Liar's Poker: Rising Through the Wreckage on Wall Street
by Michael Lewis
Mar 2002
Down with Wall Street, up with Milken
Liar's Poker offers a refreshing, amusing, and deeply cynical look at the investment banking world of the early 1980's, when Masters of the Universe lorded over all they surveyed (in their own minds anyway).
This book was one of the earliest to roll back the i-banker canopy of secrecy and respectability, revealing Wall Street at its heart… a bunch of thuggish suits with varying levels of pedigree, endlessly looking for new and creative ways to mug their clients. Though the book is old, the flavor and rhythms are timeless. Some of the criticism is fair, some of it unfair... yet many years later, it's the same old Street.
Because Lewis writes dispassionately and objectively, his words hit home all the more. He comes across as a excellent story teller, not much more or less. (This seems to be the way he wants it.)
In my earlier days of getting acquainted with markets, I often wondered how investment banks could hire rooms full of "traders" and have most of those traders be profitable. If trading requires a special talent or mindset, which it definitely seems to, how is it that all these ivy league guys can be good at trading en masse, especially when they have zero patience and huge egos?
Based on the Liar's Poker picture, the answer is that most of the "traders" in the employ of large investment banks are not trading in the true sense of the word. They are either siphoning money from unwitting customers with the help of product-pushing salesmen (no different than run of the mill brokers, except higher class), or else they are taking a bite out of the bid/ask spread, which is what many floor traders do. In exchange for providing liquidity, floor traders act as slippage extractors of a sort; the ‘skid' you see between order price and fill price is what goes in their pocket. This type of thing is more about exploiting a structural advantage, and less about competition with other traders.
Surprisingly, Michael Milken was one of the few who came out of this book looking like a winner. The rest of the world wrote Milken off as a crook without actually looking into what he did or how he made a fortune. Lewis gives a clear and lucid explanation of Milken's big idea—that the investment world as a whole had its credit rating apparatus backwards, due to a skewed perspective of corporate credit risk. The book recalls in some detail how Milken was able to leverage this single idea, with a sheer force of will, into billions of dollars in junk bond profits.
As a side note, even after reading Den of Thieves (an excellent book that chronicles Milken's ultimate fall), I still wonder if he got the short end of the stick—painted as a crook because he was exceptionally greedy and made obscene amounts of money, rather than any truly grievous wrongdoing. The massive contribution Milken made to the capital markets was to reshape the assessment of credit overall, increasing the efficiency of capital deployment across the globe. This surely gives him claim to a better reputation than the one he's gotten from the press thus far.
If you read this book and enjoy it, you might want to note that a 1990's successor to Liar's Poker is Fiasco: Blood in the water on Wall Street, written by another bond insider whose moral qualms eventually force him off the Street.
