|October - December 2008
|Early into my 10-year career as a corporate banker, I
decided it was time to learn more about the origins and inner
workings of our financial markets. A history lesson, of sorts,
was in order. And what better way to learn, than to read
about the various financial debacles that made headlines
when I was a kid. Den of Thieves was a pretty good primer
on 1980's insider trading, the rise of junk bonds as a way
for companies to raise capital, and the Savings & Loan crisis.
I moved on to Monkey Business, which taught me all I ever
wanted to know about investment banking. Barbarians at
the Gate told the story of how to buy a Fortune 500
company using massive quantities of debt.
The above two books, however, have always been my
personal favorites. Liar's Poker is Michael Lewis' account of
his four years in the mid-1980's at Solomon Brothers, which
at the time was one of the best bond trading firms on Wall
Street. When Genius Failed told the story of a group of
seriously intelligent guys (some had won Nobel prizes) who
came up with a great idea to make a bunch of money in the
early 1990's and, well, the book's title pretty much says how
that all turned out.
What makes these books most interesting, aside from the
financial history lessons, is that they keep being written.
Over....and over....and over again. I didn't bother reading
any of the books about Enron-type scandals, nor will I
spend much time on what will surely be an endless release of
hardcovers delving into the sub-prime lending meltdown,
because it's the same story: a few smart guys come up with
a great idea to make themselves lots of money, they're
eventually exposed as frauds, the companies they work for
blow up, shareholders lose everything, CEO's are paraded in
front of congress, some serve jail time, and 5 years later,
rinse and repeat.
These 5-year cycles have been well documented since the
1980's. But try locating a book similar to those I've listed
above, published between the time of the Great Depression
and the start of the Reagan years...go ahead, try. It's tough
to find any financial scandals over the course of those five
decades that required more than 2 pages to describe. The
reason for this lies in a little something the investment
bankers like to call Financial Innovation.
Investment bankers, by nature, are salesmen. They sell
ideas, and financially innovative ones sell best. Before the
1980's came along, government regulation kept those ideas
within a compact set of parameters. But over time, the
salesmen sold the ultimate idea: legislate the idea-stifling
regulation out of existence. It worked, fantastically. For a
solid 25 years, investment bankers dreamed up financial
ideas that hadn't been possible since the 1920's. Huge fees
were generated from these ideas. Derivatives, junk bonds,
commodity trading, equity research, you name it. If a
scandal was associated with it, Financial Innovation was
Michael Lewis wrote Liar's Poker with the idea that he was
documenting the end of days for the ridiculousness of
investment banks. And it was pretty friggin' ridiculous. At
my former employer, we routinely handed out six-figure
incomes to 23-year-olds and only asked them for 90 hours a
week designing PowerPoint presentations. Moderately
experienced investment bankers were lured away from big
Wall Street firms with 3-year contracts guarantying a cool
$500,000 paycheck each year. Youngsters fresh out of our
training program were given corporate credit cards and, on
each night they stayed in the office past 7:00, were
reimbursed for dinner and for $90 cab rides to their parents'
houses in the suburbs. Needless to say, they all stayed past
7:00 whether they were working on anything or not.
Turns out Lewis' end of days prediction was still a couple
decades off, but eventually the various financial innovations
related to sub-prime mortgage lending would bring us to
where we are today: a time when being a buyer of real
estate is much more fun than being a seller.
Follow-up note: after you read Liars Poker, check out an
article Michael Lewis wrote shortly after the financial markets
crashed in 2008. Very interesting reading, from a guy I'm
not ashamed to admit is my favorite author.