Monday, April 05, 2010

The End of Wall Street, Sort Of

“The End of Wall Street,” Roger Lowenstein’s grandly titled account of the collapse of Merrill Lynch, Lehman Brothers and pretty much everything else in the fall of 2008, is instructive in more ways than merely reminding us of just how close to the edge we came in those few dark months.

Written in the classic Roger Lowenstein style—careful, precise, flowing—the book also re-informs us how we got there, which had nothing to do with the short-sellers on whom the whole mess was later blamed. It was subprime mortgages, and everybody wanted in.

But before taking us on that journey, Lowenstein starts the book with a dream—literally.

It is 2006 and ace investment veteran Bob Rodriguez dreams he is on trial, defending his firm’s holdings in Fannie and Freddie paper, which, in his dream, have gone bankrupt.

Rodriguez wakes up and recognizes the dream for the early-warning sign that it is. Having already lost faith in U.S. monetary policy during the reign of Alan Greenspan; and having sold all holdings of “Alt-A” paper in 2005, Rodriguez decides to review the firm’s holdings in Fannie and Freddie paper.

And he begins to sell them. All of them.

And this takes place fully two years before Fannie and Freddie will actually go into bankruptcy—or, at least, the moral equivalent of it: government seizure via “conservatorship.”
Lowenstein then moves the narrative to the subprime story itself: how everybody from Barney Frank to Angelo Mozilo helped subprime launch the first great bubble of the 21st Century; how smart guys like Pete Kelly at Merrill Lynch saw the writing on the wall and were overruled by the dumb guys in control; how brainiac regulators like Ben Bernanke didn’t expect it to come to grief; and how it did, anyway, come to its inevitable grief.

Along the way, Lowenstein brings Rodriguez back into the story as a sort of measuring stick by which the level of reaction to the excesses can be measured. As the book ends, Rodriguez is taking a sabbatical, having guided his FPA Capital Fund to the best 25 year track record of any diversified mutual fund.

Rodriguez’s part in this story is instructive, and it is no stretch to presume that Lowenstein, an early Warren Buffett biographer, includes him in the story to demonstrate that the dangers of subprime were not as opaque as a lot of people—even Wall Street veterans—wanted to pretend they were.

(Bill Miller of Legg Mason, for example, griped at the time that the government’s seizure of Fannie and Freddie was a “monumental policy error” and that the two did not “need capital and [yet] could not get it.” He was flat out wrong: they needed capital in size, and they could not get a new dime of it.)

But instead of focusing on the losers of the crisis—and there were many former investment stars in that category—what Lowenstein does is far more instructive: he puts the reader in the mind of a guy who actually did the careful, detailed work and who figured out, in real time, the dangers of what was transpiring.

There is more to the story, of course. How men like Stan O’Neal of Merrill and Chuck Prince of Citi were paid monumental sums, essentially, for failure ($161 million for O’Neal, $80 million for Prince), for one thing.

For another, how the AIG mastermind behind the biggest black hole in the entire crisis—Joe Cassano—“flew into a rage” when an AIG auditor “found errors in the way AIG had accounted for hedging transactions.” Unfortunately, the rage was directed at the poor auditor for pointing out errors, not at the errors themselves.

And how AIG CEO Martin Sullivan—another guy who would later get paid for failure, $47 million worth—and Cassano hid the company’s problems during a presentation to Wall Street’s Finest.

Oh, yes: and how some of the key players who brought this all on themselves tried to blame short-sellers as their handiwork unraveled.

If there is one aspect to Roger’s splendid re-telling of the whole, sordid story that we’d argue with, it’s the title (although authors do not necessarily choose their own titles). “The End of Wall Street” seems a bit over-dramatic. After all, Wall Street controls money. And when you control money, you control the show.

And, last we checked, the show goes on.

But for a reminder of what to look for the next time a bubble pops up yet nobody seems too worried about it, read Roger’s book.

And if you should have a bad dream about that bubble, pay attention to it. Bob Rodriguez did, and his investors are grateful.

Jeff Matthews
I Am Not Making This Up

© 2010 NotMakingThisUp, LLC

The content contained in this blog represents only the opinions of Mr. Matthews, who also acts as an advisor: clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.


Citizen AllenM said...

I would argue that the end of Wall Street is heaving into sight as we blow yet another bubble on oceans of dollars.

At what point is equity a total crapshoot- with opaque fundamentals, crooks unpunished, and near total regulatory failure?

I would argue in my growing revulsion, a common man is gradually deciding not to ever play again. I think I will go and invest in dirt, as it doesn't disappear into some accounting scam, takeover scam, failure to deliver scam, or the usual wall street manipulation. Just look at the wreckage of the mortgage industry and the common man is once again paying for the bailouts, while the perpetrators took the money and ran.

If this market crashes again, and it most likely will, how will people feel about investments that now resemble heads I win, tails you lose?

Ten years of sideways or down is causing a lot of reassessment. Along with a Federal Reserve that saved the banking system and threw the old folks under the bus with miniscule interest rates.

In short, without some measure of safety and security, Wall Street will shrink, and drastically. Resisting regulation that will save the market is a hallmark of the ultimate in short sighted thinking.

Someday this war's gonna end...

BG said...

It seems obvious to me that the bubble that exists today is the acceptance of the Chinese "market system," as an acceptable way to allocate capital. I've done research on several companies in China lately and the way the Chinese invest massive amounts of money with wreckless breakneck speed, is going to come back and bite them some day. For instance, around 1/3 of Chinese wind energy capacity built is not connected to the grid. Several blogs have shown videos of entire cities that have sprung up with no one living in them. Granted I am probably 5 years too early, but it's hard to predict when a bubble will burst.

PhillipCharles said...

Citizen AllenM, may I offer that you may be overdoing it with your consumption of the Fox News Channel and similar forms of commercial media. Equity is only a crapshoot if the company is poorly managed, the fundamentals are weak and/or the expectations priced into the stock are overdone. As long as these factors are absent and the company produces a product or service which will endure well into the future, it makes for a safe and rational investment.

Your comments are certainly valued, but I would implore the typically prudent reader of this very insightful and informative blog to abscond from the hyper-negativity which underlies your thoughts and long-run perspectives.


Anonymous said...


It's less of a problem than you think, because the Chinese government simply orders the power companies to extend their grids to where the wind farms are.

Anonymous said...

I see your book schedule has changed slightly. Can you give us some details on where you'll be in each city?



Citizen AllenM said...

having lost serious money on takeovers that were litigated post fact and settled (c.f. Lone Star's actions in the LEND takeover that should have been prosecuted by the SEC!)
Enron, Bear Stearns, Lehman, etc.

The list goes on and on and on.
GM, Chrysler, most of American manufacturing.

A particularly good example would be Fannie and Freddie at this juncture- how are those last equity investors in the preferred doing right now? Um, $1.30 for FNM-PS that came out at $25!

As for Faux news, I don't watch it. I would make the comment that Deusenberg's car have held up their value over time, but the company perished long ago.

Ten years Phillip. Is that not long term enough for you? While I have made money over that time period, most have not, indeed there are now very few pension funds that are overfunded, and pension funds are going to face increasing withdrawels as the baby boom leaves the workforce. Another prop of the market gone.

By the way that 10 years represents half of my investing lifetime so far- so when you consider that I only have another 20 years of productive investment before retirement, that lost time is significant.

The absence of regulation has played a huge role in this loss of investment potential and trust- and to argue otherwise is to ignore what I have seen over the last two decades of financial degeneration.

Jeff Matthews said...

Albert: The Rochester date slipped owing to a scheduling issue on my part. I will post details when I get them. You may contact the Rochester CFA Chapter for details in the meantime. Thanks for asking.


Anonymous said...

FYI, the Rochester CFA society just sent out a blast email to its members inviting us to attend your talk. I look forward to seeing you there.


Anonymous said...

And yet little has changed. Wall Street continues to create packaged products, and when they collapse will once again, come out with new products. The investor doesnt make money, but the advisor or B-D does. They can walk away with more money in their pocket, the question is , "how do they look at themsevles in the mirror." The answer is simple. They have no soul

Jonathan said...

Jim Rogers said that the days of Wall Street investors driving Ferraris are over. The farmers will be the ones who drive porsches and ferraris.

I think Warrenn Buffett's right hand man, Carl Munger, had it correct when he said it was over.

Wall Street is not impervious to this. They are over as well!