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The Millions: Liar's Poker: Rising Through the Wreckage on Wall Street by Michael Lewis

Liar's Poker: Rising Through the Wreckage on Wall Street

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Michael Lewis and The Big Short


The contributor’s notes accompanying Michael Lewis’ various pieces over the last year or so have hinted at a new book in the works for Lewis that promises to take on the economic crisis and offer a sequel of sorts to Liar’s Poker, the book that he thought would take down Wall Street. Now we know the title, The Big Short: Inside the Doomsday Machine, and have a release date, November 2. (via Kottke)There’s already a book out about the crisis that Lewis edited called Panic: The Story of Modern Financial Insanity, which has garnered mixed reviews from critics looking for a more substantial take on our economic woes.Elsewhere, Lewis takes a contrarian view of Warren Buffett, everyone’s favorite billionaire, in his review of The Snowball: Warren Buffett and the Business of Life. (via The Daily Dish)

Michael Lewis Takes the Stage


As we adjust to new economic realities, Michael Lewis is emerging as the financial meltdown’s most important voice. His Portfolio piece “The End” told us how we got here but it also illuminated his own failure, in the 1980s, to get the point across with his book Liar’s Poker. Meant to be a cautionary tale, it became instead an inspiration.But Lewis appears unwilling to let “The End” be his final, confessional comment on the matter. This weekend, as a new year and new administration are gearing up, Lewis has delivered another far more aggressive piece, this time in the New York Times (Part 1, Part 2). In it, he calls out, more strenuously than before, the fraud, incompetence, and willful ignorance behind the financial crisis and makes it clear that this fall’s efforts to resolve it were flawed at best. He also makes several direct, clear-eyed proposals to set things back on the right course. One hopes Obama is watching. One also notices that Lewis, in these pieces, is no longer acting as a journalist or even a columnist. He has thrust himself into the center of this issue, as if looking to finish what he tried to accomplish more than 20 years ago.But Lewis has grown up too. Liar’s Poker didn’t wake up the world to Wall Street’s ills because its tone was too glib and too incredulous. We were meant to marvel at the goings on at Solomon Brothers just as the young Lewis had. That tone is gone now, and Lewis has returned to the task with a fierce seriousness. Whether or not you agree with everything that Lewis is writing in these pieces, his tone, backed up by his more than 30 years of writing about Wall Street, will give even the most optimistic observers pause.Interestingly, Lewis’ co-author for the two New York Times pieces is David Einhorn, a hedge fund manager who doesn’t exactly have a pristine reputation. Einhorn heads up Greenlight Capital, which racked up average annualized returns of 25.5% from May 1996 through mid-2008, according to New York Times, though his funds, like many on Wall Street, have struggled since. He’s also a serious poker player. In 2006, he placed 18th in the World Series of Poker’s main event, winning more than $650 thousand that he donated to charity.Einhorn made headlines this year for his very vocal bearish stance on now defunct investment bank Lehman Brothers. Einhorn eventually went public with discrepancies that he and his analysts had found in Lehman’s numbers. Believed to be short (i.e. placing bets that the stock would go down) Lehman and other financial names, Einhorn was excoriated in a war of words on Wall Street as regulators targeted short selling among financial stocks. Lewis and Einhorn make it clear where they stand on that issue, calling short sellers, “the only market players who have a financial incentive to expose fraud and abuse.”After much confusion as the crisis played out in 2008, it may be that we are seeing whistle-blowers like Lewis and Einhorn emerge from the mess to take control of the discussion. In time we will see if they have the ear anyone in power.

Turnips, Quarterbacks, and Strawberry Pickers: Credit Default Swaps Made Simple


Last week, Max directed our attention to a major new piece of reporting on the financial crisis: a Portfolio article by Millions favorite Michael Lewis. The author of Liar’s Poker, among other books, Lewis is a gifted explainer of an industry badly in need of explanations. In the Portfolio piece, for example, he immerses us in the world of short-sellers who saw the subprime meltdown coming. However, the key paragraph – wherein trader Steve Eisman has an epiphany about how investment banks are leveraging subprime bonds – resorts to a sports metaphor, and thus fails to demystify an elusive instrument at the center of the financial crisis: the credit default swap (CDS).”When a fantasy player drafts Peyton Manning, he doesn’t create a second Peyton Manning to inflate the league’s stats,” Lewis writes.But when Eisman bought a credit-default swap, he enabled Deutsche Bank to create another bond identical in every respect but one to the original. The only difference was that there was no actual homebuyer or borrower. The only assets backing the bonds were the side bets Eisman and others made with firms like Goldman Sachs. Eisman, in effect, was paying to Goldman the interest on a subprime mortgage. In fact, there was no mortgage at all. ‘They weren’t satisfied getting lots of unqualified borrowers to borrow money to buy a house they couldn’t afford,’ Eisman says. ‘They were creating them out of whole cloth. One hundred times over! That’s why the losses are so much greater than the loans.’I’ve heard financial insiders inveigh against peons who “don’t know a credit-default swap from a turnip,” but how are we to wise up, if explanations only come in the form of metaphors (athletic or agricultural)? Grabbing a fig leaf from the N+1 playbook, as it were, I decided to ask a friend in finance to explain the Peyton Manning analogy, as simply as possible. Here’s what he had to say (wait for “the rub”):Assume the following: Eisman buys a crappy mortgage security (say, a $1,000 bond from a mortgage given to a strawberry picker who makes $14,000 dollars per year). Say the mortgage rate the strawberry picker pays is 15%. This means he’s agreed to pay $150 a year to Eisman. But Eisman is worried that the strawberry picker will default because the guy’s house value has collapsed and his income is drying up. Thus, Eisman wants to buy insurance on the $1,000 he’s loaned. The way he does this is via a credit default swap.A CDS is essentially an insurance policy on a loan, and here’s how it works. Eisman finds a counterparty willing to sell him insurance on his loan (a big investment bank like Lehman Brothers). Eisman agrees to pay the bank a fixed rate every year for protection of the mortgage security he owns (the crappier the loan, the higher the rate). Let’s say for the $1,000 loan to the strawberry picker, his rate will be 10%. The bank pays him nothing on a regular basis, BUT, if the borrower defaults, they pay him the full $1,000.So: if times are good and everyone makes payments on time, the payments are structured as follows: The strawberry picker pays $150 per year to Eisman; Eisman pays $100 per year to Lehman (which then uses some of the cash to provision for losses, and uses the rest to make more loans). The strawberry picker gets to keep his house, Eisman keeps $50 per year (loan payment from strawberry picker minus the insurance premium he pays to Lehman), and Lehman gets $100.Got the structure? Now here’s the rub.Imagine Eisman never actually had exposure to the loan in the first place. Being the brilliant skeptic he is, Eisman would never lend $1,000 to a strawberry picker with little income. He thinks that strawberry man is doomed to default on that loan, and he actually wants to bet AGAINST him. So instead of giving the loan and buying insurance, he just buys the insurance (hence the often used and rarely understood term “side bet”). To do this, Eisman still has to pay the “premium” for the insurance he’s bought, and since it’s a risky loan, the rate is high (e.g. $100 per year in the example above). [Though he stands to win $1,000 if the loan defaults.] In effect, Eisman is paying a “subprime-like” interest rate to Lehman every year! That’s what Lewis was getting at.I would have used a different metaphor. I would have said it’s like a New Yorker buying a bunch of home insurance policies in New Orleans because you are expecting that there will be a massive hurricane coming to wreck them. Now lets say that the insurance company took the money you were giving it, didn’t provision for the coming doom, and instead, used that money to lend to more people building and buying houses in New Orleans.That’s leverage upon leverage upon leverage. And that’s the mess that is unraveling before us.

Dealing Another Hand of Liar’s Poker

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Three and a half years ago in some brief comments on Michael Lewis’ seminal memoir of Wall Street in the 1980s, Liar’s Poker, I noted,While the period that Lewis chronicles is interesting in its own right, its impact is somewhat diminished by the many corporate scandals and Wall Street improprieties that have occurred since the book was first published. Against this backdrop, Liar’s Poker is no longer an exceptional story that defined an era, it is merely another moment in the cycle of Wall Street corruption and ensuing retribution that continues today.In a remarkable piece for Portfolio magazine this week, Lewis revisits Liar’s Poker amid the wreckage of Wall Street and readily admits that the book now seems “quaint,” tragically so:I thought I was writing a period piece about the 1980s in America. Not for a moment did I suspect that the financial 1980s would last two full decades longer or that the difference in degree between Wall Street and ordinary life would swell into a difference in kind. I expected readers of the future to be outraged that back in 1986, the C.E.O. of Salomon Brothers, John Gutfreund, was paid $3.1 million; I expected them to gape in horror when I reported that one of our traders, Howie Rubin, had moved to Merrill Lynch, where he lost $250 million; I assumed they’d be shocked to learn that a Wall Street C.E.O. had only the vaguest idea of the risks his traders were running. What I didn’t expect was that any future reader would look on my experience and say, “How quaint.”And:In the two decades since then, I had been waiting for the end of Wall Street. The outrageous bonuses, the slender returns to shareholders, the never-ending scandals, the bursting of the internet bubble, the crisis following the collapse of Long-Term Capital Management: Over and over again, the big Wall Street investment banks would be, in some narrow way, discredited. Yet they just kept on growing, along with the sums of money that they doled out to 26-year-olds to perform tasks of no obvious social utility. The rebellion by American youth against the money culture never happened. Why bother to overturn your parents’ world when you can buy it, slice it up into tranches, and sell off the pieces?In the long piece, Lewis posits, convincingly, that the obit for Wall Street that he wrote more than twenty years prematurely is finally relevant, though rendered absurd by the cataclysmic collapse.The essay is a must read. In it he profiles a few who will, when the dust eventually settles, be known as – not the heroes; there are no heroes – the ones who saw it coming. And at the end he sits down with the legendary Gutfreund, whose career Liar’s Poker ruined, for the first time since Lewis left Solomon Brothers back in the 1980s.Kottke also highlighted the Lewis article today and he points out that this essay is likely material (along with several others Kottke points to) for a forthcoming book that Lewis intends to write about the death of Wall Street as we knew it. There’s little doubt that this new book will be the obit that Liar’s Poker was meant to be.

Two Tastes That Taste Great Together

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Every so often in a reader’s life, he stumbles upon two books that complement each other like red meat and red wine. Such a happy accident befell me last month, when I happened to read Michael Lewis’ Liar’s Poker hard on the heels of Thomas Frank’s One Market Under God.The Frank book, an evisceration of the free-market discourse and management culture of the 90s, was a fine read on its own: funny, incisive, and angry. And yet, in its argumentation, it at first struck me as inferior to Frank’s more recent What’s the Matter With Kansas? Like Lewis Lapham, who published excerpts from both books in Harper’s, Frank has a tendency to preach to the choir. This often doesn’t bother me; I sit right in the middle of that choir. When Frank demonstrates the tension between a free market and economic democracy, I say “Amen.” When he decries the commodification of the counterculture, I shout “Hallelujah.”When Frank gets down to naming names, however, I get uneasy. One Market Under God does not hesitate to lay the sorry state of the world at the feet of specific, individual evildoers, and I, raised to try to see the best in people, prefer to blame systemic ills. And so I’m not sure if Frank’s depiction of scheming, iniquitous fat cats is a workable belief or a bit of populist wishful thinking.Or I wasn’t sure, until I picked up Liar’s Poker. Here Michael Lewis, himself a former stockbroker, takes us inside Salomon Brothers, the investment bank where he worked in the rip-roaring 80s. Lewis establishes his centrist credentials early and often, and generally eschews editorializing. It is especially appalling, then, (if weirdly engrossing) to discover that Salomon Brothers is full of…scheming, iniquitous fat cats!Liar’s Poker is like a nonfiction version of Oliver Stone’s Wall Street (IMDb). The visionary salesmen and traders of Solomon Brothers screw the little guy at every turn, and we get to see every dirty detail. They rip off investors, lie to the public, devalue successful companies, inflate worthless ones, lay off employees, throw phones at underlings, grope secretaries, consume conspicuously, and generally turn themselves into caricatures of the worst kind of capitalist exploitation. The free-market they promote is, in fact, far from free.In an ideal marketplace, knowledge is symmetrical. The vulgar version: buyer and seller are in possession of the same set of facts, and prices reach equilibrium according to the law of supply and demand. This is why there are laws against rolling back odometers, and against making false claims in advertisements. But investment banks, as Lewis portrays them, rely on the market’s inefficiency at distributing information – its tendency to allow those most heavily invested in a market to control the flow of knowledge within and about that market – to buy below fair-market value, and to sell well above it.Of course, we are assured, such excesses have since been curbed by regulation. (This is part of the 90s market populism analyzed in One Market Under God, wherein Wall Street is brought to heel by Main Street.) Insider trading laws are now stringent, we are told; firewalls have arisen between the trading floors where commodities are sold and the equity departments where they are underwritten. But Wall Street is still raking it in, while Main Street drifts and eddies on stagnant wages.Perhaps the current investment bank bonanza is merely the financial industry’s reward for its own newfound virtuousness. Still, the next time you hear an I-banker lamenting the regulatory climate, or claiming that Sarbanes-Oxley is driving all the moneymen to London, ask him what kind of bonus he got last year, and whether he’s still living in New York. Then tell him you’ve got a bridge you’re looking to sell…See also: Max’s review of Liar’s Poker

Review: Liar’s Poker by Michael Lewis


Michael Lewis launched his successful career as an author with his book Liar’s Poker: Rising Through the Wreckage on Wall Street, which is both a youthful memoir and a journalistic look at the inner workings of Salomon Brothers, a Wall Street firm that grew fat trading bonds and then crashed and burned. The book takes place, roughly, between the years 1984 and 1987, and so I wasn’t surprised that the book reminded me of the movie Wall Street – just replace Gordon Gecko with Salomon’s head John Gutfreund. At the beginning of the book, Lewis has just been hired, quite unexpectedly, by Salomon, and he takes us through his trajectory at the company, from the cut-throat training process to his days as a bond trader in London. From this vantage point, Lewis was able to watch the company, emboldened by spectacular success in the 1980s, become a symbol of corporate gluttony. Along the way, Lewis profiles many of the company’s outsized personalities. He also delves into the intricacies of the bond market in such a way that the arcane becomes pretty readable. The book is also filled with anecdotes about the conspicuous consumption of those times and the raucous, inelegant trading floor, filled with foul-mouthed traders who threw phones and insults and reveled in their gluttony. Lewis’ revelation was that the company (and its competitors) made profits at the expense of its customers, and, while the period that Lewis chronicles is interesting in its own right, its impact is somewhat diminished by the many corporate scandals and Wall Street improprieties that have occurred since the book was first published. Against this backdrop, Liar’s Poker is no longer an exceptional story that defined an era, it is merely another moment in the cycle of Wall Street corruption and ensuing retribution that continues today.

The New New Journalists


Robert Boynton, a journalism professor at NYU, has taken a look at the journalism landscape and determined that the craft has moved an iteration beyond Thomas Wolfe’s anointing of a New Journalism in 1973. Boynton’s book, which he has titled The New New Journalism looks at the more recent crop of in depth journalists – well-known for their long pieces in magazines like the New Yorker and Atlantic Monthly and for their bestselling books. A review in the New York Times describes the destinction Boynton is making this way: “If literary experimentation and artistic ambition were the New Journalism’s calling cards, reportorial depth is the New New Journalism’s distinguishing mark, Boynton insists.” Though the boundaries of this “new new journalism” may be fuzzy, it’s exciting to me that someone is assessing these books critically as group. My feeling is that these days books of in depth journalism tend to be more readable than most new literary fiction, and, perhaps more importantly, this “new new journalism” is able to deliver more of an impact.Boynton’s book is a collection of interviews in which he encourages the writers to discuss their methods (The New York Times review likens them to the Paris Review “Art of…” interviews.) Included in the book are interviews with writers like Adrian Nicole LeBlanc, William Langewiesche, Eric Schlosser and Michael Lewis. Here’s an excerpt of his interview with Ted Conover. The collection is also well-received in the Columbia Journalism Review, which, however, expresses a wish that the book had come with a companion anthology. I agree that this would be nice, but, failing that, I though it might be worthwhile to list some of the books that these journalists have written (if only because I would like to refer back to it myself next time I have a hankering for some of the “new new” stuff.) So, here are the interviewees from The New New Journalism and some of the books they have written:Gay TaleseThe Gay Talese Reader: Portraits & EncountersThe BridgeThy Neighbor’s WifeJane KramerLone Patriot: The Short Career of an American MilitiamanHonor to the BrideThe Last CowboyCalvin TrillinThe Tummy TrilogyFeeding a YenToo Soon to TellRichard Ben CramerWhat It Takes: The Way to the White HouseHow Israel Lost: The Four QuestionsTed ConoverNewjack: Guarding Sing SingCoyotes: A Journey Through the Secret World of America’s Illegal AliensRolling Nowhere: Riding the Rails with America’s HoboesAlex KotlowitzThere Are No Children Here: The Story of Two Boys Growing Up in The Other AmericaThe Other Side of the River: A Story of Two Towns, a Death, and America’s DilemmaNever a City So Real: A Walk in ChicagoRichard PrestonThe Hot ZoneThe Demon in the FreezerFirst Light: The Search for the Edge of the UniverseWilliam LangewiescheThe Outlaw Sea: A World of Freedom, Chaos, and CrimeAmerican Ground: Unbuilding the World Trade CenterSahara Unveiled: A Journey Across the DesertEric SchlosserFast Food Nation: The Dark Side of the All-American MealReefer Madness: Sex, Drugs, and Cheap Labor in the American Black MarketLeon DashRosa Lee: A Mother and Her Family in Urban AmericaWhen Children Want Children: The Urban Crisis of Teenage ChildbearingWilliam FinneganCold New World: Growing Up in Harder CountryA Complicated War: The Harrowing of MozambiqueCrossing the Line: A Year in the Land of ApartheidJonathan HarrA Civil ActionThe Lost PaintingJon KrakauerInto Thin AirInto the WildUnder the Banner of Heaven: A Story of Violent FaithAdrian Nicole LeBlancRandom Family: Love, Drugs, Trouble, and Coming of Age in the BronxMichael LewisMoneyball: The Art of Winning an Unfair GameThe New New Thing: A Silicon Valley StoryLiar’s Poker: Rising Through the Wreckage on Wall StreetSusan OrleanThe Orchid ThiefThe Bullfighter Checks Her MakeupMy Kind of Place: Travel Stories from a Woman Who’s Been EverywhereRon RosenbaumThe Secret Parts of Fortune: Three Decades of Intense Investigations and Edgy EnthusiasmsTravels With Dr. Death and Other Unusual InvestigationsExplaining Hitler: The Search for the Origins of His EvilLawrence WeschlerMr. Wilson’s Cabinet Of Wonder: Pronged Ants, Horned Humans, Mice on Toast, and Other Marvels of Jurassic TechnologySeeing Is Forgetting the Name of the Thing One Sees: A Life of Contemporary Artist Robert IrwinVermeer in Bosnia: Cultural Comedies and Political TragediesLawrence WrightRemembering SatanTwins: And What They Tell Us About Who We AreIn the New WorldUpdate: Jessa at Bookslut compiles a set of links to articles by the New New Journalists.

A Reading Queue for 2004


I recently reorganized my bookshelves. I straightened and categorized the books, and I separated out all of the books that I haven’t read and that I hope to read sooner rather than later. These are books that I’ve bought at the store, received as gifts, and unearthed on bookfinding expeditions. There are 31 of them. For a while now, I’ve had a quite large “to read” pile, and I add titles almost every week, it seems. The problem is that stacks of books are constantly getting pushed aside while I read whatever book I’m most excited about at the moment. There’s not really anything wrong with this except that there are books that I really would like to read, but never seem to get around to it. So, since I obviously am not to be trusted, I have decided to take some of the decision making out of my hands: I have set aside a special shelf to hold my new “Reading Queue.” On it are all of the books that I own and would like to read but haven’t yet. From this shelf full of books, I will randomly select the next one to read. Before I get into that though, here’s my reading queue, some of the books that will keep me occupied during the coming year:Without Feathers by Woody AllenThe Summer Game by Roger AngellOnce More Around the Park: A Baseball Reader by Roger AngellGame Time: A Baseball Companion by Roger AngellAn Army at Dawn by Rick AtkinsonThe Sheltering Sky by Paul BowlesThe Hole in the Flag by Andrei CodrescuDon Quixote by Miguel De CervantesParis Trout by Pete DexterThe Count of Monte Cristo by Alexandre DumasThe Last Amateurs by John FeinsteinA Season on the Brink by John FeinsteinLiving to Tell the Tale by Gabriel Garcia MarquezLast Train to Memphis by Peter GuralnickThe Great Fire by Shirley HazzardRound Rock by Michelle HunevenThe Known World by Edward P. JonesBalkan Ghosts by Robert D. KaplanShah of Shahs by Ryszard KapuscinskiThe Price of Admiralty by John KeeganEverything’s Eventual by Stephen KingLiar’s Poker by Michael LewisThe Coming of Rain by Richard MariusThe Heart is a Lonely Hunter by Carson McCullersLooking for a Ship by John McPheeMoviegoer by Walker PercyFraud by David RakoffThe Man Who Mistook His Wife For a Hat by Oliver SacksEast of Eden by John SteinbeckQuicksilver by Neal StephensonMr. Jefferson’s University by Garry WillsOnce I had a full shelf to pick from, the only question was how to pick randomly. I thought about writing down names and picking out of hat, but that seemed like a pain, and I would have had to go look for a hat, so instead I located a random number generator to help me make my choice. I’m going back east tomorrow for two weeks, so I picked three books to take with me: Everything’s Eventual, Paris Trout, and Don Quixote. I’m guessing most folks will be pretty busy over the next couple of weeks, and so will I, so I’ll probably only post a couple of times while I’m gone. They should be good, though. Look for “My Year in Books” and a post about the books I gave as gifts. Happy Holidays, all.

Mmmm… More Bookfinding


Bookfinding is a science of sorts. Ostensibly, it is a money issue: the goal is to find books for two dollars or less a piece. But there is another element to this exercise. When you walk into a Salvation Army store, or any non-bookstore that has a few shelves full of books at the back, you never know what you’ll find. It’s a real treasure hunt. Sometimes you walk out the door with arms full of books, other times you walk out with one or none. Some of the highest yield bookfinding spots that I have found so far are the Out of the Closet thrift stores that are ubiquitous in some parts of Los Angeles. Out of the Closet is a charity that raises money for AIDS, and like any charity-based thrift store it does not discriminate. Along with a vast selection of clothing, each store has a ton of housewares and furniture and a mindboggling array of random junk. Still, there’s something slightly more hip about Out of the Closet. The staff is young, helpful, and fashionable. They’ve always got good tunes on the radio, and they put together clever displays and windows. It’s only a half step away from the church basement, but that half step makes a difference. I always go straight for the shelf or two of books tucked away at the back of the store, in the dimly-lit corner behind the broken exer-cycle. Though it requires the same amount of digging, the treasures that can be found are incrementally better. At the Salvation Army, I’m pleased to find old paperback editions of classics, but at Out of the Closet, you might just as easily come upon a cult-favorite and books that are more obscurely charming. Which brings me to Monday, when I made a quick run to an Out of the Closet that I hadn’t yet raided, spent ten bucks, and walked out with eight books. Good ones, too. I’m most excited about finding a hardcover edition (though it lacks its dust jacket) of Woody Allen’s print masterpiece Without Feathers. You really can’t go wrong with a book that in its first three pages has about two dozen gems like this one: “Play idea: a character based on my father, but without quite so prominent a big toe. He is sent to the Sorbonne to study the harmonica. In the end he dies, never realizing his one dream — to sit up to his waist in gravy. (I see a brilliant second-act curtain, where two midgets come upon a severed head in a shipment of volleyballs.)” Genius! I also picked up Fraud by David Rackoff, the frequent contributor to This American Life. I usually recommend this one to fans of David Sedaris who have read all of Sedaris’ books. I also somehow remembered that Michael Lewis is the name of the author of Moneyball, and when I saw a copy of Liar’s Poker: Rising Through the Wreckage on Wall Street, his 1989 memoir about working in the cut-throat, 1980s Wall Street world, I snagged it. I also found another first book by an author I like: Michelle Huneven’s debut Round Rock. And I picked up a slick little paperback edition of a somewhat forgotten 20th century American classic, Walker Percy’s The Moviegoer. I rounded out my purchases with three classics of the Calvin & Hobbes oevre which I gleefully found sitting neatly in a row: The Calvin and Hobbes Lazy Sunday Book, Weirdos From Another Planet!, and Yukon Ho!… not a bad take for 10 bucks!

Surprise Me!