(c) 2009 F. Bruce Abel
My second most-mentioned blog subject, as you can see below, is Liar's Poker by Michael Lewis. Because Michael nailed it, in 1989!
I recommend you read this quite closely, as it contains great understatement and irony in places. If you can master what he was saying you can avoid being sucked into wrong thinking about Wall Street today. It ain't rocket science; it's the "selection" game (selection of those taking economics at Princeton and Harvard and the like), and the "taking" game, placing yourself between the parties when vast sums are changing hands.
I reprise herein one of the greatest quotes forshadowing and yet explaining Wall Street, by Michael Lewis.
[Dictated with Nuance; omitted material and spelling errors not necessarily indicated or corrected; playing around with the "outline" and "quote" icon on Blogspot and do not know how to "undo"]
"Never before have so many unskilled, 24-year-olds made so much
money in so little time as we did this decade in New York and London."
"It was sometime early in 1986, the first year of the decline of my
firm, Salomon Brothers."
"At Harvard in 1987, the course in the principles of
economics had 40 sections and a thousand students; the enrollment had tripled in
10 years. At Princeton, in my senior year, for
the first time in the history of the school, economics became the single most
popular area of concentration."
"Economics was practical. It got people jobs."
"Economics alowed investment banking recruiters to compare directly the
academic records of recruits. The only inexplicable aspect of the process
was that economic theory (which is, after all, what economics students were
supposed to know) served almost no function in an investment bank."
"Glass-Steagall was an act of the U.S. Congress, but it worked more like
an act of God. It cleaved mankind in two. With it, in 1934, American
lawmakers had stripped investment banking off from commercial banking.
Investment bankers now underwrote securities, such as stocks and bonds.
Investment bankers, like Citibank, took deposits and made loans. The act, in
effect, created the investment banking profession, the single most
important event in the history of the world, or so I was led to believe."
"After Glass-Steagall most people became commercial bankers. A
commercial banker was reputed to be just an ordinary American businessman
with ordinary American ambitions. He lent a few hundred million dollars
each day, to South American countries. But really, he meant no
harm.... He had a wife, a station wagon, 2.2 children, and a dog
that brought him his slippers when he returned home from work at
"The investment banker was a breed apart, a member of a master race of deal
makers. He possessed fast, almost unimaginable talent and ambition. If he had a dog, it snarled. He had two little red sports cars yet wanted four. To get them he was, for a man in a suit, surprisingly willing to cause trouble."
"Man for man, Solomon Brothers was, in 1985 the world’s most profitable corporation. Wall Street was hot. And we were Wall Street's most profitable firm."
"Wall Street traffics in stocks and bonds. At the end of the 1970s,
Salomon Brothers knew more about bonds than any firm on Wall Street: how to value them, how to trade them, and how to sell them.... The rest of Wall Street had been content
to let Salomon Brothers be the best bond traders as the occupation was neither terribly profitable nor prestigious. What was profitable was raising capital (equity) for
corporations. What was prestigious was knowing lots of corporate CEOs. Salmon
was a social and financial outlier."
"In part this is due to the absence from the bond market of the educated classes, which in turn reinforces the point about how unfashionable bonds once were. In 1968, the last time a degree
count was taken at Salomon Brothers, thirteen of the 28 partners hadn't been
to college, and one hadn't graduated from the eighth grade. John
was, in this crowd, an intellectual; though he was rejected by
Harvard, he did finally graduate (without distinction) from
"The"In other words, Salomon carved a tiny fraction out of each financial transaction. The Salomon salesman sells $50 million worth of new IBM bonds to pension fund X.
biggest myth about
bond traders, and therefore
unprecedented prosperity on
the 1980s, are that
they make their
money by taking
large risks. …Most
traders act simply as
toll takers. The source
their fortune has been
nicely summarized by Kurt
"There is a magic moment,
during which a
surrendered a treasure,
and during which
the man who
about to receive it has
not yet done so.
lawyer [read bond
trader] will make that moment his
the treasure for a
microsecond, taking a little of it,
The Salomon trader, who provides a salesman with the bonds, takes for himself an eighth (of
a percentage point), or $62,500. He may, if he wishes, take more. In the bond market, unlike in the stock market, commissions are not openly stated."
Now the fun begins.
[Doorbell; to be continued]
And this from The Huffington Post, also on Michael Lewis and his precience.
July 31, 2009
Make HuffPost Your HomePage
Get Email Alerts Twitter: Follow Us
LobbyBlog Letter Forgery Lobbyists' Past Deceits
Ryanair CEO Defends Charging "Discretionary Toilet Visitors"
Worker Compensation Grows by Lowest Amount On Record
Can Good Economic Numbers Be Bad News?
House Votes To Restrict Wall Street Pay
Honda Recalls 440k Cars Over Potentially Lethal Airbag Defect
"I Never Thought I Would Be In This Spot At This Age": Emails From The Unemployed
State Of Illinois Sues Wells Fargo For Discriminatory Lending
NYT: AIG Risks Hidden In A Web Of Subsidiaries
Radio host, communications consultant
Posted: July 31, 2009 12:00 PM
BIO Become a Fan
Get Email Alerts Bloggers' Index
Q&A with Michael Lewis (Part 1): The Rules of the Game Were Totally Screwed Up
digg Huffpost - stumble reddit del.ico.us
Read More: Corruption, Geithner, Goldman Sachs, Liar's Poker, Michael Lewis, Morgan Stanley, Obama, Ratings Agencies, Standard & Poor's, Sub-Prime Mortgage, Wall Street, Business News
Be the First to SubmitThis Story to Digg
I recently interviewed Liar's Poker author Michael Lewis, and I didn't even ask him if the Moneyball movie was on again. (Apparently it is, with Aaron Sorkin doing a re-write.) We talked about his new book, Home Game: An Accidental Guide to Fatherhood, but we also got into his take on the financial meltdown and the bailout. This is Part One of some excerpts. You can hear the full podcast at terrencemcnally.net.
As a former Salomon Brothers trader, Lewis could understand how individuals got caught up in the high-risk bubble.
ML: There's a machine out there and a market... and as a trader you can borrow money cheaply, buy sub-prime mortgage bonds, and make the spread between the two.
Let's say you're a really smart guy who's sort of detached and intelligent about what's going on, and you see that this thing is totally irresponsible. The loans being made are likely to go bad; the lending standards are collapsing. The intelligent thing to do is not to buy sub-prime mortgage bonds but to bet against them, to sell them short.
As a trader inside a big Wall Street firm...you would face a decision: Do I exercise my independent judgment and bet against this market, or do I just keep going along with what my firm is doing? If you exercise your independent judgment and bet against sub-prime mortgage bonds, you not only probably run into some political conflict within your firm, but you'd never make the big score for yourself... The minute you make a bunch of money from your bet, your firm is doomed. They couldn't pay you. So the smart thing was just to go along and hope it lasted long enough for you to get rich.
So that accounts for single players and their firms, but what about the ratings agencies? We heard a lot of sports talk in the Sotomayor hearings. Weren't they supposed to be the impartial referees?
ML: The sub-prime mortgage bonds were rated triple A by Moody's and Standard and Poor's. Why? Well, they could give you an argument, but in retrospect, it looks like a very foolish argument.
TM: It looks worse than foolish to me, it looks corrupt.
ML: When you think about corruption, there's the simple kind where I give you $1000 to interview me on the radio so it will promote my book. That's corrupt and we both know it. But there's a different sort of corruption where we're all part of a system that is rewarding us very well to pay attention to certain things and not pay attention to others. We're paid to have blind spots. There's an awful lot of that kind of corruption in the financial system because people's incentives are all screwed up.
Ratings agencies were paid by the people who issued the bonds to put the triple A rating on them. Their incentive is to please the people who are issuing the securities. They can't at the same time independently judge the securities.
TM: Arthur Andersen went out of business for doing basically the same thing with Enron. How could someone not see that they were recreating something which had already failed in a huge way?
ML: Some people did see...The people I find most riveting are the people who saw the magnitude of the coming disaster. They were sane men in an insane world. They would call Standard and Poor's and Moody's and say, "How are you rating these things? Our models show that if house prices even go flat, all these bonds will be worthless." To the question of what happens to these bonds if house prices go down, Standard and Poor's would say, "We actually don't know because there's no place in our model to put a negative number."
TM: Obama, Geithner and the administration are putting out plans for new regulations. This isn't in there?
ML: No. It should be illegal for issuers to pay raters for ratings. It's a bribe. Instead the administration says they're going to give the regulators more authority to evaluate ratings agencies. That doesn't do anything; they already had that authority.
Lewis cited another example of a conflict-of-incentives that's nowhere to be found in the regulatory reform conversation.
ML: How can you possibly have a Wall Street firm that is at once owning securities, making bets on stocks and bonds for itself, and that it is also selling to customers? Inevitably, it will trade against its customers. It will deceive its customers for the sake of itself.
There's no reason both these functions have to be inside one place. You can have firms that provide financial advice but that don't take any positions in securities. Then you could have other firms that have their own trading accounts, but aren't allowed to deal with customers. Those functions should not be in the same place. It creates endless problems.
TM: And this also isn't in the Obama administration's reform plans?
ML: No it's not in there, and no one's even brought it up.
When Lewis suggests that the deeper problem is in "the air we breathe," he's not talking about the environment.
ML: Arthur Andersen was in place to examine Enron, the credit rating agencies were meant to be examining bonds. In both cases they had the incentive to exercise bad judgment because they were being paid by the wrong people. The rules of the game were totally screwed up.
Well, why are the rules of the game totally screwed up? This is the deeper problem, I think, and it goes back to the days of Liar's Poker. In the last 25 years, our economy has created this beast, the financial industry, that is much, much too big; that is doing lots of things that have nothing to do with productive enterprise; in which the rewards are so outlandish, they've distorted the upper tier of the income structure. The reason CEO's get paid as much as they do is that Wall Street taught them how to do it.
You get a huge sum of money for doing something is actually socially and economically counter-productive. People made fortunes out of the sub-prime mortgage bond market. That's insane.
So our society has created this very strange economic value system, where really smart people, the leadership class, thinks it's the done thing to go to Goldman Sachs or Morgan Stanley and get paid three or four million dollars a year -- even though you don't actually add value in any way. Now it's in the air we breathe.
Look for Q&A with Michael Lewis (Part 2): There's a Real Chance There's Going to Be an Uprising about This
More in Business...
Bank Pay Restrictions Face Senate, Obama Skepticism
Cash For Clunkers Will Survive: White House
New Poll: Less Than Half Of Republicans...
Business Leaders Surprised By Wide Access To...
Ads by Google
The Truth on Wall Streetwww.WealthDaily.com/Wall_StreetExposed: John Thain & the Other 9 "Culprits of the Financial Crisis"
Goldman Sachs Executiveswww.Hoovers.com/ExecutivesFind Goldman Sachs Executives- Plus, Bios, Salaries, & Even Email.
Investment Bank Bootcampwww.ibtraining.com3-Week Chicago IBank & PE Valuation Training by Sr. Bankers 95+ Billion
FAQ: Comments and ModerationFAQ: HuffPost Accounts
Want to reply to a comment? Hint: Click "Reply" at the bottom of the comment; after being approved your comment will appear directly underneath the comment you replied to
View Comments: Newest First Oldest First HuffPost's Picks Expand All Collapse All
All comments on this article are pre-moderated. This means that every comment submitted will be reviewed by a moderator before it is posted to the site. Unfortunately, depending on the volume of comments, it may take time
- + sonofsamphm1c I'm a Fan of sonofsamphm1c I'm a fan of this user permalink
The company being audited by a public accounting firm doesn't pay for the audit, who the heck is going to pay for it? The government? That would be even more open to fraud. The ratings situation and the audit situation are a bad comparison. Also, not saying that Arthur Anderson did not do anything wrong, but their felony conviction was vacated by a The Supreme Court - 9 justices voting to vacate, 0 justices voting to affirm the conviction.
Reply Favorite Flag as abusive Posted 07:59 PM on 07/31/2009
- + FoonTheElder I'm a Fan of FoonTheElder I'm a fan of this user permalink
It's all a big game....wasn't that a lot of fun!!!! Let's do it all again!! Of course, that will be after the taxpayers refill your money machine to make up for all the losses from the previous barrel of fun.No wonder all of these Wall Street crooks are laughing all the way to the bank...and the bank's probably not even in the U.S. Ha! Ha! Ha! Isn't crony capitalism great?
Reply Favorite Flag as abusive Posted 05:00 PM on 07/31/2009
- + ibsteve2u I'm a Fan of ibsteve2u I'm a fan of this user permalink
"..you not only probably run into some political conflict within your firm.."And there, ladies and gentlemen, is the disease that is killing our corporations and, by proxy, America: Political conflict.When the "big guy" (or gal) starts doing something shady, you either go along, or you face the consequences of...political conflict.
Reply Favorite Flag as abusive Posted 03:31 PM on 07/31/2009
- + itolduso I'm a Fan of itolduso I'm a fan of this user permalink
How come there's never a Q & A with someone 'outside the bubble'? Let's hear a little from the people that don't breath air laced with million dollar paydays for destroying the system. People that don't get much air of anykind....it's all been sucked up by the 'bubble machine'. Talk to someone whose equity is covered with his own sweat, instead of just the leeches 'betting' with other's lifeblood. All across this country, individuals, businesses, and corporations are struggling to produce, to innovate, & to contribute....but they are invisible. They can't get attention, they can't attract investment. The 'money train' doesn't stop at their station....all tracks lead to the bubble machine. Each time the bubble bursts, instead of looking outside, to where 'real' things are made....investors wait to be told that the 'baloon' is fixed, so they can again throw their money at the men that fill the air with nothing......except for million dollar paydays for themselves.
Reply Favorite Flag as abusive Posted 03:10 PM on 07/31/2009
- + kwright I'm a Fan of kwright I'm a fan of this user permalink
The only losers in this "game" are the taxpayers.
Reply Favorite Flag as abusive Posted 02:50 PM on 07/31/2009
- + yappnmutt I'm a Fan of yappnmutt I'm a fan of this user permalink
what? make the game honest? you must be kidding.
Reply Favorite Flag as abusive Posted 01:10 PM on 07/31/2009
You must be logged in to reply to this comment. Log in or -->
New comments on this entry — Click to refresh
Ads by Google
Asset Securitization Rptwww.structuredfinancenews.comThe premier weekly on asset and mortgage-backed securitization
Right Now on HuffPost
A NEW LOWWorkers' Wages Grow By Smallest Amount Ever
(AP): Employment compensation for U.S. workers has grown...
LobbyBlog Letter Forgery Lobbyists' Past Deceits
I'm blogging about the world of lobbying and its effect on,...
Stock Market Information
Stock Info Market Monitor-->
Don't Miss HuffPost Bloggers
John KerryWho Lost the Earth?
Dionne WarwickBig Radio's Attacks on Me Aren't Surprising
Rep. Barney FrankThe "Loan Arrangers" Will Not Ride Again
Popular Stories on HuffPost
Gates Sends Flowers To Woman Who Called The Police
Cindy Crawford And Mini-Me Daughter Kaia Step Out
MSNBC's Donny Deutsch: "If Palin Wasn't Hot Would We Be Talking About Her?" (VIDEO, POLL)
Rupert Murdoch, Jeff Immelt Met To Broker MSNBC-Fox News Truce: Report
Books by this author
This Blogger's Books from
Frankie and Johnny in the Claire de Lune.by Terrence McNally
The Full Monty: The Complete Book and Lyrics of the Hit Broadway Musicalby Terrence McNally, David Yazbek
Make HuffPost your Home Page
FAQ: Comments & Moderation
FAQ: Huffpost Accounts
Copyright © 2009 HuffingtonPost.com, Inc.