Book recommendations (1): Liar’s Poker

I don’t advise students to do much preparation ahead of starting the MFin. It’s a very full course and it’s better to get some rest rather than try to learn early what you’ll be covering in the degree. But I do recommend one or two books that are worth reading in their own right and which help to get you in the right frame of mind. Building on that short list, I was urged by a current student to list those books which I really like and recommend, going beyond just finance. I’ll start today with the one that I still think is the best read in finance, Michael Lewis’s “Liar’s Poker”.

Lewis is an excellent writer, who mistakenly took a career detour into investment banking. This produced one of the funniest and yet most educational books about financial markets. It was published in 1989, which seems another, somewhat more innocent era now. It captures the greed, excess, arrogance and hilarity of the investment bank Salomon Brothers, then the dominant bond trading house. It is a book that combines great entertainment with a lucid account of the birth of the collateralised mortgage obligation – not an easy trick to pull off.

What makes the book fun is the characters.  There is one known as the Human Piranha, who specialises in f***speak. John Gutfreund, the then chairman of the firm, is wonderfully described, together with this social climber wife. The hapless German investor who Lewis accidentally “blows up” by selling him some bonds that the traders were desperate to get rid of. And ice-cold John Meriwether, who later was fired as a result of a Salomon trader’s attempt to rig the Treasury Bond auction and set up the infamous Long Term Capital Management.

I worked at Salomons more than a decade later, in the less chaotic London office, and in equities. We in research were based above the vast trading floor in Victoria, at that time the largest in London, and it was amazing to hear the roar of the floor when some key macroeconomic data were announced. Even then there were eccentricities.  There was a legendary Japanese proprietary trader who insisted his team prayed to a shrine for good luck. For a while he made so much money for the bank that the management let him do what he wanted. It later appeared he had simply been taking big bets. When Salomons was sold to Traveller’s Group (which then merged with Citibank to create Citigroup) the CEO told a group of us that it would improve the earnings quality above the current strategy for hitting quarterly earnings, which was to take a pop at the long bond (equivalent to betting on red in roulette).

So I may have sentimental reasons for liking Liar’s Poker but I do think it remains an excellent read. Lewis has continued to write about finance from time to time. His recent essay on the Irish economic disaster for Vanity Fair combines amusement, insight and a gift for telling anecdotes.

http://www.vanityfair.com/online/daily/2011/02/michael-lewis-on-how-merrill-lynch-and-brian-lenihan-stuck-the-people-of-ireland-with-a-debt-of-106-billion.html

Lewis’s more recent book “The Big Short” is also good but not in the same class. It’s more narrow in scope and has a rather sad undercurrent, appropriate to the disaster unfolding in the US housing market as the book progresses. It’s also justifiably angry, as it describes the fraud and greed that helped push so many households into financial distress.

In a recent lecture in London, Lewis reportedly came up with a great metaphor for the credit crisis. You’re at a party where they turn the lights off and say you can do whatever you want. Then they turn the lights back on.

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