Liar's Poker

There is a central hubris that underlies much of financial advisory as a profession, and the book Liars Poker gets to the essence of this problem. Basically, there is an inherent uncertainty and complexity in financial markets, and the role that many financial advisers attempt to play is that unfailing oracles in a sea of partially efficient markets-generated uncertainty. The central conceit of the novel is the game of Liar’s poker; basically, it is a bidding game using serial numbers from dollar bills. The players must know probability and have a keen grasp of the game, but the level at which the game is actually played is based on the bluffing skills of the players, and the willingness to take real risks with the money.

A scene that exemplifies the risk-taking, and bluffing of the scene in investment banking is where John Meriwether is challenged by John Guttfreund, the former trader viewed by disdain in the firm as no longer a real player, to a single game of liars poker for a million dollars: “One hand, one million dollars, no tears.” By this, he seemingly hoped to establish his credentials when Meriwether backed down, at a price that was low enough that he could afford it if he lost. The problem in such a challenge is that a single two person game of liar’s poker, irrespective of the skills of the players, is essentially a roll of the dice. The amount was enough that Meriwether could not afford to lose it, and his status was such that he couldn’t decline. Instead, knowing that Gottfreund was able to afford a one million dollar loss, he counter challenged; “I’d rather play for real money. Ten million dollars. No tears.” Merriwether quickly backed down, unable or unwilling to bet so substantial a percent of his fortune on a game at which he knew he was outmatched. (two thirds of his liquid capital, after his wife remodeled their new apartment, according to the author.)

This wasn’t only the game they played with their own fortunes, which could multiply or melt away with tremendous rapidity; it was the game they played for, or with, their clients. Of course, you could “blow up” a client or two when you were still learning (bankrupt them by advising a bad financial move,) and then once you had your legs, you would move up the ladder, earning money for the firm by maneuvering around either the market, the clients, or the other players in the market. At the end of the day, the profits taken out of the market are zero-sum, so in this context it’s all a big game of liar’s poker, with the additional benefit of giving the players a sense that they control the world, or at least the world’s financial fortunes.

The hubris, and of course the cocaine, hookers, and profligate spending habits of the traders are legendary, but Lewis does a wonderful job of portraying the traders, as it were, in their natural habitat with motives and scenery intact. It is a interesting perspective looking at the way the street works, especially given the short viewpoints of the traders and the asymmetric motives of traders and investors. In short, anyone interested in investing, and especially working on Wall Street, should see this perspective to more fully understand some of the problems that Wall Street has representing their clients, especially on the sell side.