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Liar’s Poker by Michael Lewis

Posted by RB Kollannur on September 6, 2012


Note: This review is part of a weekly book review column that I write for City Journal, an English newspaper based in Thrissur, Kerala.

Published on 02/09/2012

Publisher – Random House; Year of Publication – 1989; Pages – 298; Cost at the time of purchase – Rs. 250

Many of us have heard about the subprime crisis that broke US housing and propelled the world into an economic crisis. How US bankers would give housing loans to low creditworthy individuals and then sell these loans to other banks bundling them with more creditable loans and how these bundles were then insured and then reinsured and resold and again insured and so on, creating a huge corpus of assets in banks and insurance companies across US and Europe.

All this is well and good since all the banks and insurance companies got their commission on the number of transactions that happened and so long as the loans kept getting sold and insured they were minting money. Until the people who took the original loan stopped repaying the loans since they could not pay it back in the first place (Hence they were low creditworthy individuals) making entire corpus non-performing for all parties involved. With such a huge amount taken out of the economy, banks did not have money to lend to businesses, which needed it to employ and pay people thereby leading to a global economic crisis.

Of course, I have put it in very simple terms, but the actual crisis is much more complicated than that. But what is tragic about the subprime crisis is that it was merely a reflection of what happened twenty years earlier when US mortgages had similarly collapsed on the weight of banking misuse done on housing and car loans.

Liar’s Poker is an autobiographical account of an investment banker with Salomon Brothers, the leading investment bank in the US in 1980s. The 1980s saw Salomon Brothers specialize in mortgage based securities which were based on mortgage loans given by thrift banks in US to buy cars and other personal loans. These securities were traded with the clients of Salomon with Salomon profiting on each transaction.

But these mortgages were given out without proper analysis and credit checking. Many banks got into trouble for this and had to sell their loans at steep discount. As a result, many banks collapsed and US government had to bail them out. What we saw in the last decade was an amplification of what happened in the 1980s with a bit more of financial “innovation”. It shows us how history’s lessons remain unlearned.

Michael Lewis gives an excellent review of the bond trading market of the 1980s US. He also gives a very revealing insight to the behaviour of the investment bankers (stock brokers in local parlance) as they lie to their clients and cheat them so that their company can maximize their profit. His former employers had to deal with criticism because of the revelations in the book but not much, since it was a widely known industrial practice. So, there is little surprise when twenty years later, thanks to similar opportunism by investment bankers the world economy again had to go through another upheaval at the cost of public money.

Liar’s Poker works well as a tell-all book about Wall Street of the “Greed is Good” era. Lewis leaves out nothing about the underhanded dealings of the investment banks laced with a mix of the internal politics and sarcastic humour to come up with an entertaining autobiography.

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One Response to “Liar’s Poker by Michael Lewis”

  1. […] Ottomans and the Battle for Europe by Andrew Wheatcroft – Published on 26/08/2012 25) Liar’s Poker by Michael Lewis – Published on […]

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