The Big Short_ Inside the Doomsday Machine - Michael Lewis [124]
The moment Salomon Brothers demonstrated the potential gains to be had from turning an investment bank into a public corporation and leveraging its balance sheet with exotic risks, the psychological foundations of Wall Street shifted, from trust to blind faith. No investment bank owned by its employees would have leveraged itself 35:1, or bought and held $50 billion in mezzanine CDOs. I doubt any partnership would have sought to game the rating agencies, or leapt into bed with loan sharks, or even allowed mezzanine CDOs to be sold to its customers. The short-term expected gain would not have justified the long-term expected loss.
No partnership, for that matter, would have hired me, or anyone remotely like me. Was there ever any correlation between an ability to get into, and out of, Princeton, and a talent for taking financial risk?
At the top of Charlie Ledley's list of concerns, after Cornwall Capital had laid its bets against subprime loans, was that the powers that be might step in at any time to prevent individual American subprime mortgage borrowers from failing. The powers that be never did that, of course. Instead they stepped in to prevent the failure of the big Wall Street firms that had contrived to bankrupt themselves by making a lot of dumb bets on subprime borrowers.
After Bear Stearns failed, the government encouraged J.P. Morgan to buy it by offering a knockdown price and guaranteeing Bear Stearns's shakiest assets. Bear Stearns bondholders were made whole and its stockholders lost most of their money. Then came the collapse of the government-sponsored entities, Fannie Mae and Freddie Mac, both promptly nationalized. Management was replaced, shareholders badly diluted, and creditors left intact but with some uncertainty. Next came Lehman Brothers, which was simply allowed to go bankrupt--whereupon things became even more complicated. At first, the Treasury and the Federal Reserve claimed they allowed Lehman to fail to send the signal that recklessly managed Wall Street firms did not all come with government guarantees; but then, when all hell broke loose, and the market froze, and people started saying that letting Lehman fail was a dumb thing to have done, they changed their story and claimed they lacked the legal authority to rescue Lehman. But then AIG failed a few days later, or tried to, before the Federal Reserve extended it a loan of $85 billion--soon increased to $180 billion--to cover the losses from its bets on subprime mortgage bonds. This time the Treasury charged a lot for the loans and took most of the equity. Washington Mutual followed, and was unceremoniously seized by the Treasury, wiping out both its creditors and its shareholders entirely. And then Wachovia failed, and the Treasury and FDIC encouraged Citigroup to buy it--again at a knockdown price and with a guarantee of the bad assets.
The people in a position to resolve the financial crisis were, of course, the very same people who had failed to foresee it: Treasury Secretary Henry Paulson, future Treasury Secretary Timothy Geithner, Fed Chairman Ben Bernanke, Goldman Sachs CEO Lloyd Blankfein, Morgan Stanley CEO John Mack, Citigroup CEO Vikram Pandit, and so on. A few Wall Street CEOs had been fired for their roles in the subprime mortgage catastrophe, but most remained in their jobs, and they, of all people, became important characters operating behind the closed doors, trying to figure out what to do next. With them were a handful of government officials--the same government officials who should have known a lot more about what Wall Street firms were doing, back when they were doing it. All shared a distinction: They had proven far less capable of grasping basic truths in the heart of the U.S. financial system than a one-eyed money manager with Asperger's syndrome.
By late September 2008 the nation's highest financial official, U.S. Treasury Secretary Henry Paulson, persuaded