Book Review of Liar’s Poker by Michael Lewis

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Genre: Investing
Author: Michael Lewis
Title: Liar’s Poker (Buy the Book)

Summary of Liar’s Poker

Liar’s Poker provides a distinctive look into a tumultuous time in American business. Fresh out of school Michael Lewis stumbled into a position as a bond salesman for Salomon Brothers, the king of trading and one of Wall Street’s leading investment banks. Lewis chronicles his three years there as well as the people, events, attitudes, stories, and absurdity that defined the age.

The book’s title refers to a high-stakes game where traders attempt to fool all the others about the serial number of a dollar bill in their possession. During the game the bluffs, weaknesses, and predictability are deciphered and probabilities calculated. At Salomon Brothers, Liar’s Poker was considered the best way to test a trader’s ability, instinct, character, and strength.

At the end of the 1970’s, Salomon Brothers had a tight grip on the bond market, including a pioneering position in the market for mortgage securities. In 1979, the Fed announced a fixed money supply and floating interest rates, a move that ushered in a golden age for bond traders that saw Salomon enter an era of hypergrowth that would eventually tear it apart.

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In 1981 Congress passed a tax break that allowed thrifts to sell off their underwater mortgages in pursuit of higher returns. Suddenly $1 trillion worth of debt was available for Salomon Brothers, as the only fully staffed mortgage department, to monopolize. It was a game of Liar’s Poker for the bond traders as they took advantage of the unsophisticated thrifts.

Salomon Brothers’ success soon led to a new attitude toward working there. “Hit and run” was the new motto, as the firm became the breeding ground for the rest of Wall Street. Salomon Brothers mortgage traders were a hot commodity; and for other firms, no price was too much. Salomon Brothers watched as its monopoly on the mortgage bond market faded away.

Around this time the collateralized mortgage obligation began to spoil the inefficiency of mortgage markets that put Salomon Brothers at the top. Management quickly lost touch as the market became increasingly more complex, and no one was willing to make the difficult decisions and do the work necessary to put the firm back on track. Infighting became rampant, and in the absence of any clear sense of direction, things started to fall apart.

Such disarray left Salomon practically absent from the booming junk bond market. Salomon Brothers grew increasingly more susceptible to hostile raiders attempting to purchase large chunks of Salomon Brothers stock. The rest of Wall Street had finally turned on one of its own, and the fate of Salomon Brothers eventually came down to a bailout from Warren Buffett.

Having watched his initial motivation for making money crumble and vanish, Michael Lewis left Salomon Brothers in 1988. With much evidence, he had learned that a better life did not come with more money. He was no longer under the illusion that the size of his paycheck equated to the scope of his societal contribution.

Warning: We don’t condone using the type of language found in this book; however, to be consistent with the tenor of the book, Michael Lewis’ terminology was used in the Brief. Please proceed with caution.


“THE TIME WAS THE 1980’S. THE PLACE WAS WALL STREET. THE GAME WAS CALLED LIAR’S POKER.” As a #1 national best seller, Liar’s Poker provides a distinctive look into a tumultuous time in American business. Straight out of school at Princeton and the London School of Economics, Michael Lewis stumbled upon his position as a bond salesman for Salomon Brothers, the king of trading and one of Wall Street’s leading investment banks.

In Liar’s Poker, Lewis outlines his three years at Salomon Brothers and recalls the people, events, money, attitudes, stories, and absurdity that defined the age. We follow Michael’s path from lowly trainee to Big Swinging Dick and put together the pieces of American business history that are often lost.

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Liar’s Poker

“ONE HAND, ONE MILLION DOLLARS, NO TEARS.” Trading is direct. A trader takes on risk and either wins or loses with no gray area in between. Money, admiration, envy, and fear generally accompanied winners, and at Salomon Brothers it was as simple as that. Salomon Brothers was the epicenter of bond trading, risking billions of dollars at any moment, and the King of Wall Street, John Gutfreund, sat at the top of the moneymaking machine.

Gutfreund was a legend at Salomon Brothers, and the founder of the identity that defined the company’s brilliant culture, represented by his “one hand, one million dollars, no tears” challenge to John Meriwether, one of Salomon’s best bond traders. Regardless of the reason, Gutfreund was willing to bet one million dollars on a single hand of Liar’s Poker.

The individual on the wrong end of the bet would have to take the loss in stride, and losing would not buy him any sympathy. The code required traders to accept all challenges, and thus we get our first glimpse into the high stakes atmosphere of Salomon Brothers. Meriwether responded with a challenge of ten million dollars, forcing Gutfreund to fold. Meriwether was playing Liar’s Poker before the game even started.

At the time, many traders believed the game of Liar’s Poker translated well to bond trading.

Many believed the game tested a trader’s character and improved his instincts, and general theory had individuals believing that a good player made a good trader. In Liar’s Poker, as few as two and as many as ten people form a circle with each player holding a dollar bill close to his chest. Each player is attempting to fool the others about his dollar bill’s serial number.

Liar’s Poker begins when a trader makes a bid for, as an example, “Two threes.” The player is betting that each player’s serial number has at least two threes. The player to the left can bid higher, meaning he bids on the same quantity of a higher number or more of any number, or challenge the previous bid. The game continues until every other player challenges a single player’s bid.

During the entirety of the game, bluffs, weaknesses, and predictability are deciphered and probabilities calculated depending on each bid and the number of random serial numbers. At Salomon Brothers, Liar’s Poker was the best way to test a trader’s ability, instinct, character, and strength.

Never Mention Money

“I WILL BE A MILLIONAIRE. I WILL HAVE A BIG HOUSE. IT WILL BE FUN FOR ME.” Finishing his master’s degree in economics at the London School of Economics, Michael Lewis received an invitation for a fundraiser at St. James’s Palace with the Queen Mother. Still in the job hunt, Lewis was seated conveniently between the wives of two managing directors from Salomon Brothers.

His night turned into an interview until the wife of the more senior Salomon Brothers managing director was satisfied. Her satisfaction turned into a chance for Lewis to work on Salomon Brothers’ trading floor. Regardless of the fact that Lewis knew nothing about trading and little about Salomon Brothers, Lewis boldly accepted the challenge of waking up each morning “ready to bite the ass off a bear.” Lewis was going to start training at the world’s most profitable investment bank.

Learning to Love your Corporate Future

“HE WHO MAKES A BEAST OF HIMSELF GETS RID OF THE PAIN OF BEING A MAN.” Stock and bonds are the language of Wall Street, and at the end of the 1970’s Salomon Brothers had a tight grip on the bond market. Better than everyone else the firm knew how to value, trade, and sell bonds. This game was not about risk but about a Salomon Brothers bond trader’s ability to act as a toll taker.

With each financial transaction, Salomon Brothers relied on the bond salesman’s ability to sell and the bond trader’s ability to execute the trade. The hitch was a trader could continue to move the bonds through the manipulation of man’s ignorance and collect a fee with each trade. Salomon Brothers knew the formula for making other investors the fools of the entire market.

Additionally, on October 6, 1979, Paul Volcker of the Federal Reserve unintentionally added to Salomon Brothers’ spoils. Volcker pronounced a fixed money supply and floating interest rates, thus stopping the money supply from fluctuating with the business cycle. This move by the Federal Reserve was the start of the golden age for bond traders. In theory, the change in monetary policy meant that interest rates, along with bond prices, would fluctuate. When interest rates rise, bond prices fall and vice versa. Bonds were no longer a conservative investment. Moreover, the sheer number of American borrowers increased the volume of bonds in the markets and added another element to Salomon Brothers’ monetary dominance.

Behind the curtain, the vastly profitable bond market forced Salomon Brothers into an era of hypergrowth that would eventually tear the firm apart.

Salomon Brothers’ hired 127 members into the Class of 1985, Michael Lewis included. The corporate identity was fading with each new hire as the training class consisted of individuals looking for money and the false belief that there was no other job worth doing. Not yet sold on the idea of devoting their lives to Salomon Brothers, new hires viewed the firm as a means to an end, and Lewis was no different.

The firm relied on its training program to forge new hires into true and uniform Salomon Brothers employees. Training on the twenty-third floor started with a number of lessons on corporate culture for Michael Lewis and the rest of the Salomon Brothers trainees.

The trading floor is a jungle, and success at Salomon Brothers was dependent on one’s ability to survive in the jungle. Rank and organizational structure was a formality with one’s capacity to make money being what mattered. Not assured of employment, the baddest of the bad were competing for jobs, so there was no relief in making it to the twenty-third floor.

Trainees were competing for the best departments in the best locations, so the pressure was mounting for trainees looking to garner the attention of managing directors. The coveted prize was a chance to become a Big Swinging Dick.

Each day, in hopes of moving in the right direction, trainees moved from the twenty-third floor to the trading floor on the forty-first.

To get a seat on the forty-first floor, a trader had to play the game and knock someone around. Filled with traders on short fuses, the forty-first floor provided trainees the opportunity to interact with managers. For a trainee, the key was to be noticed without blowing one of those fuses, and more often than not this meant becoming the Invisible Man. Typically out of place and rhythm, trainees were freeloaders, but inevitably the singular and laudable Salomon Brothers culture would set in. Regardless, Michael Lewis was finally one of them.

Adult Education

“EAT OR BE EATEN.” A trader took risks on behalf of Salomon Brothers, while a salesman acted as the trader’s connection to the world outside of the forty-first floor. Each job required a different set of skills: Being a trader required a unique and accurate perception of the market, and the prerequisite for a successful salesman was interactive social skills.

The best employees possessed skills of both a trader and salesman, so the distinction between jobs was more of a matter of mere function. The tyranny of the trader was institutionalized: a salesman’s bonus was determined by his trader, yet a trader’s bonus was defined by the profits on his trading book. Traders sat closest to the money, so it was no surprise that traders ruled the entire shop. With that said, by default, Michael Lewis fell straight into place as a bond salesman.

To echo a point made earlier, making money is all that mattered at Salomon Brothers.

There was no distinction between good and evil as long as the money continued to make its way to the firm. There were no rules behind the pursuit of profit and glory, as the entire firm was fueled by the notion of eat or be eaten. Salomon Brothers represented “capitalism at its most raw, and it was self-destructive.”

The range of acceptable behavior was truly stretched at Salomon Brothers, and there was no getting around having to run someone over to make it to the forty-first floor. Fire was met with fire, and that was the only way you survived.

A Brotherhood of Hoods

“I DON’T DO FAVORS. I ACCUMULATE DEBTS.” Wall Street has always derived value by connecting borrowers of money with lenders. In 1978, Salomon Brothers formed Wall Street’s first mortgage security department to adhere to the new definition of borrowers that included homeowners. From 1978-1981, overshadowing the government and corporations, homeowners were the fastest-growing group of borrowers.

The savings and loan (thrift) industry provided a majority of home loans to average Americans, and in return the industry received significant government protection and support, giving rise to lower interest rates.

Coupled with the tax deductibility of mortgage interest payments, lower interest rates led to a mortgage market that became the largest capital market in the world and exceeded $1 trillion.

Even so, at the time the trading of mortgages was thought to be implausible. Mortgages were loans made by savings banks and were not tradable pieces of paper. A single home mortgage was insignificant and messy as a trading security, as Wall Street was used to dealing with much larger numbers than a $100,000 home mortgage. The home mortgage needed to be depersonalized and pooled with other mortgages to become a bond.

Traders could bundle thousands of mortgage loans made by a savings and loan, and bet that only a small number of borrowers would default. The investors in these new securities would collect on both principal prepayments and interest payments.

Bob Dall was Salomon Brothers’ go-to trader for mortgage securities. Dall was a true Salomon Brothers bond trader: “He forgot whatever it was that he wanted to do for a minute and put his finger on the pulse of the market. If the market felt fidgety, if people were scared or desperate, he herded them like sheep into a corner, then made them pay for their uncertainty.

He sat on the market until it puked gold coins. Then he worried about what he wanted to do.” Dall was convinced that mortgage securities would make the most noise in the future, and thus, the mortgage department at Salomon Brothers was formed.

Preparing for the future of mortgage securities, Dall hired Steve Joseph as a financier to negotiate with banks and thrifts to sell their mortgage loans in the interest of transforming the loans into mortgage bonds.

Additionally, Dall needed a trader to create a market for the new bonds, and the obvious choice was Lewis Ranieri. Ranieri would instill confidence in investors and increase the bond market’s reach. At times, Ranieri believed that the ends justified the means and was especially in tune with his own interests and the interests of Salomon Brothers.

He was exactly what the mortgage department needed. Unfortunately, for Dall, Ranieri was everything the mortgage department really needed, and Dall found himself squeezed out of the firm by the challenger Ranieri.

By February 1979, Lewis Ranieri found himself at the head of Salomon Brothers’ entire mortgage operation. Until the end of 1981, Ranieri was in a continuous fight to keep the department together as during a time when it added no significant value to the firm’s bottom line.

Ranieri recruited at the best schools, made the hard sell for the mortgage department, worked to get his traders paid, and generated loyalty at the same time. Ranieri expanded his entire department as others found ways to hunker down or cut back, and he might as well have had a crystal ball because he did it at the exact right time.

The Fat Men and their Marvelous Money Machine

“OCTOBER 1981 WAS THE MOST IRRESPONSIBLE PERIOD IN THE HISTORY OF THE CAPITAL MARKETS.” In October of 1981, Lewis Ranieri’s expansion of the mortgage department seemed to be finally paying off. One month before, Congress passed a tax break that would allow thrifts to sell off their mortgage loans and use the influx of cash to generate higher returns.

The tax break allowed thrifts to take advantage of tax returns on losses generated by mortgage loans sold below par value. Saving and loan presidents were unloading their loans, and $1 trillion worth of debt was suddenly available for Salomon Brothers, as the only fully staffed mortgage department, to monopolize.

Hats in hand, the thrift presidents made a massive mistake in showing their weakness to the Salomon Brothers bond traders. The thrifts were desperate to rid themselves of the mortgage loans, and the only firm on the street able to handle the trades adequately was Salomon Brothers.

The only rule of engagement was: Buyer beware.

It was a game of Liar’s Poker for the bond traders as they took advantage of the ignorance of the thrifts. Savings and loans did not know the true value of what they were selling, and at times, did not even know the terms. They just knew that they wanted to sell. According to Michael Lewis, “even knowledgeable thrift presidents felt they faced a choice between rape and slow suicide.”

By late 1982, the thrifts had a new plan to avoid catastrophe. They attempted to grow by making new mortgage loans on top of their original loans. The idea was to layer brand new loans on top of the old, toxic loans in hopes of offsetting the negative impact of the old loans.

It was a desperate plan that only ensured that the next crisis would be even larger and more dramatic for the savings and loans. Ranieri and his traders could not have cared less since the money continued to stream in. Soon, the traders at Salomon Brothers found themselves in the place of thrifts with nothing between the bankers and the homeowners.

Salomon Brothers traders were now in direct contact with the homeowners’ ability to repay their home mortgages. The firm did not have the time to worry about each individual home mortgage, so the plan was to run with the new market in full faith that things would work in their favor.

Moreover, in part due to Ranieri’s diligence, the newly created Federal Home Loan Mortgage Corporation (Freddie Mac) and the Federal National Mortgage Association (Fannie Mae) guaranteed the home loans and transformed them into government-backed bonds.

Homeowners unable to repay their home mortgages became the government’s problem, and therefore, the quality of the loans became irrelevant. With minimal supervision and controls, a trader in Ranieri’s department was free to buy or sell as many bonds as he deemed appropriate.

By 1983, the Salomon Brothers mortgage department was enjoying unheard-of success.

With his department accounting for 40% of the firm’s revenues, Ranieri was placed on the Salomon Brothers executive committee and on a short list of potential future chairmen. Mortgage traders relished in advancement, glory, and large bonuses while its trading desk became popular among M.B.A.’s coming from the Salomon Brothers training program.

The main selling point was this: Mortgage bonds generated a higher yield than corporate and government bonds with similar credit quality. The U.S. government was not going to default, so the mortgages backed by Freddie Mac and Fannie Mae were an absolute steal.

With the thrifts unable to handle the volume of home mortgages in the early 1980’s, Ranieri’s group found themselves the owners of billions of dollars of mortgage bonds. The economics of supply and demand forced Salomon Brothers to bet on a bullish bond market, and they could not have been more right. Interest rates fell, and bond prices rose, along with trading profits from the mortgage desk.

Salomon Brothers controlled the entire mortgage market.

When the market steered downwards, Ranieri would buy significant positions in the bond market to drive the market up. The nascent market was also inefficient enough for traders to take advantage. Traders learned to bet on areas where homeowners were most likely to pay off their home mortgages, and so the American homeowner was once again a product of the Salomon Brothers money machine.

Unfortunately, Salomon Brothers’ success also led to a new attitude towards working there. Hit and run was the new motto, as the firm became the breeding ground for the rest of Wall Street. The new philosophy was born from Gutfreund’s strong belief that X amount was enough for a trader regardless of the production. For example, a first year trader could generate $10 million worth of revenues and still be compensated at most $90,000.

Obviously that did not sit well with many traders, and “you didn’t ask a trader to squeeze every last penny out of a market for Salomon Brother, train him to exploit the weakness in others, and then expect him to roll over and purr at bonus time.” Salomon Brothers mortgage traders were a hot commodity on Wall Street, and for other firms, no price was too much. Salomon Brothers could not keep up with million dollar contracts, and thus had to sit back and watch its talent walk out the door to the arms of the rest of Wall Street.

The Salomon Diet

“THEY NEVER UNDERSTOOD THAT THE GREATNESS OF THE FIRM WAS ITS CULTURE.” Between 1986 and 1988, Salomon Brothers had a different story to tell. With trading talent leaving for larger contracts, Salomon Brothers was forced to compete with the best on Wall Street. Traders left Salomon Brothers with market sense, trading ability, and client lists. All of a sudden, the likes of Shearson Lehman, Goldman Sachs, First Boston, and Merrill Lynch were all serious competitors to Salomon Brothers.

Salomon Brothers lost their most valuable asset as their monopoly on the mortgage bond market faded away. Unfortunately, this was not the only factor contributing to the deterioration of the Salomon Brothers mortgage department.

Created by Salomon Brothers, the collateralized mortgage obligation (CMO) began to spoil the beautiful inefficiency of mortgage bonds that put Salomon Brothers at the top.

The CMO was shaped to make home mortgages look more like other bonds. To create a CMO, hundreds of millions of dollars of mortgage bonds were gathered and placed into a trust. The trust paid out a certain rate of interest to owners, who had certificates, or CMO’s, to prove their ownership. The Group XIV CMO allowed the market to pinpoint a fair value on home mortgages by comparing them with corporate and treasury bonds.

The margin to exploit market ignorance was smaller was investors had firm idea of what the price of a mortgage bond should be. Not only did the CMO initially generate huge profits for Salomon Brothers, but the CMO also began to right the supply and demand imbalance in the bond-trading world.

With the addition of the CMO, the Salomon Brothers mortgage trading desk had an increased number of products they had to sell to an increase number of buyers. Management at Salomon Brothers quickly lost touch as the market became increasingly more complex.

Younger traders became the experts and assumed power as the older brains struggled to keep up with frontiers of innovation. The wisdom of the elders faded from the trading desk, and by April 1986, the mortgage trading desk lost more money than ever before.

Salomon Brothers’ decline was in full swing as revenues failed to keep up with the growing costs.

In an attempt to seize back control of his firm, Gutfreund created a board of directors that further isolated managers from the problems facing each department. Adding another level of management meant more disaster for the firm’s overall welfare.

The board of directors created division across the firm as board members fought to maintain their own departments. Ultimately, the division left Ranieri & Co. without jobs and Salomon Brothers with little evidence of one of the most profitable businesses in the history of Wall Street.

What Ranieri’s work at Salomon Brothers did leave behind was a legacy. Previously, Wall Street primarily dealt with liabilities, and Ranieri’s work opened up the other side of the balance sheet by showing how assets, such as home mortgages and credit card receivables, could be packaged and sold.

Salomon Brothers did its part in seeding Wall Street with competent traders and a new genre of tradable securities. Ranieri managed to put the mortgage department on the map and played a part in making the U.S. mortgage market one of the largest credit markets in the world. The secret was in the firm’s culture, and when the culture was lost, Salomon Brothers’ grasp of Wall Street was lost with it.

From Geek to Man

“EVERYONE SEES WHAT YOU SEEM TO BE, FEW KNOW WHAT YOU REALLY ARE.” By December 1985, Michael Lewis was out of training and a bond salesman for Salomon Brothers in London, the epicenter of Salomon Brothers’ plan to grasp a global brand. Michael Lewis was a geek.

Defined by traders, a geek was both of the following: “Any person who sucks farts from swans” and “a person immediately out of the training program and in a disgusting larval state between trainee and man.” As a geek, Lewis had no base and nowhere to start.

Learning meant watching how to sound on the phone, how to deal with traders, and how to discern between an opportunity and a fraud.

Lewis was taught to never question the reasoning of a customer but to encourage them regardless of common rationale. He was to appear confident in his advice, and completely understand that he worked for Salomon Brothers and not his customers. If people had to suffer, it was to be at the expense of his customers and not Salomon Brothers. Remember: Caveat emptor, Latin for “buyer beware”.

Within a month, to the obvious expense of an ignorant investor and immediate benefit of a desperate trader, Lewis had blown up his first and only customer. This was not going to be an uncommon task as Lewis worked his way from geek to investment banker.

Some people were born to be customers, and in Salomon Brothers fashion, it was Lewis’ job to take advantage of as customer’s willingness to succumb to any Salomon Brothers advice. It was a great joke that Michael Lewis, having never made real money on his own, was trusted with matters of finance for those looking to beat the market.

Michael Lewis eventually found confidence in imitating the two best Salomon Brothers salesmen he knew: Dash Riprock and a man Lewis calls “Alexander”.

Dash spent his days looking for blips, or small discrepancies, in the market price of bonds, while Alexander worked to exploit the world’s markets by interpreting events around him. Alexander sought to be a contrarian by doing the opposite of the majority or veering away from the initial focus of investor interest during major events to secondary and tertiary effects. Mentored by Dash and Alexander, Lewis was able to swing more business by providing sound moneymaking schemes and a confident sales pitch and look.

Lewis was running his own little casino as he persuaded customers to borrow large sums of money to speculate and bet. For Lewis, “success bred success” as Salomon Brothers management started to trust Lewis with bigger customers and plug him in with larger pools of money.

At his peak, Lewis was working in an investor pool of around 50 billion dollars and generating around ten million dollars each year in risk-free revenues for Salomon Brothers. His business drove him from geek to Salomon Brothers salesman, and shortly after, Lewis attained a status that every Salomon Brothers employee strives for: Big Swinging Dick.

Trading is a zero sum game, and both parties rarely win. There are certain situations where a large number of stocks or bonds need to be sold either because selling them would generate huge profits or not selling them would create huge losses.

At Salomon Brothers, these situations were known as priorities, and during Michael Lewis’ tenure, one of the biggest priorities was 86 million dollars’ worth of Olympia & York bonds. Through a chain of events, selling the bonds would generate as much as two million dollars in revenues for Salomon Brothers, but no salesman, except one, knew of a way to unload the position Salomon Brothers held in the Olympia & York bonds.

Michael Lewis sold the Olympia & York bonds by convincing his best customer of the bonds’ discounted price and incredible, undervalued worth.

Lewis spoke in the language his customer understood by allowing the buyer room to envision a quick, profitable, eighty-six million dollar trade. When the bonds were sold, Lewis received calls from the firm’s managers over the next couple of days congratulating him on his recent success and praising his future at Salomon Brothers.

By mitigating a priority, Lewis was deemed a “Big Swinging Dick” by the man who had given way to the distinction years before. Lewis’ guilt and pain for what could ensue for his customer was dulled by the overwhelming high praise and the salesman’s newfound title.

The Art of War

“YOU DON’T GET RICH IN THIS BUSINESS. YOU ONLY ATTAIN NEW LEVELS OF RELATIVE POVERTY.” In the fall of 1986, Michael Lewis watched as revenues continued to flow through his telephone line, but his personal success was not mirrored on the bottom line of Salomon Brothers. The bullish bond market that had put Salomon Brothers on top was slowing down.

When the market fell in November, “financial Darwinism prevailed.”

The firm found itself in an odd position as weak traders and customers blew themselves up. Deal flow declined and traders found themselves scrambling to keep their bonuses. Constant blame was thrown around the trading floor as everyone began working to save themselves rather than the firm. The negative market forces combined with poor management threw Salomon Brothers for a loop.

Under a flurry of problems at Salomon Brothers, no one was willing to make the difficult decisions and do the work necessary to move the firm back on track. The infighting was rampant, and there was no sense of direction, as the firm continued to grow and management remained silent.

The firm’s growth and globalization opened up the rest of the world to steal a piece of the pie as debt issuance and bond trading became the domain of hundreds of firms around the world. The firm’s employees were short-term greedy and disloyal; they wanted their money now, irrespective of the long-term health of Salomon Brothers.

When bonuses dropped, so did the average length of service for Salomon Brothers employees, and with these factors weighing down on the Salomon Brothers machine, things started to fall apart.

How can We Make you Happier?

“OUR MOST SEVERE MISJUDGMENTS WERE NOT STOPS WE HAD TAKEN BUT STEPS WE HAD NEGLECTED TO TAKE.” In late 1987, Salomon Brothers was failing to make the necessary steps to compete, and for the first time, other firms were putting up numbers that would beat Salomon even at its very best. Salomon Brothers was supposed to be Wall Street’s bond traders, yet they were in extreme danger of losing that distinction as management failed to prepare the firm to trade junk bonds. Viewed as a short-term fad in upper management’s eyes, junk bonds became extremely valuable as power on Wall Street shifted away from Salomon Brothers.

Issued by corporations deemed unlikely to repay their debts, junk bonds provide investors a high-risk, high-reward opportunity.

Throughout the late 1970’s and early 1980’s, Michael Milken at Drexel pounded the table and convinced investors that junk bonds were a smart bet. He held firm to the belief that junk bonds seemed cheap compared to blue-chip bonds, even with the added risk, and he believed, within a portfolio of junk bonds, the higher payoff would outweigh the duds in the group.

Similar to Lewis Ranieri’s work with mortgage bonds, Milken created a market for junk bonds and investors could now lend to small corporations. The market was exploding, and for proof, between 1980 and 1987, $53 billion worth of junk bonds came to market, compared to virtually zero in the 1970’s.

Salomon Brothers was practically absent from the booming junk bond market, and management continued to remain steadfast in their unwillingness to emerge from their outdated bond trading universe. The weaker Salomon Brothers was growing increasingly more susceptible to takeover as hostile raiders made every attempt to purchase large chunks of Salomon Brothers stock.

The rest of Wall Street had finally turned on one of its own. The fate of Salomon Brothers eventually came down to John Gutfreund’s relationship with Warren Buffett that would save Salomon Brothers and, more importantly for Gutfreund, his job.

When Bad Things Happen to Rich People

“HUNDREDS OF NOT PARTICULARLY INNOCENT VICTIMS WERE CRUSHED IN… MISERY.” October 12, 1987 – Day One: A report leaked that Salomon Brothers was planning to fire a thousand people. The entire municipal bonds and money markets departments on the forty-first floor were cleared out.

October 14, 1987 – Day Three: The London branch was earmarked as the branch office most in need of cuts.

October 16, 1987 – Day Five: The London office’s most recent hires were cleared out.

October 17, 1987 – Day Six: Watching out for his own interests, Michael Lewis flew to NYC to lobby for a larger bonus.

October 19, 1987 – Day Seven: The stock market fell further than it had ever in its history. Lower stock prices led to an economic slowdown. Less inflation ensued along with a drop in interest rates. Lower interest rates meant higher bond prices. The forty-first floor was cheering.

October 20, 1987 – Day Eight: Credit committees met in New York to assess the firm’s credit exposure. Salomon Brothers decided to retain 250 new trainees to fill no vacancies on the trading floor.

December 17, 1987 – Bonus Day: For the first time in history, Salomon Brothers tried to buy employee loyalty, but the money game rewarded disloyalty.


At the beginning of 1988, Michael Lewis left Salomon Brothers because he simply did not need to stay any longer. Lewis was no longer under the belief that the size of his paycheck equated to the scope of his societal contribution. Lewis had stayed at the firm long enough to watch his initial motivation for making money crumble and vanish. With much evidence, he had learned that a better life did not come with more money. would like to thank the Titans of Investing for allowing us to publish this content. Titans is a student organization founded by Britt Harris. Learn more about the organization and the man behind it by clicking either of these links.

Britt always taught us Titans that Wisdom is Cheap, and principal can find treasure troves of the good stuff in books. We hope only will also express their thanks to the Titans if the book review brought wisdom into their lives.

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