Fixers

by Michael M. Thomas

MAY 10, 2009

  Jon Stewart has a great shtick about people who say one thing and do the opposite. I’m a big Stewart fan although I wonder sometimes whether he does more bad than good by turning everything into a joke. Nowadays, everything, even matters of urgency and importance, is converted into entertainment of one sort or another and thereby loses its heft and bite.

  I wonder if Stewart and his writers will pick up on Merlin Gerrett’s newly released first-quarter report. Thanks to big write-offs in its position in derivatives, Arrow Northumberland not only showed a loss for the period, but was stripped of its triple-A credit rating by all three big services, including Morton’s, where Gerrett is the biggest stockholder. I guess hypocrisy can be a two-way street.

  Lucia tells me that in the wake of Gerrett’s first-quarter horror show he’s signing up Washington types left and right to lobby Congress and the regulators to exempt certain vintages of derivatives from regulation. If this isn’t crony capitalism, which Gerrett has also excoriated, what is?

  MAY 20, 2009

  Over drinks today at San Calisto, I happened to observe that the Murdoch empire, notably Fox News, the New York Post and The Wall Street Journal, seemed to be on OG’s case big time. What is that all about? This is not a president you’d normally feel sorry for, but I wonder about the hard treatment he’s getting from Murdoch’s minions. In business, Murdoch adheres closely to the “You put up and I’ll shut up” formula, so one has to wonder what he wants. The thing is, there’s not much left in this country that Murdoch’s wanted that he hasn’t already gotten. So how come when you turn on Fox News, the first thing you hear nowadays, either from some blonde ditz, or from that prize asshole Sean Hannity (next to whom a cretin like Rush Limbaugh looks like a combination of Socrates, Gandhi, and Bismarck) is that the president is physically incapable of carrying out the duties of his office?

  The guy has his shortcomings, and on the basis of what we’ve seen so far, his presidency isn’t shaping up as one of the all-time greats, but there’s stuff he’s trying to do—health care, for example—that only Scrooge McDuck would begrudge. My job was to insulate Wall Street from prosecution and disgrace, and that seems to have worked, at least in the sense that the Bush administration’s giveaway polices are being ably defended by the Winters-Holloway cohort. But there’s a lot else wrong with this country and the world that could stand a bit of fixing—and not the kind of fixing I’ve been involved with for the last two years.

  In the course of the Murdoch discussion, the Ancient Mariner informed the table that his son-in-law, a lawyer with an important Los Angeles firm, says that Murdoch was himself inclined to go easy on OG. After all, Murdoch was asshole buddies with the Clintons and Tony Blair; basically, he likes to be on the winning side, no matter where on the ideological spectrum that happens to be located at a given time. It turns out, however, that when Murdoch passed the “lay off” word along to Roger Ailes, the Falstaffian character who runs Fox News, Ailes’s massive jowls quivered so violently with rage that the building shook, and he threatened to quit. Naturally the Dirty Digger (as the English satirical magazine Private Eye calls Murdoch) backed down, since the latest ratings indicate that one person in four gets their news from Fox, and Fox, period.

  That’s not surprising. We’re living in an era that’s made a religion out of self-expression, and the Internet has provided a platform for every nutjob out there—someone recently joked that “the Internet has given millions of people with nothing to say a place to say it.” So Fox has had no trouble finding a huge audience for its weird ideology.

  How ironic it would be, I thought, as I walked home later, if in some strange, counterintuitive way, OG should end up being the catalyst for a racism-tinged, crypto-fascist Big Money takeover of this country. When I agreed to do this job for Mankoff, this was not something I expected to be part of. Did I help the progressive element in this country vote for its own doom? Oy!

  JUNE 20, 2009

  STST stock is back up to 143. “Oh joy, oh rapture!” resounds through the marble halls.

  Granted, the firm is showing solid fundamentals, but it’s not hurting matters that the Fed’s printing presses are driving the equity markets upward.

  Meanwhile, the great game continues. Last Wednesday, June 17, STST announced it was paying back the $10 billion of TARP money Treasury “forced” them to take just eight months ago. It was naturally implied by the MSNBC end of the media spectrum that STST’s ability to repay was the result of sinister if not outright crooked doings, like using dirty money from the GIG swaps buyout. On Fox, it was reported as good guys doing the right and honorable thing—and looking out for the taxpayer.

  And the sea rolls on, as Melville says.

  JULY 4, 2009

  Lucia’s ready to slit her wrists.

  About the worst thing that can happen in PR is when someone comes up with a derisory nickname for a client company. Once it gains traction, it’s like being squeezed to death by a boa constrictor or eaten slowly by a Great White. There’s no escape.

  Such a fate has now befallen STST. Marina Hochster, the muckraking journalist, has hung the tag “TARPworm” on them in a piece in a popular magazine. The article is entitled “A Monster Parasite.” In less than a fortnight, it’s already racked up ten million hits, and I’m told that the magazine has gone back for a million-copy second press run.

  Here’s how Hochster’s article begins: “America’s vital financial organs have been invaded by a rapacious, bloodsucking parasite called the TARPworm, also known as Struthers Strauss.” On the facing page is a cartoon of a giant faceless creature, something like an elongated slug, but with stubby tentacles and gaping suckers. Its surface is covered with the symbol “$T$T.,” and it’s coiled around a clump of cartoonish buildings marked “Congress,” “Federal Reserve,” “Treasury,” “GIG,” “White House.” The caption? “Meet the TARPworm.”

  The article accuses STST of being the main perpetrator and profiteer in every bubble and other untoward episode in the capital markets since its founding: the ’29 Crash, the merger/conglomerate craze of the late ’60s, the 2000 tech bubble, the Fannie-Freddie housing finance scams, the securitization game in subprime and elsewhere, you name it.

  Following this bill of particulars, Hochster wonders why everything has seemed to break STST’s way in the current crisis, including the GIG make-whole. In particular, she takes a hard look at Protractor and the obviously collusive (quote unquote) Polton deals, (crediting Allen Sloan’s 2007 Fortune article) and wonders why Uncle Sam has never lowered the boom there.

  It’s a savage piece of work. There’s no doubt the lady’s done her research, and knows what she’s looking for and looking at; she knows which files to probe, what numbers to call, what a between-the-lines perusal of financial statements can reveal—such as that STST only paid $14 million in cash taxes on 2008 profits of over $12 billion. This is not the sort of factoid likely to inspire good feelings in a debt-drained, overtaxed electorate.

  According to the piece, STST long ago developed a template by which it has engineered one lucrative boom-bust cycle after another. Here’s how Hochster describes it:

  The formula is relatively simple: the TARPworm positions itself in the middle of a speculative bubble, selling investments it knows are crap. Then it hoovers up vast sums from the middle and lower floors of society with the aid of a crippled and corrupt state that allows it to rewrite the rules in exchange for the relative pennies the bank throws at political patronage. Finally, when it all goes bust, leaving millions of ordinary people broke and unemployed, the TARPworm devours hundreds of millions of other people’s money to repair the damage it wrought. And then it begins the entire process over again.

  Frankly, I think Hochster overstates her case. There’s another side to the story, as I’ve come to realize. Opportunistic firms like STST, who get it right fairly regularly, do a hell of a lot less lasting damage to the economy and the taxpayer than the clowns who get it wrong—either acci
dentally or on purpose. It wasn’t STST who put Bear Stearns down the tubes, or GIG or Lehman or Countrywide or Washington Mutual, or flew Merrill Lynch into a mountain, or messed up Fannie and Freddie; it was the idiots, incompetents, and fraudsters that ran those outfits. And while we’re at it, how about GM and the auto companies, or GE, both of which have sucked up billions in bailout money?

  Rational opportunism is STST’s modus operandi. To paraphrase a nineteenth-century New York politician, “They seen their opportunities—and they took ’em.” They make their own good luck—as much as they can. But they also “mark to market” when no one else does, and they know what their risks are, and they understand that the only way to make very big money in this business is to cash in on the so-called inflection points, when anything can get sold, everything gets bought, and there’s credit aplenty to grease the wheels. Read an article like Hochster’s, and you’ll come away thinking that STST was the only firm to profit from subprime securitization, the only firm to make money out of the bailout. That’s just crap: off the top of my head, I can name a dozen players, starting with Jimmy Polton, who made more money shorting subprime than STST did, and are every bit as guilty of profiting off subprime as Mankoff, Rosenweis, and their minions.

  Still, say “Struthers Strauss,” and the knee-jerk response you get is “You mean the TARPworm?” The name drops from the ceiling like Groucho Marx’s duck in that silly quiz show my old man liked to watch.

  Around STST, of course, it’s all Lucia’s fault. She’s the person in charge of image. How could she let this happen on her watch? She should have known about it—doesn’t she have moles in all the important media?—and put a stop to it. She’s done that before. I feel for her and wish there was something I could do to defend her, but I’m helpless.

  Last Monday, Bernard Madoff was sentenced to 150 years in the slammer. The consensus at San Calisto is that he should have been given a medal instead of a prison sentence for showing the world how easily fools and their money can be parted. As always, someone’s going to profit. The fees and commissions some court appointee will be paid for cleaning up after Madoff should run into the tens of millions. Just think what Lehman must be worth to its liquidators. Billions, for sure.

  JULY 17, 2009

  If Lucia’s hitting the Tanqueray extra-hard these days, you can blame Marina Hochster. Wall Street stories now simply refer to the firm as the “TARPworm,” as in “The TARPworm reported record Q3 earnings …” “The TARPworm’s involvement in the scandals now roiling Europe …” “How much influence does the TARPworm have at the Fed …” “CFTC investigating TARPworm hijinks …” Et cetera, et cetera. I’ve even seen TARP redefined to stand for “TARPworm Armed Robbery Payoff” instead of its pompous official name.

  JULY 22, 2009

  It just gets worse: STST has now been served with the Wells Notice people were afraid of. Now the firm is facing possible future prosecution by the SEC, not just a regulatory slap on the wrist. What’s specifically under scrutiny is STST’s role in Protractor.

  There’s a dispute with STST about how, when, and whether to disclose this. In Lucia’s opinion, the Wells Notice is a big deal and should be promptly disclosed to the markets to show there’s nothing to hide. Rosenweis is fighting the idea. He hates transparency and has gotten the firm’s outside lawyers to affirm that merely receiving a Wells Notice about a puny few billion dollars isn’t a material event, given the size of STST’s balance sheet, and therefore it’s up to STST to decide if and when it will tell the world. What I find difficult to understand is why the SEC doesn’t tell the world, but apparently that’s not the way things work nowadays. Mankoff will make the ultimate decision, of course, but I gather he’s wavering.

  This is odd. Mankoff is usually the most decisive person in the room, but Lucia reports that for the first time since she came to STST, he seems distracted. His edge dulled, his focus not keen. She worries that he might not be well. I’ve noticed the same thing. I don’t think he’s been as sharp as usual in our recent interchanges. He seems tired, impatient, overburdened. On the other hand, why shouldn’t he? This has been a bitch of a stretch going all the way back to Bear Stearns, GIG, and Lehman, plus all the shuttling back and forth to Washington to answer the same sets of questions put to him by different congressional committees—and the shit just keeps raining down. Add it all up, and even a superman would start to feel the weight of the world.

  There is one bright spot out there, although the size of a pinhead compared to everything else that’s going on. The House bill levying a 90 percent tax on bonuses paid to executives of bailed-out firms? Well, it has just plain vanished. Kidnapped in the course of the treacherous journey from House to Senate and hasn’t been seen or heard from since. Fortune recently reported that once the media lost interest, so did the Hill, and that was that. Strange and discouraging are the workings of republican democracy.

  AUGUST 6, 2009

  An interesting development, perhaps not unexpected. A source close to the White House tells Lucia that all is no longer hearts and flowers between Winters and Holloway. For whatever reason, Winters is now pushing for a stimulus that would put money in the hands of the people but Holloway remains the banks’ guy, continuing to argue that every last nickel of bailout/stimulus money should go to Wall Street, and essentially without conditions.

  You have to admire consistency. When he was involved in overseas banking and credit crises (Brazil, Argentina, Thailand, and so on), Holloway was “Mr. Tough Guy,” arguing for all sorts of concessions by the debtor nations, but now that the crisis has gone domestic, with the palpable culprits being Holloway’s chums at Citi and its ilk, it’s free money for all, no questions asked.

  Lucia’s source tells her that Holloway is prevailing in most of these squabbles, thanks to OG’s man-crush, and this is driving Winters batshit.

  SEPTEMBER 16, 2009

  Talk about biting the hand that both feeds you and wields the whip.

  And talk about being stupid.

  OG came to Wall Street today to give a speech and no one turned up. At least none of the biggest hitters. Not Mankoff, not Dimon, and none of the CEOs of the other big banks, with the exception of Richard Parsons, whom Uncle Sam has installed as interim chairman of Citi. What OG got was a nondescript gaggle of hedge fund types, the usual government-in-exile panjandrums like Roger Altman and Pete Peterson, and a bunch of second-stringers who made it clear with their body language that even they had more important things on their plate and would rather have been somewhere else. When OG strode to the podium, he must have said to himself, “Here I am, the most powerful man in the world, and look at this sorry collection.”

  The president basically told his audience to clean up their own houses, or he’d do it for them. “You don’t have to wait to put the bonuses of your senior executives up for a shareholder vote,” he urged. “You don’t have to wait for a law to overhaul your pay system so that folks are rewarded for long-term performance instead of short-term gains.”

  Same old, same old—and received as such.

  According to Lucia, when he delivered that last bit, his audience cleared its collective throat and ostentatiously checked its collective BlackBerry. And when OG went on to say: “It is neither right nor responsible after what you’ve recovered with the help of your government to shirk your obligation to the goal of wider recovery, a more stable system, and a more broadly shared prosperity,” the audience simply sat on its hands.

  As Orteig said to me when he called later, they could at least have faked respect if not enthusiasm. As it is, OG left the building with what one can only imagine was a major case of the red ass. I’d have liked to be a fly on the wall when he got back to Washington and did the “how went the day” bit with his wife, whose favorite game is hardball and who’s said to hate Wall Street.

  Meanwhile, on the home front, STST has responded to the Wells Notice. The response document drafted and submitted by Arnold Braum’s firm runs 49 pages and
probably represents $5 million in hourly billings. The main thread of STST’s defense is that the people who bought Protractor and similar deals were big boys totally capable of looking out for themselves and that STST was merely responding to the demands of the market and the perfectly legal requests of a good client—just as a responsible firm should.

  Lucia and I had a good laugh over the phone when she read me the assertion by STST’s lawyers that the SEC’s theory of the firm’s misconduct “relates exclusively to the role of Polton Partners, Inc.—now recognized as a heavy bettor against the subprime market but at the time a relatively unknown hedge-fund manager.”

  Bullshit.

  Toward the end of the response comes something that Lucia says must have sent STST’s founders spinning in their graves: the excuse that the firm was forced to do Protractor as a competitive necessity because others were doing it. Talk to the old boys at San Calisto and they’ll tell you that Messrs. Strauss and Struthers were absolutely opposed to taking on a line of business simply because someone else was. Today, I guess you might say it’s a case of every tub on someone else’s bottom.

  SEPTEMBER 19, 2009

  I spent a couple of incredibly boring hours last night plowing through a hard copy of STST’s response to the SEC about Protractor. The boilerplate was beyond incomprehensible—but I understood enough to wonder about certain details. For instance, the response claims that in 2007 it wasn’t generally known that Polton was shorting subprime and related securities and options. Well, I already knew about it back when I met Mankoff at Three Guys in February of that year, and if I did, real Street insiders must have known twice as much, twice as early.