Liar’s Poker

The securities industry performs two basic functions: (1) it raises cash for businesses by offering to sell ownership in those firms (i.e., stocks), and (2) it raises cash for businesses by selling ownership in loans to those firms (i.e., bonds). Once companies are thus endowed, they move forward with their operations, while investors trade the stocks and bonds of the companies back and forth. Stocks of profitable firms tend to rise; bonds pay principal and interest at maturity.

These securities rise and fall in value; investors, buying and selling them, essentially are placing bets on those values. In that respect, the stock and bond markets behave somewhat like a casino, except that the underlying values are not cards in a deck or numbers on a table but companies that create products and services for sale. The game of investing thus generates economic value by financing the corporations that do the business of a society.

The function of an investment bank like Salomon is to act as the casino; its traders and salesmen are the dealers and croupiers in the investment game, taking a small percentage of each trade in much the same way a casino takes a small percentage of every bet.