"All this has happened before and will happen again."
For sci-fi geeks and TV wonks, these words will be instantly familiar as lines of scripture from the polytheistic religion of Battlestar Galactica, but they could just as easily be applied to nearly any catastrophe on Wall Street. Probably the most surprising thing about reading anything about its history is the constant recognition of some error or horror committed in the past that is being re-committed in the present.
Such is the case with Michael Lewis' 1989 book, Liar's Poker, at once both a memoir of a young man's rise through the tumultuous and fantastically profitable 1980s and a meditation on the excesses and blindness that drove them.
Lewis' name should be familiar to many readers right now, for two reasons. Over the last decade, modern statistical analysis has overtaken baseball, driven in part by the early-2000s success of the small-market Oakland A's and Lewis' profile of their general manager Billy Beane. That profile, Moneyball, showed how teams could win "an unfair game" by using the same methods of analysis that brokerage houses use when evaluating a company's stock.
The second way in which Lewis should be familiar is that his work currently appears in the movies and is slated to do so again soon. A Moneyball movie is in the works, with Steven Soderbergh set to direct, Aaron Sorkin (of West Wing fame) punching up the script and Brad Pitt starring as Beane. Meanwhile,
The Blind Side garnered healthy holiday audiences in the theaters, with a heartwarming true story of a suburban mom (played by Sandra Bullock) adopting a young man who went on to become a standout offensive lineman.
The book takes its name from a high-stakes game of bluff and probability that involves guessing the numbers on the backs of dollar bills, and the game itself works as a kind of metaphor for the world Lewis entered. A Princeton graduate with an art degree, Lewis seems distinctly unprepared for the type of work he undertakes, and much of the humor and shock of the book comes through his own bewildered commentary as he realizes that he indeed is being paid to bluff that he knows how to do his job and then bluff that he knows how to do it at other people in order to get them to give him money.
This perspective works three ways. One, by couching his narrative as a sort of babe-in-the-woods tale, he's able to explain complex ideas about investment and trading to an audience that might not understand them. We learn as he learns. Two, some of his naivete may be something of a pose: by acting just as flabbergasted as we are, Lewis probably seeks to expiate some of his sins for participating in as much wanton greed as anyone else. Three, it helps to explain that even the supposedly complex evaluative systems and high standards of talent employed by these brokerage houses often bear little relation to the quality of their results.
The most obvious example here is Lewis: this is a guy with an art degree, yet he made a lot of money and was smart enough to see what was going on. But other examples of the blindness of the Masters of the Universe leap out as well. Take the case of Lewie Ranieri. This was a man promoted from the mail room and undervalued as an employee because he lacked the Ivy League and business-school pedigree. Yet he essentially invented the mortgage-backed security — the Collateralized Mortgage Obligation (CMO) — immediately opening up billions of dollars in loans and properties to securitization (i.e. bundling them together and turning them into securities that could be traded). Even so, while he was doing this, management undervalued his innovation or simply failed to understand it. Often, in Liar's Poker, it becomes clear that the men running the store don't know or understand the decisions being made beneath them.
This point should be most salient to current readers. What's galling about Liar's Poker isn't that a horrible lesson had to be taught to investors, bankers and brokers but rather that the lesson largely went unlearned. The mechanisms seen in Lewis' book are on display today, unheeding not only 1987 but 2007. Just as John Gutfreund, the Salomon Brothers boss of Lewis' time didn't fully understand what his employees were doing yet represented the will of the firm to the world, we see representatives from Merrill Lynch, Lehman Brothers, AIG and Goldman Sachs testify before congress and demonstrate unmistakably that very few of them understood what was going on in their day either. Just as the last decade saw banks deliberately making more and more risky home loans to create more loans that could be bundled into packages, securitized and sold off in tranches, so too did the thrifts (Savings and Loans) of the 1980s create a Ponzi Scheme of loans not only to fund their operations but also to generate more CMOs, the CDOs (Collateralized Debt Obligations) of their day.
Perhaps cycles of boom and bust like this are inherent in any unregulated market, but it's still worth the effort to learn their histories in order to attempt some measures to prevent repeating them. Liar's Poker offers both an entertaining history as well as an accessible primer in bond and securities trading. While it can be enjoyed primarily as an entertaining and witty personal memoir, it can also be read as a bitter indictment of lessons twice ignored by the people with the most power to effect changes based on them.
Within the past hour, I saw a young man reading a very old pb of LIAR'S POKER. And I thought the very same thing.
Yes, I would absolutely agree that "cycles of boom and bust like this are inherent in any unregulated market." Precisely why we need regulation. I find it very instructive to shove LIAR'S POKER at those freer-than-free market Republicans who claim the most recent bust was the result of the Clinton admin's regulatory changes--all the Dems fault! Granted, those particular changes contributed to the particular shape of this bust, but was Clinton president in 1987?
The problem I see is that the will of the people--including investors, no less!--is no longer expressible in any legislative form due to lobbying and ever-more-closely interlocking boards and financial interests that govern and run the financial markets.
Even libertarians will concede that one of the functions of government, in a free trade market, is to prevent blatant fraud. No market can survive continued basic fraud -- even in early capitalist societies, someone made sure the silver was silver and the gold was gold. There's no one making sure that the CMOs and other side bet securities are worth anything but what their sellers say they are worth, except people who make money by valuing them at what they are not worth. And "caveat emptor/buyer beware" is just not working out as an adequate foundation for the world securities market.
Harrumph. Great post, btw! If I could ever figure out how to give more than one laurel, I would 
