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By Root 3544 0

2005, Zitting began to dip his toe into the subprime market, although he insisted on tight controls. Every subprime loan that was offered at a branch was underwritten again at headquarters. He still remembers the day in June 2005 he got a call from a wholesaler who bought his company’s loans. This wholesaler was “one of the largest organizations on the planet.” (Zitting, who is still in the business, won’t name the company, other than to say, “They’re not around anymore.”) They flew him to their headquarters because they wanted to talk to him. Around a conference table sat a dozen men in suits. “They said, ‘Dave, what’s going on? Your company sells us the lowest amount of approved loans of anyone we do business with,’” Zitting recalls. Because Zitting used this company’s software, they could see that their system was approving loans that Zitting was then rejecting at headquarters.

“Oh, it’s simple,” Zitting told them. “We check the credit at corporate, and not a lot make it through.”

“That’s why we flew you out,” one of the suits responded. “We don’t like that. You need to trust our system, and if you do, your volume will go up by leaps and bounds.”

“How do I know the borrower will pay?” Zitting asked.

“You don’t need to worry about that,” they responded.

The next day, Zitting says, he got the “trade tapes” for the subprime loans he was selling, which showed the prices various buyers were willing to pay. June had been a big month for him: Primary Residential had underwritten $9 million of subprime loans. Usually, the offer was close to what the buyer had been promising verbally, but this day, the offer was surprisingly low. So Zitting called up the guy he dealt with. “I said, ‘Something is screwed up in the secondary market,’” he recalls. “He said, ‘I’ve been fielding those calls all day.’” It was a moment when the subprime market was tightening up, almost as if the bubble was coming to an end. Although the moment didn’t last very long, it was enough for Zitting.

“Dave,” the man said. “I like you. Get out.”

“Excuse me?” Zitting replied. He thought to himself, “I just came from a meeting where people were telling me not to turn down loans.”

The man said, “If you ever say I said this, I’ll deny it, but if you want your company to be around, you will not fund another subprime loan. There is going to be a bloodbath.”

And so, Zitting says, he called an emergency board meeting and he shut down his tiny subprime business, even though his firm had just spent $400,000 buying some necessary software. “All my friends in the business were laughing all the way to the bank,” he says. Over the next two years, he watched his business pals make millions and buy private jets and mansions. He remembers thinking to himself, “What the crap?”

11

Goldman Envy

Goldman Sachs went public on May 4, 1999, ending a 130-year partnership and ushering in a new era, with shareholders to answer to, a board of directors to provide oversight, and a chief executive officer instead of a senior partner. Even at a time when Internet IPOs were all the rage, Goldman’s public offering stood out. The stock was priced at $53 a share, but it opened at $76—the opening was delayed an hour because the demand was so strong. By day’s end, it stood at $70 a share, giving it a market valuation of $33 billion. The $3.6 billion the company raised in the offering made it the second largest IPO ever. The average take for the 350 former and current partners who owned most of Goldman’s stock was $63.6 million. Senior partner-turned-CEO Jon Corzine held shares that were suddenly worth $305 million. Hank Paulson, who would become CEO within days of the IPO, had a stake worth $289 million. One Wall Street competitor told Business Week, “To have priced this much paper—as a nontechnology stock—is incredible.”

To an outsider, the Goldman IPO must have seemed like a no-brainer. But people connected to the firm knew that the act of going public had been the culmination of a long struggle that had left many scars. As early as 1986 Bob Rubin and Steve Friedman, who were