SIGTARP, Part IV – What Small Banks Are Going Under Next?

Ok, so it’s no secret I’m pretty sweet on SIGTARP, the Norse God of Financial Accountability.

There’s the pleasure of calling a fellow US Treasury colleague a liar.

There’s the feistiness of a government official pointing out that through our failure to rein in TBTF banks, we’ve laid the groundwork for the next crisis

There’s the carefully balanced review of the Citigroup Bailout.

Frankly there’s the plain old fun of SIGTARP himself, Neil Barofsky, responding during his book tour[1] to my tweet about Geithner, unconcerned that Geithner would jump to Goldman, Sachs, because at least at GS he’d do less harm than as Treasury Secretary!

Barofsky’s response to my question about Geithner going to Goldman. “He could do less harm there.”

But I digress.  There’s a good deal of valuable information in SIGTARP reports, and in this installment I thought I’d highlight a few things we can learn about small and medium size banks.  I’m sad to say that four years after the Credit Crunch, many small and medium size banks are doing terribly.

US government regulators NEVER tell you which banks are in distress.[2]  But SIGTARP consistently goes where other regulators dare not tread.[3]  Read the full report to find out which small banks will go under next, probably by 2013, or simply go to the list of banks which have missed dividend payments.

On missing Dividend payments owed to Treasury for TARP money

The stated reason for TARP was to ensure that TBTF banks did not bring the entire financial system to a grinding halt when taken over by the FDIC or placed in receivership.  For less clear-cut reasons[4] however, Treasury also offered small and medium size banks a chance to take advantage of the fast-track route to recapitalization via government investment.

As it turns out, and despite explicitly forbidding this[5], the TARP money extended a lifeline to small and medium size banks that have failed to thrive following the Great Credit Crunch.  A few hundred of these banks have either succumbed to failure or have missed so many dividend payments to the Treasury that survival seems doubtful.

SIGTARP reports list not only those banks which have outright failed or those where the government has lost money, but also those banks that have missed dividend payments to the Treasury and the number of those payments as well.  The missed dividend signals the banks that are probably too far gone to survive.

Wondering if your local TARP-bailout bank is in good shape?  You can check for it in the SIGTARP report HERE.

To save you some time scrolling through the SIGTARP report, you can look on the following pages for:

Pp 98-102: 162 Banks that have missed one dividend or many dividends.

Pp 102-103: 41 Banks where the US Treasury has realized a loss through its TARP investment.

Pp 110-117: 99 Banks that have failed, gone bankrupt, or had their US Treasury investment forcibly restructured.

 

On troubled Community Banks that still owe TARP money

One measure of recovery from the Great Credit Crunch would be the strength and stability of banks in the United States.  And, unfortunately, a great number of small community banks, we learn from SIGTARP, are really still sucking wind.

While 90% of the original TARP money[6] from late 2008 has been repaid from all of the TBTF banks (except Regions Bank), small and medium size banks have been much slower to repay.

As of the latest Congressional report, approximately 400 small and medium size banks have yet to pay back TARP funds.  Even that group of 400 TARP banks overstates smaller banks’ ability to repay, since an additional 137 banks swapped TARP funds for a program custom-designed to let them off the TARP hook, through a financing called SBLF.

What are the implications for the future of small banks unable to repay TARP?

400 banks account for approximately 5% of banking institutions in the country, not a huge portion of the total.  In a strictly macroeconomic sense, it is systemically irrelevant whether these banks live or die in the years to come.  A case can even be made that fewer banks in the United States would be just fine.

From a taxpayer perspective the $20 Billion value in small bank preferred shares and warrants represents less than the US Treasury risked with individual banks such as Citigroup and Bank of America in the early days of the crisis.

On the other hand, comparing small bank failure to household financial failure shows the locally devastating effect if they implode financially.  That is to say, it matters to those banks and their communities if they fail.  Not only that, we can assume, not unreasonably, that failing banks will be concentrated in depressed regions of the country, exacerbating access to credit for small businesses and real estate developers in precisely those areas which can least sustain losses.[7]

The SIGTARP report provides evidence, if you read between the lines, that a great number of these smaller 400 TARP recipients are on life-support, and many will not make it out of the intensive care unit.

Congress passed the Small Business Lending Fund (SBLF)[8] nominally to provide more credit for small business, but in reality to allow medium and small banks to exit TARP and roll into a less restrictive government program.[9]  One hundred thirty-seven banks qualified for Treasury funding under SBLF by proving their likelihood of increasing their loan portfolio to small businesses – and exited TARP shortly thereafter.  Those who could exit TARP at that time, did – the rest could not.

Furthermore, executive compensation restrictions make it unlikely that any bank still owing TARP money has a profitable and sustainable banking franchise.  If they could have paid it back, they would have by now.

The 162 Banks Most Likely to Fail

As of the July 2012 report, one hundred sixty two, or almost half of the remaining 400 TARP banks, have missed dividends (currently with a 5% coupon rate) on the preferred shares owed to Treasury.  By law, the dividend rates jump to 9% on these bank preferred securities beginning in 2013.  Payments of 9% on their capital is an exorbitant rate for banks to pay when the costs of funds in the money markets for healthy banks remain below 2%.

In sum, the picture is grim for remaining small and medium TARP banks, but the financial system and ordinary taxpayers will not suffer extraordinary losses.  To badly hit communities, however, more pain awaits, probably in the second half of 2013 when 9% dividends deal the fatal blow to weak banks.

 

 

Also see:

In Praise of SIGTARP Part I, “Truth in Government”

In Praise of SIGTARP Part II, “We blew it on the repayment of TARP by the largest financial institutions”

SIGTARP Part III – “The Citigroup Bailout”

and SIGTARP V – The AIG Bailout



[2] There’s a good public policy reason for this.  Exposing a weak bank publically may create a self-fulfilling prophesy of weakness, as depositors and customers leave the zombie bank for its stronger competitors.

[3] Which is why it’s kind of an illicit thrill to see struggling banks publicly outed this way.  I know, I’m weird.

[4] One strongly implied reason at the beginning of TARP was the ‘safety in numbers’ idea.  That is, if many banks took TARP funds at the same time it would remove the stink of government intervention from the actual targets, the TBTF banks on the financial precipice.  Another reason is probably the sway of small and medium banks with their Congressional representatives.  One reason that makes less sense is the systemic value of small and medium banks.

[5] TARP funds were supposed to be only available to Qualifying Financial Institutions (QFIs.)  But the definition of a QFI included the mandate that they be “healthy, viable institutions.”  We know with hindsight that at least both Citigroup and Bank of America would have failed to qualify for this designation had “healthy, viable” been a truly disqualifying condition.  But we now also know hundreds of small banks failed that test as well.

[6] In this posting, by “TARP funds” I really mean to refer to the Capital Purchase Program (CPP) by which Treasury bought preferred shares and warrants in 707 banks, including the largest 17 TBTF banks.  Technically “TARP funds” could include a wide variety of other investment programs authorized under TARP, but I’d rather use the acronym TARP than CPP, since it is better known.

[7] See this interesting site with stats and maps of bank failures.

[8] In September 2010

[9] The initial dividend rate of 5% matches the TARP dividend rate of 5%, but crucially SBLF funding does not carry restrictions on executive compensation.  Much better, Smithers.

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Book Review: Unintended Consequences

Would you like to understand where Mitt Romney’s economic ideas come from?

As soon as Edward Conard hit the book-selling circuit with Unintended Consequences: Why Everything You’ve Been Told About the Economy Is Wrong, I started to get messages from my reliably liberal friends.  Conard made the cover of The New York Times Magazine, – with the arresting headline “The Purpose of Spectacular Wealth, According to a Spectacularly Wealthy Guy” – and he made an appearance on The Jon Stewart Show, two hostile environments in 2012 for a former Bain Capital partner, apparently preaching an updated version of Gordon Gekko’s “Greed is Good” speech.

“You have got to review this book and tear this guy apart,” my friends urged, and I promised I would.

Suspecting I would not want to own the book, I put in a request to borrow it from my local library, only to endure 2 months on the waiting list before a copy became available.  Meanwhile Unintended Consequences hit the New York Times best seller list and Conard went on to represent the Bain Capital perspective all up and down the cable television circuit.  Unintended Consequences finally became available at the library at the end of the summer, and I read it over Labor Day weekend.

My dear liberal friends, I have a confession to make: I like this book quite a bit.

I’m not saying you need to go out and buy it, as I’m sure you will not.  But I am saying the guy has made a serious and effective effort to represent the Mitt Romney view of the world, one which has an internally consistent logic, if you agree with his assumptions.

Let me start by describing the part of the book I really liked, followed by the part I liked pretty well, and then I can finish with a critical flourish that I expect will return me to the good graces of my liberal friends who recommended I review it in the first place.

Conard organizes the book in three sections, “What Went Right,” “What Went Wrong,” and “What Comes Next,” sections which may otherwise be described as Past (1950-2005) Present (2006-2012) and Future (beyond 2012).  In summarizing my views of the book: I loved the Present; I liked the Past; and I plan to get a little snarky in the Future.

 

“What Went Wrong” – The Mortgage Crisis

I’ve invested a significant portion of my working life in the mortgage finance industry, first as a mortgage bond salesman, then as a hedge fund investor purchasing consumer debt including mortgages, and most recently as a self-appointed commentator – blogger – on the Credit Crisis and Great Recession trying to figure out causes and effects that stem from the mortgage market blowup.

As a result of my professional past, I cannot state strongly enough how much it bugs me to read terrible analysis from otherwise respectable journalism sources about what went wrong with the sub-prime mortgage market and the Credit Crunch.

If most journalists get the mortgage story 50% right and 50% wrong, Edward Conard gets it about 90% right, and for that fact alone I am grateful for his book.  In debunking a significant portion of the equine urine that passes for our national sub-prime mortgage narrative, Conard earns my gratitude.

Forthwith, some mortgage market narrative myths Conard helps debunk:

Predatory bankers frequently tricked people into taking out loans that they could not afford to pay back.  Um, no.  This is not a real world banker strategy, to lend money to people who cannot afford to pay back the loans.  It’s just not. It’s illogical to believe most bankers seek to make bad loans, and it drives me nuts to read this implied or stated by otherwise intelligent writers.  Bankers in the real world make loans to people they believe will pay them back.  In the run-up to the most recent crisis, Wall Street mortgage bond structuring departments and mortgage investors mistakenly believed rising home values and low interest rates would help sub-prime borrowers refinance before they defaulted 1 – a pattern that only worked for a short while – but it was a mistake, not a conscious predatory strategy. 2

 

On the other hand, I have dealt in my investing business with many predatory borrowers, people who took out mortgages they knew they could never pay back, but who hoped to get lucky with real estate price appreciation or who hoped to delay the foreclosure process long enough to keep a house for free while they defaulted on their debt obligations.  That scenario happened to me in my investing business almost too many times to count, but I never once met a banker who sought to make a loan that couldn’t be paid back.  It’s bad for business. Banks that make loans that can’t be paid back go out of business quickly.

2. Wall Street Banks, in a conspiracy with the rating agencies, duped mortgage bond investors in the run-up to the crisis.  Not even close. While it is true – and Conard acknowledges as much – that there’s an imbedded conflict of interest in the fact that rating agencies get paid by Wall Street to rate their products, its equally true that mortgage bond investors are among the most sophisticated financial analysts found anywhere.  They were, and are, hyper-aware of exactly who pays whom.  Mortgage investors know what massive grains of salt need to be applied to rating agency information.  Just because journalists and politicians recently discovered the role ratings agencies play in the investment world does not mean mortgage investors needed them to discover that role for them.  It’s a known Wall Street truism, which I stated before and will state again as long as I need to: Professional investors never react to rating agencies moves,3 and professional investors understand the limitations of bond market ratings.

3. CDOs and other mortgage derivatives became so complicated that they were bound to blow Wall Street up.  A common journalistic conceit in describing bank losses due to CDOs 4 and the alphabet soup of other mortgage bond structures (RMBS, ABS, CMOs, CMBS, IOs, and POs to name a few of the more common ones) implies that the opaque nature of structured products doomed them to failure.  Not true.  Just because a journalist does not understand the product does not mean that the structurer, trader, and mortgage investor do not understand the product.  The mortgage bond desks of Wall Street firms and of bond buyers make it their job to understand their products.

 

Some mortgage derivatives, CDOs in particular, suffer from a chronic lack of liquidity, for which in ordinary times the market demands compensation, in the form of higher yields.  In the Credit Crunch of 2008, CDOs and other structured products became untradeable at anything like fair market value.  They are terribly illiquid, not terribly complicated, for professionals who traffic in structured mortgage products.

 

In addition to effectively debunking some myths of the causes of the Credit Crunch, Conard gets the story right in a few other respects, namely:

  1. The optimistic policy begun in the Clinton era of encouraging expanded home ownership through low-money down loans had the unintended consequences of kick-starting a doomed boom in sub-prime lending.
  2. The run on liquidity throughout the crisis was far more consequential in destroying financial firms than any realized losses actually suffered by banks and insurance companies.  In other words, the panic was worse than the ultimate defaults.
  3. Credit Default Swaps (CDS) per se were not the cause of financial system distress, nor are they inherently anything more than risk transfers between counterparties, like buying or selling a bond or loan.

In sum, Conard builds up a lot of good will with me by getting the causes of the Credit Crisis essentially correct, or at least far more correct than I’ve read in other books and journalistic narratives.

“What Went Right” – The US Economy, 1950-2005

In this section we begin to see daylight between Conard and me, although not because he’s necessarily wrong, but rather because we have different starting assumptions.

Conard became such a target for liberals with the publication of Unintended Consequences for his unabashed celebration of massive wealth concentration for successful business people.  He sees inequality as a natural consequence of a difference in people’s work ethic, their innovative contribution to economic progress, and what he terms ‘lucky risk taking,’ by the entrepreneurial and investor classes.  As a Bain Capital partner, he and his book represent to liberals the ultimate voodoo doll for Romney-bashing in an election year.  We’ve seen enough of Romney’s comments on and off the record to believe that there’s considerable agreement between Conard and Romney on this view.

I have issues with the Conard/Romney world view, but I want to be careful to point out what I like about Conard’s argument.  His ultimate concern, clearly stated, is growing the total amount of economic output in the most efficient way possible.  He believes that incentivizing people and institutions to maximize economic output – via financial gain – is more effective than anything else at producing a growing economy.  Impediments to economic growth, in the Conard universe, include taxes, business regulations, trade restrictions, and income redistribution payments, each of which he believes lead to lower economic output over time.

Now, while Conard does not prove his assumptions to be true, they all strike me as logically correct.  I too believe that each of those factors leads to lower economic growth.

Where we differ, and where I expect my liberal friends will gather around me again in support, is whether maximizing raw output in an economy is the single most important goal.  I happen to believe that inequality of income and wealth outcomes have quite a bit to do with whether an economy is ‘successful,’ and have quite a bit to do, as well, with whether my society is the best it can be.  At a certain point, I would trade some GDP growth for a bit more justice in the world, and I might choose a societal safety net now at the expense of a marginal innovation in computer processing.

Conard consistently advocates the economic growth path over the economic justice path.  Before I paint him in overly simple terms, however, I think it’s worth returning to the Conard argument on its own merits, to appreciate it for what it is.

I find his argument entirely credible, for example, that our choice of wealth distribution via transfer payments dooms us to a lower growth path as an economy as a whole.  I believe him when he argues that taxing the wealthy, who allocate an average of 40% of their income to economically productive investments, will leave less capital available for innovation, production, and economic growth.  I agree with him when he states that in a global economy of efficient markets the unionization of US workers will quickly lead to offshoring of those jobs on the one hand, and higher consumer prices on the other.

One Conard argument about the success of the US economy in recent years stands out when compared to Europe and Japan.  He notes that in the last two decades of innovation in computers, software, the internet, and social media, the United States essentially ‘ran the table’ when it came to all of the most important businesses.  Citing “Google, Facebook, Microsoft, Intel, Apple, Cisco, Twitter, Amazon, eBay, YouTube and others,” he highlights the US economy’s investment climate and rewards for risky innovation as a differentiating factor compared to the rest of the developed world.

In sum: I believe Conard when he argues for the factors that lead to higher growth of an economy overall.  I don’t want to live in that society, but I do think it’s useful for people who disagree with the Bain Capital model to think about what they’re willing to give up to live in a different type of society.  Are you willing to be a little bit poorer?

 

What Comes Next – Conard’s Future

In the third part of Unintended Consequences I have to part ways with Conard entirely.  I can’t endorse his prescriptions for the economy, in part because I don’t agree with his view of growth vs. equality, but also because he begins to reveal a curious coldness that hurts his arguments.

In the wake of the Credit Crunch, Conard argues not for regulating banks more but rather for enduring bank runs like we experienced in 2008 since “The Crisis also reveals that the cost of government guarantees, excluding the future cost of moral hazard, was near-zero.  In fact, the government expects to turn a profit on the assets it bought to mitigate withdrawals in the Crisis.”  Notably absent is his reckoning of the cost in human terms or non-government costs of the financial wipeout for so many.

Conard also displays a curious tick in his thinking – and his writing – of quickly taking any government imposed limitation (taxes, regulations, unionization, trade restrictions) on individual or corporate wealth and translating that immediately into “even more lost jobs and higher consumer prices.”  As I review his book, he appears to do this every single time.  Anything that affects the rich and upper classes, in Conard’s description, has an opposite and larger detrimental effect on the middle and lower classes.  The first few times he does this I’ll acknowledge that, yes, some government interventions may have unintended consequences in other areas.  But when Conard continues to say it every single time I’m left thinking – ok, I get it, higher taxes on your Bain Capital folks is just going to bite the rest of us even worse every single time, in all cases.  Unfortunately, by applying the same response to different situations his opinions appear less evidence-based and more economic dogma-based.

My final thought about Unintended Consequences is that’s it’s curiously devoid of any personal or professional anecdote.  Conard worked for Bain Consulting, Wasserstein Perella, and then finished his career as a partner of Bain Capital, running its New York office.  Surely Conard accumulated not only material wealth, but a wealth of interesting business stories with which to illustrate his logical, yet dry, economic analysis?  But Edward Conard, the person, is curiously absent.5  So where are the people in Unintended Consequences?  Ultimately Conard’s book describes a mechanized world of efficient human economic units, each maximizing their own utility for private gain.

What does Conard think of people who don’t fit this dry, efficient world?  In his own words: “A shortage of talent exists, in part, because a large number of college graduates refuse to take the risk and responsibility necessary to bring unrealized investment opportunities to fruition.  Art history and Elizabethan poetry don’t employ workers; the arduous and tedious application of business sciences such as computer programming and accounting does.”

Ok, then.

If you would like a country with higher economic output and more wealth for some people, “Vote Romney/Ryan 2012!”

However, if you would like a world with a bit more poetry in it – and a measure of social justice – you may want the other guys.

Please see related post:

Book Review: The Upside of Inequality by Edward Conard

 All Bankers Anonymous Book Reviews in one place.

 

 

 

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  1.  Just to flesh out the idea in a little more detail here.  A “sub-prime borrower” means somebody who has a FICO credit score below Prime, usually set at a FICO cutoff of 720.  By definition a ‘sub-prime borrower’ does not pay all debts on time.  Sub-prime mortgages therefore went to people who had trouble paying their bills.  In an environment of rising home values and easy refinancing – between approximately 1998 and 2006 – sub-prime borrowers paid back their mortgages in very high numbers.  This anomalous behavior by sub-prime borrowers gave false assurance to mortgage structurers and rating agencies about the likelihood and severity of expected defaults.
  2. I’m not saying predatory lenders don’t exist.  They do.  But I’m saying predatory lenders exist in a way irrelevant to the sub-prime mortgage debacle.  Banks try to lend to people who will pay them back.  When loans don’t get paid back, banks lose.  A majority of journalistic descriptions of the mortgage debacle are unclear on this topic, and I have to acknowledge Conard gets it right.
  3. Never, ever, ever believe a journalist who says the market moved today in response to a rating agency change.  Ratings are usually months, or at the very least weeks, lagging markets, and the ratings-change information is always reflected in the price of the relevant securities.
  4. CDO = Collateralized Debt Obligation.  Basically a delicious bond sausage made from the drippings and leavings left on the butcher’s floor by bond structurers after all the choice financial cuts have been sold elsewhere.  Always illiquid.  Always cheap.  Best not to ask what’s inside.  Some people love them though.
  5. In fact all people are absent from this book, except for the stock cartoonish characters of Obama and Bernanke.  Conard’s references to these two is so exaggerated as to suggest Native American monikers, along the lines of Barack “Hunts and Kills Business” Obama, and Ben “Rushing River of Currency Devaluation” Bernanke.

The Citigroup Bailout – SIGTARP Part III

We love to criticize the wastefulness of bureaucracy, the agency ass-covering, and the naiveté of government officials.  But it’s a surprising pleasure to read[1] The SIGTARP [2]  review of the government’s response to Citigroup’s near-death experience and its bailout in the Fall of 2008.

Here we have a US Treasury position created for the purpose of reviewing the government’s own actions in the heat of the crisis, and we might be excused for bringing low expectations to the table.  I have to admit, however, that my jaundiced eye opens wide with the quality of the analysis and indeed the downright feistiness of the SIGTARP report.

The report reviews the timeline of the crisis, the systemic need to bail out Citigroup, and the particulars of negotiating – actually, Treasury mandated – a $20 Billion preferred-equity capital infusion and a loss-absorbing backstop for a $300 Billion ring-fence around Citigroup’s riskier assets.

We do not know what would have happened without government intervention on behalf of Citigroup, but the SIGTARP nicely summarizes the case for Citigroup’s status as a Too Big To Fail (TBTF) Bank for those of us with short memories.  Citigroup was at the time the largest currency exchange bank, the largest consumer finance lender, the world’s largest credit card lender, the 2nd largest banking organization, the third largest mortgage servicer, and the fourth largest student lender, with over $175 Billion in uninsured domestic deposits.

SIGTARP shares numerous interesting details from the negotiations in October and November 2008.

First, the government needed to lie to itself and the public in the Fall of 2008 when it declared Citigroup a ‘healthy and viable’ banking institution[3], as a necessary condition for providing an initial $25 Billion capital infusion through the Capital Purchase Program (CPP) in October 2008.[4]  Treasury Secretary Paulson and New York Federal Reserve Board (FRB) President Geithner clearly felt at the time that they could only get Congressional support for the CPP if it came with a large dose of self-deception about ‘healthy and viable’ banking institutions.  Why would a ‘healthy and viable’ banking institution need an emergency $25 Billion capital infusion from the government anyway?  It’s a Potemkin Village type absurdity, and SIGTARP lets us enjoy the irony.

Next, Treasury, FDIC, and the FRB cut a pretty good deal for taxpayers in negotiating with Citigroup.  Most importantly, they announced to the public (and Wall Street) the ‘ring-fencing’ of over $300 Billion in Citigroup assets – government insurance against losses.  By ring-fencing, they separated presumably toxic assets on Citigroup’s balance sheet, and declared these assets would be treated in a special way to limit Citigroup’s total losses.

Here’s the clever part about the ring-fence; Citigroup remaining on the hook for the first $39 Billion in losses, with a combination of Treasury and FDIC absorbing the majority of the next $15 Billion in losses, and the Federal Reserve Board absorbing the rest of the loss risk via non-recourse financing.  While the announcement emphasized the government insurance for Citigroup’s riskiest CDOs, RMBS, CMBS, and auto loan ABS, loss-scenarios suggested only Citigroup would bear the losses on the portfolio.[5]

If you can’t figure, as neither Citigroup nor the market could out at the time, what the bank’s biggest loss could be on its portfolio, then the market would assume the worst and treat Citigroup as a soon-to-fail entity going the way of Bear Stearns, Lehman, and AIG.  But if you can precisely define, as the ring-fence did, the upper limit of the bank’s losses, then the market understands the known limit and the self-fulfilling prophesy of expected losses leading to financial wipeout can stop.   So, that’s clever.

Following this announcement, as intended, markets credibly believed Citigroup to be TBTF, with a perceived government guarantee on a huge portion of its riskiest assets.  The stock-shorting activity reversed, CDS spreads tightened, and we saw no world-wide run on Citigroup’s bank deposits.

SIGTARP’s feistiness surfaces most particularly in reviewing not only the actions of government leaders, but their disagreements with each other and with its review.  Numerous times throughout the report, we learn of requests by FDIC’s Sheila Bair to change or redact statements in the report.  We also learn that Citigroup successfully withheld a listing of its ring-fenced assets from publication by SIGTARP, citing propriety information[6], but SIGTARP is not afraid to respectfully disagree.

SIGTARP’s summary of the story emphasizes the ad hoc, but ultimately correct, decision of government leaders to massively intervene on behalf of Citigroup.  SIGTARP calls out our own government for what they failed to make Citigroup do; this distinguishes the report and makes for good reading.

SIGTARP gets to the heart of unsolved problems with the government interventions of 2008.  Citigroup, along with more than a dozen financial institutions, today remains TBTF.  Which means we could repeat the same crisis we all just survived. 

Not only that, but SIGTARP rightly states that the last bailout may increase the likelihood and severity of the next crisis, because the moral hazard problem also remains with us today.  High-risk takers, namely Citigroup creditors and counterparts, were not punished in the bailout, so they may reasonably expect to under-price similar credit and counterpart risk in the future, believing that the government provides an invisible safety net underneath high-wire risk taking.

Even short of a repeat crisis, we know that the implied government guarantee for TBTF institutions constitutes a massive subsidy to Citigroup and its brethren via lowered borrowing costs and collateral costs.  This subsidy provides huge advantages over smaller financial firms, but, more troublingly sets the taxpayer up for unlimited liability for private institutions, with little discernible public benefit.  Citigroup, the big red umbrella, is still not paying us citizens for the giant insurance policy we offer them.

I don’t criticize the government, and neither does the SIGTARP, for preventing a Citigroup collapse in the Fall of 2008.  I do blame the US government, and thankfully SIGTARP does too, for allowing TBTF banks to continue their invisible but nevertheless powerful draw on free taxpayer support.

Ultimately, as SIGTARP rightly (and depressingly) points out, we cannot know the cost of this Citigroup bailout until we know the cost of the next bailout, partly born out of this one.

Two concluding thoughts make me optimistic, however.

First, although SIGTARP is part of the government, it plays the ombudsman role fairly, critically analyzing what other parts of the government have, and have not, done since the acute crisis subsided.  There’s hope in a system which can criticize itself and thus correct its future course.  Course change is hard, but a report like SIGTARP’s makes it possible.  I made this thematic point in an earlier post, but it’s worth emphasizing.  I’m not sure we’re improving, but I am sure that critical thinkers within the system, like SIGTARP, give us a chance at improvement.

Second, throughout the narrative of Citigroup’s near collapse and rescue, we see instances of massive government intervention but not a massive government power grab.  This too bears remembering.  The United States has a tradition of public official respect for private enterprise, which is both understood and credible  – but not always recognized by politicians wanting to score points. [7]

A market collapse and an overwhelming government bailout naturally give rise to conspiracy theories on the political fringes.  Many, if not most, societies in the rest of the world would fit the Citigroup events into a conspiratorial, but ultimately unhelpful narrative.  The specific history of Citigroup as told to us by the SIGTARP, however, reminds us that even if the government did not get everything right, they actually did pretty well, considering.

 

Please also see SIGTARP Part I – Truth in Government

SIGTARP Part II – Biggest Banks Still Too Big To Fail

SIGTARP Part IV – Which Small Banks are Going Under Next?

and SIGTARP Part V – The AIG Bailout



[1] Assuming you like wonkish reviews of the government’s response to the 2008 Credit Crunch as much as I do.

[2] Special Inspector General for the Troubled Asset Relief Program, aka SIGTARP, aka Norse God of Financial Accountability.

[3] Both Treasury Secretary Hank Paulson and FDIC Chair Sheila Bair used this description in written and spoken statements.

[4]A banking institution had to be “healthy and viable” to be considered a “Qualifying Financial Institution,” as only “Qualifying Financial Institutions” could receive this capital infusion.

[5] As, in the end, it turned out.  When the $300B guarantee program unwound in the Fall of 2009, only Citigroup had suffered losses.  So we’ve got that going for us.  Which is nice.

[6] In pointing this out we get to share SIGTARP’s undoubted chuckle about the ‘special sauce’ of proprietary information Citigroup keeps from its competitors, which contributed to one of the most catastrophic losses in human financial history.  Seriously, guys?  No one wants your special recipe of assets that contribute to financial Armageddon for your bank.

[7] Anti-market and anti-government cranks both see vast conspiracies and vindication of their own warped views in the events of 2008, but thankfully they mostly troll the Internet commentary pages and do not reflect, you know, reality.

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In Praise of SIGTARP Part II – We blew it on the repayment of TARP funds by the largest financial institutions

See related post In Praise of SIGTARP Part I here

We are now at the four year mark on the deepest part of the Great Credit Crunch and Great Recession, so I’m moved to ask:

When it comes to avoiding the next financial blowup and bailout we need to ask “Are our bank protections better off now than they were four years ago?”

A Congressionally-mandated investigative entity, SIGTARP[1], AKA the Norse God of Financial Accountability, does not think so.

We know the United States government leaped into bailout frenzy throughout 2008, attempting virtually every permutation of intervention to keep the country’s largest financial institutions – and by extension – the world economy – from complete collapse.  The US government used mergers, direct investments, shotgun marriages, bankruptcy, receivership, loan guarantees, voluntary asset sales, forced asset sales – the whole toolkit.

While the bailout process could best be described as ad-hoc, we hope that the delicate unwinding of the government safety net for Too Big to Fail institutions will be more thoughtful, and less chaotic.

We hope, however, in vain.

According to the SIGTARP report the bank’s exit from government protection has been quite ad-hoc as well.  Worse, we[2] let weak TBTF banks pay back public funds before they were really steady on their feet with enough capital.  The same banks – Citibank, Bank of America, Wells Fargo – remain weakly capitalized.  This matters a whole lot because taxpayers continue to silently subsidize the safety net for TBTF banks.

SIGTARP’s report on repayments by the TBTF banks raises and answers key questions, such as

  1. Why did banks want to repay TARP money so quickly, before they were fully ‘ready’ to access private markets for their funding?
  2. How do we know the process was ad-hoc and rushed?

The answer to question number one is simple.  Bank executives said it was to remove the shame and stigma of continuing to receive public bailout funds from TARP.  I think anyone who has spent time around finance executives, however, knows that shame could not possibly weigh as heavily on them as did the TARP restrictions on executive compensation. [3]

The answer to question number two forms the bulk of SIGTARPs report from September 29, 2011, and the details are fascinating.[4]

To get the full gist of the issue, we need some background first, which SIGTARP nicely provides.

The authority to directly invest in TBTF banks[5] via preferred shares came with a sensible proviso that banks could not repay TARP money for 3 years, but Congress reversed course a few months later in early 2009 with a new law[6]  that allowed banks to repay the borrowed capital more quickly.  Although TARP money came from Treasury, the Federal Reserve Board headed up the regulatory team[7] charged with setting criteria for repayment.

Nine reasonably well-capitalized banks[8] repaid TARP funds in June 2009, while another eight – including 3 of the 4 largest banks in the country(Citigroup, Bank of America, and Wells Fargo) – failed a bank stress test.  Among the criteria developed then for the weaker banks was a requirement that they raise a significant amount of TARP repayment funds – specifically 50% of the cash required for repayment — through common stock issuance.[9]

When push came to shove, however, we learn from SIGTARP’s report that regulators stretched, pulled, waived, and disagreed with one another about whether to make banks comply with the rules they had just put in place.  Treasury’s rush to encourage repayment, it turns out, trumped the regulatory need for strong banks.  And if you suspect large banks get better treatment than small banks, here’s your evidence.

Bank of America, for example, raised capital partly through preferred shares issuance, a less regulated type of capital.  Citigroup, as well, fell short of its required 50% issuance of common stock.  Wells Fargo attempted multiple times to wriggle out of the need for a fully dilutive equity issuance but ultimately raised the required amount at the end of 2009.  Regulators, nevertheless, signed off on all three banks’ 2009 repayment plans, waiving their own requirements mere months after setting them.

FDIC’s then Chairman Sheila Bair, however, stands out as a vocal critic of the regulatory cave-in to the combined Treasury and bank-executive pressure.

Treasury, FRB and OCC officials apparently claimed that private markets were too weak to support the admittedly massive equity issuance needed for the banks.  Paradoxically, at the same time Treasury, FRB and OCC implied the direct opposite, that banks were strong enough to pay back public funds.

As FDIC Chief Sheila Bair points out,

“The argument [FRB and OCC] used against us – which frustrated me to no end – is that [Bank of America] can’t use the 2-for-1[10] because they’re not strong enough to raise 2-for-1.  That just mystified me.  The point was if they’re not strong enough, they shouldn’t have been exiting TARP.”

Sheila Bair called out the impossible double-speak coming from Treasury, the Federal Reserve and the Office of the Comptroller of the Currency.

It makes sense to me that you can’t be both too weak for private capital markets but plenty strong enough to leave public protection.  Regulators blew it by letting the banks out of TARP too early.

As a result of the rush to re-privatize we missed the chance to control, from a regulatory standpoint, the destiny of TBTF institutions and our public exposure to the next big crisis.

SIGTARP’s September 2011 report has a ‘remains to be seen’ conclusion on whether banks are now strong enough to absorb future financial shocks.  That’s a pretty interesting negative-report from within the government, significantly doubting whether regulators have properly done their job.

Also, there’s this, from SIGTARP:

“Unless and until such institutions, either on their own accord or through regulatory pressure or

requirements, are restructured, simplified, and maintain adequate capital to absorb

their own losses, they will pose a grave threat to the entire financial system.”

That’s a compelling and scary argument right now, with Bank of America stock down 50% and Citigroup down 30% from when they repaid TARP in November 2009.

 

Also, please see In Praise of SIGTARP Part I here

SIGTARP Part III- The Citigroup Bailout

SIGTARP Part IV – Which Small Banks are Going Under Next?

and SIGTARP Part V – The AIG Bailout



[1] AKA Special Inspector General of the Troubled Asset Relief Fund.

[2] And by “we” I really mean primarily the US Treasury Department.

[3] When explaining bank executive behavior, always assume personal compensation comes first, until proven otherwise.  It’s just a rule I follow and it’s never steered me wrong.  Bankers feeling shame at receiving public funding to save their bacon?  Please don’t insult me.

[4] All of this is assuming you find financial regulatory reviews fun reading, as I do.

[5] Through the Emergency Economic Stabilization Act of 2008 of October 2008

[6] Through the American Recovery and Investment Act of February 2009

[7] Generally the Federal Deposit Insurance Corporation (FDIC) and Office of the Comptroller of the Currency (OCC)

[8] GS, MS, JPM, US Bancorp, Capital One, Amex, BB&T, BONY/Mellon, State Street

[9] Regulators like common stock issuance because it improves a bank’s ability to absorb future losses, ie. it’s ‘capital ratios.”  Bank executives dislike stock issuance because it dilutes value for shareholders, including themselves.

[10] “2-for1” is the regulatory short-hand language to indicate that 50% of TARP repayment money must be raised as new common equity

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Guest Post: 9/11 Diary from the Banker’s Wife

This is a guest post written by Michael’s wife about her experience working as a doctor at Columbia Presbyterian Hospital on September 11, 2001.  They cleared the hospital and waited all day for injured victims to show up, but nobody did.  She wrote this about two weeks later.

See Michael’s 9/11 diary here

 

At first it was a fire.

From the patient lounge on the AIDS/Tuberculosis ward of Columbia Presbyterian Hospital, the prison guard who was there to guard my incarcerated patient announced, somewhat casually, “Hey, one of the twin towers is on fire.” We all looked up, puzzled. One of my co-interns asked “which one?”, but could only remember that the one his mother worked in had the antenna. We went to the lounge to look at the TV, and there was the one with the antenna, a thick, concentrated stream of smoke streaming from a big hole about 3/4 up. He went to the nurses’ station to call his mom.

Patients, family, nurses, and doctors were now all standing in front of the television in the lounge, watching the plume of smoke. Some people went to the window, which, being at the top of a large hospital at the top of Manhattan, looks all the way downtown, past Central Park, the Chrysler Building, and the Empire State Building all the way to Wall Street and the Trade Center. In the mornings, after about an hour of work, I can see the sun rise and glint pink off the Twin Towers, and think, Mike’s down there. Tuesday was a clear day, and we had a great view.

I called Mike, who works on Wall Street, about ten blocks from the towers. He picks up the phone immediately and says “We’re OK.” News is starting to come in. It’s not a fire, it’s a bomb. Some people think it was a small plane that hit the tower. An accident? Someone else asks. No one really knows. Downtown, no one knows either. Mike is trying to email his clients, who work on the 85th floor of the burning building. I tell him I love him and we hang up.

I try to go back to my regular morning business. I find my med student. This morning I’m going to teach him how to put in iv’s. I get the stuff together, and we start to set one up, using the bottom of a tissue box as our first iv-needing victim. Then there’s a collective gasp from the lounge. A plane just hit the second tower. More people rush to the window. We run to the television or the window where you can see both towers, smoke pouring from the top of them like blown-out birthday candles. My friend O—, whose mother works in the tower with the antenna, looks pale. An announcement comes over the speakers calling all of the heads of department of the hospital to an emergency meeting. My resident shows up, who hasn’t heard any of it. I explain that it looks like two planes crashed into the World Trade Center. “By mistake?” he says. “I don’t think it’s an accident,” I say.

Things start to happen very quickly. One of the second-year residents shows up to tell us that the hospital is in disaster mode. I am on call; this means that I’m going to be admitting people into the hospital today. I’m told to expect to be busy for the next few days. All elective surgeries and procedures are cancelled, and the operating rooms will be open and ready for any injured. We should try to discharge as many people as possible from the hospital to leave more beds open for the wounded. Any extra doctors on non-critical services are being pulled to help triple-staff the emergency room.

Then I get paged by my brother-in-law. I call back and after two or three tries I get through. My sister-in-law, Kim, gets on the phone to find out if I’ve talked to Mike. I say that I did, but that was before the second plane hit. Kim says that Jim, Mike’s brother, really thinks that Mike should get out of downtown as soon as he can. She sounds scared. I try to call Mike’s office, but all the phones are down. In the meantime, I’m trying to talk over my patients with my resident and find out if we can get any of our patients out of the hospital. We come up with a list of three people who can probably leave. Mike’s sister in Boston pages me. She wants to know if I’m OK and if I have heard from Mike. I try to call Mike again. I get his co-worker, Nadia, who says that she can’t find Mike, that she thinks he may have left the building. I feel like she just punched me in the stomach.

Then I’m paged by the MAR (medical admitting resident) about my new admissions. They are trying to get as many people as possible out of the ICU’s and out of the emergency room. She tells me about three new patients, all of whom are on the floor and waiting for me to see them (usually you find out about patients you will be admitting long before they actually arrive to your care). One of them is coming out of the ICU because they need a bed but is still pretty sick. The MAR says I should try to check on him soon because he’s “not that stable.” That’s doctor-speak for dying more quickly than slowly.

We start rounds. My attending physicians seem relatively unaffected by the whole thing and we start rounds like it’s a regular day. Except for the fact that we can still hear people yelling news from the patient lounge, and the TV blaring with voices that we can’t quite make out. For the next two hours, we sit in rounds, listening to patient presentations, and my attendings have an academic discussion about treatment of pneumocystis pneumonia. I don’t hear any of it. The only thing that is in my mind is that Mike left his office and no one has heard from him. And next to and towering over Mike’s subway stop is the World Trade Center.

I get paged again to Kim and Jim’s number. But all the hospital phones and cell phones are down. I go back to rounds, where the discussion continues. I get paged again, so I leave rounds and go down the hall to where there are pay phones. There are people in the hallway crying and a man on the phone next to me saying “Its OK, its OK, its OK,” into the receiver. I call Jim and Kim’s number and get their voicemail. I go back to rounds. Ten minutes later I leave rounds again, go back to the same payphone, and get their voicemail again. This time I leave a message, telling them to please have Mike page me if they hear from him. I tell them that I love them and I hope they are ok. I’m sure this is the first time I’ve every used the word love with my in-laws.

The resident who is transferring one of his patients to me comes in to rounds to tell us about her. But first, he tells us that both of the towers have fallen. “You mean collapsed to the ground?” someone says. Everyone looks numb, but no one else says anything. We go on. All I can think of is Mike. Both my feet seem to have fallen asleep as I realize that I would never be able to do any of the things I do without him. I could not be a doctor, could not continue my internship, could not be a good friend, could not be myself. We’ve been together for six years, married for three months, and it dawns on me that what we have become is so much better than who we are individually. I think about what it would mean to lose that. A tear hits the page in front of me and I discover I am crying.

I leave the room, without even being paged first– a giant break in attending rounds protocol, so much so that I actually pretend that I’ve been paged, looking down at my beeper at a number I can’t even see. I go back to the same payphone. I pick up the phone and miss-dial the number twice before I can put the right numbers in the right sequence to call Kim and Jim. Kim picks up the phone, she says that Mike is there, that he and Jim went out to try to get cash out of an ATM. They are all ok. Mike and Jim come back from the store and Kim puts Mike on the phone. Hearing his voice makes me realize how tired I am and how much I want to be with him.

Mike asks if I can leave the hospital. They want to drive out of the city to someplace safe and want me to come, but all the roads are flooded with people trying to do the same. Mike starts to tell me about what it was like leaving downtown but breaks down. Later, he tells me how he left Wall Street and traveled within two blocks of the towers to find a subway to take him uptown. He tells me about seeing some people fall out of the towers, and some people jump, holding hands. How thousands of other people were just standing, out in the open, watching, unable to move or look away. He wants me to come home soon. I tell him I don’t think I can leave the hospital for the next few days. I tell him I love him. I have to wait to stop crying before I can go back to rounds.

Rounds are ending, thank god, and the rest of the day passes in a daze. I am busy, frantically rushing to get all my work on the patients who are in the hospital already done so that I can be ready when more arrive. We keep waiting for people, keep asking if anyone has shown up yet in the emergency room, if ambulances have brought up any survivors. The answer is always no. The smoke plume from downtown shifts directions, and the whole hospital starts to smell like smoke. “Is something burning?” one of my patients asks me. “Yes,” I say, “Downtown.” Televisions in every patient room are on, blaring, with news from the disaster. My friend O— hears from his mom at around 1PM. She was evacuated safely.

We can hear helicopters and planes screeching overhead, ambulances and firetrucks below and see all the traffic stopped going up the West Side Highway. There is a bomb threat on the George Washington Bridge, which is a few blocks from the hospital. We all eye it from the windows as we go about our day. All day, as I come across people, the greeting is always, “How are you doing? Do you know anyone down there?” We are all trying to both get our work done and call relatives, friends, anyone we know who might have any reason to be downtown. As we work, our friends are streaming out of downtown, ash covered, heads down, not looking back, a gray pilgrimage pouring over every bridge, up the FDR and West Side Highway away from the disaster. There are no cars, so they walk on the five-lane highways and avenues, and soot drops on them as they go. From the hospital, we can look down and watch them pour over the GWB, having walked the length of Manhattan in their dress shoes and suits to go home to their families in New Jersey.

Mike actually got on the subway before the buildings collapsed, before the subway stopped running. So he came up to midtown on a train of people, half of whom knew what was happening and half of whom had been on the subway since Brooklyn and were still living in the New York City where none of this was possible. They only made it to midtown though, and then Mike ran though Central Park, leaving dusty footprints in the jogging lane, to Kim and Jim’s apartment on the upper West Side.

At one AM, September 12th, I’m finished with all my work. I haven’t gotten any more new admissions since those I heard about in the morning when we first went on disaster mode. All of my patients are “tucked in” for the night. But no one is sleeping. The patients on our service, many gaunt with AIDS and haunted by traumas, past and present, are wandering the halls of the ward, staring at each other as they pass by, iv poles in hand, walkers pushed in front of them. Roommates who have ignored each other in spite of being five feet apart through their entire hospital stay are talking to one another.

The ER is like a ghost town. Eerily silent, yet full of doctors, nurses, social workers, many of whom just showed up at the hospital that morning to see if they were needed. The surgery interns are sitting on empty gurneys, swinging their legs over the side and waiting for patients who aren’t coming. Occasionally someone will say “I can’t believe it.” Or “its like a movie.” The only loud sounds are the telephones, which the social workers are answering, telling caller after caller, all in tears, that we haven’t seen their wife, son, partner, mommy, that they haven’t been sent to our hospital.

Downtown, we hear that they set up a triage center and the building fell on it, killing all the emergency workers, including the disaster coordinator for the state of New York. Then they set up another one and then rubble fell and destroyed it as well. I keep thinking that if I hear anything worse than what I’ve just heard I will break down, be unable to do my job. But then I do and I just get more numb. I desperately want someone to hug me so that I can just cry and stop pretending to be a doctor.

I go to the resident lounge to find out what I should do next. All day, I’ve actually looked forward to finally being able to do my part for the people caught up in this nightmare. But when I get to the lounge it is full of residents watching TV with tears in their eyes. I ask one of the chief residents what I should do next. There is nothing. No survivors are beating down our doors. The thousands of people who walked out of the financial district, looking like ghosts covered with white ash, don’t need our help. Like my husband, they are home with their families, trying to put words to what they saw. The other thousands who were still in the buildings at the time of their collapse are beyond our help. They tell me to go home and sleep.

So, at 1:30AM, I take a gypsy cab from the hospital to my apartment. I share it with my friend R—, who spent the entire afternoon looking for her grandmother who works on the forty-fifth floor of tower two. It turns out that her grandmother had been late to work that day, which saved her life. She was in the lobby when the plane crashed into her tower, and was able to get out safely but had smoke inhalation and couldn’t contact her kids (or grandkids) until around 7PM. On our way home we pass a large FedEx truck, surrounded by police cars, firemen, and dogs. As the cab slides silently past, I am sure that it will blow up. It doesn’t.

I crawl in to bed with Mike at 2AM. He is not asleep. I get the hug that I’ve needed all day, and say a quick prayer of thanks that I, unlike so many people tonight, have someone to come home to. Then I feel selfish for thinking that. Mike has fallen asleep when a truck rumbles down Amsterdam and he awakes with a start. “I thought it was a plane,” he says. At four AM I get back up to go back to the hospital. I cry as I dress, and step out of my door into a ghost town, where nothing is open, there are no little tin coffee carts on my street to sell me breakfast, and no cabs. I take the subway back to the hospital. There are very few morning commuters. At the top of Columbia Presbyterian, my friend Jeff and I walk to the window and look downtown. There is a hole in the sky, and below it a red glow. Smoke pours into and out of that hole in the sky. The Empire State Building, always dwarfed, looks huge and vulnerable. I am afraid for it.

The next few days are still a blur. I spend all day Wednesday in the hospital, where we still have hope for caring for some of the victims as the digging begins, and again I am sent home early in the morning on Thursday because there is no one to fix. I sleep four more hours that night, and then my schedule changes, so that on Thursday evening I leave the hospital before it is dark for the first time in a week. My blurry eyes look around at a different city. On the street, there are flags in every window. On the subway, people are deferential, and try to give everyone some personal space. In shops, on the sidewalks, and street corners, people speak quietly, and it is not uncommon for someone to be crying as they go about mundane tasks. Church, temple, synagogue and mosque doors are all flung open, with signs that say come in to pray in many languages. Many shops are closed, and on those shop fronts, on bus stop overhangs, and on the sides of buildings all over the city are the missing signs. The faces of people who didn’t walk out. What they were wearing, how tall they are, how much they weigh, which tower, what floor they were on.

Over the next week, we, the City of New York, the New Yorkers, Gotham, learn that we actually are one group. That though we are the most diverse city in the world, we do belong to something. That something is terrible and tragic and stunned, but at least we aren’t alone. We greet friends and acquaintances we haven’t seen yet with “How are you doing. Did you know anyone down there?” When the phones are working we continue the calls to friends and colleagues who we haven’t heard from. We flinch every time we get an answering machine. We go to Union Square and light candles in front of the pictures, the poems, the paintings that are our response to what has happened to us. We clean our apartments and sweep up the white dust that seems to be everywhere. We look up into the sky with dread every time we hear an airplane, we walk quickly past tall buildings, we jump at loud noises that were part of regular life in Manhattan just a few days ago.

Now, weeks later, I cry when I read the paper. Mike, who sat at home with nothing to do the first two days after the disaster, has returned to work to watch the market fall and fall and his co-workers go to funeral after funeral. He came home for the first week with his clothes smelling like smoke. He is less on edge. We are more able to talk about things other than what happened that day. But we still don’t have a name for it. Its funny, but no one in New York seems to refer to it as the attack, and the bright logos and big adjectives used by the news networks seem unbelievably inappropriate in our gray, solemn city. We call it “Tuesday” or “the 11th” or “the disaster” or just “what happened.” We still cannot really describe what it is like to wake up to a world where none of the rules you thought applied to your life, or your safety, or your ability to see the people you saw today again tomorrow, work anymore. Our eyes have been opened. We look at the people we love now and realize that every day with them is a blessing and we should live with the knowledge that it could be our last.

 

Also See: Michael’s annotated diary from 9/11

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My Diary, September 11, 2001

The Great Recession and the World Trade Center attacks reshaped our country and continue to dominate the way I see the world and our place in it.  While I concentrate on the former events at Bankers-Anonymous, today I commemorate the latter on the 11th Anniversary of September 11 2001. 

I transcribed my diary below from that day. I’ve annotated my diary entries with additional recollections of what I saw and felt.

Here is my wife’s diary from that day as well.

 

September 11, 2001

 

“I hope never again in my life to be so close to mass tragedy and mass terror as I was today.  I watched a silent television image of a burning hole in the side of one of the World Trade Center buildings, and then, while on the phone telling Jim that I was ok, I watched a second plane slam into the side of the second World Trade Center building, which exploded at the point of impact.”

 

Bond markets reacted instantaneously to the first attack, but it remained unclear to all of us on the trading floor whether the first tower fire was caused by a bomb, an errant small commuter plane, or something else.  A bomb seemed the most likely scenario, since the Towers had been attacked previously.  The clear blue sky day didn’t favor the commuter plane theory.  But we just didn’t know.

Between the time of the first tower and second tower being struck, many of us on the trading floor of the 85 Broad Street Goldman building looked up at the sky to see a mixture of smoke and paper debris flying just over the top of our roof.  Although we worked a number of blocks away from the World Trade Center, we were apparently directly downwind of the first burning tower.  Staring upwards out of the window, one of my Emerging Markets derivatives traders remarked absently and ironically about all the written derivatives contracts that had literally flown out the window.  At the time, about 8:55am, it didn’t seem overly callous – we just didn’t know that this was an attack, and we didn’t realize yet that this wasn’t something that could be joked about.

Also, Jim is my brother.

 

“Jim made me swear I would leave the building, which I did do, although the Goldman building is a 5-minute walk from the Twin Towers.”

 

In fact, “swear” in this sentence has a double-meaning, because as we were both watching CNN on the television from our respective offices, while talking on the phone together wondering about the cause of the initial hole in the first tower, we saw the second plane hit live, and all I could hear in my ear from Jim was a series of explosive F-bombs telling me to get away from Wall Street, that we were under attack, and “blankety blank blank blank get the blank out of there!”

 

“I walked to the closest subway, Wall Street, then was forced to Fulton Street, and finally caught an uptown 6 Train at City Hall.”

 

The second tower was struck at 9:03am, and I was out the door of 85 Broad Street by about 9:08am.  Wall Street and Fulton subway stops had closed by the time I reached them at 9:15am, but the City Hall subway stop remained open.  So I had a 10 minute, approximately 10 block walk North to City Hall.

Three or four of us boarded the subway at City Hall, tear-streaked and shell-shocked, only to greet Brooklyn-based commuters who had no idea what was going on above ground.  They had gotten in the train 20-30 minutes earlier, but had no idea that in the course of their Brooklyn to Manhattan commute, the entire world had changed.  We were the first ones to tell them New York was under attack.

Originally I took the subway to 54th Street to try to find my brother Jim, who had insisted, between F-bombs, that I should head to his midtown office.  I know mine was among the last trains heading north.  After I got to midtown and tried to re-board the subway just ten minutes later, it no longer ran.

By the time I arrived at his office, Jim had left to join his wife and newborn daughter at his apartment on the Upper West Side.  Some of his office mates – still in his office – greeted me as if I was a ghost back from the dead.  My brother had left them with the mistaken impression – based on his concern at me being down on Wall Street – that I worked in one of the Towers.

 

“Fortunately I was in time before they shut down the train, which saved me from walking all the way uptown, although I needed to run from 54th Street to 104th Street, where I spent the rest of the day with Kim and Jim.”

 

Other recollections from the afternoon with Jim: I didn’t know the towers had collapsed until I made it to 104th Street, and his doorman told me, as he’d been watching it on TV.  By mid-day on the Upper West Side, every store owner on Broadway had brought down those garage-door style metal curtains covered in graffiti, in effect battening down the hatches.  It was unclear to us at that point whether the citizens of New York would respond in patriotic solidarity – as mostly happened – or whether rioting and looting might take over.  Store owners weren’t taking any chances.  In the late afternoon of 9/11, my brother and I ventured out from his apartment onto the deserted streets, to withdraw a chunk of cash from an ATM machine, in the event that we were about to enter a Mad Max-style futuristic dystopia.  Anything seemed possible on that day, with the Pentagon under attack and an unknown number of passenger planes still unaccounted for.  In one of the few moments of levity in the day – at least in retrospect – we carried tennis racquets with us to ward off looters.  We strolled down the empty Upper West Side like Bizarro-world Williams sisters, alert and on the balls of our feet, ready for the apocalypse.

 

“The most horrific thing I witnessed was a falling body from near the top of the World Trade Center to the ground.  I shudder when I think of the abject terror those falling people must have felt from 100 floors up.”

 

During my 10-minute walk North to the City Hall subway stop, I also remember the thousands of people on the street, in the blocks nearby the burning towers, just staring upwards in horror.  The vertical steel stripes near the top of the towers glowed red.  Smoke rose upward, while debris and the occasional human shape fell downward.  Thousands of us, slack-jawed, tears streaming, hands clutching our mouth or our heart, leaning on the arm of the next person just to remain upright.   I walked past thousands of us, watching this from the ground.

 

“I am very scared for Darren Schroeder, Michael Skarbinski, Guillaume Fonkenell and the few others at Pharo who worked on the 85th Floor of Building One.”  

 

At the time I wrote their names, I was sure I was writing their epitaph in my diary.  Pharo Management was a relatively new Emerging Markets hedge fund at the time, and I had visited their office on the 85th Floor of Tower One about two weeks earlier, and I had the image of the view from their office in my head at the time I wrote this diary entry.  The next day after 9/11, I read on Bloomberg that not only had they survived, but that Pharo had an off-site backup contingency system for all their trade data and Fonkenell, the founder, had managed to get the word to his customers via Bloomberg about their survival.

 

“I pray to any God who is up there that they did not suffer.”

 

As an institutional bond salesman, I sat on the trading floor facing my bond traders, about 5 feet away, each of us separated by a row of computer monitors.  Wall Street Bond traders all traded bonds with other Wall Street firms via inter-dealer brokers with the at-the-time obscure names of Cantor Fitzgerald, Tullett & Tokyo, and Prebon.  For a small commission per trade, the inter-dealer brokers offered a measure of anonymity and liquidity between, say, Goldman Sachs and Morgan Stanley.  My traders and the inter-dealer brokers didn’t use traditional phones between them, but rather a ‘hoot,’ an intercom system which allowed them to be in constant audio contact.  Mostly these inter-dealer brokers worked in offices on the top floors of the World Trade Center Towers.

In the minutes between the first and second tower being struck, the traders in my group communicated to us one of the most awful scenes of suffering imaginable, from their counterparts at Cantor Fitzgerald and Tullett & Tokyo.  The Cantor and Tullett guys from the first tower were trapped above where the first plane hit, and they realized there was fire blocking their elevator and stair exits.  They reported to my traders that some of them were heading up to the roof, rather than down, in the vain hopes that they might be rescued from there.  We received their pleas for help and for advice over the hoot on the trading floor, in real time.  We now know none of these bond brokers survived.

 

“My closest friends and family seem to be safe right now, and I have no word on specific tragedies with people I know.  I hope the guys at Pharo survived the horror.”

 

I spoke on the phone to Pharo’s Michael Skarbinski about 3 days after 9/11.  He told me the first plane struck 2 floors above their office, smoke filled their entire floor, but they survived the impact.  They started to head downstairs almost immediately.  He reported it took them most of an hour to walk the whole way down, but they all made it out of the tower a few minutes before his tower collapsed.

“I have felt sick and weak all day and sad that Barbara has been at the hospital all day.  All I want to do is hug her and appreciate our luck, up until now.  I am sick with fears as well that this will spell the end of certain liberties and a carefree life that we have until now enjoyed.”

 

That afternoon’s post-apocalyptic walk with my brother on the Upper West Side had reminded me that if you just scratch the surface of a civilization, there’s a bestial nature waiting to come out.  I really felt writing this diary on the night of 9/11 that we might be on the verge of something new and awful in human experience.

 

“Baby Caroline may grow up in a different world.”

 

Caroline is my niece, born just 2 weeks before 9/11.

 

Also See: My wife’s diary from that day

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