Eric Johnson
01-27-2018
This is the first installment (if you will) of my new year’s resolution. This month I read the book Liar’s Poker by Michael Lewis while I was traveling on break from school. I enjoyed the book and noticed some similiarities to what I have heard from friends and seen during recruiting at school in the finance world. What follows are some takeaways, memorable quotes, and thoughts I have after reading the book. If you are curious to learn more about what it was like to work in finance during the exciting period of the 1980s or are interested in general about the field, I highly recommend checking out this book.
Lewis describes how he luckily got the job at Salomon Brothers after failing to get investment banking job offers during his time as an art history major at Princeton. He sat next to a MD’s wife at an event and she pulled strings to get him the job.
The wife of the more senior Salomon Brothers managing director, an American, took our table firmly in hand, once we’d finished craming our necks to snatch a glimpse of British royalty. When she learned that I was planning to enter the job market and was considering investment banking, she turned the evening into an interview. She prodded, quizzed, needled, and unsettled me for about an hour until finally she stopped, satisfied. Having examined what good had come from my twenty-four years on earth, she asked why I didn’t come and work on the Salomon Brothers trading floor.
Simple as that, Lewis had a job. There are many doors into jobs on Wall Street or finance, but I am certain that the best door is not the front. “Knowing a guy” helps immensely, if nothing else to get you in front of someone for an interview. If you are seeking a job, remember the value you offer for someone who can help get you hired. Most firms give referral bonuses, so (for example) if I refer you and you are hired, I also get a nice check in my pocket - it never hurts to ask for help.
Aside from Lewis’ luck finding a job, his description of finance interviews from the rest of this section is on par with what I have generally come to expect after going through some recruiting at Cornell. Interviews are hard, but if you land the job/internship, you will be rewarded accordingly. With that said, I don’t think its a good idea to major in econ and join business clubs (or the like) for the sole purpose of landing interviews and/or job offers. You can probably do better for yourself in the long run if you focus on personal growth in college and become an interesting person as a result.
Next Lewis dives into a full on exposure to Salomon Brother’s infamous training program. The program seems insane but also funny in a mean, brutal kind of way. The characterizations of the different people in the training class seem to point to the different types of people who make it in the world of finance. There are front row people (mostly goody-goody MBAs) who brown nose and seem to take the program too seriously. There are back row creatures who treat the program as a game, cheering and/or booing speakers, throwing spit-balls, betting, and generally doing whatever they want - putting the training on the back burner. Other notables are the Japanese, who Lewis seems to think that Salomon hired to try and sell bonds out in Tokyo and assimiliate into the markets out east. The rest are seemingly average trainees like Lewis, who find their way throughout training without really falling under a label of a specific group.
Training sounds cliquey and competitive, especially knowing that each new analyst is fighting for a spot within a Salomon department that will ultimately determine their trajectory at the firm. People try to schmooze with the “right” directors and ask the right questions so that they will end up with the job they please. Most want to end up trading bonds on the 41st floor in New York, where all the action is. The game of trying to sell yourself without trying suck up too much to potential managers probably helps the future traders just as much as the mathematical formulas they are taught in the classes. The ability to read bluffs, scheme, and out-manuever another seems to be essential for success trading bonds at Salomon. I think Lewis’ description of the training program does far more to make readers want to work at Salomon Brothers than to dissuade them from wanting to join Wall Street.
Another manifestation of practicing these skills comes from the game that also serves as the book’s title: liar’s poker. This is a game similar to poker that involves placing bets on the number of specific numbers on the serial number of a dollar bill. The ability to read bluffs and your opponent are paramount to success, as the serial numbers are about as truly a random number generator as one can get. John Meriweather is notably the world champion at this game, and likewise among the top traders in the firm, according to Lewis.
As training progresses and nears its end, we (and also the trainees) start to see the firms hierarchy and act as such during different speakers and seminars.
First noted during Lewis’ training and touched on later in the book, firm hierarchy plays a large role at Salomon brothers. At the top are the traders on the 41st floor in New York. These guys make the most money so naturally they matter the most to the firm. The firms directors also seem to have mainly come from roles like these. Next comes traders in other parts of the world (like London where Lewis was assigned), traders on other floors (lesser bond traders were on the 40th floor) and also different types of asset classes. Below that are equities, people who traded stocks. And below that are corporate finance and back office roles. This is funny to me, as I know many people who now want to go into corporate finance for investment banks and consider these types of roles to be the best they can shoot for. Here is what aspiring trainees think of the possibility of being assigned to work in trading equities.
There were many bad places your name could land on the job placement blackboard in 1985, but the absolute worst was in the slot marked “Equities in Dallas.” We could not imagine anything less successful in our small world than an equity salesman in Dallas: the equity department was powerless in our firm.
A beatdown was given by a trainee speaking to equities trader (dudes got balls of stone):
“When you trade equity options” asked my friend Franky, “do you hedge your gamma and theta or just your delta? And if you don’t hedge your gamma and theta, why not?”
“You know” he [Equities trader] said, “I don’t know the answer. That’s probably why I don’t have trouble trading”
“That,” said Franky, “is why you are in equities.”
Clearly there was a hierarchy in the firm. Money talks, even if it was a cocky trainee yet to make any money himself. He still felt he was above an equity salesman, and let him know as such. From experience I am aware of some hierarchy in financial firms today but wonder if it is as defined as it is in Lewis’ writing. I think firms are more mobile and understanding to the fact that they need back office people and even equities traders to stay on top of their business - but maybe I am just naive.
Even within the powerful 41st floor, there were divisions and sects among traders. The main three groups were corporate bonds, government bonds, and mortage bonds. These groups were like different mafia families, according to Lewis. They fought for power and consistently undermined each other (even in terms of creating new businesses/sources of profit for Salomon). Reading about this and how the firm was structured as a result was a big surprise to me. The firm had next to no true cohesion. For such a “well oiled machine” that was regarded among the most powerful on the street, it was run by self-interested short term profit seekers, specifically seeking profits for their groups and their men. The prominent leader (and extrememly valuable) Lewis Ranieri (who practically invented mortage bond trading for the firm and the world) was ousted and his department dismantled by others in the firm. We see that the management of the firm was made up of former traders who acted as such, and as a result the long term health of the firm was never truly in good hands.
At an investment bank making millions of dollars on single trades and billions over the years, greed can be expected. There were numerous examples of this in the book, here are some noteable ones.
Ranieri (the mortage guy who was ousted) took steps to directly undercut other Salomon salesmen when they tried to start selling junk bonds. He straight up told his investors not to buy them. Salomon lost out of huge profit opportunities because of this, but Ranieri was fighting to protect his turf and did his best to keep Salomon out of the trades. It’s astounding that a firm with this much money would miss an opportunity like that, especially given that they were actively trying to enter the junk bond markets. Greedy traders will do that.
A second example was when Salomon was almost the subject of a hostile takeover in which the chairman Gutfreund would have definitely been fired. To make sure it didn’t, he made a deal with Warren Buffet to buy the stake in Salomon that would prevent the hostile buyer from gaining a controlling majority of the company. Buffet did so, and got a sweet deal:
Buffet got a free play, over the next nine years, in the shares of Salomon. If Salomon Brothers continued to falter, Buffet would take his 9 percent interest and be content. If somehow Salomon Brothers recovered, Buffet could convert his bond into shares and make as much money as if he had stuck his neck out and bought our [Salomon’s] stock in the first place.
Gutfreund convinced the other chairman to agree to the deal by threatening to resign. He disguised his self interests as high principle to shareholders. On Gutfreund’s actions, Lewis writes
If there is one thing I learned on Wall Street, it’s that when an investment banker starts talking about principles, he is usually also defending his interests and that he rarely stakes out the moral high ground unless he believes there is gold under the campsite.
His personal greed lead him to fool people who were (by law) required to act with the shareholders best interest in mind. Lewis also described how if Salomon was taken over, it probably would have been for the best for the company both for employees and shareholders alike. However, this didn’t happen. It’s impressive that Gutfreund could convince his counterparts to go through with the deal, but scary again that such a power company was run by such greedy and self-interested men.
There was also quite a bit of individual greed shown in the book. Traders jumped ship for more money else where regularly. You can’t blame them for this. Traders jumping ship are just trading their own personal skills for the highest bidder. Salomon refused to pay them to stay loyal, so they found someone else who would. The problem with this (for me) lies in the vicious cycle of always wanting more. If you can make 100k/year somewhere but can accept a new job, do the same thing, and get a 25k bump in salary you are silly not to. But eventually you worry more about the next job, the next raise, or the next bonus, and stop being proficient at your work. Then you are worth 0k, no matter where you work. I believe its the norm in finance to still change firms with some regularity, each time you change, expecting somewhat of a raise from before. However, I want to stress that you should constantly think and evaluate how you add value to your current company, not just worrying about the value a new company could give to you.
There are too many more greedy examples to list, but thats why you should read the book. If you work in finance, take a step back and think if your firm acts similarly to Salomon. It’s important to learn from mistakes like the ones they made, and adapt to make sure it doesn’t happen again. Who knows if the powers that be adhere to this, but I would like to think the best ones do. Greed can be good, but the risk of bankruptcy is worse, imo.
Also, here is another post that was written about the book, with many great excerpts I left out of this piece:
https://danwang.co/liars-poker-by-michael-lewis/