Mortgage Bond Era

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...

Liar's Poker Summary The Rise of the Junk Bond

The next investment trend to sweep Wall Street wouldn’t arise from Salomon Brothers but would instead be used against it. These were so-called “junk bonds” that had existed for decades but would be pushed to new heights by Michael Milken, head of the bond department at rival firm Drexel Burnham. Lewis describes how Milken fostered the junk bond craze of the late 1980s and how he used it to fund a wave of hostile corporate takeovers, including one directed at Salomon Brothers.

(Shortform note: Milken’s career was plagued by scandals that escalated throughout the ’80s and beyond. In Den of Thieves, James B. Stewart writes that Milken, who was under constant scrutiny by the SEC, played a key role in a massive insider trading scheme. Shortly after Liar’s Poker was published, Milken pled guilty to fraud and conspiracy, was sentenced to 10 years in prison, and was [banned from the...

Shortform Exercise: Reflect on Your Outlook Toward Wall Street and Investing

Lewis’s depiction of 1980s Wall Street can lead to deeply cynical conclusions about the financial industry as a whole. Nevertheless, many other authors have written about investing as a thoughtful process that anyone can pursue without unethical behavior. Consider whether you believe Lewis’s portrayal is typical of the modern world of investing, or if the practices he describes are emblematic of a few “bad apples” in the business.

If you contribute to an employer’s pension fund, how transparent is that fund about how your money is invested? How much do you trust your pension fund’s managers to make wise investment decisions, and why do you feel that way?