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Liar’s Poker by Michael Lewis

An interesting tale of life inside a big brokerage house, where the strangest behaviors are normal… if you’re a big swinging dick. It’s a weird dip into a very different life, as the author acknowledges.

It’s half a memoir; the classes and story are told from his perspective, but he takes long asides to explain the politics and organization charts that drive the activity. It sounds like the whole organization underwent a tremendous transformation shortly before he arrived, changing from a partnership with strong controls into a corporation. The older people, who’d worked in the partnership environment, stay decent for a while–out of habit and intertia–but the new kids aren’t locked in as partners, making it much less costly to defect.

A great part of the story was about the beginnings of the residential market and its CMOs. They are kissing cousins to the CDOs that featured so prominently in the 2008 crash… but I never heard of CMOs before this book.

It also demonstrates 2 decades early exactly why the brokerage firms resisted listing prices on an index. Back in the early 80s, the Solomon Brothers middlemen were able to take a huge bite–like 5%–out of mortgage trades where only they knew the prices. That lack of transparency helped drive mortgages from an ignored remnant to 40% of the profit in less than 5 years. But, as soon as their rivals had access to the prices [mostly via defectors], the margins collapsed quickly.

The relations he describes makes the movies about Wall Street sound like documentaries, instead of the wild exaggeration for the screen that I’d hoped. It’s an amazing tale, with corruption at hand at every turn. It’s amazing that he was able to avoid enough of the snares to escape… with a hefty bonus, but without permanently taking on the trader’s worldview.

What’s scary is how many of the very same things played out in the 2008 crisis–also driven by “financialized” versions of mortgages sliced into tranches. It’s crazy how much is familiar…

Anyway, well written, with terrifying foresight baked in.