Saturday, December 4, 2010

All the Devils Are Here

From Whitney Tilson:

I just finished reading Bethany McLean and Joe Nocera’s new book on the financial crisis, All the Devils Are Here: The Hidden Story of the Financial Crisis, which I enjoyed.  They do a nice job of tracing the many causes of The Great Bubble, especially of exposing what a gigantic boiler room Ameriquest was – FAR worse than Countrywide (they present a surprisingly mixed/balanced picture of the company and Mozilo).  This article captures what Ameriquest was like: www.latimes.com/business/la-fi-ameriquest4feb0405,1,7774916,full.story.  Roland Arnall is surely rotting in hell.

These were my two favorite parts in the book (did Fuld REALLY try to keep Lehman’s balance sheet big?!):

1) “What Arnall’s defenders say – indeed, what all the defenders of the subprime originators would say after the fact – is that the true villains were not the lenders on Main Street but the investment firms on Wall Street.  Wall Street, after all, was both making the warehouse loans on which the subprime companies depended and then buying up their mortgages and then securitizing them.  The Wall Street firms, in fact, were dictating what kind of mortgages they would buy and at what price.  They wanted the riskiest subprime mortgages they could get their hands on, because those were the mortgages that generated the most yield.  In a presentation to the board of directors, Washington Mutual executives noted that subprime loans were roughly seven times more profitable than prime mortgages…

…Jon Daurio, the executive who had worked for Arnall at Long Beach and then went on to form several other subprime companies, recalls a meeting in 2003 with some representatives of Bear Stearns.  “How can you increase your volume?” the Bear Stearns bankers asked him.  “We said, tongue in cheek, ‘Well, we can do a 100 percent loan-to-value stated-income loan for 580 FICO scores!”  Translated, that meant making loans with no down payment and no income verification to borrowers with very low credit scores.  Daurio continued, “They said, ‘Okay!’  We said, ‘No problem!’  Let’s do this all day!’  And we did it, in massive quantities.” (p. 134-5)

2) “And there was strong suspicion that Lehman’s marks were inflated. Indeed, Tim Geithner would later tell the Lehman bankruptcy examiner that a fire sale of assets might have revealed that Lehman “had a lot of air in [its] marks.”

What bothered Hank Paulson, though, was that Fuld just didn’t seem to share his urgency.  Although Fuld did raise $4 billion in additional capital in March, for which Paulson congratulated him, he was deeply resistant to Paulson’s constant suggestion that Lehman was vulnerable and that Fuld needed to find a buyer.  Fuld, Paulson would later tell the bankruptcy examiner, was “a person who heard only what he wanted to hear.”  What he wanted to hear, clearly, was that the government wouldn’t let Lehman go under – a view that had become widespread inside the company, even though Paulson says he consistently told Fuld that help would not be forthcoming.  “Hank was consistently emphasizing to Dick, ‘You’ve got to have a Plan B and C.  Hope isn’t a strategy,’” Bob Steel told Vicki Ward, the author of The Devil’s Casino, a book about the fall of Lehman.

Then again, maybe hope was a strategy.  Ward also reports that around this time a former Lehman bond trader named Peregrine Moncreiffe bumped into a friend who was working for John Paulson.  Fuld had recently visited Paulson’s offices.  “Fuld told us he’s deliberately going to keep the balance sheet big,” the friend told Moncreiffe.  “He thinks that this way, the government will have no choice but to save him.”