Fixers

by Michael M. Thomas

  Not everyone’s fooled. Fannie’s shares alone have lost two-thirds of their value in the past month, while the technocrats try to figure out if there’s some way to resolve the mess short of outright nationalization, which is the Street’s worst nightmare. You can see why: if Fannie and Freddie can be taken over, why not GIG, why not Citi?

  Apparently Polton has accumulated a massive short position in Fannie and Freddie stock using STST as his prime broker. According to Lucia, Mankoff took a look at the account and called Rosenweis in just the other day, cut him a new one and ordered him to tell Polton to move his short position to another firm. I gather Rosenweis was really unhappy, but at STST it’s Mankoff’s unhappiness that calls the tune.

  Two weeks ago, The Washington Post ran a story reporting that OG’s campaign had solicited ex-Fannie CEO Franklin Raines for “his advice on mortgage and housing policy matters.” Mankoff saw it and commented that a lot of people think that Raines is a jerk-off with slimy ethics, and isn’t someone OG should be seen in public with and definitely not someone for the press to perceive as a member of OG’s inner circle. I passed this on to Orteig, and he promised to take care of it.

  The pain is metastasizing. As far as which firms people are betting on to fail, Fannie and Freddie sit atop the Las Vegas tote boards, with Merrill Lynch, Lehman, and Citi close behind, and BofA next up, thanks to its stupid acquisition of Countrywide. Layoffs on the Street are said to have finally reached the magic number of 100,000. Some of this is in the junk end of the mortgage market, jobs that probably should never have been created in the first place, but most of the hit is being taken by order clerks, cafeteria servers, contract cleaners. Scaramouche contends that this is standard Wall Street procedure: the money gushes up, the trouble trickles down. Always the little people, never the big shots whose lack of executive judgment allowed the mess in the first place. STST’s not letting people go, not yet; Mankoff hates to fire people, and he’s allowing normal attrition, opportunism, and nervous stomachs to reduce his headcount.

  He hasn’t canceled shore leave, but executives with primary desk or departmental authority have been told to stay within three hours’ travel distance of the office just in case. People are hoping for a quiet August, for a respite during which to mentally regroup and screw their courage to the sticking place. But no one’s under any illusions. This isn’t August as usual. Party time in the Hamptons and Monte Carlo.

  The name that people at STST can hardly bear to speak without crossing themselves and praying is GIG. A year ago, the insurance and finance colossus was thought to be totally impervious to harm, but no firm is insulated from internal idiocy, and that’s what’s nailed GIG. The word is that the man in charge of their “Special Finance” unit in London went apeshit in the derivatives market and has stuck GIG with positions that might cause it to implode. Among those positions is $20 billion due STST that Mankoff’s going nuts trying to figure out how to get out of. Right now, Lucia tells me, it’s a standoff: STST puts the arm on GIG for more collateral; GIG argues the number, then grudgingly agrees to post additional collateral, to which STST applies a discount (generically called a “haircut”) that GIG disputes, and the Sisyphean process starts start all over again with STST stuck with $20 billion in bad paper.

  Then there’s Lehman. No one can figure out how bad it really is over there. On top of a $3 billion loss last quarter, they’re admitting that $130 billion of their assets are impaired. God knows what other balance-sheet bombshells are about to drop. There’s a stage when “l’ état, c’est moi” types like Dick Fuld transition from denial to delusion as their empires collapse about them. Lucia hears that Fuld sees only a diminishing circle of colleagues he trusts when he isn’t wandering the world in his jet like Diogenes in search of someone, anyone, who’ll put up enough money to get Lehman through the end of the year. Today, Dubai; tomorrow, Seoul; day after that, wherever. The gossip is that Fuld tried to make a deal with Merlin Gerrett, and that Gerrett actually made a conditional offer, but that Fuld thought Gerrett’s terms were too tough and walked away.

  Politically, all the news is good. Orteig has offered me a floor pass for the Democratic Convention next month in Denver, but I’ve declined. I can’t imagine anything worse than a week in the Rockies surrounded by shrieking yahoos in funny hats.

  And now, if you’ll excuse me, I’m going to take off for a long weekend on the Vineyard with a Yale classmate and his family, followed by a fortnight in Nova Scotia.

  Talk to you after Labor Day.

  SEPTEMBER 5, 2008

  Do you want to know what a political death wish made flesh looks and sounds like? Start with a reasonably pretty face concealing a brain evidently empty of all useful knowledge and any fond regard for truth. Add a nasal voice, the kind that Wodehouse says can open an oyster at twenty paces, in which is delivered gaffe after gaffe, often employing some very unusual grammatical constructions, along with a kind of “mean girl” knowingness, and what have you got?

  Sarah Palin.

  She’s the ex-governor of Alaska who’s just been nominated to be John McCain’s running mate on the GOP ticket. A walking, talking recipe for political suicide. Better than hemlock.

  Don’t put any stock in the jubilant immediate reaction from the usual suspects: a great victory for women’s rights, a magnet that will draw millions of white women to the GOP, etc. The McCain campaign is boasting that $7 million poured in after Palin’s nomination was confirmed at the GOP convention.

  Bullshit. Or should I say: “So what?”

  Don’t take it from me. That’s Orteig’s opinion, and he’s normally a cautious guy who considers going an inch out on a limb the very definition of imprudence. Orteig thinks that Charles Krauthammer, a right-wing pundit that OG’s team heartily detests, got it right when he wrote the following last week in his Washington Post column: “The Palin selection completely undercuts the argument about (the Democratic candidate’s) inexperience and readiness to lead … To gratuitously undercut the remarkably successful ‘Is he ready to lead’ line of attack seems near suicidal.”

  Orteig thinks Palin’s selection may be the single dumbest maneuver he’s seen in all his years in politics.

  Having watched the lady on the tube, I can’t disagree.

  SEPTEMBER 8, 2008

  New York is going through what Parisians call la rentrée, the time when everyone returns to the capital after a summer at the beach or in the mountains and goes back to work after the long August vacation. Magazines run forecasts of all the cool stuff that’s on the agenda and the elite’s shopping list; Wall Street cranks up, as do publishers’ lists, shows on Broadway and the Museum Mile. The culture vultures flap their giant wings and take to the sky. The aspirational obbligato of so-called “socialites” approaches concert pitch.

  But not this year of our Lord 2008.

  Over this past weekend Uncle Sam finally ran out of excuses and evasions concerning his beleaguered stepchildren and pulled the plug: both Fannie Mae and Freddie Mac were taken into “conservatorship” by Washington. I suppose that’s a polite way of saying “nationalized.” Uncle Sam had no choice, given the other horror shows now turning the financial horizon an angry red, with Bear Stearns interred inside JPMC, Lehman dismasted and half underwater, and Merrill’s mainsail flapping uselessly, while the crew runs out the lifeboats.

  Great and bloody has been the carnage. Fannie shares closed last Friday at $13 and change, opened this morning a tad under $4, sank as low as $2.50 during the day, and closed at $3. The price action reflects the bill Washington is charging for picking up the pieces: new stock representing a 79.9 percent equity interest that translates into a loss of tens of billions to existing stockholders. The latter are moaning, and here and there you’ll encounter the occasional murmur of sympathy, but let us not forget that these were huge institutional stocks, owned in million-share blocks by endowments, mutual funds, sovereign wealth funds (including China), and wealth managers, and these institutions and their
advisers, from what I hear, simply sat on their hands and watched as Fannie and Freddie charged headlong into subprime to juice their stock prices and fatten their executives’ bonuses. It’s also said that they had a good one-third of Congress “on the pad,” lest anyone in Washington get any ideas about throttling back.

  From Mankoff’s general disposition, I gather STST is OK, although it’s turning out to be a closer-run thing than anyone would have thought six months ago. The firm still has some $20 billion of credit quality and maturity mismatches that they haven’t been able to lay off, and that’s on top of the GIG swaps, but STST has avoided the worst “by the hair on our chinny chin chin,” which is how Lucia puts it. Even so, STST is thought to be in manifestly less worse pro forma shape than everyone except JPMC and possibly Wells Fargo, and a definite competitor in a game in which the last man standing will get first dibs on whatever’s left.

  SEPTEMBER 9, 2008

  Mankoff summoned me to his office late this afternoon, ostensibly to talk about a big Rubens show at the Royal Museum in Brussels, where the firm has opened a branch to be close—“within convenient bribing range” as Scaramouche puts it—to the EU parliament. He slid a slip of paper across the desk to me.

  Here we go again, I thought. I suppose I could have said “enough’s enough” and slid the paper back—but of course I didn’t. The truth is, I can’t stand not to know what’s coming next.

  On it was written “Ian Spass” and a 917 cell phone number. The name meant nothing to me. “Who’s this guy?” I asked.

  “He’s the guy you’ll be working with in Washington from now on. There’s going to be some serious negotiating to be done with both the group that’s in power now and whoever succeeds them after the election. Treasury and I have agreed not to speak directly; these days, you never know who’s listening in. I need someone I can trust absolutely who doesn’t have this firm’s name on their business card, and Washington feels the same way about their end. I’m going to want you to be on call for at least the next six months. Same thing for Spass.”

  He filled me in on my new counterpart. Ian Spass was about my age. Harvard undergraduate, Harvard MBA. He’d been a mergers-and-acquisitions star at a big bank, had done a stint in the Bush Treasury Department, and now works as a freelance consultant.

  I said I understood. I didn’t say that the name of my new opposite number amused me: Spass is German for “joke.”

  This could get exciting. And I have to say I’m flattered that Mankoff reposes such a high degree of confidence in me.

  SEPTEMBER 12, 2008

  Spass and I spoke for the first time today. I could tell from his tone and choice of words that he’s a member in best standing of Big Swinging Dickdom, Washington version, where it’s not about the money but about who’ll take your call. I made sure to sound impressed.

  Ours was a short chat, its main purpose to get a dialogue going between us. According to Spass, this coming weekend will tell all: either the fever breaks, or the patients start dying one by one. Lehman will be out of cash by Sunday night, apparently, with Merrill right behind them in the headlong rush to insolvency. Wachovia has suddenly turned out to be a major problem, but at least they are a true bank, with a big insured deposit base that might appear fetching to a buyer like Wells Fargo or JPMC. Same for Washington Mutual, which is poised to do an Olympic-quality plunge into the toilet. Funny: two years ago, these were among the hottest names on the Street.

  He wanted to know about our end, and all I said was that they’re reviewing their options like everyone else. I do know from Lucia that Arnold Braum has been pushing Mankoff to become a bank in order to access the funding privileges that a depositary institution enjoys. It seems the means are at hand, because it turns out that STST actually owns a real bank way up in northern Michigan, which was part of a regional investment firm STST bought in 2005. It has a deposit base of only $123 million and a scattering of ATMs at local stores and service stations. Chickenfeed by today’s standards, but suddenly, given the direction events seem to be heading in, potentially priceless, because it may be a way around Sheila Blair, the hard-nosed, no-bullshit woman who runs the FDIC and is no friend of Wall Street. She wants Washington to deal with the Lehmans and their beleaguered ilk the way she dealt with Indy Mac: shut the fuckers down, pay off the legitimate depositors, let the counterparties fight it out among themselves, and screw the stockholders. Even banks like Citi, she argues, are liquid enough to make their depositors whole; if their trading books drag their stockholders and lenders under, that’s just too damn bad!

  SEPTEMBER 13, 2008

  I called Spass at the end of the day and relayed Mankoff’s strongly held view that Washington should think twice about bailing out Lehman: “Lehman’s a special case,” I told him. “Their balance sheet is pure fiction. Nobody will touch their collateral. With them, it’s all about real estate. You rescue Lehman, and you’re going to have Harry Macklowe and those clowns that did the Stuyvesant Town buyout and every other real estate mega-deadbeat on your doorstep, looking for handouts.”

  I expected a brief lecture about the need for financial patriotism in this hour of national crisis, and Spass delivered one, but I held firm. Yesterday, Treasury contacted Mankoff and some other big hitters to ask them to come to Lehman’s aid and was turned down flat. Partly on the terrible credit fundamentals, but also because those who are solvent, even if just barely, are convinced that when Lehman goes under, the golden doors of Washington’s various vaults will be thrown open with free money for anyone who needs it or says they do.

  After hanging up with Spass, I reflected that this isn’t the way his side has expected things to play out. His mission is to tell Mankoff via me how Washington has decided things are going to be, and that will be that. But my mission is just the opposite: to deliver the Mankoff/Wall Street decision as to how things are going to be. No one other than Leon Mankoff tells Leon Mankoff what’s what. He’s carefully discarded his way to a strong hand, and now he intends to play it for all it’s worth.

  SEPTEMBER 14, 2008

  Long years ago, when I was still at Yale, my roommates and I took off for a ski weekend in Vermont. By the time we got to within twenty miles of our destination, early winter darkness had descended along with a snowstorm; the road was icy, visibility poor. We hit a skid and the back end fishtailed. The driver did what he was supposed to and steered into the skid, but this didn’t seem to work, so he jerked the wheel the other way, with the rest of us shouting helpful contradictory advice, but this didn’t seem to work either, and so finally he just said the hell with it, took his hands off the wheel, and let the car find its own way—a long, slow, sliding arc of maybe fifty yards that carried us gently into a snow bank. When we recovered our collective breath, we got out, managed to push the undamaged car out of the drift and back onto the road and resumed our journey.

  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 med
ia 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.