Liar's Poker ( Michael Lewis ) 0 comments

Michael Lewis' 1989 book about his short career, or ordeal, in Saloman Brothers, then the top investment bank in the US, is considered one of the best-written first-hand accounts of trading in the bond markets, which were hot in the 1980s with deregulation in the financial industry and the junk bond boom.

The author started as a trainee in Saloman's highly-regarded training program (where students were all expensively-educated graduates) in 1985, and went on to become a bond salesman in their London office, set up to drive Saloman's global expansion. Between then and his eventual departure in early 1988, his experiences in the training program, his insider exposure to the political jostling in the higher echelons of power of Saloman, his rise from "geek" to "big swinging dick" are all recounted excellently with cynical humour in the book (a very readable 250 pages).

What is special about this book in comparison with other more self-centric first-hand-account type books (such as "Trading with the Enemy") is that it tries to also present a macro perspective of market developments in the 1980s --- in particular, the development of two big bond sectors from virtually nothing: firstly, the mortgage bond segment, built up by Saloman's Lewis Ranieri in the early 1980s, and secondly, the junk bond segment, pioneered by Drexel Burnham Lambert's Michael Milken, which exploded in the middle-to-late 1980s. A quarter of the book was devoted to the earlier, given its growing importance to the firm's bottomline as Saloman established a virtual monopoly in this segment in the early 1980s.

The account of growth, domination and eventual demise of Saloman's mortgage trading department is an entrancing read.

Mortgage bonds are essentially similar to REITs which are probably more familiar to most of us --- they are to home loans/residential properties what REITs are to commercial/retail/industrial properties. Home loans are pooled into and securitised as mortgage bonds, which are then sold to investors who will collect the routine interest and principal payments from the homebuyers. There are plenty of lessons to be learnt from Lewis' narration of its evolution for students of the capital markets (bonds, and even equities) --- how at the start, huge margins could be grabbed by the pioneering investment bank (Saloman); how their quantitative models allowed them to capitalise on a grossly inefficient market in home mortgages; how competition (including departure of key personnel to other banks) and market maturity eventually forced pricing efficiency and squeezed the margins, eventually leading to the demise of Saloman's mortgage trading department. One might be able to, indeed, draw parallels to Singapore's REITs market, which were great bargains in 2001-02 when the first few were being launched but may now be less attractive as the market warms to this instrument.

Just as Jesse Livermore's Reminiscences of a Stock Operator offers relevant cross-market insights although he might be talking about commodities, so Liar's Poker is good reading even for the stock market-focused investor/trader. For one, it imparts insider understanding to the selling of investment instruments to the firm's customers --- it is common for undesirable instruments to be pushed to the customers by the articulate salesmen, especially when these are being held by the firm's proprietary traders who wish to dispose of them. Corollary: always be cynical when people try to sell things to you. For another: greed is supreme in these investment banks, and if these professionals owe no sense of loyalty to their employers but only to money (as repeatedly described in the book where staff are lured by higher wages elsewhere), what makes you think they owe any sense of commitment to their clients?

One of the most interesting characters in the book is a character named Alexander. His attitude to markets, if Lewis' description of him is accurate, is one to behold. It is about being able to see how the various asset and geographical markets are interrelated, much like a "tightly-woven web" where "yank on one filament in the web, and the other filaments had to move too", and where sensing the secondary and tertiary effects of a market development and betting on them offers huge rewards. Read these few pages on the trading methods of Alexander if nothing else (in the later parts of the book).