by Ron Suskind
Fink, along with Blankfein’s team from Goldman and Dimon’s from JPMorgan, was part of that select group. Larry advised Paulson, Bernanke, and Geithner to buy up the toxic assets directly from the banks, creating some sort of “resolution/reconstruction” bank to hold, handle, and work them out, rather than hand billions directly to the CEOs. He was outgunned by other voices. But Fink knew that dance: for years he’d seen the many ways banks and investment firms avoided hard actions in their long-term interest—such as disposing of toxic real estate, taking heavy losses, and then moving on—in favor of “wait and see” models that allowed earnings to remain solid, quarter to quarter, while they waited for the market to rebound before working on their toxic asset problem in the flooded basement.
But once the government hands over the money, it is entering into a kind of quiet partnership with the bank’s management—almost like an investor, but one who is eager to show that his investment, a vote of confidence in existing management, is sound and not sour, and not demanding another investment of good money after bad.
It’s that partnership—and the way banks were hauling in trading profits while letting their troubled real estate portfolios languish—that had been driving him buggy. In several interviews through the winter, he’d done something that he knew was imprudent: talk publicly about the way the government, in the wake of the financial crisis, had written rules to protect the second liens, second mortgages, home equity lines, and the like. These amounted to $450 billion, of which 90 percent were on the books of the top five banks. This reversed the traditional lineup of debt, where a first mortgage was, of course, first: “senior” to all others, and secured by the property. If it defaulted, or got restructured, the secondary liens were often wiped out. The protection of the secondary liens, as a way to protect the big banks, ended up standing in the way of the many large holders of first mortgages, including a significant number of small and midsize banks, keeping them from restructuring first loans that were in default, in some cases for years. For those banks, payments on many defaulted loans might resume, albeit at a reduced level, and a larger share of the four million Americans who were in foreclosure proceedings might eventually be able to stay in their homes.
Before Fink stepped up to the lectern, as friends from various financial houses crowded around, he offered up a prize, a vindication on the matter from none other than John Dugan, the U.S. comptroller of the currency. Fink recounted how, while sitting next to Dugan at a recent meeting of the Bank for International Settlements, he grilled him on “the backdoor bailout of the banks of $450 billion—almost as much as has gone out the door in TARP!” Dugan agreed, Fink said, “but said his office had done an analysis and put the number at closer to $200 billion.”
Of course, few people breathing have more credibility assessing the value of a toxic mortgage security than the product’s inventor, Fink—“I’d like to see Dugan’s model on how much a lien on a mortgage is worth!”—which was why he was the star today, even among the august list of speakers.
And there was concern around the room that he might speak too—justified concern. At the end of April, the Fed had ended “quantitative easing,” a program, started in the fall of 2008, in which the Fed bought Treasury bonds and mortgage-backed securities from banks to inject liquidity into the economy and promote growth. The cash that banks got from these Fed purchases—now totaling a whopping $1.7 trillion—became excess reserves, which should have allowed banks to engage in more lending. The Fed purchasing caused mortgage rates to fall and yields on Treasuries to hit a record low, but bank lending remained sluggish. It gave no one much confidence that the Japanese had attempted a similar quantitative easing program in the late 1980s and early ’90s, when its interest rates were near zero—as in the United States currently—and there were fears of deflation. It was a large continuing effort, but it didn’t do much beyond drain the Japanese treasury and saddle their central bank with toxic real estate of declining value. Not that the banks were complaining. They were getting a healthy slice of mortgage securities off their books—at what were generally acknowledged to be inflated prices paid by the Fed—and were now sitting on more than a trillion dollars of reserves—reserves that were not being lent out, certainly not much in demand-deficient America, but rather, were fueling the machine of fixed-income trading on all cuts and slices of debt. A lot of liquidity with nowhere to go, in a low-yield environment, was, of course, the ideal circumstance for lots of speculative, exotic trading games.
Which is why Larry was soon huddling with Greg Fleming, who’d just shown up, and Bill Winters, the former number two to Jamie Dimon, who’d left JPMorgan a few months before. These three, speaking one after the other, would be carrying forward the “Capital Markets” portion of today’s festivities. But what they talked about together as the moderator prepared to introduce them was the day’s overarching topic: Would ardor for financial reform—now revived in the wake of the health care bill’s passage and Goldman’s pillorying in front of Congress—slow or stymie the trading machine (the only way, in Fink’s mind, for the banks, the investment houses, and the hedge funds to make any real money these days . . . and maybe, for many days to come)?
Of special concern was Blanche Lincoln’s move to force the spinning-off of derivatives operations. Fink said, nothing to worry about—“Geithner will never let it happen,” and that the spinning-off of derivatives, along with some of the more strident reform proposals, would “be used as bargaining chips.” Fleming was not so sure: the linked chain of exotic trading—the securitization and reselling of debt in derivative plays, the credit hedges, and the credit default swaps, all of which bind institutions together in the same webs of systemic risk that caused the collapse—“is what most of these reforms are trying to kill off,” he told Fink, “so banks have to get back to their core business, actually lending.”
Fink laughed, unconvinced. “Most of them, even if they’re passed as they are now, won’t have that much effect. Goldman can get around almost everything currently on the table. And if they think banks are going to actually start lending in America, they’re dreaming. They’ll find other ways to make money.”
It was time for the trio to take the stage. Winters first, and then Fleming—each ran through regulatory issues, various expectations for how it all might map out and where investment returns were the strongest: overseas. When Fink came on, to talk about the many burgeoning foreign markets that were most attractive to investors—and that would stay so in the near future—Winters was milling about in the empty area behind the ballroom, a forest of cloth-covered round bar tables littered with empty coffee cups, where the group had just finished its fifteen-minute morning break.
“A lot of muffins get eaten in this town,” Winters said, nosing around to see what was left at the buffet table, as Fleming was speaking inside the ballroom. “It’ll be nice to be out of all this for a while.”
Winters, who built JPMorgan’s fixed-income trading business and then moved on to head investment banking—a trajectory that put him on a short list someday to succeed Dimon—was now planning a move to London. He’d been asked to help the British government wrestle with their version of financial reform, with proposals to be first recommended by a special independent committee, organized under the Chancellor of the Exchequer’s Office. He’d be one of the members.
Leaning on a waist-high table, he talked about gaining more perspective with each passing month since his departure from JPMorgan last November, and how he’d often thought, lately, of a dinner he had with his extended family back in 2007. It was a big group, led by Bill’s father, a World War II veteran, a poor kid from Wheeling, West Virginia, who’d served in the U.S. Navy, came home, got educated on the GI Bill, and then got a job with the National Steel Corporation. His father was “a tough proud guy, very responsible, supported his family” and had grown concerned in the previous few years about how much money he saw his son spending. He didn’t know exactly how much Bill was making
—Winters earned $22.5 million in total compensation in 2007—but now he saw his son paying for eight people at a fancy restaurant on the Florida coast.
“So he takes me aside and looks at me with real seriousness. This is something he’d been wanting to say for a while. He looks me in the eye, mentions how much money I’ve been spending, how much a dinner like this costs, and says, ‘Bill, is what you’re doing legal? I don’t see how it can be.’ ”
Winters shook his head, mulling over his dad’s words. “I think a lot about that. Him saying, ‘How could this be legal?’ ”
Inside the ballroom, Fink was now holding the crowd rapt; they hung on each word. He spoke, like everyone else, of the overseas opportunities. Fink was a globalist, joyously, and profitably disrespectful of borders. He’d spent much of the fall tapping sovereign-wealth funds in Kuwait, Saudi Arabia, and across Asia—huge capital troves that could be swiftly directed by the governments that ran them. These funds, like most of the rest of the world’s aggregated wealth, were happy to work the vast U.S. debt markets, but didn’t generally see equity growth opportunities in an American economy. Despite its size—$15 trillion in GDP, nearly three times the size of China’s $6 trillion and Japan’s $5 trillion—the United States was viewed as overregulated and maturing fast. The pools of money around the world, led by Wall Street, were being invested in the upside of countries with cheap labor, no regulations, child labor, no union organizing. (Organizing, considered a crime, can bring lifelong incarceration in China.) Everyone was busy buying shares in this bright future. Fink, needing something fresh on this front, mentioned Colombia, with a per capita income of $9,800 and half the population below the poverty line. It was also the third-largest exporter of oil to the United States. Yes, Colombia, Fink said—great growth potential—as the analysts nodded and jotted.
But there was more, one more thing, what they had come to hear: Fink’s judgment on the core financial business that defined America, still, as it had for the past decade: packaging the flow of money, much of it foreign money, into debt for all the parts and parcels of America. As an inventor of securitization, manager of the U.S. toxic debt portfolio, and overseer of BlackRock—with its unparalleled analytics in how the American government, corporations, and individuals were faring, day to day, under a still-crushing debt load—Fink was in the best position to say what he, in fact, then said: “Everything correlates.”
What did this mean? That the core of all their trading strategies, at all the financial houses, had reasserted itself—strategies that rested on loading mountains of data into various predictive equations, algorithms designed to show how the trading and shifting market values of disparate financial products correlated with the past. BlackRock had a longer tail of data than anyone else, especially on mortgage-related securities, and the longer the tail, the more precise the predictive model. When the actual price of a security strayed from that model, traders, or their trading computers, bought, often in huge volume, in whatever direction, short or long, that predicted a regression back to the bell curve over a designated period of time. The more faith you had in your model, the more leverage you piled into it, so each split-second trade was that much more profitable. Traders called this “picking up nickels in front of the steamroller.” Do that with trillions of dollars, you make tens of billions picking up those nickels. Of course those bankers and analysts listening to Fink were jittery, and how could they not be? In 1998, Long-Term Capital Management, run by two Nobel Prize winners, thought its predictive bell curve, mapping the movement of interest rates over the past few years, was sound. It was, until it wasn’t, and a unique event—aren’t they all?—of Russia defaulting on its debt created a “fat tail,” where the flat-bottom edge of the bell curve turned up, as though it were starting a new curve. With housing prices rising for three decades, in a thirty-year bubble inflated by easy credit, the meltdown of the mortgage market would be a surprise times a hundred.
What Fink was saying was “Relax.” No more “black swan” moments for a while. You won’t have to go back to investing in America, back to finding underappreciated value—the intrinsic worth of something that improves someone’s busy day, that excites or comforts them—and spotting it before anyone else in this fast-fire, democratized information age, to be the first to put your money down. That was difficult and actually risky, and harder than ever in what looked like a painfully mature America economy. The trader, with his equations that claimed to represent reality—until they didn’t—still ruled. That meant more booms were ahead, along with the inevitable busts. And that’s why all concerned parties should stick with BlackRock. Because when the coming bust—the next one, which would be even bigger, as each successive one seemed to be—showed its first perplexing signs, when that first moment came, when things didn’t correlate for a passing but significant instant, you should be with Fink rather than Dimon or Blankfein. Why? Because that’s when they, Dimon and Blankfein, would make their real killing, making—with their own proprietary, pure-profit capital—a “directional” move against the market, often done invisibly, through intermediaries, or in the “dark pools” of derivatives bets. Before you knew that the world had just listed, just heaved in a new direction, you’d be left with securities that couldn’t be sold in a declining market; you’d have to catch the falling knife. BlackRock was as drenched with “informational advantage” as Goldman or JPMorgan, but—and here was the sell—BlackRock would use that advantage to make sure its clients were the ones who leapt away before the steamroller flattened them.
Beyond the partitions, with the empty muffin tins, Bill Winters was still thinking about his father’s question—“How can this be legal?”—which was now being asked in coffee shops, in carpools, and in Congress.
There was, institutionally speaking, an entity, or rather, three particular firms, that were designed to act as honest brokers in assessing value rigorously, and publicly, for all to share simultaneously: Moody’s, Standard & Poor’s, and Fitch. That they’d been stunningly, disastrously, stupefyingly wrong in stamping risky CDOs with their triple-A seal of soundness and safety was one of the most widely acknowledged verities of the great crash. It was also clear that, with all three public companies, they were in conventional competition for profits and primacy, quarter to quarter. The fees for rating CDOs—generally around $200,000 a bundle—were too good to turn away.
But nearly three years after the credit markets began to ice up in 2007, the question of why it had happened, and had there been fraud, still hung like a mist. With no end in sight to Wall Street’s impulse for turning financial complexity into cash, and with its powerful, quick-kill incentives unchanged, the rating agencies’ role—as a stamped and sealed proxy for actually understanding the next financial gizmo and the one after that—would only grow.
It was thus a twist of good fortune that Bill Winters was suddenly channeling his father, with his plainspoken steelworker’s sensibilities. “These were young guys at the rating agencies, making $100,000 a year, one-tenth, or one-fiftieth, what the guy from the investment bank explaining the complex model to him was pulling down,” Winters said, as he felt around the contours of it. “He wants to someday be that guy, and maybe he will be, if he plays his cards right. So you take him to a couple of Knicks games, a few fancy dinners, and you’ll get your rating.”
Carmine Vision wasn’t having thoughts of suicide anymore. They came when Lehman fell, and they went. But it was not surprising for a man who looked into oblivion’s dark maw, and then jerked away, to keep pulling back across the long life that preceded his brush with self-destruction. That’s part of what brought him here to the old neighborhood of Brooklyn—that, and the gravitational pull of life events. His father, the controlling, emotionally penurious bricklayer, whose fierce standards of measuring value are most of what he left to his son, just died—alone in a nursing home—having long since left Carmine’s mother, now north of eighty, who still lived in the family’s nondescript house on a street near C
oney Island.
Not far, in fact, from where Carmine’s cobalt blue Mercedes was now weaving, taking the long way, street by street, across the storied realms of Brighton Beach and Sheepshead Bay.
The brick row houses, strips of solid square shops, stone churches built to outlast the “second coming,” hadn’t changed. It’s just everything else that had, or so it seemed to Carmine, as he drove into the past, pointing out what was.