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December 31, 2008

Liar’s Poker

Rising Through the Wreckage on Wall Street
Michael Lewis – ISBN – uncertain: use only title and author and you will find it
(no longer in print, but thousands are available, used, on line, for as little as $3)

I owned it years ago but never read it; gave it away when I moved to Florida, and forgot about it. Recent events caused me to order a copy. Published in 1989, you will find it not only a fulsome, but a frightening read today--prescient as well. “Spot on” when undertaking to understand what has happened to Wall Street and to Investment Banks. I recommend it!

The author was employed for several years by Salomon Brothers in both New York and London. In his introduction he indicates that as a graduate of Princeton and the London School of Economics he was sought out by Salomon, went thru their training program and became a bond trader; an endeavor he knew absolutely nothing about, was never very good at, but still managed to earn a six figure income despite his inadequacies.

“Economic theory which is, after all, what economics students were supposed to know) serves almost no function in an investment bank.” Bankers simply use the degree to vet applicants for “general intelligence.” It showed!

He discusses why the Federal Reserve was greatly responsible for the Savings and Loan failure in the 80’s, as well as the present calamity. The present one has been in abirthing since the S&L collapse. He explains things in a fashion understandable to most readers, and he’s easy to read. For instance:
• “Why”, he asks, “did investment banking pay so many people with so little experience so much money? Answer: When attached to a telephone, they could produce even more money.
• How could they produce money without experience? Answer: Producing in an investment bank was less a matter of skill and more a matter of intangibles—flair, persistence and luck.”

The reader is, or at least ought to be, appalled by the cavalier approach to investment: the lies told, the absence of conscience in recommending to clients “issues” which management wanted sold, without concern for the buyer . . . only the commissions to the company. Virtually all of the salesmen worked exclusively for the money, and spent little time learning about their products. Sales techniques were all that mattered to them. What is exposed is abysmal, to say the least.

Midway thru he gets into a discussion of Michael Milken, junk bonds, and the origins of the mortgage disaster which now haunts us, and is almost singularly responsible for the Trillion Dollar Meltdown we are amidst. (That book, by Charles Morris, is also a great read.) Lewis explains in quite simple terms the evolution (up to 1989) of the marketing of mortgage portfolios as if they really were bonds. Prior to the S&L collapse mortgage loans had been local and well managed. Offered opportunity, Wall Street created new avenues of finance which were disingenuous and begged numerous intermediaries to lie, cheat and steal . . . for which we are now paying.

I won’t go into the details since I want to emphasize that in his memoir Lewis exposes the chicanery of these masters of manipulative investing, solely for their own profit. With rare exception they are all moral cretins. While he is dealing expressly with his own employer—Salomon Bros.—he includes the rest of the players, indicting them all for similar, reprehensible behavior which was at least negligent and at worst approached criminality.

While junk bonds originally made sense, and were singularly responsible for much of the financing of the information age and the Reagan economic boom. Milken understood that the market for finance was outmoded, even archaic, and devised a totally new means of raising capital: bonds, not loans. Thus he introduced a wholly new kind of finance. But eventually there were so many offerings, and so much money chasing them for their promised high yields, that greed overtook both sellers and buyers and “real junk” was sold to the unsuspecting, the naïve and the greedy—by people who knew it. Wall Street made outrageous profits thru misrepresentation.

Arbitrage, was a euphemism “for what we did with other people’s money.” It meant “trading risklessly for profit.” Riskless, that was, to the sellers, not to buyers. The banks would orchestrate an offering, make it look good, sell bonds out the whazoo, collect their commissions—often in the millions—and vamoose. The whole point of the activity was to sell to a public unable to assess the risk; dependent on the offering and rating agencies for advice, which was disingenuous and wholly directed at their profits.

He sagely observes that “when an investment banker starts talking about principles, he is usually defending his interests.” And later adds a note to members of all governments: “be wary of Wall Streeters threatening crashes. They are tempted to do this whenever you encroach on their turf. But they can’t cause a crash any more than they can prevent one.”

He also confirms a suspicion I have had for years, that “Most of the time when markets move, no one has any idea why. A man who can tell a goods story can make a good living as a broker. It was the job of people like me to make up reasons, to spin a plausible yarn. And it’s amazing what people will believe.”

He was fortunate to become good friends with several truly talented men who gave him (and his clients) good advice, but quit early--leaving his “surest way to becoming a millionaire”--because he could not endure the stench of the activities.

His father’s generation (mine!), he summarizes, “grew up with certain beliefs. One of those beliefs is that the amount of money one earns is a rough guide to one’s contribution to the welfare and prosperity of our society. . . . [I was close to, and learned from my father] . . . It took watching his son being paid 225 grand at the age of twenty-seven, after two years on the job, to shake his faith in money. He has only recently recovered from the shock.”

“I haven’t!” When you sit at the center of the most absurd money game ever, and benefit out of all proportion to your value to society, when myriad other equally undeserving people are raking it in faster than they can count, something happens to your money belief. . . . Or at least ought to. They take their funny money seriously and it becomes their “guiding light.” It is tempting to believe that they will get their comeuppance eventually, but they don’t. They just get richer and die fatter and happier.

He couldn’t do it, so he quit and wrote this riveting, expository memoir. Read and reflect upon the immorality of what has been begotten. It really is worth it to understand that capitalism works only when the capitalists are grounded in morality, honesty and fairness. It has been lost, and we’d best get together and organize a search party.

And while reflecting, read my quote dated Dec. 26th, 2008: The pope was right.

You might also want to link to this:

(you'll have to copy and paste) This man is absolutely brilliant, and I recommend you consult his primary site often:

Posted by respeto at December 31, 2008 2:45 PM