Liar’s Poker

Salomon is an investment bank that trades stocks and bonds for its clients. In the early 1980s, it becomes the most profitable bank on Wall Street by dominating the mortgage bond market, a business it developed largely on its own. Imbued with a take-no-prisoners, macho approach to securities trading, Salomon’s employees play fast and loose with ethical constraints to pull down huge revenues. Salomon is sold in 1981 and becomes Philbro-Salomon Inc.; this launches a series of internal changes that contribute to the firm’s growing problems. Eventually other companies steal Salomon’s best ideas and most talented traders, and the once-mighty bank’s glory fades.

According to Lewis, “[a]rbitrage means ‘trading risklessly for profit’” (203). Generally, arbitrage involves finding a place in the market where a security will sell for more than it costs. This search for price gaps adds liquidity to the market, making it easier for investors to buy and sell, but it also tempts salesmen to exaggerate wildly when negotiating with clients. Salomon’s European customers have a taste for risk but want to believe they’re not taking risks, so the traders flatter them by calling their bets “arbitrage.”

The most successful salesmen and traders are referred to crudely, if admiringly, as “Big Swinging Dicks” for their cool and tough-minded abilities to generate huge profits in the competitive bond market. Some “were truly awful human beings” while others “were naturally extremely admirable characters” (86). In short, “it didn’t matter one bit whether he was good or evil as long as he continued to swing that big bat of his” (86).

At the Salomon Brothers London office, a geek is “a person immediately out of the training program and in a disgusting larval state between trainee and man” (190). Lewis begins work at Salomon’s London office as a geek.

A goof at Salomon is a practical joke, and “[g]oofs were a rite of initiation” (104). They can be simple, as with the “Suitcase Goof,” where a trader’s suitcase of weekend clothes gets replaced with wet towels or “pink lace panties” (150). Or they can be elaborate, as in the case of Matty Oliva, who, in his first year at Salomon, was viciously pranked with a phony criminal investigation and nearly quit the firm.

A junk bond is a corporate bond rated so poorly that there is doubt the debt will be repaid. As such, junk bonds are risky, and respectable investors avoid them until Michael Milken at Drexel Burnham develops them into securities for sale to the public (much as Salomon developed mortgage bonds), and they become a big hit.

An option gives the purchaser the right, for a fraction of the full price, to buy or sell a stock at a preset price on a given date in the future. If, for example, the market price has risen by that date, the purchaser of an option to buy can obtain the stock at the preset price and then sell it at the higher market price.

“Rabbi” is Salomon slang for a mentor, a floor manager who will “take you under his wing” (62). The rabbi helps a new hire avoid the pitfalls of the ruthless competition among traders. Advice can be pithy: “‘You’ve got to think of Salomon Brothers as like a jungle’” (48).

Also called a “thrift,” a savings and loan is a bank that specializes in home loans and mortgages. Such institutions are vulnerable to troubles in the housing industry. During the downturn of the late 1970s, hundreds of savings and loans become insolvent, and many of the rest are rescued only by a new tax break that, in turn, provides a gigantic windfall for Salomon’s new mortgage-bond trading desk.