Liar’s Poker

In 1985 junk bond king Michael Milken of Drexel Burnham visits John Gutfreund at Salomon, but they argue, and Milken is escorted from the building. By 1987 there is much bad blood between the men, and Milken backs corporate raider Ron Perelman in a bid for partial ownership of Salomon. Drexel is Salomon’s biggest competitor in the bond market, lately more profitable even than Salomon, and the only firm that makes Gutfreund nervous. Many Salomon traders defect to Drexel, where they earn much more: “Milken drowned his people in money” (259). He will lavishly reward a successful trader, then ask, “‘How can we make you happier?’” (259).

Lewis and Dash agree that a takeover isn’t a bad idea because “[o]ur management deserved the ax” (260). Salomon’s leaders have vastly overbuilt their offices in New York and London, then dismantled their most profitable department, mortgage bonds. The resulting losses pile into the hundreds of millions of dollars. Even worse, Salomon has failed to take advantage of Milken’s great new invention, junk bonds.

Corporations like to borrow money through bonds because the interest is tax deductible. Junk bonds are corporate bonds with ratings so low they won’t be touched by traditional investors.