LIAR'S POKER

There are two reasons to read Liar's Poker by Michael Lewis, which I have just done, some 20 years after I first did. For one, it is extremely well written and very funny in parts, surprising attributes of a book about business (basically, the history of Salomon Brothers and the bond market during the 1980's).

Secondly, and more importantly, it is extremely prescient. First published in 1989, it has everything in it that any reasonably well-read regulator/bank CEO/politician would need in order to avoid the financial crisis that erupted some two decades later. True, the products, the companies and the people had changed in the meantime. In 1987 it was mortgage bonds and junk bonds, thrifts, Salomon Brothers and Drexel, Burnham, Lambert, John Gutfreund and Michael Milken; in 2007 it was collateralised debt obligations and sovereign risk, Lehmann Brothers and AIG, Hank Greenberg and Dick Fuld. Other than that, the problems were the same. If a trade was good for the financial institution, then it nearly always meant that it was bad for the client (and vice versa); there were no controls, so the obvious way to recoup a loss was to try to double your money; senior management had no idea what subordinates were doing; compensation was out of touch with reality.

But the most egregious problems came from two sources. First, Government meddling (the mortgage bond market took off in the U.S. because of a tax break misguidedly designed to support the savings & loan industry). Secondly, terrible management decisions by those in charge of financial institutions (all four of the above companies either no longer exist or had to be bailed out by the U.S. Government). Basically, the top people "running" large financial institutions have no real idea what their companies do, they are bureaucrats (in the true sense of the word), relying on systems. Those systems are in one sense incredibly sophisticated, being made up of high-powered computers spawning zillions of bytes of data. On the other, they are peopled by individuals whose interests vary wildly, and are only rarely in synch with the organisation whom they work for.

The current financial crisis was dressed up as being about markets, but ultimately, it was all about power. And, as Lord Acton once succinctly put it, power tends to corrupt and absolute power corrupts absolutely. Until that changes, we are all in for another crisis in x years' time, no matter what anybody says.

Walter Blotscher