They’re BAAAAACK: The CIT Takeover of OneWest Bank

john thainWow. I mean. Just, wow.

You gotta love these guys.

Two phrases came to mind when I read the headline today about CIT Group taking over OneWest Bank.

First: “History does not repeat itself, but it certainly does rhyme.”


Second: “Madness consists of doing the same thing over and over again and expecting a different result.”

The casual reader of financial headlines will neither recognize nor care about this acquisition by a middle-market business lender (CIT Group) of a California retail branch banking institution (OneWest).

But it’s not the relatively anonymous companies that matter, but rather the people behind the takeover, and the historical provenance of the companies, that matters. This acquisition involves some of the key chess pieces of the 2008 Crisis and the worst excesses of that time. Let me go through some of the key names and highlights.


OneWest Bank – This is really IndyMac bank with a new name.

“A rose, by any other name, would smell as sweet.”

You haven’t heard of IndyMac?

IndyMAC was kind of a ground zero mortgage lender in the 2007/2008 time period. Before failing, it was the seventh largest mortgage originator in the United States, and when it was taken over by the FDIC in July 2008 it was the fourth largest bank failure in history.

Of course it was originally founded by the later notorious Countrywide founder Angelo Mozilo, who spun off IndyMac as an independent company in 1997.

IndyMac did the usual thing as everyone else, borrowing with short-term debt, and lending out in the form of illiquid dicey mortgages.

IndyMac in particular was a leader in the intermediate “Alt-A” mortgage lending segment – mortgages too risky to be considered ‘Prime,’ but not entirely as shaky as Sub-prime either.

OneWest Bank became a newly formed bank in March 2009 when it took over the remains of IndyMac, via an FDIC auction of the failed mortgage lender.

Leading up to this transaction, the CEO of OneWest is Steve Mnuchin, a former Goldman Sachs partner and member of the management committee.

Prior to taking over OneWest, Mnuchin led Dune Capital with other Goldman partners who had made their reputations and fortunes investing in the distressed assets of the Resolution Trust Corporation, the government’s response to the Savings and Loan Crisis of the 1980s.

CIT Group – In February 2008, this lending company rang the New York Stock Exchange opening bell to celebrate its 100 years of existence. By April 2008 the company was reeling from losses, ceased its student loan lending, and subsequently its home-loan lending by the summer 2008. With billions in shareholder value destroyed, the company declared bankruptcy in 2009. In January 2010. CIT hired John Thain as Chairman and Chief Executive.

John Thain – Once heir-apparent to the CEO position at Goldman Sachs under Hank Paulson, Thain left Goldman in 2004 to run the New York Stock Exchange when current Goldman CEO Lloyd Blankfein got the clear nod to succeed Paulson. Thain took over the leadership of Merrill Lynch in late 2007, after Stanley O’Neal did his best to drive the old bull straight into a financial ditch through self-inflicted subprime CDO wounds, leading to a $8.4 Billion write-down.

Thain – to his credit – quickly raised $6 billion capital from the Singapore sovereign national fund, only to have to oversee close to another $10 Billion in write-downs in his first half year on the job.

By the Summer of 2008, Thain was forced to market Merrill’s toxic CDOs, offering them to – among others – Steve Mnuchin at Dune Capital, before selling them to Lone Star Capital at a severe discount.

With Merrill reeling by the end of 2008 – and with by then a total of close to $50 Billion in sub-prime mortgage CDO-related write-downs, Thain managed to sell Merrill to the only CEO who actually performed worse than O’Neal throughout the crisis, Ken Lewis from Bank of America.

Criticism of Thain 

Thain subsequently was criticized for:

a) Spending 1.2 million to decorate his executive suite, including his famous $1,000+ gold-plated wastebasket

b) Requesting a $10 million personal bonus from the Merrill Lynch board for saving all of their collective bacon, and

c) Paying out $4 Billion in bonuses to Merrill Lynch executives, just prior to the Bank of America takeover in January 2009, after the firm received $25 Billion in a direct US Treasury infusion of taxpayer money in October 2008.

All of which are fair grounds for accusing him of a touch of, shall we say, hubris. But from Merrill Lynch’s narrow perspective, John Thain was a motherflipping genius.

Thain is a genius, of a sort

Thain’s simultaneous saving of the venerable Merrill Lynch, and fleecing of Lewis and Bank of America’s shareholders in the midst of a financial meltdown is the single greatest sales job ever performed in financial circles.

Seriously. Ever.

But here’s the key point that links this financial history to Thain’s pursuit by CIT of OneWest Bank:

This greatest-sales-job-ever all would have been impossible if Thain’s former boss Treasury Secretary Hank Paulson had not guaranteed a $20 Billion sweetener for Ken Lewis to consummate the deal in January 2009.

Lewis apparently woke up from whatever drunken stupor had led him to acquire first Countrywide, and then Merrill Lynch, and Lewis tried to back out of the deal between December 2008 and January 2009.

Secretary Paulson ponied up $20 Billion in taxpayer first-loss money and jammed the deal through. Paulson could not afford, in the midst of the crisis (as well as Presidential transition) to have Merrill Lynch dropped by Bank of America, and very likely, bankrupted.

 Some other relevant facts

Also, coincidentally, his direct protégé from his Goldman CEO days ran Merrill Lynch at the time. Anyway. Not completely off-point, Thain reportedly earned $83.1 million from Merrill Lynch during his service from December 2007 to January 2009. Anyway.

Thain was a hero for Merrill in December 2008, but crucially could not have pulled off his magic trick had Merrill not been Too Big To Fail. And THAT, my friends, is what this CIT takeover is about.

And Thain has said that as plainly as possible.

CIT, under Thain, wants desperately to be Too Big To Fail

In recent months Thain has talked about whether CIT would pursue a bank acquisition. The additional safe deposits would be nice for CIT, Thain has said, but the key to CIT’s next purchase would be to get well above the threshold of $50 Billion in assets. Why does that matter? Because $50 Billion is currently the cutoff for becoming a “systemically important financial institution, or SIFI.

As the Wall Street Journal reports

On a conference call, Mr. Thain said he believes CIT is ‘well-positioned to satisfy all of the criterion or being a SIFI institution.

And as the Wall Street Journal further reports,

The takeover of IMB Holdco LLC, which is OneWest’s parent company, will bump CIT’s assets up to $67 billion, making the bank large enough to be considered ‘systemically important’ by regulators. CIT, a lender to small and medium-size businesses, had $44.15 billion in assets as of June 30.


SIFI, by the way, is what we now call Too Big To Fail institutions.

Ironically, becoming a SIFI should be considered a disadvantage, because it involves additional layers of regulatory scrutiny. In a normal, pro-business, capitalist financial system, we would expect that becoming a “SIFI” would be a “NoNo” for any bank.

Since 2009, regulators from the FDIC, SEC, Federal Reserve, CFTC (and any number of other acronymic bureaucracies) have been struggling with how to deal with Too-Big-To-Fail financial institutions.

Their answer: More regulations, more ‘living will’ requirements, more stress tests, more disclosures, more restrictions on proprietary trading, more capital requirements.

You’d think that any growing financial institution would run for its life, away from this type of bureaucratic morass.

Not CIT. Not Thain.

He knows first-hand how awesomely, personally, profitable it can be to run a massive private financial institution that has socialized any future losses because it’s a SIFI. Thain’s no dummy.

Steve Mnuchin, no slouch himself, will join the company as vice chairman and will join the board as well.

Please see some of the related posts:


In Praise of SIGTARP Part II – We blew it on the repayment of TARP

SIGTARP Part V – The AIG Debacle


Book Review of Bailout by Neil Barofsky

Book Review of Diary of a Very Bad Year by Anonymous Hedge Fund Manager

Book Review of Too Big To Fail by Andrew Ross Sorkin


Life After Debt: Putting the Band Back Together

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Four Factors Favoring Fabulous Fab

The Fairy Tale SEC suit against Fabulous Fab
The Fairy Tale SEC suit against Fabulous Fab

Below are my reactions to the US Securities and Exchange Commission fraud suit that began yesterday against “Fabulous Fab” Fabrice Tourre, a Vice President at Goldman Sachs for structured products.

From what I gather in the press, the Feds are suing Fabulous Fab for the following reasons:

  1. He sent embarrassing emails to his girlfriend revealing anxiety about the performance of his markets.
  2. He did not fully disclose his and Goldman’s simultaneous role as broker between one client – John Paulson & Co – who wanted to short mortgage derivatives, and another client ACA Financial Guaranty Corp – who wanted to go long mortgage derivatives.
  3. He’s French.[1]

Listening to the news last night I realized that people might actually think Fab is to blame here.  That is a travesty.  The SEC’s suit is a joke, albeit a really unfunny one if you’re Fab.

Fab is no more to blame for investors’ losses in a CDO known as the Abacus 2007-AC1 than any broker who sold you shares in any publicly traded stock in the year 2007 which subsequently halved in value by the end of 2008.

The SEC prosecution appears to rest primarily on the idea that Goldman brought together clients with opposite views of the mortgage derivative market, and then didn’t tell all sides of the trade who everyone was.

Factor #1

What?!!  You mean to tell me Goldman brought together clients with opposite views on the market?

One of the disappointing aspects of William Cohan’s Money and Power: How Goldman Sachs Came to Rule the World is Cohan’s seeming misunderstanding of how a broker-dealer works.  Cohan seems shocked, as the SEC attorneys in the Fab trial want the jury to be shocked, that Goldman could match up clients with diametrically opposed views on the mortgage derivative market.

Hey guys?  Let me give you pro tip:  That’s how a broker-dealer works.

It’s the job of a broker to find willing buyers and willing sellers, all day long, to take diametrically opposed views on the future direction of securities and markets.  It’s also the broker’s job to generally protect and make anonymous the counterparties to a trade.

[NB: Cohan clearly does know how a broker-dealer works and he has an excellent review of the Fab case here on Bloomberg.  My jab at him is about his book in which he doesn’t clarify just how ridiculous Sen. Carl Levin, and by extension the SEC’s theory is, on potential conflicts of interest within a broker-dealer]

So the fact that Paulson and ACA had different views on mortgages means that Goldman did its job.  The fact that Goldman didn’t overly advertise the central role of Paulson in the CDO structuring is not evidence of a crime.

The level of expected disclosure in CDO structuring will be a combination of

1. law, and

2. informally agreed-to market standards.

I spent enough time around the persnickety legal compliance folks at Goldman to have confidence that Fab’s team complied with the letter of the law over counterparty disclosure, or what is called in the business ‘name give-up.’

Some types of trades require it, some types of trades forbid it, and some types of trades will rely on market standards to determine the correct level of disclosure.

At the moment of structuring the Abacus CDO it’s less clear to me, from a distance, whether Fab’s team reached a less formal level of ‘market standard’ when it came to disclosing Paulson’s role.  But market standard is a kind of nebulous concept for which I can’t believe Fab can be found guilty by the SEC

Factor #2

Why go after Fab and not bigger fish?  Because he’s the only one against whom you could find embarrassing emails to his girlfriend?  (Give him a break.  He’s French.)

Fab was a relative nobody.  Like Greg Smith (of Muppets fame), or like me, Vice Presidents are in charge of very little at a Wall Street firm.  From his ill-advised emails we gather he was an over-worked, under-sexed, anxious, and narcissistic guy, but what 31 year-old on Wall Street isn’t all of those things?  If that’s a crime, then lock ‘em all up.

I’m not a fan of the Eliot Spitzer- trademarked prosecution-and-trial by embarrassing email.[2]  That appears to be why Goldman settled for $550 million with the SEC a year ago, because of Fab’s anxious, flirty emails to his girlfriend.[3]  Goldman, as is typical in these situations, did not admit guilt, they just paid the money in order to move on.

I’m not saying the SEC shouldn’t bother to prosecute bad actors even if they are low on the totem pole, but I am saying two things:

1. Fab was a small cog in a big machine doing exactly what he was paid by his bosses to do, and

2. There’s nothing bad about what he did except try to sell squirrely investments to willing, professional, sophisticated buyers.  And that’s his job!  CDOs are squirrely.  Everybody knows that.  CDOs, we used to say on the desk, are “sold, not bought.”  Meaning, once you’ve placed them in a client’s portfolio, pray they never ask to sell them back to you.  You do not want to buy them back.  They’re too squirrely.

Factor #3

ACA was no innocent victim

ACA was not an ‘innocent victim’ of mean, nasty brokers tricking them into buying destined-to-soon-fail derivatives.  These were highly compensated, professional, CDO investors.  ACA charged their customers millions of dollars in fees, and collectively paid themselves millions of dollars in compensation, to provide their “unique insight” into buying complex financial products.

As Michael Lewis pointed out before in The Big Short, if any fraud or crime was being perpetuated, it was by ACA on their own customers, for pretending they knew how to separate the profitable from the unprofitable, the gold from the dross, the good from the garbage.  If you can’t do that, you’re just tricking your own customers.  If you lose money buying a terrible product in the way ACA did, you should only blame yourself.

Factor #4

But ACA was on the wrong side of John Paulson without knowing it.  Paulson’s a genius!  It’s so unfair!

John Paulson in 2007 was not John Paulson.  He was just another contrarian hedge fund guy taking a swing at the overly frothy mortgage and housing market.  Everybody who had done this type of trade previously – betting big against mortgage credit and housing in the run-up – from 2001 to 2007 – had lost their shirt, as the market moved against them.

Everybody who took Paulson’s side of the trade before things broke in 2007 was an idiot and a money loser.  What’s obvious now in retrospect was not obvious then.  The ACAs of the world – buying the stupid, illiquid, highly-levered subprime, garbage CDOs – had made much more money in the previous years than the John Paulsons of the world.

That’s why Paulson was so damned successful.  Because there were only a few Paulsons around to take the other side of the mortgage derivative trade in 2007.

Being on the short-side, like Paulson dared to be, appeared to be for suckers.

ACA must have been laughing all the way to the bank.


If Fab is guilty, then I’m the big bad wolf.

Bloomberg News wrote that

U.S. District Judge Katherine Forrest, who will oversee the trial in Manhattan, summed up the SEC’s allegations this way in a June 4 opinion: “Tourre handed Little Red Riding Hood an invitation to grandmother’s house while concealing the fact that it was written by the Big Bad Wolf.

The SEC’s version of the case is so absurd it’s hard for me to believe they’re pursuing it.  It’s a fairy tale.

[1] In my opinion, this is the only valid reason of the three.

[2] For more on this, as well as a great primer on why Spitzer should never, ever, be elected dog-catcher, I recommend this blast-from-the-past article.

[3] Broker-dealers always, always, always settle with regulators because the cost of fighting regulators in court is that you’re out of business.

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Midlife Muppet Crisis

With the impending release of Greg Smith’s tell-all book about his time at Goldman Sachs, it’s finally time for me to vent a little about his ridiculous New York Times Op-Ed last Spring.

Immediately following the online release of the New York Times Op-Ed that would launch a thousand Muppet jokes , I printed it out and handed it to my editor in chief[1] because I knew she would be interested.  I knew everyone would be interested.  Smith nailed the 2008-2012 financial Zeitgeist [Goldman is greedy!] and he made a credible witness as an insider.[2]

Now, there’s three things that must be said about Smith’s bombshell of an Op-Ed, two of them complimentary and the third one, not so much.

First, Smith’s letter, compared to Lloyd and Gary’s dead-speak corporate response, was an unfair fight the likes of which we haven’t seen since Mike Tyson took down some of his patsy opponents in the late 80s.  Smith can write some interesting sentences, while Lloyd and Gary, just as clearly, cannot.  Their passive voice construction, reference to a workplace poll about employee satisfaction, and clear put-down of his status at the firm[3] simply did not respond to Smith’s main accusation.

Second, and most importantly, Smith’s main accusation is absolutely true.  Yes, Goldman collectively only cares about the money.[4]  Yes, you get promoted at Goldman for profitable behavior.  Yes, higher complexity products have a greater chance of being profitable than lower complexity products, so you will be rewarded for trafficking in higher complexity products.  Yes, Goldman employees tend to favor their employer’s needs over the needs of their clients in the long run, and sometimes, in some cases, even in the short run.  All true, although I’m not sure why any of this is news.

Third, and most problematic, however, is Smith’s assertion that “Goldman has changed” during his ten year career from 2002 to 2012.  That, my friend, is complete malarky. [5]  Goldman didn’t change.  Goldman was like that when I started there in 1997.  Goldman was like that in 1985.[6]  Goldman was, no doubt, like that in 1931.  Goldman didn’t change.  Greg Smith changed.  He became a middle-aged guy who no longer wanted to compete and win at everything, at all costs.  He grew up.

And yet, he does still need to compete, and that’s the worst part.  There’s a kind of pathetic part of Greg Smith that does want to compete and win at everything, so he must tell New York Times readers about his scholarship to Stanford, the bronze medal in the Maccabiah Games in table tennis, and about being a finalist for the Rhodes scholarship.[7]  He must enumerate the size of his hedge fund clients and their assets under management.  After ten years he has evolved enough to know there is more to life than ripping clients’ faces off, yet he can’t quite break the habit of telling you how much size matters to him.

I wish you well, Greg Smith[8].  But I sense this is going to take some time for you.

[1] Mom

[2] albeit on his way to becoming an untouchable outsider in record time.

[3] Their roundabout way of highlighting what a no-status worker Smith was: while commenting that 89% of clients found service from the firm positive, and “for the group of nearly 12,000 vice presidents, of which the author of today’s commentary was, that number was similarly high.” Very clever, Lloyd and Gary.  We get it, Smith is a Vice President nobody in your eyes.

[4] If this is too blunt, we can treat you like a child and tell you the opposite: Yes, Virginia, there really is a Santa Claus, and yes, your friendly bankers at Goldman really want what’s best for YOU.

[5] As Joe Biden would say, to his good friend Paul Ryan.

[6] See e.g. Michael Lewis’ Liar’s Poker

[7] On the one hand he’s bragging.  On the other hand, the evil voice in me has to say: The what games? Never heard of them.  In table tennis, you say…Is this a joke?  Are you trying to undercut yourself?  And you’re bragging about being a Rhodes finalist?  And this is what you’re most proud of ten years later?…let’s just move on.

[8] But forgive me if I don’t rush out to read the book you’ve produced with a reported $1.5MM advance, chock full of descriptions about the size of your client base.

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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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When Geithner Goes to Goldman

Just an FYI: I plan to walk out my front door to punch the neighbor’s cat in the face, toward the end of this year, when US Treasury Secretary Geithner finally announces he’s joining Goldman, Sachs & Co as senior advisor and Managing Director.

While he’s indicated his intention of leaving his post as Treasury Secretary soon, Intrade gives Geithner a 37% chance of leaving before the end of Obama’s first term.  The departure of two top Geithner aides to Goldman Sachs in the past 4 months has increased the chatter that Geithner will soon be headed that way as well.

To be clear, I believe punching Mr. Biggins on his cute little cat nose will accurately reflect the combination of surreal injustice and rage that I will feel.  Consider it a measured, senseless act of violence and random mean-spiritedness to match the public mood that should accompany Geithner’s inevitable sell-out move.  What else can I do?  What else can any of us do?

While my act will be appropriately senseless, I want to be careful in how I explain my feelings.

I hold no particular grudges towards those who, in the spirit of providing a better life for their families, seek employment in the private sector following a long career in public service, like Timothy Geithner.

I won’t blame Goldman for offering Geithner the job, either, as it’s clearly in their interest to hire such a key player in shaping the current financial architecture.

I also hold no specific animus toward Geithner himself, who appears to have executed admirably on his difficult professional assignments.

Geithner’s resume deserves respectful review and appreciation.  The man served as Under Secretary of the Treasury under Larry Summers when the latter signed our dollar bills as Treasury Secretary.[1]  He moved up to President of the Federal Reserve Bank of New York in 2003.

Some FRB-NY Presidents have served in that position, easily the second most powerful seat at the Federal Reserve, in relative obscurity.  But not Geithner.  He had the interesting fortune to be on the FRB-NY President hot seat during the Great Credit Crunch in 2008[2], thereby putting his imprint on every major decision made about Wall Street from 2007 to 2009.

When Bear Stearns teetered on the edge of Bankruptcy and the FRB-NY offered a $25 Billion loan to tide Bear over, Geithner was there.  When the FRB-NY subsequently rescinded its offer to Bear, ensuring its immediate demise, Geithner was also there.

JPMorgan Chase then bought Bear Stearns for a song, and the FRB-NY provided up to a $30 Billion non-recourse loan to get the deal done.[3]  Geithner was there too.[4]

When the FRB combined with the US Treasury to lend up to $182 Billion to prop up AIG, a bailout understood at the time to be, and a bailout that actually was[5], a back-door bailout of the largest financial firms in the world, Geithner was there.[6] [7]

When the Federal Reserve and US Treasury made available to Bank of American $20 Billion in additional TARP funds[8] and an extra $118 Billion in asset guarantees[9]  to ensure that it followed through to purchase Merrill Lynch in December 2008, Geithner was there too.[10]

Obama took office in January 2009 and Geithner received a promotion from the FRB-NY President to US Treasury Secretary, a logical move to ensure continuity at a very dicey time in financial markets.  I’ve written in an earlier post about the tight circle of government officials running financial policy, and the trade-offs between continuity and stagnation.  It was not crazy for Obama to promote Geithner.

In the light of Geithner’s impending employment by Goldman Sachs, however, it’s interesting to review how Geithner has not “been there” on a number of issues.

When AIG paid bonuses to its executives after its $170 Billion bailout, the largest financial failure/bailout of all time,[11] Geithner as US Treasury Secretary did not force a clawback of those AIG bonus payments.  Under what authority could Geithner influence bonus payments?  The US government owned 92% of AIG at that time.  But Geithner somehow wasn’t there.

After Ken Lewis destroyed a perfectly healthy Bank of America in 2008 through his devestating purchases of Countrywide and Merrill Lynch, forcing the extraordinary Treasury and FRB-NY bailouts to stabilize the bank, Lewis departed in 2009 with an estimated $125 million retirement package.  Under what authority could the US Treasury Secretary influence executive payments?  Well, for starters, Bank of America owed $45 Billion at the time to the US Treasury.  But Geithner wasn’t there to claw back Lewis’ compensation.

While Too Big to Fail (TBTF) banks continue to this day to operate as large hedge funds, and continue to compensate their executives accordingly, under an implied government guaranty of safety, Geithner is not taking a public stance against this.

While I review the FRB-NY and US Treasury bailouts in some detail I want to be careful not to blame Geithner exclusively for mistakes that were made.  I don’t endorse every decision made by Paulson and him, but I acknowledge the battlefield conditions under which they labored.  I know the issues are complex; they weighed financial stability against moral hazard, justice against political feasibility.  I get it.  This stuff is hard.

But at no point in his tenure as FRB-NY President or US Treasury Secretary did we witness Timothy Geithner take a principled, unpopular stance – in the face of egregious moral hazard – to come down hard on Wall Street’s surviving behemoths.

I’m not a paranoid person by nature, and I believe Geithner’s actions to be defensible without accusing him of sucking up to his future employers.[12]

Clearly one analogy here is a powerful Congressman[13] who leaves office, moves down to K-street, and sets up a profitable lobbying shop influence peddling on his access to decision-makers.  We have some, albeit too few, restrictions on this type of brazen move.  Even that comparison, however, misses the magnitude of Geithner’s influence in recent years over $Billions in compensation and investment returns.

As an ex-banker I – oddly enough – still believe in the system.  I assume a basic decency tempers all but a few bad actors.  I’m still shocked by corruption.  I still can be disappointed by greed and influence peddling, and I believe the United States still boasts the least corrupt financial center in the world.[14]

More than any other single financial leader Geithner has argued within the administration for stabilizing and buttressing TBTF banks above all other factors, and seemingly has resisted efforts to extract proportionate commitments from the salvaged banks in the name of systemic reform or limitations on executive compensation.  Geithner’s heroic efforts on behalf of the TBTF banks have been worth billions of dollars to them, and he’s become the face of moral hazard within the Obama administration.[15]

Geithner’s move to become a Goldman Managing Director later this year – rightly or wrongly – will signal to journalists, Wall Street, SEC regulators, investors, you, and me, that all is for sale.  The move will signal that private gain trumps public good, every time.

But back to cat-punching for a moment.  If we have no way of preventing Geithner’s move to Goldman, then we have no reason (except sheer naiveté) to ever expect tough decisions to rein in Too Big to Fail banks.  I for one cannot stand to have my neighbor’s cat live peacefully in that kind of world.  Consider yourself warned, Mr. Biggins.

[1] One of my closest friends served under Larry Summers at Treasury.  I’ve shaken Larry’s hand a couple of times.  I’m not breaking any news here to say that Larry is not a super fun guy to spend your working day with.  Let’s agree to award Geithner a Bronze Star for that portion of his professional career.

[3] The $30 Billion non-recourse loan arranged by Geithner’s FRNNY  in this transaction was simply awesome for JP Morgan Chase.  Non-recourse means that only Bear Stearns collateral backed the loan, so if it turned out its portfolio was worthless, JP Morgan could walk away with only the first 3% of losses.  What that means is that the Federal Reserve agreed to absorb up to $29 Billion in losses on JP Morgan Chase’s purchase of Bear’s $30 Billion asset portfolio.  It’s kind of like being given a million dollar house by the Federal Reserve, but if you decide you don’t want it later you just owe 30K, and they can’t go after you for the other $970K.  Like I said, so awesome.  Jamie Dimon, you owe free drinks to Geithner for the rest of his drinking life.  We would all love the option to walk away from 97% of a $30 Billion loan.   We should seriously all try to get one of these loans from the FRB-NY.

[4] Bear Stearns initially got sold to JP Morgan Chase for $2/share, just 7% of what Bear Stearns had been worth 2 days before, before the FRB-NY rescinded its loan offer.  Later, sort of out of pity and to avoid further litigation, Paulson allowed an upward revision of JPMorgan Chase’s purchase price to $10/share, still an extremely low price.

[5] If you have a taste for wonkiness and financial history like yours truly, I highly recommend this link.  But for the rest of you let me summarize the key point of page 24.  The size of the bailout for each firm you’ve heard of, via the AIG loans from FRB-NY, were as follows: Societe Generale: $16.5B, Goldman $22.5B, Deutsche Bank: $8.5B, Merrill Lynch $6.2B, and UBS $3.8B.

[6] To briefly review the history of this particular bailout: AIG got taken out by a series of lightly-collateralized credit default swap trades done with some of the largest Wall Street firms.  The trades were meant to be, from AIG’s point of view, a nearly riskless cash-flow stream based on insuring the credit of a large portfolio of high quality companies, as well as some highly rated but ultimately dodgy mortgage securities.  When the unexpected mortgage downturn happened, and some high-quality companies got downgraded, AIG’s Wall Street counterparts asked AIG to provide additional collateral to reflect a change in value of the trades.  The portfolios themselves did not necessarily suffer outright losses, but the collateral requirements to Wall Street meant they had to come up with many $billions in cash very quickly.  If AIG had failed to post collateral, suddenly many major Wall Street firms would have suffered immediate life-threatening cash shortages, at the worst point in the crisis, September 2008.  When the FRB-NY (along with Treasury) provided essentially unlimited funds to AIG, the rest of Wall Street got their collateral and bought themselves a bit more breathing room.

[7] When the FRB-NY went back in November 2008 to ask, you know, if maybe Wall Street would give some of that AIG money back because it kinda looked bad at the time, Wall Street told FRB-NY, essentially, to go fuck themselves.  The whole report of Wall Street’s response is in the link in the main text above, but, linked to again here for your convenience.

[8] This $20 Billion exceeded the $25 Billion already invested by the US Treasury to shore up Bank of America in October 2008, and the extra $20 Billion legally could not be offered without creating an entire special work-around program just for Bank for America, called the Targeted Investment Program (TIP).  Bank of America said, “thanks for the TIP.”  See what I just did there?

[9] Again, these latter guarantees were non-recourse to Bank of America, and the Federal Reserve pledged to absorb 90% of losses after the first $10 Billion write-down.  Again, non-recourse meant Bank of America could default on loans from the government without any negative hit to their credit.  It also meant that the Federal Reserve, again under Geithner’s leadership, took on (up to) a theoretical additional $100 Billion liability so that Bank of America would complete its purchase of Merrill Lynch, all in the name of bank stability.

[10] Details and a review of the rationale behind this move are here, starting on page 23.

[11] Incidentally, isn’t a bonus an optional reward for a job well done? I’m just going to go out on a limb here and say that AIG executives, more than ANY other financial executives who kept their jobs through the Crisis, should not have been rewarded for ‘a job well done.’  Were there any forced clawbacks of bonuses at AIG?  Nope.  Not one.  To steal a phrase from my favorite sports writer, I will now douse myself with kerosene and light a match.

[12] However, I will note that Geithner’s longtime financial benefit to Goldman Sachs and a few other surviving banks far exceeds by multiple billions of dollars the comparatively miniscule compensation of a few million dollars he’ll receive as a new GS Managing Director.  It’s really the very least Goldman could do, to put him on the payroll for a few years.

[13] Or more commonly, his senior staff members.  Wall Street has long considered the SEC a joke for this reason, as the only way to get well compensated as an SEC executive is to cash in on your position for a senior role at a Wall Street firm after a stint supposedly regulating the Street.

[14] Ok, I know you’re all groaning out there at my sudden earnest patriotism.  But I stand by my statement and it’s not based in patriotism.  Why does the dollar, despite our weakened government credit, continue its role as the dominant reserve currency?  Why do M&A transactions worldwide get done by US-based law firms, and financial litigation gets fought in US-based courts?  Because we are the least corrupt place in the world for financial transactions, that’s why.

[15] Paul Krugman lays out Geithner’s role within the Obama Adminsitration in his review of recent books on economic policy “…it is Tim Geithner, Obama’s treasury secretary, who appears, even more than Obama, as the decider in this saga. In contrast to Summers, whom [one of the authors] Scheiber portrays as a flexible, reformist Rubinite, willing to alter his views in the face of evidence, believing in particular that shareholders of bailed-out banks could and should pay more to taxpayers, Geithner is described as a doctrinaire Rubinite who viewed his primary task as one of restoring financial market confidence, which in his mind meant doing nothing that might upset Wall Street.”

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