Fixers (20 page)

While watching Washington handle the Lehman situation this past weekend, I was reminded of that experience. Like our driver long ago, Uncle Sam’s minions finally froze at the wheel and allowed Lehman to drift freestyle off the road.

But this skid has not ended gently. This is a full-speed-ahead, brakes-failed crash into a brick wall, killing all aboard and probably a few roadside pedestrians. Washington’s inaction has left the 150-year-old firm no alternative but to file for bankruptcy. Harvey Miller and his crack Chapter Eleven team at Weil, Gotshal & Manges have been given hours to prepare a filing that should properly have been done in an orderly manner over weeks, if not months. At the beginning of the year, Lehman stock sold for $62. (I just looked it up.) It closed Friday at $3.65. It will probably bring pennies when the markets open tomorrow.

At one point, it looked like Washington had cut a Lehman deal
with Barclays along the lines of its Bear-JPMC “rescue.” But no deal got done, because the UK version of our SEC invoked some legal technicalities—stockholder rights, due diligence, that sort of inconvenient stuff—that caused Barclays to back off. Worse still, the financial media are now reporting that under UK bankruptcy law, Lehman’s London operations, and by extension its EU and other London customer balances and trade settlements, will be frozen. This could be huge, since it was in the London legal jurisdiction—presumably for tax reasons—that Lehman booked and cleared its global trades, held collateral and clients’ securities, and so on. Bottom line: according to the experts, we are about to see total constipation in the credit markets. And if no one will lend to anyone else … sayonara, baby!

Despite all this, Mankoff seems remarkably cool. He’s certain that Washington has now painted itself into a corner and will be forced to bend over backwards to avoid a repeat at, say, Citi—which could be a catastrophe several orders of magnitude more dire than Lehman. This could prove a windfall for firms like JPMC and STST.

So here’s the way things stand on Sunday evening, September 14, 2008. Despite the widespread conviction that the entire Street’s on the brink of insolvency, a small number of big firms are in OK to semi-OK shape: STST, JPMC, Wells Fargo, Bank of New York Mellon, and a few others. But only if overnight credit keeps flowing. On the brink, no matter how you cut it, are Wachovia and Washington Mutual, both said to be in almost as bad shape as Lehman was, and then there’s Citi, of course, and Morgan Stanley. And the 10,000-pound elephant in the room, whose name no one dares breathe: Bank of America, which has just done a deal to merge with Merrill Lynch. Why Kenneth Lewis, BofA’s CEO, wants to stack Merrill’s mortgage difficulties on top of the fraud-suffused pile of crap he bought with Countrywide is anyone’s
guess. The inside skinny making the rounds is that Washington forced his feet to the fire.

Finally, there’s GIG. The word on the latter is that unless they’re bailed out within forty-eight hours, they’re down the tubes, and now you’re talking real money. Amazing! GIG was the great spider squatting at the center of the giant web of global finance and now it’s roadkill.

So we’re at precisely the point Mankoff foresaw when he summoned me to Three Guys. Widespread collapse in the financial sector, Washington flailing, rumors swirling about with cyclonic velocity. What must follow is some form of general bailout in which the measures used to save the weakest will be gravy for the strongest. It remains to be seen how rich a harvest it will yield for STST. More tomorrow, when markets open, and we can get a feel for how bad it’s going to be. People are saying: Wall Street in 2008 is going to resemble Hiroshima in 1945. Stay tuned.

The immediate result of Lehman’s death is exactly what Mankoff feared. Credit markets worldwide are simply shutting down. STST stock is off 20 percent since Labor Day, when Lehman rumors turned deadly serious, although the broader market’s done a bit better; month-to-date, it’s about flat. As for Lehman, it closed today at $0.21.

I have a friend over there—just a friend, not the sort of person who traffics in insider gossip—who has a million Lehman shares vested in his benefit plan. At Christmas just a year ago, he went to his bank, took down $15 million from a credit line secured by those shares, and went shopping: he bought his wife a knockout Seaman Schepps bracelet and a Dennis Basso fur jacket, pledged a donation to a Hamptons charity sufficient to secure his wife a committee slot at its big charity bash, gave $1 million to his prep school, and got his name on the girls’ locker room. He also paid $5 million for a co-op in a building that doesn’t allow “financing” against the property, which means that he paid for it with another loan secured by his Lehman shares. And he hired Hal Norden, NYC’s decorator du jour, to do over the new digs. He told me this over lunch at Nobu, where the sushi goes for the price of a Southampton rental, and wanted me to come along with him after lunch to the Ferrari dealership. That was a year ago. He called yesterday to ask where he could buy some hemlock cheap—and he sounded like he was only half-kidding.

What we’re dealing with here is a form of PTSD that has led to a complete and systemic loss of trust. The world hasn’t run out of money; there’s a ton of it out there, but it’s frozen like a deer in the headlights. No one on any side of a transaction now believes the other party or parties will be good for the money come settlement.
This is the real damage Lehman has wrought. Good faith even among fraudsters is what greases the wheels of finance. Lose that, and the whole bloody engine races out of control and then blows up. Trust on Wall Street has long since abandoned honesty or character as measures of reliability; fuck the handshake, it’s all about the balance sheet, and what someone thinks your paper is
really
worth versus what you say it is. Right now, Wall Street has essentially ceased to function, and it’ll remain that way until someone comes along with the antifreeze. And that means Uncle Sam. Who else is left?

Worse still, I’m hearing the “r-word”—as in “recession”—more and more often. The Street’s already laid off close to 150,000, and you can add one or maybe two zeros to that figure to estimate what the collapse of finance will amount to in the larger economy. Construction has imploded, and retail is close behind, they say. And those are two categories that have recently employed a lot of people. In addition, thoughtful observers are scared by the amount of consumer debt, what Mankoff calls “retail.” Ours is an economy largely dependent on aspiration, and when people can’t earn enough to close the gap with the Joneses, they borrow—on credit cards, in home equity and second mortgages and so on.

These are interesting times. We are told we should consider ourselves lucky to live in them. Whichever Chinese philosopher said that can go fuck himself.

The bad news has come so thick and fast since my last entry that I decided to hold off until I could catch my breath and do a sort of omnium-gatherum of what’s happened since Lehman went under.

After a week when it seemed the world might be coming to an end, seem to have quieted down, but no one thinks we’ve seen the worst. So Wall Street is staying close to its Bloombergs. Lucia and I had lunch at Balthazar the other day, and it was practically empty.

It’s understandable. At times like these, one doesn’t feel social; you never know how this crisis may have affected friends, since the kind of friends I prefer don’t make a big deal of how much or how little money they have. I decided to stay in this weekend, so on Friday night, I stopped at Szechuan Gourmet on 39th Street and picked up enough stuff to get me through to Sunday. At home, I had a few drinks and watched a bunch of first-season
Law & Order
episodes on DVD. Saturday, I devoted the morning to dry cleaning and getting a pair of shoes resoled. Back home, I thought about calling my tailor and canceling an order for a couple of new suits, but then decided not to: why punish him for the mess stirred up by a bunch of mindless Wall Street greedheads? Obviously if this continues, my own circumstances may compel me to join the chain reaction, but thankfully, not so far. The people who handle my mite are by nature cautious, and I’m in OK shape financially. But it would be foolish not to expect some contraction of my consulting business, in which case I may have to cut staff. God, I hope not. For me, there’s nothing worse than having to fire someone, even for cause.

Now it’s Sunday and a good time to review the bidding. Let’s begin with the big news of the moment, fresh from Lucia: STST and Morgan Stanley will shortly announce that they’re
becoming regulated bank holding companies, just like JPMC and Citi.

This will give them unlimited access to the few taxpayers’ pockets they don’t already have a hand in, presumably including basket privileges at the Fed’s printing presses. Better still, it will qualify them to participate in any bailout, backstop, make-whole, or other form of government handout that Uncle Sam offers banks like Citi. Such as the “extraordinary” exemptions that allow them to transfer “assets” such as STST’s residuum of billions of unsalable derivatives and other junk into their insured bank subsidiaries, from whence they can be stuffed onto the Fed’s balance sheet in return for free cash. This is what is meant by “privatizing the profits and socializing the risks.” Democracy in action—with We the People participating in the great events of the moment.

Now let’s turn to the Lehman chain reaction. Since Lehman filed for bankruptcy last Monday, overnight credit has dried up. By Friday, it was like Aunt Augusta’s cucumbers in
The Importance of Being Earnest
: none to be had anywhere, not even for ready money, and not even for “safe” houses like JPMC and STST. Indeed, Lucia’s fighting off Street gossip that if Morgan Stanley implodes, STST must surely follow. Everyone’s arguing about collateral values, and nobody’s yielding an inch.

Tuesday the news got worse. The culprit this time was the Reserve Fund, the giant money-market fund where corporations and other big players stash their free cash balances, money needed for bills and settlements coming due, the make-whole side of swaps transactions, calls for collateral, even payrolls. As a consequence of writing down its $785 million position in Lehman paper to zero, Reserve’s shares, redeemable at $1 since the beginning of time, have “broken the buck.” This means that for each dollar you’d put on deposit you’d get back ninety-nine cents
or less. Nothing like this has been seen since the bank runs of 1907. Washington has granted Reserve permission to suspend redemptions, equivalent to a major bank closing its doors. Interesting factoid: Reserve’s assets, which stood at $60 billion two weeks ago, had shrunk to $23 billion by last Friday. Don’t tell me someone didn’t know something.

In financial circles, the innermost ripples are starting to look like whirlpools. The word on the Street is that close to $300 billion in hedge-fund and sovereign money has been taken away from institutions rumored to be shaky and redeployed to
theoretically
safe havens like JPMC and the big Swiss and German banks. The Street’s seeing squeeze upon squeeze. Even STST isn’t immune; Lucia whispers that the firm’s “liquidity pool” has been cut by roughly a third. Bottom line: the overnight funding market is a $3-trillion-plus operation. If it seizes up, the entire world economy will suffer a coronary.

Finally, tjere’s our old friend GIG. Uncle Sam marched into their downtown headquarters last Tuesday and effectively took them over, extending an $85 billion emergency loan and extracting an 80 percent equity interest. Negotiation by confiscation, you might say. People are whining about “nationalization,” but what alternative is there—especially since the word is that Washington loathes the GIG management with almost the same passion it hates Fuld. Still, it’s amazing: three years ago, GIG was one of the biggest and most admired financial institutions in the world. Now it’s bust, a ward of Uncle Sam, brought low by derivatives bets made in London that apparently no one at GIG headquarters in midtown Manhattan understood. People are saying that this is a major root cause of the crisis: firms have been destroyed by bonus-seeking termites, traders booking transactions that generate immediate bonuses for the individual, but clobber the firm and its stakeholders when these trades crater down the road.

What’s weird is that the numbers argue that GIG was in even worse shape than Lehman, and yet it got rescued (so to speak) on exactly the same terms Fuld and his people were begging Washington for. Same as Morgan and Bear Stearns back in March. These “rescues” seem scripted by Orwell: some animals are more equal than others. Let’s see how STST fares if the going gets really hairy. Any way you cut it, a financial pandemic is what we’re looking at, the twenty-first-century version of the Black Death that killed half of Europe seven centuries earlier. Money-market plague. No one gets spared.

It may be that my ears are fooling me, but for the first time I’m hearing traces of concern in Mankoff’s voice. I know about the bad GIG swaps—that’s a $20 billion potential write-off that doesn’t qualify for a bailout (even Uncle Sam has to draw the line
somewhere
)—but God knows what other crap there may be that Rosenweis wasn’t able to offload and that Mankoff doesn’t know about. Even STST may be in one of those situations where it’s what you don’t know that’ll kill you.

The media are doing their bit, of course. The TV networks keep showing clips of Lehman people exiting their Seventh Avenue building with cartons of personal effects, picking their way among sneering people carrying placards condemning “greedy, reckless bankers” which is the cliché du jour. The Street’s response has been to send those few of its high-visibility CEOs who still retain a shred of credibility onto MSNBC and Fox to convince the world that the subprime collapse is someone else’s fault—mainly Washington’s—but this doesn’t seem to be having much effect.

In this alternative reality, Uncle Sam and the borrowers were the real fraudsters. The mortgage promoters, lenders, and packagers were just poor saps, mere putty in the hands of indigents and incompetent, crypto-socialist bureaucrats.