Wall Street Archives - Page 3 of 4

April 23, 2013April 24, 2013

The Meaning of Jon Corzine

With the announcement that MF Global Trustee (and former FBI chief) Louis J. Freeh will charge Jon Corzine for failing in his duty to oversee the company, the meaning of Jon Corzine shifts once again.

Prior to this announcement, I understood the meaning of Corzine primarily through the following investment aphorism:[1]

“One of the worst things that can happen to you or a client is an early investment that wins big. You will become overconfident of your abilities and proceed to lose much more in the future through imprudent decisions than you initially made on the winner.”

Corzine’s career is the epitome of this wisdom, although he combined it with an uncanny ability to “fail upwards.” A few salient points in his timeline illustrate his pattern.

The 1994 failure in Goldman’s Fixed Income department

1. He made partner as a government bond trader in the ‘80s, and later managing Goldman’s entire bond trading operation, but Corzine ramped up fixed income risk just when the wrong moment hit.

Interest rates rose sharply in 1994, prompting a bloody massacre of fixed income departments on Wall Street, including an existential threat to Goldman’s survival, due to losses.[2] Instead of firing Corzine for his astonishing imprudence, the partnership felt it had no choice but to elevate Corzine to Chief Executive, all the better to unwind the level of risk in the fixed income department. His elevation illustrated another finance aphorism:[3]

“If you owe the bank $1,000., they own you. If you owe the bank $100 million, you own them.”

Corzine, as described in William Cohan’s Money and Power, How Goldman Sachs Came to Rule the World, in a sense ‘owned the bank,’ as the partnership could not afford to lose him due to its exposure to rising interest rates. He was a massive risk taker in the lead-up to 1994, making extraordinary money in 1992 and 1993. But when it all turned bad, instead of being fired, Corzine was rewarded with the top job at Goldman, paired with Hank Paulson to temper Corzine’s risk appetite.[4]

Summer of 1998, Long Term Capital Management, and Corzine’s attempted rogue portfolio trade

2. With the August 1998 Russian ruble-bond default and Solomon Brothers’ swap desk liquidation, most of Wall Street faced major exposure to the insolvent Long Term Capital Management, the first Too-Big-To-Fail hedge fund. The New York Federal Reserve attempted a private sector “bail-in,” requiring cooperation and an infusion of capital from each of the Wall Street firms, via a Godfather-style meeting of the families, hosted by the New York Fed.

Corzine, however, nearly managed to personally blow up the whole bail-in, achieving the rare trick of pissing off not only the rest of Wall Street but the entire Goldman partnership as well.

While the Fed urged cooperation between banks, Corzine attempted a sideswipe of the portfolio out from under the rest of the Street. He secretly negotiated a purchase of Long Term Capital’s entire portfolio using Goldman’s capital[5], presumably believing the firm could make a profit by taking on the risk of the illiquid trades.

This attempt, ultimately unsuccessful, came at a delicate time for financial markets, suffering unexpectedly large losses on Russia and exposure to LTCM.

Goldman, in particular, had been planning an IPO that Fall, which Corzine’s actions undermined. The IPO was delayed by market conditions, but also by the frightening style of rogue trading risk which Corzine engendered with his move. The firm leadership of Paulson, along with deputy heads John Thain and John Thornton, engineered a coup against Corzine’s leadership as a result.

Corzine seemingly never saw a risk he didn’t try to take, which ultimately proved too much for the partnership. They allowed him to stay nominally in charge through Goldman’s IPO in June 1999, with the understanding that Corzine would be professionally sidelined after that. His political career began shortly after.

MF Global and lack of risk controls

3. After unremarkable stints as Senator and Governor of New Jersey[6], Corzine landed the top job at MF Global, a medium-sized brokerage.

We now know Corzine continued his pattern of 1994 and 1998, in which he doubled-down and tripled-down on risks, in the face of extraordinary losses. Although his trading led to huge losses, somehow his ability to fail upwards did not derail his own personal career.

Up until MF Global became the eighth largest bankruptcy of all time, the meaning of Corzine seemed to be about his almost Forrest Gump-like success, in the face of amazing failure. His Midwestern affable, bearded, demeanor masked an unlimited appetite for investment risk. Sometimes it worked, sometimes it didn’t, but either way Corzine kept on moving upward.

We know in retrospect that Corzine’s pattern of unrelenting risk-taking continued at MF Global, and that ultimately some wrong-way bets on European sovereign bonds pushed the firm into chapter 11 bankruptcy.

We also know some $1.6 Billion in customer funds were misplaced in the final days of MF Global, for which I’ve argued Corzine should be in jail.

A new meaning of Jon Corzine

Following the debacle of MF Global, and in the light of the 2008 credit crisis, however, Corzine’s career came to represent something darker and more insidious.

Unlike failed chief executives Dick Fuld of Lehman Brothers, or Jimmy Cayne of Bear Stearns, Corzine actually oversaw the misplacement of customer funds, not just the destruction of shareholder value.

We forgive – mostly – the leaders who drove their firms into the ground through errors in judgment, or risk management, like Fuld and Cayne. Shareholders lost, but shareholders took equity risk and our system rightly allows for losses like that.

Fuld and Cayne lost personal fortunes invested in their own firms, as they should have, and suffered for the loss in their reputation.[7]

But we should not forgive those who commit the fiduciary sin of misplacing customer funds, like Corzine.

I make a distinction between these so that we do not lose sight of the different types of losses, and the consequences. It bothered me, up until now, that Corzine was not pursued more aggressively for the loss of customer funds.

Too Big To Fail executives

For me, Corzine additionally offered the ultimate lie to the public about executive compensation. Namely, if you’re so essential to your business that you deserve, say, $12.1 million per year in good times,[8] how can you not retain the liability and responsibility when things go horribly wrong?

In what way did you earn the upside profitability, but not deserve the downside liability?

If you’re so good at what you do, then you need to be held personally liable when $1.6 Billion in customer funds go missing.

All of which is to say that I’m extremely pleased to see MF Global Trustee suing Corzine for his responsibility in the failure of his firm.

MF Global, the firm, was not Too-Big-To-Fail when it went under in September 2011.

Jon Corzine, the executive, until now represented a type of CEO who could earn profits and bonuses in the good years, without suffering personal consequences when things went wrong.

With the latest news, however, I’m encouraged that at least one Too-Big-To-Fail executive will suffer the consequences.

Please also see Arrest Jon Corzine Now

And Update on Jon Corzine by the MF Global Trustee

And One more rant on Jon Corzine

[1] All credit for this aphorism to financial planner David Hultstrom, whose ‘Ruminations on Being a Financial Professional’ is the best collection of pithy and wise investment advice I’ve ever seen collected in one place. See especially pages 9-12.

[2] Incidentally, I’m not in the prognostication business, but when you look at this simple chart of fixed income over the past 50 years, you see we’re at the very bottom of the rate cycle with very little to go from here. No risk manager alive has ever dealt with a massive move upward in rates, only short spurts in a secular move to lower rates. When the trend reverses, it will by U-G-L-Y.

[3] Attributed in different variations to John Paul Getty as well as John Maynard Keynes.

[4] I didn’t work in Goldman’s fixed income department until 1997, at which point Corzine ran the firm as senior partner, along with Hank Paulson from investment banking. Corzine was the bearded, affable, sweater-vest guy who would occasionally come down to the bond trading floor.

[5] Matched with capital from Warren Buffett’s Berkshire Hathaway.

[6] An associate of mine who dealt with Governor Corzine frequently complained about Corzine’s leadership in New Jersey. Although in agreement with his political persuasion, he found Corzine unwise politically and inconsistent to deal with.

[7] I actually wish we had more Japanese-style “begging of forgiveness” for corporate failure by chief executives. The promise of public shaming might help temper risk appetite.

[8] Corzine’s scheduled final executive package, before he wisely offered it back, in the wake of the Ch. 11 filing of MF Global.

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March 1, 2013March 1, 2013

Are Wall Street Bonuses Fair?

I love a contrarian argument, and once upon a time I enjoyed Wall Street bonuses, so you can imagine my delight to receive in my inbox a link to a video from MinuteMBA [1] titled “In Defense of the Wall Street Bonus” yesterday.

The video is worth watching.

The video is also a great example of the difference between being smart and being wise. That difference comes down to “Can you ask the right questions?”

The folks behind “In Defense of the Wall Street Bonus,” ask the wrong questions.

The video sets out to answer the following wrong questions:

1. Are bonuses an appropriate mechanism for compensating Wall Street bankers, when compared to salaries?

They give the correct answer, which is “Yes.” Flexible compensation in the form of bonuses is the key to mitigating volatile profits streams inherent to Wall Street firms, as currently constituted.

2. Are there potential negative consequences to the economy to the regulation of Wall Street bonuses?

Again, they get the correct answer, which is “Yes.” More regulation = less employment, which leads to negative knock-on effects for finance-dependent economies like New York.

3. Are banker bonuses fair?

The narrator in the video makes a passing reference to the idea that Wall Street folks “might be overpaid,” and I share his ambivalent feeling about this.[2]

So far, so good, as these questions go.

Unfortunately, in the light of the 2008 bailouts of Wall Street firms, none of these three questions are the most important questions to ask about Wall Street bonuses.

A better series of questions with respect to Wall Street bonuses would go something like this:

1. Are Too-Big-To-Fail Banks actually private entities at all?

2. Are they instead systemically important and heavily subsidized corporations entrusted with the public welfare – akin to electric utilities, or Amtrak?

3. If they are heavily subsidized and systemically important, doesn’t it make sense that they would be heavily regulated to within an inch of their lives?

4. Just as we would expect with a public utility entrusted with the public welfare, doesn’t it make sense to limit the compensation of employees and executives, until such time as they make themselves systemically irrelevant?

I actually think that the Too-Big-To-Fail banks do serve a systemically important function. We do need them, and their sudden and messy disappearance would prompt a swift financial and societal crisis.

As a natural result of their importance, we taxpayers have a nearly unlimited liability[3] with respect to exposure to these systemically important institutions.

I’ve got no problem with taxpayer funds backstopping systemically important institutions at critical times, just like we pay for national defense, the FDA, the CDC, and NASA. Our big banks are important too.

What really has me snapping pencils[4] however, is to see Too-Big-To-Fail banks with a government guaranteed safety net paying bonuses to its employees, as if they are being run as private entities.

Guess what? As long as you know the government’s got your back, you’re not really private.

If you’re Too-Big-To-Fail, you’re Amtrak in my book.[5] None of you should get more than a few hundred thousand annually. And that’s being generous.

Now, before you accuse me of being a Communist, or a Wall Street hater, let me clarify.

I love private enterprise.

I applaud successful hedge fund managers, for example, and I do not begrudge their extraordinary compensation, provided they follow the rules[6] and manage capital for willing investors.

One of the keys to my applause, however, is my belief that any of those hedge funds could disappear tomorrow, as a result of a bad bet, misplaced customer funds, or a faulty computer algorithm, and no government entity will step up to save their bacon.

I long for the day when the employees of Wall Street banks can reap legitimate profits, if they deserve it, or similarly disappear without a whimper, if they deserve it.

If the Too-Big-To-Fail banks managed to break themselves into systemically irrelevant parts, I would have no problem with their executives paying themselves massive bonuses in good years. They’d have earned it.

But until that day, when they’re finally Too-Small-For-Bailouts, please don’t pretend that they’re anything more than a big NASA – a bunch of smart people in a big room full of flat screens, filling an important government-subsidized mission – working on the taxpayer’s dime.

[1] I’d never heard of them either, but the site looks intriguing.

[2] When I worked on Wall Street I certainly never felt overpaid. In fact I felt underpaid and pissed off about it most of the time. Just like everybody else. Alas, with the passage of time and some distance between Wall Street and me, it becomes easier to say, “Yeah, all those guys over there are overpaid.” So, yes, self-serving delusions are universal and an inescapable feature of the human condition.

[3] Ok, technically not unlimited. Neil Barofksy, aka SIGTARP, the Norse God of Financial Accountability, placed the public liability at the height of the bailout at $23.7 Trillion.

[4] Picture me scribbling these next few sentences long-hand with a stubby pencil bearing down too hard on a dirty notebook at some fluorescent-lit diner smelling like last month’s ham and swiss, and you’ll get a sense for how mad I get about this. Pretty much starkers.

[5] By the way, Jamie Dimon? You’re announcement this week that “You need us Big Banks” is another reminder that self-serving delusions are universal and an inescapable feature of the human condition.

[6] Which, of course, I have my doubts they all do, but that’s a longer story.

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January 31, 2013April 4, 2014

The USA of I.O.U.

Every once in a while I read a finance article that sticks in my head and never goes away. An article about the historical intersection of debt and the United States from the New Yorker from four years ago by Jill Lepore is just one of these.[1]

The USA of IOU

Jill Lepore’s article explains that in many ways the United States was founded of the debtors, by the debtors, for the debtors.

We know from English literature that the United States represented a fresh start for insolvents from the lower and upper classes, which makes sense when we learn that both Dickens’ father went to debtor’s prison and Trollope’s father fled England to avoid it.

What I didn’t know is that as many as two-thirds of Europeans arriving in the Colonies were debtors, paying their way as indentured servants. The colonial governments of Virginia and North Carolina for their part, eager for laborers, passed incentives by promising 5 years’ worth of debt protection. The founder of Georgia, James Oglethorpe, specifically started the colony as a debtor’s refuge in 1732, as an alternative to English debtors’ prison.

Lepore makes the interesting comment that Founding Fathers Jefferson and Washington were so up to their necks in debt to London bankers that the Declaration of Independence from England not only served democratic Enlightenment ideals but also their own balance sheets.[2]

Debtor’s prison

Before reading Lapore’s article I had no idea that the English tradition of locking up debtors in prison jumped the Atlantic and came to the American colonies and the young United States. Debtors through colonial times and the first 40 years of the Republic routinely got locked up in brutal prisons, – often for very small amounts. There the debtor would stay, half-starved and dependent upon alms from passers-by, until someone – usually a relative – paid the debt.

New York became the first state in the nation to outlaw debtors’ prisons in 1831, paving the way for other states to follow suit.

Debtors’ prisons largely predated proper bankruptcy law, which makes sense as bankruptcy would always be preferable to prison.

Bankruptcy for Traders vs. Everybody Else

You are not going to believe this[3], but in the 1800 to 1830 period, financial traders typically received preferable treatment, by law, over everybody else, when it came to insolvency.

If you were a stockbroker in 1800s Wall Street, for example, or you engaged in financing merchandise shipping and trade, or trading in agricultural commodity futures[4], you could declare bankruptcy if the business went awry. But, if you were not a financier, you had no way of getting clear of your debts, and you might face debtors’ prison.

In essence when debts became overwhelming, Lepore explains, a bankruptcy law in 1800 allowed financiers to declare bankruptcy and receive a fresh start, freed of their debts. Presumably lawmakers justified this disparity through a logic similar to today’s “Too Big To Fail” principal. If the brokerage houses in turn of the 19^th Century Wall Street couldn’t work through their financial distress, well then my goodness, what would happen to the economy????[5]

Since the bankruptcy law only applied to traders, everybody else was liable to be thrown into debtors’ prison. Indefinitely, in fact, until their debts got paid. Not until 1841 did Congress pass a permanent bankruptcy law so that ordinary folks could declare bankruptcy in the event of insolvency.[6]

So, if you were wondering whether the bailout of Wall Street in 2008 while Main Street suffered represented the nadir of financial inequality and injustice, you’d be wrong. Early 19^th Century injustices were even worse. There, doesn’t that feel better now?

[1] Here’s a Scribd link to the article as well.

[2] Before reading Lepore’s piece I knew about the historical train of thought that the Founding Fathers were greatly motivated by selfish private interests, such as keeping taxes low and protecting their own private property, something that British sovereignty increasingly impinged upon in the years leading up to the Declaration of Independence. As a recovering banker, however, I find the we’re-up-to-our-necks-in-debt-let’s-cut-ties-with-our-bankers argument plausibly intriguing. I’m sure Jefferson and Washington were great guys and all, but any time you can simultaneously establish a radical new experiment in non-Monarchical government based on Enlightenment ideals and wipe out your personally huge debts at the same time? Wow, I mean, that’s a two-for-one. You kind of have to do it.

[3] Yes, that’s sarcasm.

[4] Yes, the concept and use of commodity futures are not hundreds, but thousands of years old.

[5] Does this sound familiar to anyone?

[6] Lepore relates the story of a clever insolvent who found a loophole in the bankruptcy law of 1800 that offered unequal treatment between traders and everyone else. With extraordinarily large debts that had previously landed him in jail, her hero John Pintard managed to get a temporary reprieve from prison through a loophole in the debtors’ prison laws. He took out an advertisement in a newspaper that he was doing business as a stock broker. Pintard then traded a single stock, pocketed the fifty-eight cents profit (later donated to charity), and filed for bankruptcy as a trader.

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December 10, 2012November 14, 2013

Book Review: Bailout; An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street

If every novel or Hollywood movie starts with either the premise of “A Man Walks Into a Town” or “A Man Goes On a Journey,” Bailout by Neil Barofsky begins with the former. Neil Barofsky plays the leading Jimmy Stewart hero role in this modern update to Mr. Smith Goes To Washington.

In late 2008, the outgoing Bush administration nominated Barofsky, a federal prosecutor from the US Attorney General’s Office in New York, to head up the Special Investigator General of the Troubled Asset Relief Program (aka SIGTARP). After then-Treasury Secretary Paulson pushed through Congress the approval of $700 Billion in government cheese dedicated to propping up the US financial system, Congress had the foresight to demand someone who could, in Barofsky’s turn of phrase, “catch the rats” inevitably attracted to the cheese.

Much of the humor and pathos of Bailout derives from Barofsky’s naïve outsider status[1] crashing awkwardly into – or exploding spectacularly against – the self-interested forces of Washington. Time and again, he brings his moral outrage and laugh-or-you’ll-cry innocence to a self-interested, power hungry town.

He’s brutally harsh on well-known characters such as Treasury Secretary Tim Geithner[2], Paulson protégé Neil Kashkari[3], and Treasury deputy Herb Allison[4], as well as lesser known players who make up the DC financial policy world. He’s also hilariously open about his own deficiencies for the SIGTARP job, in his role as a bridegreoom,[5] or as an initially clumsy political player on the Washington scene.

I’m not in the least surprised that I loved this book, as I’ve been a dedicated fan-boy[6] of Barofsky’s SIGTARP reports on this site (here, here, here and here), trying my hardest to make more people aware of how good and rare a job he did as SIGTARP.

I am surprised, however, at how much this book should be the book everyone reads to understand our federal government in the early 21^st Century. I’m not going to insist yet that Barofsky’s Bailout is the Washington DC version of Michael Lewis’ Liar’s Poker, but the parallels are strong enough that I’m putting the comparison into the conversation.

Both relate hilarious and cringe-inducing stories of ambitious, smart, successful, and powerful jerks acting badly, for personal gain, to the public’s detriment. Both walked away from short stints in their respective centers of power with the guts to risk complete ostracism from that center of power by eviscerating the players in hilarious character sketches and painful interactions.

Throughout Bailout, Barofksy reminds us that the only possible way he could succeed as the Top Cop of TARP would be to act with complete indifference toward his next job. Any personal consideration of the professional consequences of his actions – like money or advancement or power or prestige or making friends – would keep him from pursuing his investigatory role to its fullest extent.

It helps that Barofsky, by his own description, has an almost Aspergers-syndrome disregard for niceties like human feelings or sympathetic tones when they get in the way of what he believes to be right. He exudes a super-hero focus on righteousness – even more than I had realized when I first dubbed him the Norse God of Financial Accountability.

If Barofsky demonstrates any character flaw in Bailout, it’s this same self-righteousness, his personal conviction that he’s got the right answers that nobody else except he (and his SIGTARP deputy Kevin Puvalowski[7]) had in Washington. He mocks the Treasury creators of TALF[8] and PPIP[9] for not fully understanding the potential for fraud in these programs or flays them for pushing plans with overly Wall Street-friendly terms.

On the one hand I have no doubt Barofsky’s mostly right (and neither does Barofsky), but on the other hand we hear the righteousness in his voice that must have rubbed the sleep-deprived-and-making-it-up-as-they-went-along TARP bailout folks in the Treasury department the wrong way.

To nitpick a bit more, Barofsky tends not to give much credence to the Wall Street view of the world throughout Bailout. As a former Wall Streeter, my own instinct tells me that simply ignoring Wall Street’s concerns in late 2008 and early 2009, and pursuing the purer prosecutorial approach seemingly favored by Barofsky, could have led to its own disastrous consequences as well. I’m not happy with Paulson’s and Geithner’s coddling of the Street, but Barofsky’s hard line might not have been optimal for the public good in the long run either.

Overall though, I admire his consistent choice to be right over being liked, and his consistent choice to push public welfare over private advantage.

Why don’t more people go to Washington and do the right thing? Barofsky clearly provides the answer: Because everybody is always looking to the next job. You don’t uproot bad actors if those bad actors might actually help you get the next plum position.

At Bankers Anonymous I remain obsessed with the nexus of finance and politics that brought us to the brink of financial apocalypse in 2008. Bailout isn’t the book for understanding the Wall Street side of the crisis, but it’s the best so far for understanding what deeply embedded conflicts of interest prevent government officials from doing the right thing to prevent a Credit Crisis.

Nothing I’ve seen shows any resolution of those conflicts of interest.

Please see related post: All Bankers Anonymous Book Reviews in one place.

[1] I have to admit his Mr. Smith Goes to Washington naiveté throughout the book has to be a bit of a pose, given that he’s a badass prosecutor who went after Colombian drug lords and white color financial criminals, experience which I imagine prepared him for interacting with the less savory aspects of human behavior.

[2] Barofsky argues that the original tax evasion problem that came up at Geithner’s confirmation hearing in 2009 illustrates Geithner’s basic disrespect for law and truthfulness. Let’s just say that based on Bailout we should be glad to see the back of Treasury Secretary Tim Geithner in a second Obama administration. I’m still going to be so pissed when Geithner announces he’s joining Goldman Sachs as senior partner upon leaving office next month.

[3] Barofsky grudgingly calls TARP architect Kashkari a reasonably straight-shooter. I love this typical Barofsky backhanded compliment: “Sure, he was combative, not always forthcoming, and excessively deferential to Wall Street, but Kashkari had generally been straightforward with me. I don’t think he ever flat-out lied to me, which in Washington put him into rarefied air.”

[4] The book’s forward alone, in which Barofsky relays Herb Allison giving him a classic drug-lord choice of “Gold or Lead” is worth the price of the book. Barofsky sums up – with that one anecdote – everything you need to know about Washington DC in the 21^st Century, and why people so rarely act for the public good when that conflicts with their private interest. Allison opens his Gold-or-Lead proposals with “[Y]ou’re a young man, just starting out with a family, and obviously this job isn’t going to last forever. Have you thought at all about what you’ll be doing next?” When Barofsky professes only an interest in doing this job well, not focusing on the next job, Allison gets nastier, saying his tone is losing him credibility, people are talking badly about him. Barofsky calls his bluff, after which Allison reverts to bribery again, asking him what kind of job he’d like? An appointment? A judgeship? Basically anything to get Barofsky to play ball.

Powerful people worry too much about their potential next job to do the right thing in their current job. In fact, the better-selling but largely uninteresting Andrew Ross Sorkin book Too Big To Fail suffers from precisely this problem. Sorkin was too worried about enhancing his future journalistic career by protecting future sources such as the CEOs of Wall Street to criticize any of them in any interesting way. Which is why the book should have been called Too Connected to Criticize.

[5] You have to love the story he tells on himself on the night of his own wedding rehearsal, unable to tear himself away from engaging over Blackberry in political fights with Treasury colleagues. “Even when Karen tried to walk me through the drill for the ceremony, I couldn’t stop. As she explained, ‘So we’ll come down this elevator and then walk down these stairs to this area, where we’ll have the ceremony,’ I responded, annoyingly, ‘Treasury is going to fight this. Kevin’s right, they’re going to flip. It’s going to shine a light in an area they want to keep dark.’ ‘And this is where the band will set up,’ Karen said, ignoring me and pointing out where the party would occur. ‘Treasury could just go out and tell the banks to respond with the ‘all money is green’ argument, and the banks will just say that they can’t respond to the request. We’re going to have to get real specific in the subpoena,’ I blurted out, more to myself than her. ‘This is where the buffet will be; we can taste some of the food tonight at dinner if you’d like,’ Karen placidly continued. She very smartly refused to engage with my obsession, and she finally got some degree of peace after I walked into the pool with my Blackberry still clipped to my bathing suit, frying it.”

[6] For example, the post in which I named him the Norse God of Financial Accountability.

[7] Puvalowski is Barofsky’s buddy from the US Attorney’s office in New York who became his deputy at SIGTARP.

[8] Term Asset-Backed Securities Loan Facility. A Federal Reserve program to lend public money to restart private investment in asset-backed securities after that portion of the market froze in the second half of 2008. TALF proposed to provide loans of 95 cents on every private dollar invested, with non-recourse to the borrower. For an introduction to some other non-recourse lending handouts from Washington to Wall Street, please read footnote #3 to this posting.

[9] Public-Private Investment Fund. A Wall Street-friendly program providing 92 cents of federal funds for every dollar invested via PPIP to encourage private fund managers to purchase distressed assets off the balance sheets of big banks. Also non-recourse to the borrower. Again, see footnote #3 on this post for why that’s so awesome for Wall Street.

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July 25, 2012October 2, 2014

In Praise of SIGTARP, Norse God of Financial Accountability

“…But in 2012, the people became restless. They mistrusted the 1% who lived far away in beautiful, unattainable, icy Jotunheim.

And the people quarreled amongst themselves. They could not agree with one another or keep the peace. The people were the 99%, and they divided into warring ideological camps, visiting bloody internecine raids upon the other side.

One group, the Teaparty tribe, worshiped the demigod Free Market and raged against encroachments from their sworn enemy, Big Gov, who dwelt smugly in the elaborate Federalist castles of Washington DC.

The others, the Occupy tribe, supplicated before the Mother Goddess Collective Action, and they named their enemy Big Bank, who ruled cruelly from the executive suites of New York skyscrapers.

Periodically one tribe drew blood from the other side in a furious ideological battle. But even amidst the carnage, both sides wished for a savior, a hero who could unite them. The One.

In the beginning, little did the people notice online publications from Neil Barofsky, which showed the 99% their common enemy lived in both Washington DC and Wall Street. Who was this Neil Barofsky? At first he appeared to be a mild-mannered grunt, a common civil servant, toiling in the basement of the US Treasury from 2008 to 2010. But on July 25, 2012, with the publication of Bailout: An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street, he became known to the world as SIGTARP [1], Norse God of Financial Accountability!

At last revealed in all his glory, SIGTARP arrived, flanked by Amazons!

The 99% needed a hero to unite them, to show them how both Washington and Wall Street betrayed them all. SIGTARP unfurled his fearsome flag of financial accountability. The two tribes put down their weapons against one another and turned toward the new banner.

They finally understood the truth. Big Government and Big Bank conspired together to keep them down. A new unity began to emerge, as the armies of the 99% integrated.

No longer needing his disguise as Neil Barofsky, SIGTARP ripped off his itchy wool suit to reveal rippled musculature and a mighty pen describing infernal, festering corruption. Under the Bailout banner, SIGTARP and the newly united 99% began their determined march upon Jotunheim.”

Ok, I haven’t read Bailout yet, as it was just published today. Based on today’s NY Times Review, the book suffers from some simplistic moralizing and, perhaps, Barofsky’s savior-complex.

But – and I mean this in earnest – I have had a serious man-crush on Neil Barofsky for a while now. As SIGTARP, he managed to accurately review the TARP process, while maintaining critical distance from both Washington and Wall Street.[2] I will highlight in the next few weeks some of the excellent reporting done by his office. For all the unhappy things that may be said about the cynical nexus of Wall Street and Washington, SIGTARP has given me hope in the last year that our system can be resilient and accountable. A hero may yet rise.

Thank you SIGTARP!

“No problem, kid,” answers a booming, disembodied voice, before soaring upward, headed toward Jotunheim.

[1] SIGTARP stands for Special Investigator General for the Troubled Asset Relief Program, the Congressionally appointed watchdog over the $700B TARP program created in 2008 at the height of the Credit Crunch.

[2] Not an easy trick! As the NY Times review excerpts from the book preface, Barofsky met in 2010 with Herb Allison, former head of TIAA and Fannie Mae: “ ‘Have you thought at all about what you’ll be doing next?’ Mr. Allison asks Mr. Barofsky, soon adding, ‘Out there in the market, there are consequences for some of the things that you’re saying and the way that you’re saying them.’ ‘Allison was essentially threatening me with lifelong unemployment,’ Mr. Barofsky concludes, and alternatively suggesting a plum government appointment some day if Mr. Barofsky would simply ‘change your tone.’ When Mr. Barofsky tells his deputy of the exchange, the deputy says, ‘it was the gold or the lead,’ resorting to their joint experience prosecuting drug kingpins in New York: Cooperate and share the riches, or don’t and get plugged.”

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June 11, 2012December 4, 2014

Book Review: Too Big To Fail

You may, like me, be curious about what happened during the Great Credit Crunch. You may, like me, have the feeling we reached a financial precipice, peeking over the edge into the abyss. But before falling in we blacked out and woke up in the hospital, a thick IV needle in the arm, tired and confused but otherwise basically OK, thinking, “But, but, but, wha, what happened back there?”

Andrew Ross Sorkin wants to answer this question for us in Too Big to Fail, his bestselling account of the eight most dramatic months of the Great Credit Crunch. It begins in March 2008 with the demise of Bear Stearns, peaks the week of September 15 2008 (Lehman declared bankruptcy, Bank of America agreed to purchase Merrill Lynch, and AIG got its first $85 Billion bailout by the Federal Reserve) and ends in October 2008 with the mandatory TARP investments by the US Treasury in nine systemically important – aka Too Big To Fail – banks.

Sorkin covered the crisis for The New York times via his Dealbook column, and has a lot to offer us as that front-line journalist, under nearly war-time conditions of high stakes and daily – even hourly -changing conditions. For sheer personal access to the leading protagonists, as well as the rendering of real-time conversations, Too Big To Fail is a helpful first brush at history. No doubt the movie attracted even more attention than the book, because, well, most people would rather watch a movie than read.

For all the attention and acclaim he received for his A-list account of the Great Credit Crunch, however, Sorkin has two big problems. The first is a minor stylistic issue, the second a fundamental difficulty.

Look, Sorkin had a problem in writing this book; namely, how to make concrete action out of events that took place primarily on the financial ledgers of governments and banks. These ledgers do not exactly provide riveting visuals, and I definitely get the feeling Sorkin planned to sell the movie rights before he finished Chapter One. So visuals were key to his plan. As a way to create cinematic action Sorkin highlights every swift swipe of the Blackberry from Hank Paulson’s pocket, every frenzied snatch for the phone while riding in a Town Car zooming away from the Federal Reserve. There’s a lot of gasping and ‘Oh my God!’ horrified looks as bank executives read the latest risk report on their phones from their loyal lieutenants. Paulson’s phone in particular plays a fetishistic role in the book, constantly moving from his ear to his pocket and back. It’s just a quirk of style on the one hand (movie rights must be sold!) but it is nevertheless distracting and silly. Sorkin tries to show the high stakes danger facing Paulson and his deputy Neil Kashkari, but instead merely brings to the reader’s mind Crockett & Tubbs shouting into their oversized car phones, buzzing the Day-Glo storefronts of Miami in 1985.

The more fundamental problem with Too Big To Fail stems directly from Sorkin’s strength as a New York Times journalist – his access to financial executives and government officials. They needed him to tell their story, and he needs them to write his story, but their pact of mutual benefit results in a narrative with no bad guys. In Sorkin’s story, every Dick Fuld, every Tim Geithner, every Lloyd Blankfein and every Jamie Dimon is just a high powered guy with a Blackberry doing his darndest to survive this financial firestorm. They gave extraordinary access to Sorkin, they will give extraordinary access to Sorkin in the future, and there’s really no point in painting any of them in a negative light, now is there?

Hank Paulson made this book happen through repeated interviews with Sorkin, in his attempt to get his (Paulson’s) version of the crisis on the record first. As a result, the one exception to Sorkin’s rule of mutual benefit is Chris Flowers, who clearly got so under Hank Paulson’s skin (their historic antagonism goes back to the ‘90s when both were at Goldman) Sorkin shows him as the backstabbing, untrustworthy thief that he probably is. In this case, Sorkin risks an unflattering portrayal (and really, the shocking thing is that ONLY Flowers is shown in this light) because he needs to present Paulson’s version of the truth. Reading Too Big to Fail I kept thinking that the Wall Street I know has got a lot more unsavory characters than just Chris Flowers.

I do not mean to imply that I prefer a book bashing the heads of Wall Street firms. There are plenty of those, and frankly they’re even less helpful than Sorkin’s book. What we do need, however, is some analysis that might make Sorkin’s sources uncomfortable. We need a chronicler of the Great Credit Crunch to contextualize what happened, to explain the forces at work that put us in this situation in March 2008 in the first place. Less necessary is Sorkin’s entire book – which can be summed up as: ‘There were a bunch of aggressive but basically good guys working late nights and weekends to save their bacon and that of their firms, and it was really scary but kind of exciting to be there with them.’

If you read the news as obsessively as I did during that period, you know the basic facts, and Sorkin tells us a lot more basic facts of who said what to whom, and when, and what late model Blackberry they used. But now we’re lying groggy in the ICU with that thick IV muttering, “OK, I know WHAT happened, but WHY?”

Please also see related post, All Bankers-Anonymous Book Reviews in one place.