Liar's Poker Organizational Behavior Term Paper

Pages: 7 (1874 words)  ·  Bibliography Sources: 2  ·  Level: College Senior  ·  Topic: Business

Liar's Poker

The Salomon Brothers and Michael Lewis' Liar's Poker: An Inside Look at Organizational Structure and Culture

The recent economic downturn that the world experienced -- and is still experiencing, in many parts of the world and indeed globally, according to many theorists -- has led to renewed reflections as to the regulation of and watchfulness over financial markets and attempts at profiteering from risky investments that could destabilize major organizations in the financial and banking industries. The use of mortgage-backed securities as places in which to invest and grow wealth, for example, was allowed to occur in a period of rampant deregulation and massive speculation in the real estate industry and he making of home loans by a variety of banking institutions. The ultimate failure of many sub-prime mortgages almost instantly eroded much of this wealth and brought credit markets to a grinding halt, which in turn sent stock markets and other economic indicators plummeting.

The widespread and extreme levels of unemployment, home foreclosures, drops in new construction, and reduced consumer confidence can all be traced wit a great deal of directness to the sale of securities that were in fact bundles of thousands of mortgages, the sale of mortgages to create these bundles, and the making of home loan deals that were beyond the borrower's means. This is not the first time that a confluence of deregulation and unscrupulousness in related areas of the financial industry have led to major scandals and the loss of wealth for many, however. Nor is it the first time that some individuals have become inordinately wealthy from such behavior.

Michael Lewis' book Liar's Poker is a largely autobiographical story, supplemented with subsequent research and other elements of documentary non-fiction, about the Wall Street temperament in a period of similar deregulation and the type of personalities and organizations that prospered in this period. Specifically, the author recounts his own time at Salomon Brothers, which basically invented and then thrived -- for a short time -- on the mortgage bond market and became a major player in the savings and loan crisis, at least according to Lewis. Through the lens of Lewis' own experience working in the halls of Wall Street, it is possible to see how, at least in one very specific and perhaps idiosyncratic era, decisions were made and fortunes were made and lost by the "powers that be" -- or perhaps more correctly, by the "powers that were," as Lewis' story also clearly reveals the revolving door nature of individual success and profit on Wall Street.

Liar's Poker

A large part of the book is concerned with Lewis' personal story of his involvement in the financial world, which seems initially incongruous for a Princeton art student such as Lewis, and indeed the rather extreme descriptive prose that Lewis uses throughout the book while engaging also demarcates him as something of an oddball in the cast of characters he describes. This is not to suggest that Lewis is the only person in the book that is somewhat (or hugely) idiosyncratic, and in fact far from it. His initial description of Salomon Brothers' chairman John Gutfreund as an almost maniacal grizzly bear quickly sets the tone of the book (13).

It is Lewis' tone and the idiosyncrasies that he reveals throughout his personal narrative, as a matter of fact, that make the more documentarian aspects of this book so compelling and so horrifying at the same time. Through detailed descriptions of the types of people at work in Wall Street offices in the 1980s and the level of their decision making rationales as well as their impulse control (or near total lack thereof), Lewis makes Liar's Poker a very human and very nderstandable explanation of the way Wall Street and the world of high finance works, or at least used to work. As Lewis describes it, its is a world that involve far more sophomoric humor that reaches a frenzied and decidedly unfunny places than it does cold calculation, risk assessment models, and financial acumen. Liar's Poker makes it clear that, at least at one organization in te 1980s, Wall Street and a large proportion of the world's wealth was in the hands of some seriously greedy and immature jackasses.

Salomon Brothers: Business Model

Ostensibly, Salomon Brothers was set up like most other business corporations, with a Board of Directors and a Chairman, and company executives and associates as well as secretaries, etc. There was a far more influential informal model and organizational structure at work in Salomon Brothers, however, that truly dictated how operations were controlled and values were disseminated. The description with which Lewis opens the book of how Chairman Gutfreund would roam the building in search of trouble and sneak, at once hunter and bear, up on his prey is only one example of how this business model operated (13-4).

There was a strange dichotomy of formality and informality in the Salomon Brothers' business model that at once made heroes and company power players out of standard mid-level associates, yet at the same time largely robbed them of decision making power and compensatory bragging and seniority rights. Ranieri, for instance, who had earned the company enormous sums of money by creating a market for mortgage bonds before their sale was even truly viable, was first made a manager and his extremely disruptive behaviors were indulged by the company. When push came to shove, however, Ranieri and many others were tossed out for not towing company line, and these individuals were consistently left out of large decision making ventures and promotions (123-50). The business model created a clear difference between upper and middle management, and this turned various factions of the company at all levels against each other.

Structure and Incentives

Because a large part of pay was attached to bonuses for individual sales performance, and due to the increased profile within the company that one could achieve through higher sales, performance was largely dictated by the same rules as simple greed and ambition. Liar's Poker describes an organizational structure that provides a great deal of recognition to extrinsic success and the pure making of money, yet only just enough recognition to make the lower level managers and associates in the company continually hungry for more. The corporate powers in the company were engaged in external power plays of their own, in the meantime (207-9).

So, on the one hand there was an incentive system that boosted one's profile within the company and gave them higher earnings when compared to others at their same basic pay scale when they were more successful at generating revenue, while on the other hand there was an obvious ceiling to earnings and the possibility of advancement. This structure and incentive schema within the Salomon Brothers' organization was tenuous at best, and the informality of leadership within the company compared with the very real and very sudden results of incurring official wrath from any of the higher-ups only made the situation more tense and prone to adolescent hi-jinks. Behavior and values were not really recognized or rewarded by the organizational structure. The only thing that was recognized was money: making more of it brought positive recognition and making less of it would eventually get you canned.

Successes and Failures

It is perhaps already clear from this less-than-enthusiastic explanation of the Salomon Brothers' business model, incentive structure, and organizational culture that the company was not headed for permanently rosy skies. These incentives and the organization's overall business model did lead to abundant success in the short-term, however, and the rampant exploitation of the mortgage bond market and even some successful attempts at playing the junk bond market raked in windfall profits for certain stakeholders during Lewis' early years with the firm. In part, the (im)maturity level of the individuals in the organization was beneficial in that they were endlessly willing to compete for ultimately meager rewards.

This type of adolescent competitiveness drove ongoing success for individuals and thus for the company for some time, but eventually many of the company's people were hired away by other firms that offered better salary and benefits packages. The lack of a clear and amply rewarding incentives package and promotion structure led to a difficulty in attracting retaining even mediocre talent at Salomon Brothers, and eventually the company itself was part of a hostile takeover attempt due to its willingness to engage in arrogant and childish displays of power, obstinacy, and snide revenge tactics (208). Because the company did not really reward knowledge or valued growth, it was ultimately left without these things at pretty much any level of the company, and though it managed to survive for some time past its hey day during the mortgage bond rush, the lack of a true organizational structure or strong culture of reward and recognition (not to mention values) led to the company's failure.

Lessons to Be Learned

One instant if rather cynical lesson that can and should be taken away from… [END OF PREVIEW]

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