Self Help

Liar's Poker - Michael Lewis

Author Photo

Matheus Puppe

· 47 min read

“If you liked the book, you can purchase it using the links in the description below. By buying through these links, you contribute to the blog without paying any extra, as we receive a small commission. This helps us bring more quality content to you!”



Here is a summary of key points from the preface and first chapter of Liar’s Poker by Michael Lewis:

  • The book provides an insider’s perspective of Wall Street during the 1980s boom as Lewis worked as a bond salesman at Salomon Brothers.

  • Unprecedented profits were made by young, inexperienced traders during this era due to favorable market conditions.

  • John Meriwether was one of Salomon Brothers’ top bond traders, renowned for his ability to hide emotions and take risks. He and his team of math/econ PhDs became obsessed with the gambling game Liar’s Poker.

  • John Gutfreund was the CEO of Salomon Brothers but loved trading and wanted to be “one of the boys.” He challenged Meriwether to a high-stakes $1 million game of Liar’s Poker, which shocked people given Meriwether’s skill at the game.

  • The chapter establishes Meriwether as the “king” of Liar’s Poker and Gutfreund as an outsider, suggesting his challenge was a risky gambit to prove his courage and status as a trader.

  • The author was invited to dine at St. James’s Palace in London through a distant cousin who had married a German baron. It turned out to be a fundraiser with hundreds of insurance salesmen, not a close encounter with royalty as advertised.

  • Seated between the wives of two Salomon Brothers managing directors, the author was interrogated about his career plans and interests. When he expressed interest in investment banking, one of the wives offered to have her husband arrange a job for him at Salomon Brothers.

  • As the evening concluded, the 84-year-old Queen Mother and her entourage, including corgi dogs, passed by. In a bid to grab attention from royalty amid hundreds of guests, the Salomon Brothers wife loudly shouted “Hey, Queen, Nice Dogs You Have There!” causing discomfort among many present.

  • This chance encounter eventually led to the author receiving a job offer to work on the trading floor at Salomon Brothers in New York, launching his career in investment banking.

  • The passage describes an awkward social situation at a party in St. James’s Palace where the wife of a Salomon Brothers managing director intervened loudly to alleviate discomfort.

  • Impressed by her forcefulness, the author accepted an implied job offer from Salomon Brothers without interviews. They planned to start him in a training program.

  • Days later, the head of Salomon recruiting, Leo Corbett, invited the author to breakfast but still did not formally offer a job. A friend advised the author to call Corbett and accept the role directly.

  • The author did so, and Corbett confirmed he would start in the training program. However, details like pay were not discussed.

  • The author reflects on how unusual and fortunate it was to get this role without interviews, considering his previous unsuccessful attempts to find Wall Street jobs after graduating from Princeton.

  • In the early 1980s, most college graduates pursued analyst roles for corporate finance rather than considering careers in trading, which had a lower prestige. The author almost became trapped in this path himself.

  • Economics became the most popular major at Princeton in the 1980s, driven by the demand from Wall Street investment banks looking to recruit.

  • Investment banks wanted practical hires who would prioritize their careers over other pursuits. Economics taught technical skills but in a dull, non-creative way that demonstrated candidates’ commitment to economic and career pursuits.

  • The author chose to study art history instead of economics because he felt economics was studied for the wrong reasons by his peers. Art history was an unpopular major that wouldn’t help get a job on Wall Street.

  • The author had an interview with Lehman Brothers but was unprepared for a role in investment banking given his major and lack of relevant experience. He recounted stories of stressful interview techniques used by investment banks at the time.

  • Ultimately, the author recognized he was not ready for a job in investment banking despite the pressure to join that career path coming out of college in the 1980s. Economics had become a default path primarily to get recruited by Wall Street firms.

  • The author recalls their first day arriving at Salomon Brothers investment bank in the mid-1980s. They felt jittery but also excited, not truly believing they were starting a job.

  • Salomon Brothers had offered the author a generous starting salary of $42,000 plus a $6,000 bonus after 6 months, totaling $48,000. As a young graduate with no MBA, this was double what professors earned and seemed like lottery winnings.

  • At the time, Salomon Brothers was extremely profitable as it dominated the bond market. Other banks were more focused on equities and corporate dealings. Salomon trafficked in bonds and knew more about valuing and trading them than any other firm on Wall Street.

  • The only small gap in Salomon’s dominance was junk bonds, which were handled more by Drexel Burnham. But junk bonds were still a tiny part of the overall bond market then.

  • The generous salary the author received came directly from Salomon’s big profits in the booming bond market, where it faced little competition from other banks at that time. However, the author did not deeply examine where the money came from at the time.

  • Bonds were traditionally an unfashionable and unglamorous investment on Wall Street. Bond traders received little attention or respect.

  • In the late 1970s, Federal Reserve chair Paul Volcker changed monetary policy to fix money supply and allow interest rates to float freely. This caused bond prices and yields to become highly volatile.

  • As bond markets became more speculative, volumes and trades exploded at firms like Salomon Brothers. Their traders and salespeople became extremely profitable.

  • In the 1980s, borrowing by governments, corporations, and individuals in the US skyrocketed. This caused the total volume of outstanding bonds to surge from $323 billion in 1977 to $7 trillion by 1985.

  • Salomon traders benefitted from both the increased volatility in bond prices due to floating interest rates, as well as the huge growth in the size of the bond market. Their trades and profits grew dramatically during this period.

  • The passage describes the author’s first day arriving for training at Salomon Brothers. It focuses on cultural differences observed between the highly competitive and brash trading floor culture versus the author’s initial expectations.

  • The passage describes the arrival of a new trainee class (Class of 1985) at the investment bank Salomon Brothers, which was going through a period of rapid growth and hiring large trainee classes.

  • It introduces two stereotypical trainees - a disheveled Englishman who sleeps on the floor, complaining about the training, and a woman trying to sell winter clothing from an Asian sweatshop.

  • The speaker argues the trading floor is like a jungle and trainees need to learn from their bosses/guides to succeed. This analogy appeals to the rowdier trainees in the back rows.

  • Overall, the passage paints a picture of an overly large, diverse trainee class that is less committed to long careers at Salomon Brothers compared to past classes. It suggests this influx of new people ultimately contributed to the firm’s decline.

  • The essay describes the culture and dynamics that emerged within the Salomon Brothers training program. Trainees were pitted against each other for a limited number of jobs.

  • This created intense competition and division between trainees who curried favor with managers (the “front row”) and those who remained aloof (the “back row”). Both approaches had pros and cons for getting a job.

  • Job placements were presented opaquely on a blackboard, creating stress. Trainees had to find sponsors among managing directors to advocate for them.

  • Cultural divisions emerged, with front-row trainees ingratiating themselves while back-row trainees mocked the process. Exceptions included a few who had guaranteed jobs and others with family responsibilities.

  • The presence of Japanese trainees added an unpredictable element, as they slept through classes but may have had protected status due to Japan’s financial importance to the firm.

  • This intense competitive environment and lack of transparency or support from management ultimately undermined collaboration and cooperation among the trainees.

  • Salomon Brothers highly valued the few Japanese traders they employed and treated them differently than other employees.

  • The training program was intended to indoctrinate new employees into the Salomon Brothers culture and way of doing business. Speakers shared stories and lessons to socialize trainees.

  • There was a clear division between “back row” and “front row” trainees. Back row acted as a herd and approved of masculinity-focused messages.

  • Success on the trading floor meant becoming a “Big Swinging Dick” - someone who could generate huge profits from their phones. This was the main ambition of trainees.

  • Sally Findlay, a front row trainee, asked a speaker what the key to his success was, prompting ridicule from the back row for kissing up.

  • The training aimed to impress on trainees that they started at the bottom but that standing at Salomon was higher than other firms. It was a form of brainwashing to shape employees in the company’s image.

  • The article describes the intense training program new hires went through at Salomon Brothers investment bank. Even three months in, trainees were uniformly dedicated to the firm.

  • Pay was very high even for inexperienced new hires. When asked why, one trainee cited basic economic supply and demand - many people wanted the jobs so pay was high. But others felt something was off about how supply and demand actually played out in investment banking.

  • Each day after class, trainees were pressured to go to the noisy, intense trading floor to find a mentor and learn. But it was intimidating to approach busy traders. The environment emphasized how trainees were basically useless at first.

  • One lucky trainee, Myron Samuels, seemed to escape the usual hazing process through family connections. He walked around the trading floor confidently while doing no real work, to the frustration of others.

  • In general, the article provides insights into the demanding onboarding process at Salomon Brothers and tensions around high Wall Street pay despite trainees’ lack of experience.

Jim Massey, a senior executive at Salomon Brothers known as the firm’s “hatchet man”, comes to speak to the trainee class. The trainees are nervous and afraid of Massey, who is stern and serious. When he asks for questions, there is silence from the trainees out of fear. Finally, one overly eager trainee asks if the firm has considered opening an office in Prague. The question gets some mocking reactions from other trainees due to its cluelessness. However, Massey answers the question formally without acknowledging how silly it was. The visit reinforces the trainees’ intimidation of Massey and senior management.

The passage discusses two speakers who addressed the Salomon Brothers trainees - Dale Horowitz and John Gutfreund.

Horowitz, nicknamed “Uncle Dale”, had a warm demeanor but got upset when asked about controversial topics like Salomon’s blacklisting by Arabs and its largest shareholder being a South African company. He shut down the questioning.

Gutfreund, the CEO, presented himself as a calm statesman figure. However, trainees knew of his reputation for brutality and suspected his demeanor was just an act. Neither Horowitz nor Gutfreund provided any meaningful insights.

The trainees felt management’s behavior reflected how they had greatly profited from recent financial trends but lacked real understanding of the risks involved. An analyst named Henry Kaufman privately expressed concerns about rising debt levels in America.

In summary, the passage discusses the trainees’ lack of meaningful engagement with Salomon Brothers’ top management and hints at complacency among managers who had profited immensely from recent financial conditions but failed to recognize growing underlying risks.

  • The passage describes the environment and culture of the equity (stock trading) department at Salomon Brothers in the late 1970s.

  • Equity trading had declined in prestige and profitability relative to bond trading after the deregulation of stock commissions in 1975.

  • The equity department was located on the less desirable 40th floor, while bond traders enjoyed the prime 41st floor space.

  • Equity traders had to work harder to attract and retain customers due to greater competition, similar to how they had to plead their case to recruiting trainees.

  • Despite their lower status, equity traders seemed content with their work and enjoyed the challenges and fluctuations of the stock market.

  • Laszlo Birinyi, who led the equity department recruiting pitch, struggled to convince the quantitatively-trained trainees that equity trading was a worthwhile career, as it relied more on experience than academic theory.

  • In the end, the cultural divide between the number-focused recruits and the experience-focused equity traders made it difficult for the latter to attract new talent.

  • An MBA trainee named Franky stumps an equities specialist from Salomon Brothers by asking a technical question about options hedging that the specialist cannot answer. This is an embarrassment for the specialist.

  • Trainees were being courted by the equities department but were wary of committing to it. The department took trainees on a boat ride to try recruiting them more aggressively. Trainees had to be evasive to avoid commitments.

  • Bond trading was becoming more popular among trainees who saw it as a path to more power and money than sales. Sales roles were seen as subordinate to trading. There was a divide between traders and salespeople in status and responsibility.

  • The protagonist concludes they are ill-suited to be a trader based on interactions. They see sales as only marginally more plausible. Transitioning to a career is proving difficult and wall street culture is intimidating and narrow.

The passage describes two colorful characters, the Human Piranha and Sangfroid, who came to speak to trainees. The Human Piranha was a government bond salesman known for his abrasive manner of speaking, littered with profanity. He derided the French government’s bond decisions. His abrasive style made trainees in the front row nervous but those in the back row giggled.

Sangfroid, from the corporate bonds department, took a more intimidating approach. In silence, he stared at the trainees then called on one to state the LIBOR rate, which the trainee correctly answered. He continued down the aisle, grilling another trainee on the TED spread, which the trainee did not know. This confrontation showed trainees were unprepared, disappointing given the expectations of the trading floor. While abusive, these characters were deemed brutally honest by the narrator. Their intimidating styles aimed to prepare trainees for the pressures of the trading floor.

  • Richard O’Grady, a young bond salesman, shares his experience interviewing and eventually working at Salomon Brothers.

  • During his initial interview process, he encountered aggressive and inappropriate behavior from interviewers like Lee Kimmell and Leo Corbett.

  • After telling Corbett where to “stick” the job offer, O’Grady was later recruited back to Salomon where he had a successful career.

  • O’Grady shares advice for surviving the difficult traders and environment on the 41st trading floor. He recounts a story where he stood up to an aggressive trader by calling him an “asshole,” gaining his respect.

  • His message is that trainees need to be prepared to aggressively stand up to the “assholes” on the floor in order to succeed there.

  • The mortgage trading department, known for being the most cutthroat, completes the trainees’ classroom phase. Their traders were infamous for aggression like throwing phones and instilling fear even in experienced employees.

So in summary, O’Grady shares his experience navigating a hostile work environment at Salomon Brothers and advises trainees to aggressively confront difficult traders in order to survive on the trading floor.

  • Matty Oliva was a new trader joining the mortgage desk at Salomon Brothers. As a trainee, he would be hazed by the senior traders.

  • One day, the traders sent Matty to fetch them food from the cafeteria. Matty bragged about stealing some of the food without paying.

  • This set off an elaborate prank by the senior traders. Matty received a fake call from the “SEC food division” investigating the theft. The next day, managing director Michael Mortara confronted Matty about it.

  • Matty was then called to meet with John Gutfreund, the CEO of Salomon Brothers. Gutfreund lectured Matty severely about the incident. Matty thought his career was over.

  • However, it was all just an elaborately staged prank by the mortgage traders to haze the new recruit. When Matty realized it was a joke, all the traders were laughing at how they had fooled him. It was the traders’ way of initiating new members.

So in summary, the senior traders played a prank on Matty, pretending he was being investigated by the SEC for a small cafeteria theft, to welcome him to the trading desk in a humiliating way.

The passage describes the origins of mortgage-backed securities on Wall Street in the late 1970s. At the time, mortgages were seen as small and insignificant compared to corporate bonds. Savings and loans handled the majority of home loans.

Robert Dall at Salomon Brothers believed mortgages could be made tradable by pooling them into standardized bonds. This would allow individual mortgages to be sold off to large investors while keeping the homeowners separate.

The passage uses a skit performed by Salomon salesmen to spoof the stereotype of savings and loan executives as small-time golfers who didn’t understand complex financial products. It acknowledges the cultural divide between suburban homeowners and Wall Street “cowboys”.

By pooling mortgages into homogenous bond-like instruments, individual mortgages could be removed from the local savings and loans and traded anonymously on Wall Street. This innovation helped grow the mortgage market and connect homeowners to a much larger pool of capital. It heralded the securitization of mortgages that would transform Wall Street in the decades to come.

Bill Simon tried to get Ginnie Mae to address the prepayment risk for mortgage bond investors, but they ignored his objections. This gave Simon a distaste for the home mortgage market.

Bob Dall’s job at Salomon Brothers was to borrow and lend money on a daily basis to finance Simon’s bond bets. One day when he had trouble borrowing money, Simon advised him to become the seller instead, which allowed Dall to profit from fluctuations in the money market.

Dall saw potential in the mortgage security market and created the first private mortgage bond issue with Stephen Joseph. He wrote a memo convincing John Gutfreund to start a mortgage department.

Dall needed a trader and financier to lead the new department. He chose Stephen Joseph as the financier and Lew Ranieri as the trader. Dall selected Ranieri because he was a strong, tough-minded dreamer with a quick mind, and Dall believed these qualities were needed to create a new market.

  • Lewie Ranieri was a top trader in Salomon Brothers’ corporate bond department. In 1978, he was abruptly transferred to lead their new embryonic mortgage security department, which he saw as an exile.

  • At first, Ranieri thought mortgages were an unappealing area with little money to be made. However, within 6 years he built the department into a hugely profitable business, earning more than all of Wall Street combined that year.

  • Ranieri had come from humble beginnings, starting as a mailroom clerk at Salomon after dropping out of college. The firm had supported him financially during a difficult time, building his lifelong loyalty to them.

  • At Salomon, ambition and aggressiveness were valued. Ranieri quickly took control of the new mortgage department, expanding it aggressively through hiring and sales. He squeezed out the original head, Bob Dall, within a few months.

  • By 1985, Ranieri had grown the mortgage department tremendously through his energy and expanding their scope. However, he remained a brash and forceful character focused intensely on profits and business.

  • Bob Dall helped build Salomon’s mortgage securities business but was eventually replaced by Lew Ranieri without being formally notified. He felt he was “left hanging” as his role diminished.

  • Ranieri officially took over the mortgage department in 1979. Initially the team was small and inexperienced, coming from back office roles rather than traditional banking backgrounds. They struggled to get the business off the ground.

  • Jeffery Kronthal joined as the first trainee on the team, starting in a low-level clerk role despite his MBA. The team yelled at him frequently as they had no trades or profits yet. However, he believed in Ranieri and the future of the mortgage market.

  • The team faced resentment from other Salomon traders as the mortgage group struggled financially and culturally did not fit in with the rest of the historically Jewish-led firm that was becoming more elite and WASPy in the late 1970s. This caused tensions.

  • They struggled for years to gain traction in the difficult early mortgage market until eventually finding success under Ranieri’s leadership in the following years.

  • The mortgage department at Salomon Brothers had a distinct culture compared to other departments like corporate and government bond trading. It was led by Lew Ranieri and had two main groups - Italian Americans who started it and Jewish traders who later joined.

  • Within Salomon Brothers, the mortgage department was more diverse than other areas in terms of gender and ethnicity. Over time, the annual reports showed other departments becoming less diverse.

  • Ranieri created a tight-knit ‘brotherhood’ in the mortgage department through loyalty and favorable treatment of traders. However, traders had more independence than staff from other areas.

  • The mortgage department felt resented and looked down upon by other departments at Salomon Brothers. Others viewed mortgages as unimportant compared to their areas like government bonds.

  • In 1980, there was a push from within Salomon Brothers to shut down the struggling mortgage department. However, Ranieri expanded it during this difficult time for the mortgage market.

  • Ranieri worked to change laws and build relationships to support the fledgling mortgage bond market, despite resistance from within Salomon Brothers. He received backing mainly from John Gutfreund.

  • Ranieri intentionally kept the mortgage department separate from other areas due to the lack of support and willingness to help from others at Salomon Brothers.

  • In 1981, the US savings and loan industry was facing collapse due to rising interest rates. Congress passed tax breaks to help thrifts, but it required them to sell off mortgage loans.

  • This created a huge supply of mortgage loans for sale that overwhelmed the market. Salomon Brothers’ mortgage trading desk, led by Lewie Ranieri, was the main buyer absorbing much of this supply.

  • The tax breaks were a windfall for Salomon, not something their analysis had anticipated. Thrifts were desperate to sell and didn’t understand the market, so Salomon traders could get very favorable prices.

  • Ranieri took some steps to curb the most aggressive behavior of his traders, such as forcing one to lower the price on bonds he had just sold to make a quick profit.

  • However, the situation greatly benefited Salomon overall as volumes and profits soared. It transformed their small mortgage department into the dominant force in the market during this crisis period for the thrift industry.

  • Lewie Ranieri started a mortgage bond trading department at Salomon Brothers in the early 1980s, seeing an opportunity to securitize and trade whole home loans purchased from savings and loans (thrifts).

  • Trading whole loans directly exposed Salomon to borrower default risk, so Ranieri planned to quickly bundle the loans into bonds guaranteed by Ginnie Mae, Fannie Mae or Freddie Mac. This passed the default risk to the government agencies.

  • Ranieri’s department was hugely profitable but loosely managed, with traders having huge position limits and bonuses based solely on revenues generated rather than profits.

  • By the mid-1980s the mortgage department dominated Salomon’s revenues and Ranieri rose to be one of the top executives as his influence and department grew substantially.

  • Salomon mortgage traders felt they dominated the US mortgage market and saw themselves as uniquely bold and profitable. But the firm’s loose controls failed to properly monitor costs and risks.

  • In the 1980s, Lew Ranieri pitched mortgage-backed securities to institutional investors like pension funds and insurance companies, struggling to convince them to buy despite the higher yields.

  • The main concern was that prepayments made the cash flows unpredictable, making it hard to calculate yields. Ranieri started emphasizing the price - at what spread over Treasuries would they become attractive?

  • Ranieri eventually succeeded in changing investors’ views by marketing mortgage bonds as a way to champion homeowners and build America. He portrayed himself as a champion of average homeowners despite being wealthy on Wall Street.

  • Ranieri had great sales skills and looked the part of a “common man” which helped convince thrift managers and their investments fueled much of the growth in mortgage bonds.

  • The thrift industry became heavily reliant on Ranieri’s advice and became very active traders, with Salomon profiting immensely from the other side of their speculative trades. This boom in mortgage bonds transformed the roles of thrifts and traders.

  • In the early 1980s, interest rates peaked at around 21.5% for prime rates and 17.5% for bills. Long-term rates peaked in October 1981 at around 15.25%.

  • In August 1982, Henry Kaufman turned bullish on bonds, predicting interest rates would fall sharply. When he announced this, the stock market had its biggest single-day gain and bonds rallied dramatically.

  • Salomon Brothers mortgage bond trading desk, led by Lew Ranieri, benefited greatly from the ensuing bond market rally and declining interest rates. They were forced to own billions in mortgage bonds due to market conditions.

  • Ranieri’s traders, like Andy Stone, found ways to manipulate other firms by dominating trading and using research reports to inflate bond prices and unload positions.

  • Younger Ph.D. traders like Steve Roth and Scott Brittenham exploited inefficiencies, like using research to predict which government housing project loans would prepay, allowing huge profits.

  • Traders also studied homeowners’ prepayment behavior, using data to predict which mortgages would prepay when rates fell, again allowing bond profits from prepayments. Howie Rubin developed models to analyze this.

So in summary, Salomon’s mortgage bond traders capitalized on Kaufman’s interest rate forecast, the subsequent bond rally, and inefficiencies in the market to realize huge trading profits through the early 1980s.

  • Mortgage bond trader Lew Ranieri closely monitored homeowners’ repayment behaviors to predict which mortgages were likely to be prepaid. He would then profit by informing traders like Stanley Jaffee, who would buy those mortgages. However, homeowners were unaware they were being watched.

  • Mortgage trading was very profitable initially due to the complexity of modeling prepayment risk. However, as the desk grew, the traders became rowdier and less concerned with others in the firm. Their culture revolved around excess eating and practical jokes.

  • Ranieri encouraged this frat house culture to foster cohesiveness and risk-taking. He enjoyed outrageous stunts like pretending to light a trader’s pants on fire with a lighter. Trading successes were celebrated with lavish monthly dinners.

  • Practical jokes among traders escalated, culminating in an incident where an expensive suit was mistakenly dumped in construction debris, never identifying its true owner. This illustrated both the traders’ recklessness and their willingness to cover for each other.

  • In summary, sophisticated math models drove profits, but traders’ unprofessional behavior devolved, reflecting Ranieri’s encouragement of brazen risk-taking and pranks over collaboration with the wider firm.

  • Lewie Ranieri, a top trader at Salomon Brothers, was pressured by John Gutfreund to change his appearance and image as he was being promoted. He was taken shopping against his will and outfitted in suits, ties, and shirts.

  • Howie Rubin was seen as a uniquely talented young trader, comparable to Ranieri. He had previously worked counting cards in Las Vegas casinos. In his first two years at Salomon, he made $25 million and $30 million respectively, but was only paid the standard first and second year trainee salaries due to compensation policies.

  • The huge trading profits created tensions with compensation. Traders would negotiate fiercely each year for higher pay, implying they may leave for other firms if not paid what they felt they deserved given their contributions. Rubin eventually left Salomon for a guaranteed $1 million salary at Merrill Lynch.

  • Gutfreund struggled to balance acknowledging top performers like Rubin with the firm’s view that it was Salomon creating the opportunities, not individual traders. This led to talented traders being poached by other firms.

  • John Gutfreund led Salomon Brothers and his attitudes were shaped in the era when it was a partnership, requiring loyalty and wealth sharing. But it changed when sold in 1981.

  • Younger traders now demanded cuts of profits they generated. Gutfreund refused to pay more than he felt was enough, citing the era when paying traders millions was unthinkable.

  • Gutfreund criticized younger traders’ greed while paying himself millions. His attitude changed once he cashed out from the sale.

  • He focused on firm growth for status and glory. Traders felt this, not competitiveness, drove expansion.

  • Rising stars like Howie Rubin were recruited away with multi-million dollar contracts, starting a trend of traders using Salomon to get experience then leaving for bigger pay elsewhere.

  • This made Salomon a “nursery” for other firms and weakened its mortgage desk as top producers like Rubin, Baum and others departed for better opportunities elsewhere.

  • Gutfreund tried persuading talent to stay, claiming anyone leaving must be an idiot, but could not compete with outside offers given his refusal to share firm profits fairly with younger traders.

  • After Andy Stone left Salomon Brothers in 1986 demanding a large pay raise, other talented mortgage traders began leaving for competitors as well. This depleted Salomon’s monopoly on the mortgage trading business.

  • The departing traders took their skills, knowledge of customers, and trading strategies to other firms like Merrill Lynch, Goldman Sachs, and Drexel Burnham. They helped those competitors build up their own mortgage trading businesses.

  • As a result, Salomon’s dominance and profit margins in mortgage trading declined rapidly as it had to compete against former employees who knew its playbook. This opened up the market and accelerated other firms catching up to the strategies and technology Salomon had pioneered.

  • By 1987-1988, the period discussed in this chapter, the mortgage trading business at Salomon had significantly deteriorated. Profitability peaked in 1985 but declined as the staff defects undermined Salomon’s monopoly position.

  • Salomon Brothers’ mortgage bond trading desk, led by Lew Ranieri, had dominated the market for years due to the inefficiency and lack of buyers for mortgage bonds.

  • However, the innovation of collateralized mortgage obligations (CMOs) in 1983 disrupted this dominance. CMOs made mortgage bonds behave more like other types of bonds, appealing to new classes of investors and evening out profits.

  • CMOs divided mortgage bond pools into tranches with varying maturities, giving investors more certainty about when they would be repaid. This attracted a huge influx of new pension fund and international money into the market.

  • By 1986, CMOs had driven down returns on mortgage bonds, settling prices based on comparisons to corporate and treasury bonds. The market was now dictating prices rather than traders exploiting buyers’ ignorance.

  • As the market grew more complex with new CMO varieties, younger traders at Salomon Brothers took over management of risks from older analysts who struggled to keep up with innovations. Ranieri lost influence and control of the trading desk.

The traders played a prank by raising Ranieri’s chair so he banged his knees on the desk drawer when sitting down. When asked who did it, D’Antona lied and blamed Mortara, even though he wasn’t there yet. In retaliation, Ranieri dumped all the nearby trash cans on Mortara’s desk. When Mortara asked who did it, D’Antona admitted it was Ranieri.

The mortgage trading desk was losing a lot of money, estimated at $35-65 million that month, but they had offset it with prior profits hidden on their books.

Gutfreund created new management roles to try to control costs, including an Office of the Chairman with Ranieri, Voute and Strauss. However, they did not get along and were seen as continuing the divisions between their respective departments. Strauss and Voute wanted to dismantle the mortgage department. A corporate bond director, Mark Smith, was placed in the mortgage department, seen as a “spy” or “Trojan horse” to weaken Ranieri’s control. D’Antona swore ignorance about who was behind the various pranks and disputes.

Based on the passage,

Mark Smith was a trader at Salomon Brothers who was known for taking big speculative bets. After Merrill Lynch trader Howard Rubin experienced a huge loss from an unauthorized trade in mortgage bonds, Smith saw an opportunity. He convinced Salomon to issue its own mortgage bond securitization, called IOPOs, to take advantage of Merrill’s distress.

Initially things went well - Salomon was able to sell its IOPOs more cheaply than Merrill’s. However, Smith had taken a large short position in mortgage bonds by buying POs, expecting prices to rise. When the market turned, Smith lost tens of millions.

To recover his losses, Smith then claimed the profitable IO positions held by Salomon’s mortgage arbitrage group actually belonged to him as part of a larger planned trade. He took over their profits to offset his own losses. This angered the other traders, as Smith was essentially stealing their money. It highlighted dysfunction at Salomon Brothers and eventually led to several traders quitting the firm in protest.

Based on the passage,

  • Lewie Ranieri had been fired from Salomon Brothers by John Gutfreund in July 1987 during a brief meeting at a law firm office. Ranieri was surprised by his firing.

  • When word reached the mortgage trading desk that Ranieri had been fired, John D’Antona was visibly shaking. The rest of the Ranieri family/old guard on the mortgage trading desk knew they would likely be purged as well.

  • Over the next few months, the rest of the mortgage trading department that had been led by Ranieri was fired, beginning with the head of training Michael Mortara. This included other key members like John D’Antona, Ron Dipasquale, Peter Marro, and Tom Gonella. Only Paul Longenotti remained for a short time.

  • So in summary, Ranieri had been fired by Gutfreund, and in the months following, the rest of the mortgage trading department that had been established and led by Ranieri was fired as well in a purge of the “Ranieri family.”

The passage describes Michael Lewis’s experience as a new trader starting work at Salomon Brothers in London in 1985. He sees London as a place to gain more independence compared to the strict culture of the New York headquarters.

The London office has a more relaxed and irreverent attitude towards management. When CEO John Gutfreund visits, the Europeans poke fun at him rather than treating him like God like in other offices.

Lewis struggles in his early calls as a trainee, having trouble pronouncing a name in the company directory. This highlights the challenges of adapting to a new work culture in a foreign country.

Over time, Salomon steadily expands its London office as part of an ambitious plan by Gutfreund to make Salomon a major global investment bank. However, the different cultural styles between the American management and European employees creates tensions. Lewis finds himself caught between these two worlds as a new “geek” or junior trader.

  • The narrator was assigned to work in Dick Leahy’s bond options and futures sales department at Salomon Brothers after completing a training program.

  • Leahy and his colleague Leslie Christian let the narrator have flexibility to make money in any way rather than pushing specific products.

  • In London, the narrator reports to Stu Willicker, who runs his unit independently and lets his team work flexibly.

  • On the narrator’s second day, his coworker Dash Riprock advises him to short (bet against) Salomon Brothers stock as an early lesson. Dash sees growing bureaucracy at the firm.

  • Dash points to a commemorative book and bowl gifted to employees as signs the firm is wasting money on propaganda rather than core business. This violates the old Salomon ethic in Dash’s view.

  • The narrator is trying to learn the ropes from Dash and others by observing conversations and getting explanations later. Dash gives cryptic advice that the narrator has to interpret on his own.

The narrator describes his early days as a bond salesman (called a “geek”) at Salomon Brothers. He was given little training and relied heavily on his colleagues for advice and feedback. Another salesman, Dash, felt the narrator was easily influenced by whoever he had last spoken to and changed his opinions frequently.

The trading desk was fast-paced, with constant phone calls and rumors moving the markets. The narrator’s initial clients were small European investors betting millions, as larger clients were seen as too risky for a new salesman. One such early client was Herman from an Austrian bank in London, who the narrator foolishly advised with little experience. The narrator acknowledges he posed a danger to his inexperienced clients and may have “blown up” (destroyed) some of their accounts through bad advice as he was learning the job. It was an unforgiving environment where mistakes could cost clients dearly.

Here are the main ideas from the passage:

  • A Salomon Brothers bond trader approaches the narrator with an idea to buy AT&T bonds and short US Treasuries, claiming it would make money for his new customer.

  • The narrator places the trade, buying $3 million of AT&T bonds and shorting $3 million of Treasuries. He does not realize the AT&T bonds were already on Salomon’s books.

  • The next day, the bonds have fallen in value. The trader admits he was trying to unload AT&T bonds that had been losing money for Salomon.

  • The customer, Herman, loses $60,000 on the trade and is furious. The narrator realizes he was used by the trader to help rid Salomon of a bad position.

  • This is the narrator’s initiation into the reality of Wall Street trading - that traders will mislead and use customers/salespeople when it benefits their firm. It’s a situation of “screw the customer” over caring about building long-term relationships.

  • The author had an early experience where he recommended bonds to a German customer that ended up losing $60,000. This showed him the downside of being a middleman who can blame others when things go wrong.

  • The customer blamed him fiercely for the losses over subsequent phone calls. The losses eventually grew to $140,000 and the customer was fired.

  • In his early months at Salomon, the author struggled with many undesirable clients from Europe, some of whom also ended up with losses.

  • He describes meetings with the head of an English brokerage firm who seemed out of his depth in discussing options/futures. They had a long lunch where the man talked extensively.

  • The author felt like a charlatan in those early days as he didn’t really know much but was holding himself out as a finance expert. He struggled to stay ahead of embarrassment through rapidly learning from others.

  • Dash Riprock and Alexander were bond traders at Salomon Brothers with very different styles. Dash did small trades to make money off minor price discrepancies. Alexander had a more big-picture view of global markets and how different events could impact different sectors.

  • The author found Alexander especially insightful and skilled at interpreting news and anticipating secondary effects on markets. Alexander would take contrarian positions when others were selling en masse. He also looked beyond the primary impact of events to related sectors.

  • Alexander served as a mentor to the author, spending significant time talking through trades and his thought process. This helped the author learn to think like a trader and see opportunities. Alexander surprisingly took a personal interest in advising the author despite having no obligation to.

  • Examples are given of how Alexander profited from contrarian plays during crises as well as how he connected events like Chernobyl to unrelated market impacts on oil and potatoes before others saw it. Playing “what if” scenarios was another method Alexander used to gain an edge.

  • The passage describes investing strategies during an economic downturn in Japan following an earthquake. It suggests buying shares of stable Japanese insurance companies and government bonds, which would increase in value as interest rates fall.

  • It also recommends buying the Japanese yen currency, as Japanese companies and investors would withdraw foreign investments and reinvest in Japan, increasing demand for yen. If the yen fell after the quake, that would make it a more attractive investment.

  • The passage then shifts to discussing a salesperson’s techniques for pitching investments over the phone to clients. It describes mimicking the mannerisms and styles of successful colleagues to appear knowledgeable and confident.

  • Leveraging client funds with debt is described as a way to generate large trades and commissions, even with clients who don’t have much cash. This allowed the salesperson to rapidly scale up business.

  • Within months, the salesperson had accumulated a large international client base controlling $50 billion collectively. By anticipating market movements, they were able to profitably shift large sums between different asset classes and countries.

  • Closing a very large trade of $86 million in bonds transformed the salesperson’s reputation within the firm from a “geek” to a “Big Swinging Dick,” suggesting successful completion of a high-profile, challenging deal.

Tom Strauss was an investment banker at Salomon Brothers. One day, he was struggling to sell some risky bonds called Olympia & York (O&Y) bonds. His colleague Alexander suggested selling them to a large Arab investor who wanted to unload them cheaply.

Strauss wasn’t sure about the idea at first. The bonds were unpopular and risky since they were backed by a property, not the full faith of the company. However, Strauss knew selling them could earn Salomon and himself significant profits and bonuses.

After discussing it with Alexander and getting assurances from his supervisor “The Human Piranha”, Strauss called his French client and pitched the bonds as a quick trade opportunity. His client bought $86 million of the bonds.

Strauss was praised and celebrated within Salomon for making the sale. However, he later had nightmares about letting down his client by selling him such risky bonds. The chapter shows the internal conflict Strauss felt between wanting to please his employer for profits and bonuses, versus acting in his client’s best interests. It reveals some of the ethical challenges of working as an investment banker.

  • The narrator is an investment banker working in London for Salomon Brothers in August 1986.

  • He came up with an innovative new financial product (a warrant on German bond prices) in collaboration with his colleague Alexander.

  • Another colleague, who the narrator refers to as “the opportunist,” inserted himself into the project and acted as a liaison to the German government to get approval.

  • The deal was very successful financially. However, the opportunist then took full credit for the idea and deal in a memo circulated internally, making no mention of the narrator or Alexander.

  • The narrator was understandably angry about the opportunist stealing credit. However, the opportunist quickly fled to New York on the Concorde to avoid any confrontation.

  • This caused an internal rivalry and power struggle at Salomon Brothers over who deserved recognition for the lucrative new financial product.

  • The narrator and his colleague Alexander helped arrange an important deal for their company, Salomon Brothers, with a client. However, an opportunistic vice president, referred to as “the opportunist”, took all the credit for the deal in a memo.

  • When the narrator was away, the opportunist bragged about the deal to colleagues in New York. He did not acknowledge the contributions of the narrator or Alexander.

  • The narrator was angered by this, feeling robbed of credit. Alexander wanted to ignore it but the narrator decided to get even by setting up a similar fake deal without telling the opportunist.

  • When the opportunist’s boss heard about the fake deal from others, he confronted the opportunist, who did not know about it. This embarrassed the opportunist.

  • The opportunist then angrily confronted the narrator, threatening his job. But the narrator outmaneuvered him, drawing further admissions, and feeling he had gotten the better of the opportunist in their confrontation.

  • Syndicate managers on Wall Street coordinate all investment banking deals in a similar role to chiefs of staff or general managers. They have much power and influence over decisions.

  • The narrator tells the London syndicate manager about an “opportunist” colleague who tried to take credit for a successful deal.

  • The syndicate manager uses her influence to deny this colleague a promotion and bonus. He ends up quitting.

  • As the bull bond market loses steam in late 1986, Salomon Brothers starts struggling. Traders and salespeople blame each other for failures.

  • Management fails to address issues or make tough decisions. Grunt employees have a clearer view of problems than top management.

  • European institutional investors are increasingly irritated by American banks like Salomon ripping them off. They have more options to go elsewhere unlike locked-in US investors.

  • The author meets an investor controlling just $86 million who has dealt with 285 different investment banks, showing the fragmented global market. Small firms can now compete through low prices.

  • The author and other managers in Salomon Brothers’ London office were under pressure as their global strategy was flawed and not working in local market conditions. The offices were struggling and losing money.

  • Management in New York was still committed to a strategy of global domination but was blaming local managers instead of reexamining the strategy itself. Morale was low.

  • The London managers were new and inexperienced. They struggled with an impossible task given to them by the New York office.

  • Salomon Brothers moved to a new, lavish London office space that was too large and opulent for their needs, signifying hubris and excess.

  • By late 1986, the firm was struggling financially. All employees were focused solely on their upcoming year-end bonuses, which were highly anticipated and critically important to them.

  • Bonus day was an emotional experience, with relief, joy, anger depending on the size of individuals’ payouts relative to peers. It effectively summarized one’s entire year’s worth and value to the firm.

  • The author’s own bonus meeting was deliberately drawn out to increase anticipation and impact. He was highly praised for his performance but still felt major nerves until learning the actual size of his payout.

Here is a summary of key points from the passage:

  • The narrator works as a bond salesman at Salomon Brothers in London in the mid-1980s.

  • He and his coworker Dash Riprock follow a daily routine - Dash arrives early and the two chat constantly as they work to sell bonds to clients.

  • On September 24, 1987, their usual pattern is broken when someone yells “We’re in play!” - this signals the beginning of a major market event, though its nature is not yet clear.

  • The passage sets the scene of the hectic trading floor culture at Salomon Brothers and introduces the narrator’s relationship and daily interactions with his coworker Dash Riprock as they go about their bond sales work. It hints at a significant market disruption taking place but does not provide details. The focus is more on describing the work environment and routine.

  • Hostile raider Ronald Perelman, backed by Drexel Burnham, was making a bid to acquire a large stake in Salomon Brothers investment bank. His advisers were Joseph Perella and Bruce Wasserstein from First Boston.

  • This represented the first time that Wall Street turned on itself in a hostile takeover attempt.

  • It was believed the bid was engineered by Michael Milken of Drexel Burnham to get revenge on John Gutfreund of Salomon for past disputes, including cutting off business ties after Drexel faced legal issues.

  • Milken had built up Drexel’s business in high-yield “junk” bonds that was competing directly with Salomon. Many Salomon employees defected to work for Milken given the huge bonuses he offered.

  • Perelman’s bid could help remove the dysfunctional management at Salomon Brothers which had made poor strategic decisions like overexpansion and ignored profitable new opportunities emerging on Wall Street.

  • While a takeover by Perelman may not have been the best outcome long-term, it offered a chance to examine Salomon as a business rather than an empire run by Gutfreund.

  • In 1986, Drexel Investment Bank had replaced Salomon Brothers as Wall Street’s most profitable firm, making $545.5 million in profits on $4 billion in revenues.

  • Drexel was making its fortune in the growing junk bond market, which Salomon failed to recognize as important. This was a major oversight that contributed to Drexel’s rise and Salomon’s eventual takeover attempt.

  • Michael Milken at Drexel created the modern junk bond market starting in the 1970s. He convinced investors junk bonds were a smart investment despite the risk, similar to how Lewie Ranieri did with mortgage bonds.

  • Milken had an unconventional mind and went against Wall Street norms. He built a highly profitable junk bond department at Drexel in Beverly Hills. His focus was solely on dealmaking, unlike other firms where status came from other factors.

  • Unlike most traders, Milken had both trading skills and the ability to focus and think about companies and industries for the long term. This allowed him to truly understand companies and credit in a way that transformed Wall Street.

  • Michael Milken, working at Drexel Burnham Lambert, completely reassessed how to evaluate corporate creditworthiness and investing opportunities. He focused on smaller, growing companies and large companies with problems that banks wouldn’t lend to.

  • Milken argued the credit rating system overly relied on past performance and balance sheets rather than future potential. He was willing to lend to risky companies if management and industry prospects seemed promising.

  • Junk bonds offered higher yields than blue-chip bonds to compensate for higher risk. They behaved more like stocks than traditional bonds.

  • Milken had access to private company data through Drexel’s research that others lacked. There were no insider trading laws for bonds.

  • Milken pitched junk bonds widely to institutional investors like savings & loans, emphasizing potential returns despite risks. Many gave him control over their bond portfolios.

  • This drove huge growth in Drexel’s business and allowed Milken to finance many growing companies. However, it also exposed some investors like savings & loans to more risk than they could handle.

The passage describes the rise of the junk bond market and corporate takeovers in the 1980s, fueled by Michael Milken and Drexel Burnham Lambert. It discusses how Milken’s early presentations pitching junk bonds to savings and loans received no orders, as those customers had been told by Milken’s competitor at Drexel not to believe the Salomon Brothers team. As demand for junk bonds grew rapidly in the mid-1980s, Milken realized he needed to find more ways to use the capital. This led to the use of junk bonds to finance hostile takeovers, with Milken funding many prominent raiders like Boone Pickens. The takeover activity created huge business opportunities for investment banks. It also led to a dramatic increase in corporate restructurings, management buyouts, and leveraged buyouts as companies responded to the threat of hostile bids. Young bankers aggressively targeted companies they saw as undervalued. Within a industry could suddenly be disrupted as multiple firms became takeover targets.

  • Investment banks like Drexel Burnham and Wasserstein Perella made huge sums of money from advising on mergers and acquisitions in the 1980s, reaching fees of over $100 million for single deals.

  • Salomon Brothers was initially slow to get involved in this lucrative business of financing corporate takeovers through junk bonds. Their excuse was concerns raised by economist Henry Kaufman about overleveraging, but the real reason was senior management didn’t understand the business amid internal turmoil.

  • In 1987, Ronald Perelman launched a takeover bid for Salomon Brothers using junk bonds. To fend him off, John Gutfreund struck a deal with Warren Buffett for Buffett to lend money to Salomon to buy back shares, preserving Gutfreund’s job but costing shareholders dearly.

  • The deal gave Buffett a profitable security while only requiring a safe investment, not full ownership. It allowed Gutfreund to position himself as acting in shareholders’ interests but was largely self-serving given he would have lost his job to Perelman.

  • In the mid-1970s, there was a discussion about potentially taking Salomon Brothers public or selling the firm. William Salomon preferred keeping it a private partnership, while John Gutfreund initially agreed but later changed his mind.

  • In 1981, Gutfreund sold Salomon Brothers to Phibro for $554 million, making him the highest earner from the sale. Salomon believed the firm did not need the capital.

  • In 1987, corporate raider Ronald Perelman made an unsolicited bid to take over Salomon Brothers. Gutfreund persuaded the board to reject the bid and accept an investment from Warren Buffett instead.

  • This raised questions about how well the firm was being managed if Perelman thought he could improve it. It also made some employees envious of those like Michael Milken who were making billions in the booming junk bond market, while they were not.

  • In October 1987, amid the stock market crash, Salomon faced a series of blows over eight days including rumors of layoffs, losses, and eventual involvement in an illegal activity involving U.S. Treasury securities. This was a traumatic period that hurt many at the firm.

  • The head of Salomon Brothers’ London office promised that no jobs would be at risk from an upcoming review. However, two entire departments in New York (municipal bonds and money markets) consisting of around 500 people were suddenly fired.

  • The author questions whether these unprofitable departments needed to be dropped entirely, as keeping a small staff could have maintained customer relationships and opportunities. He also critiques the lack of effort to find other roles for talented employees.

  • A theory emerged that John Gutfreund, the chairman, had intentionally leaked news of planned cuts to The New York Times in order to speed up and expand the layoffs for his own purposes. However, the source of the leak remained a mystery that divided top management.

  • Officials in London were warned their branch was deemed in most need of cuts due to a poor presentation to reviewers in New York. Employees began anxiously awaiting decisions about their own jobs amid rumors that as many as a third may be cut. Unit managers submitted ranked lists of employees and cuts were made from the bottom.

  • By day five, a major storm hit London, underscoring the already tense atmosphere as staff waited to learn their employment fate following the chaos of the unplanned mass layoffs.

The passage describes the aftermath of mass layoffs at Salomon Brothers during the stock market crash of October 1987. Over 170 people in the London office lost their jobs after struggling through treacherous conditions to get to work, only to be individually called into meetings and fired. Most were embarrassed at having failed. Others tried to transfer to different departments that weren’t cutting jobs. Management took the easiest route and fired the newest, youngest employees who lacked influence. A disproportionate number of women were also let go. As people were fired, there was weeping and comfort on the normally stoic trading floor. The author witnessed similar scenes in New York, where empty desks and motivational signs remained from those suddenly laid off from the money market department. It was an unsettling time of upheaval and uncertainty during a major market collapse.

  • The stock market crash led to a boom in the bond market as money flooded into safe haven assets like bonds. One bond trader who bet against this movement lost money and angrily shouted curses at the Statue of Liberty.

  • Questions arose about Salomon Brother’s recent decisions to enter the junk bond market and take a large stake in British Petroleum, both of which significantly lost value in the crash.

  • John Gutfreund, Salomon’s CEO, became actively involved in trading decisions during the volatile time and personally purchased Salomon stock, believing it was undervalued. Others at the firm followed suit.

  • There was blame placed by some at Salomon on the British government for continuing its sale of BP shares, which they argued exacerbated the crash. One managing director even threatened the Bank of England with another crash if they didn’t buy back BP shares at the original price.

  • Morale dropped significantly among Salomon trainees who feared widespread layoffs in the aftermath of the crash.

So in summary, it describes the fallout from the 1987 crash through the lens of traders at Salomon Brothers and actions taken both internally at the firm and externally in dealing with the crash consequences.

  • The speaker gave a presentation to Salomon Brothers trainees, but they showed little interest and were more concerned about job security and opportunities in the London office.

  • Jim Massey then announced that the training program would continue, but most trainees would end up in back office roles rather than trading floors.

  • On bonus day, the speaker received $225,000 even though their performance did not warrant such a large bonus. Senior managers were panicked about retention and trying to buy loyalty with higher pay.

  • However, the speaker’s loyalty was to individuals, not the firm. And they saw money as no longer reflecting contribution to society after witnessing the absurd bonuses on Wall Street.

  • The speaker left Salomon Brothers in 1988 even though it meant losing a chance at becoming a millionaire. Their job lacked adventure and they sought more risk. However, leaving was a “suicidal trade” financially.

  • The speaker believes the best decisions are unexpected ones against convention. Leaving may have been against financial logic but cut against expectations, so it could still prove to be a good choice in the long run.

Here are the key points of a case for unpredictability in career planning from the provided summary:

  • Careers can take unexpected turns. The author transitioned through several jobs before finding his niche in journalism, working as a stockboy, cabinetmaker, and tour guide before landing writing gigs.

  • Even at top companies and on successful career paths, circumstances can change rapidly. Salomon Brothers was a dominant firm that suddenly faced scandals and losses. Prominent executives left or were replaced.

  • Rumors and speculation often surround major deals and changes in leadership. The facts aren’t always clear.

  • Economic and market forces are difficult to predict and can impact companies and industries in unforeseen ways. Once thriving businesses and deals took unexpected downturns.

  • Career prospects and compensation situations aren’t guaranteed. Senior managers at Salomon initially faced no consequences after major losses, contradicting expectations.

  • Flexibility and willingness to adapt to new opportunities may serve individuals better than rigidly sticking to long-term plans. The author found new avenues in journalism after experimenting in different fields.

So in summary, the case advocates embracing some unpredictability and uncertainty in career planning given how quickly circumstances, companies, and entire industries can change in unexpected ways. Flexibility may better position people to respond to disruptions.

Author Photo

About Matheus Puppe