Written in 1988 the book gives us a ringside view of the creation of Mortgage bond and Junk bonds. Twenty years later we witnessed a massive blow up involving Mortgage subprime lending and NINJA loans (No Income No Job or Assets) that led to the great Financial Crisis.
The creation of the Mortgage bond market is the genesis to an incredibly mismanaged risk allocation culture – all in the chase to drive the short-term yield on money. But this is not just serious stuff – the writer relies on his own experiences as a rookie bond salesman to provide us a glimpse into the lives of the privileged few who had highly stressful jobs and incredible lifestyle to keep them hooked.
The opening scenes describe the ‘Liar’s Poker’ game played by the traders. It is a smart game – you need to have a mind for numbers and probability. You need to be able to mask your emotions and knowledge just on similar lines as required to play poker. The game gets an extra edge since you are playing with professionals; so it no real kid play. But the game is amoral not even immoral – the actors can keep changing but the relentless pursuit of yield will go on undaunted by man or the environment.
The writer engages with a false modesty in describing 24-year-old kids being randomly picked up and given responsibilities to manage huge sums of money without being equipped with sufficient knowledge and experience. To begin with the kids are smart enough to jump the hoops of the education and recruitment system. They have the burning ambition to make it big (usually that stands for money) early in life and they are willing to pay the price.
Of course the price is so dear – they nearly lose their lives paying the cost. In the initial settings, the writer describes their training induction process. Part of it is stress that make them play strange tricks and indulge in anti-social behaviour. Part of it is actually the initial engagement process itself – managing to find the right job within the organization, avoiding the moves that doom you to failure from the start, trying to attract the attention of the people who matter but not being craven about it.
So the book is all about risk, morals and the psychological game. The morals are abysmal is learnt early on – the entire system is geared to ensure that the rules of the game are understood and played. ‘Asymmetry of information’, the sucker in the market, caveat emptor (buyer beware), the obvious conflict of doing it right for the firm v/s for the client, the inherently ‘zero-sum’ nature of the game, the scramble to take credit for wins and the schemes to shift the blame for failures, the relentless search to find the next big thing that will be the holy grail in the firm – it all points to a rather ‘sick’ environment. And obviously even the most talented people are not able to put up long with the toll it takes on their health and soul.
The schisms widen further when interdepartmental rivalry is in full flow and the annual bonuses (spoils of the war) are not shared equitably (the System favours loyalty and rewards vintage staff more. Further the departmental fights for their pound of flesh is de rigueur as well).
Lewis’ gives us a great insight into the bond market. The evolution of Mortgage bonds and Junk bonds is very instructive and one marvels at the creativity shown by people who take on long odds in the hope of creating a new market.
But the relentless chase for the moolah is dehumanizing for sure – everything is commoditized, favours are traded and meaningful relationships are such a rare reality. The ‘team’ spirit is missing as well. (The Mortgage bond team is shown to share it, but it eventually morphs into a clique and finally get blown to bits as well).
An ideal case study for improving Organizational Design and ensuring the rewards are not so disproportionate that all that can be seen is ‘animal spirits’ being unleashed. But Lewis is no starry-eyed kid. He eventually leaves and acknowledges the revulsion he felt for the System that he ‘abused’ and was ‘abused’ by in return as well. It leaves him so numb that he finds it no longer valuable to earn and maximize the honest living. He seems to hope that the 80s were a period of adolescence in the evolving financial world and soon a more matured phase would replace it. By the likes of what we saw in 2008, that doesn’t seem to have happened yet. The ‘Dog-Eat-Dog’ syndrome continues unabated. It even led Lewis’ to make an insightful comment after the 2008 Financial Crisis where he remarked on Banking, “The crash happened because of a dramatic failure of free markets and capitalism in general. To top it all, the banks were saved by the taxpayer. In other words, banks benefit from socialism, while everyone else has to live under capitalism. The people who are paid the most live by a different set of rules to everyone else. How absurd is that?”
Yet he is not a socialist as he doesn’t think that it works on the whole. Well one is never to get to live in a perfect world right. So as it comes with any other decisions, never let go the phrase ‘caveat emptor’ (Buyer Beware) if you don’t want to be sold Lemons. But do read the book and get yourself a first class education on the world on investment banking and how money makes the world go round.