Before he wrote The Big Short and Moneyball, before Sandra Bulloch saw The Blind Side, Michael Lewis published Liar’s Poker, a sometimes cynical, mostly thankful, and somewhat prescient account of his three years at Salomon Brothers. Having read Lewis’ book about the recent financial meltdown, I could not help but wonder “doesn’t anyone learn from experience?” as I saw eerie similarities in a book written two decades earlier. Based on this book, traders at Salomon Brothers seemed supercilious, short-sighted, and superficial. They may have made a great deal of money in the past but very little time was devoted to understanding what they did well and how they could continue to be profitable going forward.
The company did not believe that there was significant money to be made outside the bond market yet the mortgage swaps department was very successful (yet, as we have since learned, these swaps are extremely volatile). As Michael Milken was exploiting junk bonds and taking Drexel Burham to new heights, Salomon was stagnant, unable to see the opportunities in the future or threats on the horizon. Subsequently, the company became reactionary, terminating the money markets division on the eve of Black Monday leaving themselves unable to take advantage of the market drop. They chased junk bonds that were actually junk and not simply undervalued because it was trendy. Corporate culture was so ignorant and nobody was in a position to say anything about the firms eminent downfall.
As Nassim Nicholas Taleb wrote in his seminal work The Black Swan, people don’t think anymore. Groupthink, myopia, and fear headline countless biases that influence decisions. Liar’s Poker is the story of a blue chip firm blown apart from inside and financial markets more eager to satisfy supply and demand than make money wisely. Taleb outlines the importance of probability and preparedness and how individuals and groups can protect themselves from risk. Though the book may be four hundred pages, the steps are simple. So why does thinking go wrong so often, repeatedly.