Liar’s Poker (Michael Lewis) #1

The biggest myth about bond traders, and therefore the greatest misunderstanding about the unprecedented prosperity on Wall Street in the 1980s, are that they make their money by taking large risks. A few do. And all the traders take small risks. But most traders act simply as toll takers. The source of their fortune has been nicely summarized by Kurt Vonnegut (who, oddly, was describing lawyers):"There is a magic moment, during which a man has surrendered a treasure, and during which the man who is about to receive it has not yet done so. An alert lawyer [read bond trader] will make that moment his own, possessing the treasure for a magic microsecond, taking a little of it, passing it on.”

In other words, Salomon carved a tiny fraction out of each financial transaction. This adds up. The Solomon salesman sells $50 million worth of new IBM bonds to pension fund X. The Salomon trader, who provides the salesman with the bond, takes for himself an eighth (of a percentage point), or $62500. He may, if he wishes, take more. In the bond market, unlike in the stock market, commissions are not openly stated.

Now the fun begins. Once the trader knows the location of the IBM bonds and the temperament of their owner, he doesn’t have to be outstandingly clever to make the bonds (the treasure) move again. He can generate his own microseconds. He can, for example, pressure one of his salesmen to persuade insurance company Y that the IBM bonds are worth more than pension fund X paid for them initially. Whether it is true is irrelevant. The trader buys the bonds from X and sells them to Y and takes out another eighth, and the pension fund is happy to make a small profit in such a short time.

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