Better Late…

Liar’s Poker: Rising Through the Wreckage on Wall Street has to be the first book about the mortgage crisis that the United States is going through. I say this with some confidence, because it was first published on October 1, 1990. Yes yes, 18 years ago, but I swear to you it is the most coherent explanation of mortgage securities, and what can go wrong with them, that I’ve seen. The author, Michael Lewis, was a trainee at Salomon Brothers in the mid-1980’s, just when these securities were invented, whole cloth, by a savvy trader on Salomon’s trading floor.

Oddly enough, I picked this book up almost two years ago on a lark; Lewis’ more recent books (Moneyball and The Blind Side, both economics/sports books) had been enjoyable reads, so I snagged his first book, used, on a lark. It turns out that his first career out of college was in finance, and so his first book was a memoir-ish look back at his time at Salomon Brothers, just in time to see it spiral into its death throes.

The middle of the book is an amazing primer on how and why mortgage-derived bonds were created, as well as a couple of ways that they could completely screw you. (While a collapse precisely like the current one doesn’t take place, the situation is clearly predicted by Lewis’ description.) Essentially, mortgages represented an unpleasant investment opportunity for the simple reason that you didn’t know when you’d get your money back; early repayments of mortgages are common, so your 30 year mortage-based security could actually get paid back before you want it to; this does not make financial planners happy.

Then Lewie Ranieri came along. Under his guidance, Salomon created securities that… well, that did a lot of different things: split interest payments from principal payments, guaranteed first (or middle, or last) repayment, and so on. The market boomed, Salomon Brother got filthy rich, and then the inevitable infighting and decline.

Michael Lewis is an excellent writer, with a good sense of what makes a good story. I highly recommend Liar’s Poker if you’d like to see point A of the trip we’re currently on.

Leave a Reply