by Michigan Municipal League (MML)

It is universally accepted that death and taxes are the only two certainties of life.  However by designing a tax efficient strategy for investment and distribution, people who are retiring can keep majority of their assets for themselves and for their heirs. Here are four of them.

1. Selecting appropriate investments

Municipal bond is a choice of most of the retiring people for investments.  These bonds enjoy exemption from Federal taxes on the interest.  If your tax bracket is higher, then these bonds give you a real advantage.

You can also think of investing in mutual funds which are tax-managed.  There are a lot of strategies employed by the managers of these funds to get the tax efficiency. Also from 2003 onwards, the maximum federal tax rate on many dividend producing investments is limited to 15%. So it is advisable to make an appropriate mix of municipal bonds, high yield bonds and growth stocks or value stocks to get maximum tax advantage.

2. Order of liquidating your securities

This is a very important decision to be taken by the retiring people.  Generally it is advisable to hold on the tax deferred investments because they compound on a pre-tax basis and naturally have better earning potential as compared to taxable investments.

However, remember that the tax deferred investments ordinarily attract federal income tax rate of 35% while the rate is maximum 15% for taxable investments.  This is because capital gains on these investments held for less than a year will be taxed at a regular rate.

So it isn’t good to hold taxable securities for a longer time in order to get the tax rate of 15%.  Long-term capital gains are most attractive from the point of view of estate planning because you get the ‘basis’ on appreciated assets.

3. Appropriate gifting strategies

There are many strategists to make the payment of taxes easier for your heirs.  The option of transferring assets to an irrevocable trust is a good one if you are approaching the threshold of million.  In this arrangement assets are passed on without estate taxes, which save thousands of dollars to your heirs.  A specific point is – keep in mind moving assets from your tax deferred account prior to 70 ½ years.

You can make a tax free gift of ,000 for every individual (,000 for married couples) every year.  This is a good distribution strategy from your taxable estate.  Also making gifts to kids over fourteen years of age is a good strategy because the dividends which are gains will be charged at a lower rate than those charged to the adults.

4. Management of RMDs

It is necessary that you should start taking an annual RMD from your traditional IRAs after your age of 70½.  The logic behind RMD rule is very simple –withdraw less every year if you’re expected to live longer.  The RMDs take into account the age of a participant, and they are based on a uniform table.  If you are unable to take the RMD, then it can result into tax penalties which are 50 per cent of the required distribution amount.  If you feel that you will be taken into a higher tax bracket at the age of 70 ½ due to RMD rules, you may start withdrawing when you are in sixties.

However if you are contributing to Roth IRA, there is no necessity to take distribution by age 70½.  You will be never required to take distributions from such accounts and whenever you withdraw it is tax free.  So you should liquidate your investments from a Roth IRA only after exhausting your other sources of income.

There will always be some complications when you plan your taxes for retirement.  So it is better to plan well in advance and if necessary consult a tax adviser and a real estate expert to sort out your options.

It is universally accepted that death and taxes are the only two certainties of life.  However by designing a tax efficient strategy for investment and distribution, people who are retiring can keep majority of their assets for themselves and for their heirs. Here are four of them.

1. Selecting appropriate investments

Municipal bond is a choice of most of the retiring people for investments.  These bonds enjoy exemption from Federal taxes on the interest.  If your tax bracket is higher, then these bonds give you a real advantage.

You can also think of investing in mutual funds which are tax-managed.  There are a lot of strategies employed by the managers of these funds to get the tax efficiency. Also from 2003 onwards, the maximum federal tax rate on many dividend producing investments is limited to 15%. So it is advisable to make an appropriate mix of municipal bonds, high yield bonds and growth stocks or value stocks to get maximum tax advantage.

2. Order of liquidating your securities

This is a very important decision to be taken by the retiring people.  Generally it is advisable to hold on the tax deferred investments because they compound on a pre-tax basis and naturally have better earning potential as compared to taxable investments.

However, remember that the tax deferred investments ordinarily attract federal income tax rate of 35% while the rate is maximum 15% for taxable investments.  This is because capital gains on these investments held for less than a year will be taxed at a regular rate.

So it isn’t good to hold taxable securities for a longer time in order to get the tax rate of 15%.  Long-term capital gains are most attractive from the point of view of estate planning because you get the ‘basis’ on appreciated assets.

3. Appropriate gifting strategies

There are many strategists to make the payment of taxes easier for your heirs.  The option of transferring assets to an irrevocable trust is a good one if you are approaching the threshold of million.  In this arrangement assets are passed on without estate taxes, which save thousands of dollars to your heirs.  A specific point is – keep in mind moving assets from your tax deferred account prior to 70 ½ years.

You can make a tax free gift of ,000 for every individual (,000 for married couples) every year.  This is a good distribution strategy from your taxable estate.  Also making gifts to kids over fourteen years of age is a good strategy because the dividends which are gains will be charged at a lower rate than those charged to the adults.

4. Management of RMDs

It is necessary that you should start taking an annual RMD from your traditional IRAs after your age of 70½.  The logic behind RMD rule is very simple –withdraw less every year if you’re expected to live longer.  The RMDs take into account the age of a participant, and they are based on a uniform table.  If you are unable to take the RMD, then it can result into tax penalties which are 50 per cent of the required distribution amount.  If you feel that you will be taken into a higher tax bracket at the age of 70 ½ due to RMD rules, you may start withdrawing when you are in sixties.

However if you are contributing to Roth IRA, there is no necessity to take distribution by age 70½.  You will be never required to take distributions from such accounts and whenever you withdraw it is tax free.  So you should liquidate your investments from a Roth IRA only after exhausting your other sources of income.

There will always be some complications when you plan your taxes for retirement.  So it is better to plan well in advance and if necessary consult a tax adviser and a real estate expert to sort out your options.

Executive Summary

            Michael Lewis’ Liar’s Poker documents his time as an investment banker at Salomon Brothers during the late 1970s through the late 1980s. He explains how he got the position, nearly as an accident. It gives details of his time while he was a trainee. From having to listen to traders that was already on the floor and having to deal with the clowns and pranksters in the back of the class.

            He mentions what it was like to be a “geek” on the trading floor for the first time. When it was time for trainees to become geeks, they were thrown on the trading floor, given a client list, and were told to call every name and make them buy bonds. He just watched what other salesmen on the floor were doing, and listened to a few mentors along the way. The mentors were not very helpful, but every little bit helped.

            He eventually was able to become, what the top management at Salomon Brothers would call a “Big Swinging Dick” simply by luck. He got a client to purchase an extremely large amount of bonds for a company that was soon to fail. He started to feel awful for the Frenchman that bought the bonds, but that is what Salomon Brothers wanted him to do. Salomon thought a client would buy anything as long as the trader told them it was a good idea.

              It provides an accurate account of what Wall Street and traders was like during the 1970s through the 1980s. I still think it provides true today. His time at Salomon Brothers was the first time that mortgage trading had been in existence. It also explains collateralized mortgage obligations or CMOs. It gives the reader a glimpse of what it was like in the life of an investment banker during this time.

The Ten Things Managers Need to Know fromLiar’s Poker

1.            “But how can you speak of loyalty to the firm when the firm is an amalgam of small and large deceptions and riven with strife and discontent? You can’t. And why even try.”

2.            “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.”

3.            “It might be more important to choose a jungle guide than to choose your product.”

4.            “Many thrifts layered a billion dollars of brand-new loans on top of the existing, disastrous hundred million dollars of old loss-making loans, in a hope that the new would offset the old.”

5.            “Despite their frenetic growth, savings and loans, as Bob Dall had predicted, could not absorb the volume of home mortgages created in the early 1980s.”

6.            “Where there was distress, there was always opportunity.”

7.            “Ranieri was impulsive in a way that business school case studies seldom account for when they analyze managerial decision making.”

8.            “I’m now convinced that the worst thing a man can do with a telephone without breaking the law is to call someone he doesn’t know and try to sell that person something he doesn’t want.”

9.            “Thinking, as yet, was a feat beyond my reach. I had no base, no grounding. My only hope was to watch the salesmen around me and gather what advice I could.”

10.            “And if our leaders were going to lie about their methods, they were almost by necessity going to tell a whopper.”

Full Summary of Liar’s Poker

Liar’s Poker

            The book takes place in 1986, on the trading floor of an investment bank, Salomon Brothers. It is told through a first person’s point of view. It introduces the chairman of the company, John Gutfreund. It talks about how he knew when a crisis on the trading floor would unfold. He would be right there behind you. No one needed to turn and look to see if he was there, they could feel his presence. It also talked about John Meriwether, who was a member of the board of Salomon Inc. and one of their finest bond traders. Everyone at Salomon Brothers knew Meriwether was the King of Wall Street, and that Gutfreund only held the title because he was management and the face of the company.

            It talked about this one particular day in 1986 when Gutfreund went to Meriwether’s desk and told him, “One hand, one million dollars, no tears.” Meriwether knew that meant he wanted to play a game of Liar’s Poker. Liar’s Poker was a game played with two to ten people. They form a circle, and each player holds a dollar bill. Each player tries to fool the other players about the serial numbers on the bill. An example would be if one player said, “Three sixes.” This meant that all the serial numbers of the dollar bills would have three sixes. The game would move clockwise until all of the players agree to challenge one player’s bid.

            Gutfreund and Meriwether have never played for that kind of money before; normally it had only been a few hundred dollars. Meriwether was the best trader on the floor, and was the best player of Liar’s Poker. Meriwether was able to control his emotions. He had the same expression on his face if he won or lost. On that day, no one could understand why Gutfreund wanted to challenge him for that much.

 Never Mention Money

            This chapter goes back to when the narrator of the book was about to finish his master’s degree in economics at the London School of Economics in the winter of 1984. He was invited by a distant cousin to dine with the Queen Mother. While there, he was seated between two wives of two senior managing directors of Salomon Brothers. One of the wives found out that he was about to enter the job market, and turned the dinner into an interview.

            He later received a call from the wife’s husband and, was asked to join Leo Corbett, the head of Salomon recruiting for New York, for breakfast. He said he would, and thought that it went well and that Corbett wanted him to work for the company. Corbett never asked him too though. Later he found out from a fellow student that Salomon Brothers never came out and gave job offers, only hints. He learned he was supposed to call and take the job from them, which he did. He had already tried to get a job on Wall Street. All the men on Wall Street agreed about his application, they laughed at it.

            He also says he learned, “investment bankers didn’t like to talk about money.” He learned through an interview with Lehman Brothers in 1982. He was asked, “Why do you want to be an investment banker?” He said, “Well, really, when you get right down to it, I want to make money.” The interviewer replied, “That’s not a good reason. You work long hours in this job, and you have to be motivated by more than just money. It’s true, our compensation is in line with our contribution. But frankly, we try to discourage people from our business who are too interested in money. That’s all.” Lehman Brothers eventually failed.  

Learning to Love Your Corporate Culture

            Investment banking during the 1980s was somewhat explained in this chapter. He also talked about his first day in training. He saw one group of men playing a game he did not know, but would soon find out was Liar’s Poker. He talked about how all of the trainees would be in one room, and an investment banker would talk to them.

            He described the trainees. There were the front row people, who were the Harvard graduates and they would try to make an organizational chart for Salomon Brothers. Then there were the Japanese, who would be sleeping in the room. There were the last row people, who were the trouble makers and would give the investment bankers problems. They would throw wads of paper at them, etc. Then there were the “Great Divide” people. These would be neither of the ones mentioned above. They were the average people, that did not fit in with the front row, Japanese, or last row people.  

Adult Education

            He goes on to talk about what happened the fifth week of the training program. It went on like any other day before had, but that day they were going to hear from Jim Massey. The trainees feared Massey, because he was the one who control them. He could control their paychecks, and to where they were to be placed, Atlanta, New York, etc. He came to answer the trainees’ questions bout the firm.  They were then visited by another committee member, and finally the chairman. No one wanted to ask the committee members and chairman, what they thought about the company growing so fast.

            He talked about Henry Kaufman, who was the head of bond research at Salomon and was referred to as Dr. Gloom. During the 1980s, there was an expansion of debt because the Federal Reserve announced that the money supply would cease to fluctuate with the business cycle; money supply would be fixed, and interest rates would float. Kaufman would not come straight out and say it, but Salomon had contributed to the problem. In the end, there were only five picked to become mortgage traders. The narrator was not one. He was sent to London to become a bonds salesman. He still followed the mortgage traders and the market.

A Brotherhood of Hoods

            This chapter starts off with Matty Oliva, and it was his first year on the mortgage trading desk. He was tormented by senior members, and was basically supposed to get them food everyday, all day. One day, he had gotten food for them in the Salomon cafeteria. He snuck past the security guard, so he would not have to pay. He was stupid and told some of them what he had done. He ended up getting a call from someone with the SEC, and was asked about stealing in the cafeteria. He hung up on them, because he thought it was a joke. The next day, he was called into a managing director’s office. He asked him if he had stole from the cafeteria, and told him it was very serious. Later, he was called into the chairman’s office. Later on, he found out it really was a joke.

            Next, the book went on to talk about Robert Dall. He was the first at Salomon mortgage security department. Lewie Ranieri would be the one to help Dall make a market for mortgage bonds. Ranieri would later take over completely leaving Dall without a job in 1984.            

The Fat Men and Their Marvelous Money Machine

            This chapter explains what went on between the years of 1981 through 1986 at Salomon Brothers. It talks about how the mortgage trading desk at Salomon Brothers was buying and selling mortgage loans from savings and loan banks (thrifts). Things really started to get hot at Salomon Brothers when in September of 1981; Congress passed a tax break for the savings and loan industry. Many of the savings and loan presidents were not thinking long-term. He said, “The hypergrowth only meant that the next savings and loan crisis would be larger. But the savings and loan managers were not thinking that far in advance.”

            From 1983 to 1985, Lewis Ranieri’s mortgage traders made 0 million dollars. The book then talks about how Salomon Brothers began to lose some of their own mortgage traders to Merrill Lynch. One in particular was Howie Rubin. He signed a million contract with them to run their mortgage trading desk. In 1986, most of the young mortgage traders at Salomon Brothers had left the firm.

The Salomon Diet

            The years at Salomon from 1986-1988 are documented in this chapter. It explains collateralized mortgage obligation (CMOs).  They were certificates of ownership of hundreds of millions of dollars of ordinary mortgage bonds combined into a trust. As Lewis wrote, “It made home mortgages look more like other bonds.” It also talked about interest only (IOs) and principle only (POs). These were the pooling of home mortgages split into interest payments and principle payments, and were the rights to each of these cash flows.

            It explains how Salomon Brothers and the savings and bonds presidents would get by around Federal regulations. Salomon Brothers had created products that were classified as “off-balance sheet” products.  During the years of 1986 and 1987, Salomon Brothers began to lose money. They were not doing well at all. Of course, Lewis Ranieri was fired. Most of his regime had left to run the mortgage desks of other companies.  

From Geek to Man

            Lewis is now talking about his life after being a trainee. He talks about his work in the London office. It starts with his work as a “geek”. A “geek” in the trader world meant, “a person that was immediately out of the training program and in a disgusting larval state between trainee and man.” He knew nothing on the floor, and learned what he did by watching others and learning their attitudes. He learned things through Dash Riprock, who took him under his wing. Dash would tell him things, and it was up to him to figure out what he was trying to say.

            He then realized that in 1986, he was no longer a “geek”. Traders were asking for his advice, and people were calling him Michael. He goes on to tell how he became a “Big Swinging Dick”. They were the ones who sold the huge amounts of bonds that the Salomon Brothers did not want, because they were soon to become a loss for Salomon. He got a Frenchman to buy million of Olympia & York’s bonds.

The Art of War

            Lewis is talking about how he came up with a great new idea a new type of security that was sure to make huge profits for Salomon Brothers. One of Michael’s customers wanted German bonds, so he created a warrant along with another trader named Alexander. They received help from a vice-president in charge of another area on the trading floor. Michael calls him “the opportunist”. A warrant transfers risk from one person to another. He wanted to put warrants on German interest rates. The deal went through with the Germans, and after “the opportunist” sold the credit for his idea.

            “The Opportunist” had heard that Michael was working on a deal with a Japanese warrant. “The opportunist” scowled at him, and told him he would not be able to do it without his help. Michael went to their London syndicate manager, who had helped them with the German warrant. She ended up being the one who was responsible for what “the opportunist” made, and needless to say he did not get a promotion. He also quit the firm, after his bonus was in his bank account. 

How Can We Make You Happier?

            In September of 1987, it was announced that Ronald O. Perelman would put a bid in to buy part of Salomon. This marked the first time that as Lewis put it, “Wall Street had turned and attacked its own.” It was, because Perelman was being advised by Drexel Burnham. One of Drexel’s bond kings was Michael Milken. Gutfreund had treated him badly, and Milken was after revenge. Salomon and Gutfreund started to lose several traders to Milken and Drexel. Milken would give them huge bonuses, just to make sure they were happy.

            In 1987, Salomon Brothers was not the one who was making all the money and who was the one who was king of Wall Street. Others had started to be able to compete with them, and Drexel was taking over the title. They were making it big with junk bonds. It talks about how Milken created the market for junk bonds. Gutfreund ended up talking Warren Buffett into investing in Salomon Brothers, and he got to keep his job.

When Bad Things Happen to Rich People

            In the last chapter of this book, Michael talks about how everyone in Salomon was focusing on junk bonds. Then, there were eight days that shook Salomon. The first was when Salomon Brothers fired two departments, municipal bonds and money markets. The funny thing was that management told the employees no one was going to be fired, but everyone heard the news from a New York Times reporter. One of the Salomon Brothers board members had leaked the news. Everyone was trying to figure out who had leaked the news.

            On day three, President Tom Strauss told the London traders they were cutting most of the London office staff. Day five was even worse when a hurricane hit, and as people would get into the office they were fired. Several more were just waiting there to get the news that they too were fired. That day, the bonds department took the cuts. On the seventh day, October 19, 1987, the stock market fell and crashed.             

The Video Lounge

http://money.cnn.com/video/news/2008/11/26/news.michaellewis.112608.cnnmoney/

This video features Michael Lewis talking to a CNN reporter about his book Liar’s Poker, and what he thinks about Wall Street and the economy in 2008.

Personal Insights

Why I think:

The author is one of the most brilliant people around…or is full of $ %, because:

I think Michael Lewis knows what he is talking about, because he did work on Wall Street during the time he wrote about it. He had first hand knowledge and experience. Even thought he says he did not leave Salomon because he did not think it was going to be doomed, I think he did. He knows what the people of Wall Street are like, and I think he provides an accurate detail of how they were in the 1970s and 1980s. 

Then, all of the following bullet-items are mandatory to write about:

If I were the author of the book, I would have done these three things differently:

1.            While I liked that it showed a glimpse into the mortgage trading world of Salomon Brothers, I would have liked him to have written more about his personal experience.

2.            Since he did give an account of what it was like on the trading floor at Salomon Brothers, he could have provided more details on the time period he was there.

3.            I did like that he explained things in the mortgage trading world well, so that anyone could easily understand what he was talking about. I like how he explained CMOs, IOs, POs, etc.

Reading this book made me think differently about the topic in these ways:

1.            It makes me think of how Wall Street was back then. I think it is still probably the same way today. 

2.            It makes me think that the people who work on Wall Street are greedy, and have learned how to hide their greed from others. It is amazing to think how ignorant the savings and bond president’s were, and that they could not stop.

3.            It goes to show you that greed can and eventually will catch up to people or a company. They kept trying until finally, it could not take anymore.

I’ll apply what I’ve learned in this book in my career by:

1.            I learned that I would never want to work on Wall Street. I do not think that I would be the type of person that would fit in on Wall Street. I really think that trading stocks and bonds is not something that I would want to do.

2.            I’ll really think about my career, and make sure it is something that I would really want to do. I would like to stay at a company or wherever I may end up for a long time.  I want to make sure the company is stable and if it started to fall, I would want to be able to get out.

3.            The book really made me think about how I would not want to work for a big company. Sometimes they can become too big, and want to control everything. I would not like that.

Here is a sampling of what others have said about the book and its author:

In a review by Russ Allbery, he talks about other books and pieces written by Michael Lewis. He talks about how Moneyball explained mortgage-backed securities. He describes Liar’s Poker as, “It’s not a book with solutions; it is a book that will give one a deep dislike and mistrust for the Wall Street trading culture and which drives home the ways in which Wall Street firms are not on the side of their supposed clients.” He thinks that Michael Lewis captured the cultural mindset of the Wall Street trading culture with this book.

Carin S. wrote a review on Caroline Bookbinder. She gives a short summary of the book. She talks about how she thinks since it was written in the 1980s that it would be outdated. She thinks that it is not, because of the state of the economy in 2008. She thinks it gives an accurate account of what Wall Street was like then, and what it is like now. Carin S. wrote, “You might think with all the financial turmoil of the last 3 years, and all the advances of the last 20 that this book wouldn’t hold up and would be very dated, but it was disturbingly still on point.”

Bibliography

    1) Allbery, Russ. (4/20/2009). Liar’s Poker by: Michael Lewis. Retrieved from:http://www.eyrie.org/~eagle/reviews/books/0-14-014345-9.html

    2) S., Carin. (June 13, 2010). Book Review: Liar’s Poker by Michael Lewis. Retrieved from:http://carolinebookbinder.blogspot.com/2010/06/book-review-liars-poker-by-michael.html

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Contact Info: To contact the author of this “Summary and Review of Liar’s Poker,” please email jessica.ledet@selu.edu.

Biography

David C. Wyld (dwyld.kwu@gmail.com) is the Robert Maurin Professor of Management at Southeastern Louisiana University in Hammond, Louisiana. He is a management consultant, researcher/writer, and executive educator. His blog, Wyld About Business, can be viewed at http://wyld-business.blogspot.com/. He also serves as the Director of the Reverse Auction Research Center (http://reverseauctionresearch.blogspot.com/), a hub of research and news in the expanding world of competitive bidding. Dr. Wyld also maintains compilations of works he has helped his students to turn into editorially-reviewed publications at the following sites:

Management Concepts (http://toptenmanagement.blogspot.com/)

Book Reviews (http://wyld-about-books.blogspot.com/) and

Travel and International Foods (http://wyld-about-food.blogspot.com/).                

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