Inside the Wall Street Whisper Campaign

As I watched last week’s PBS special about the financial crisis, “Inside the Meltdown,” one of the many things I was struck by was the lengths to which the producers went to establish the consensus of opinion regarding Wall Street’s inordinate sensitivity and susceptibility to rumor, gossip, and innuendo.  That such a vast, powerful, integral industry run by people presumed to be America’s “best and brightest” could allow decisions affecting the rise and fall of entire global conglomerates comprising the world’s economic foundation to be based on nothing more than “he said, she said” tales told out of school, or worse, possibly deliberately planted, malicious seeds of doubt, seems hard to fathom.  Yet, the possibility of such an eventuality was demonstrated in great detail in the documentary, and, with just a modicum of imagination, one might easily consider that a few well timed “revelations,” true or not, might well take down an entire financial empire, if not industry.  A little research might lead one to believe that such a thing is not only possible, it just might have happened.

In March of 2008, at the time Bear Stearns tanked and was  sold to JP Morgan Chase at 2 dollars a share, only to have the price bumped up to ten dollars a share after the government intervened, even that price was only considered to be approximately ten percent of its market value.  According to many sources, such intervention was rather suspect, for a lot of reasons, especially considering that the firm was not insolvent, though nobody would loan them money because of rumors that they were.  In other words, it was not a lack capital that undid the company, but a lack of confidence.  Vanity Fair encapsulated the cause of Bear Stearns’ death this way in the opening paragraph of its August ‘08 “autopsy:”

On Monday, March 10, the rumor started: Bear Stearns was having liquidity problems. In fact, the maverick investment bank had around $18 billion in cash reserves. But soon the speculation created its own reality, and the race was on to keep Bear’s crisis from ravaging Wall Street. With the blow-by-blow from insiders, Bryan Burrough follows the players-Bear’s stunned executives, trigger-happy reporters at CNBC, a nervous Fed, a shadowy group of short-sellers-in what some believe was the greatest financial scandal in history.

So, why did the corporation’s protestations to the contrary fall on industry-wide deaf ears?  The company had experienced difficulties the previous year with 2 of its subprime mortgage hedge funds,  High-Grade Structured Credit Strategies Fund, and High-Grade Structured Credit Strategies Enhanced Leverage Fund, and was facing lawsuits from Barclays and other angry investors, as a result.  Additionally, two of its former managers, Matthew Tannin and Ralph Cioffi, were eventually arrested in June of ‘08 for taking their own money out of the funds while propping them up with corporate bailout money and lying to investors about it.  But, that was after the company died and was consumed.

According to CNN Money, Fortune, CFO Sam Molinaro asserted that by February, ‘08, Stearns’ troubles were behind them:

Bear had survived one liquidity challenge, in the summer of 2007, when two of its hedge funds cratered after the subprime mortgage collapse. The firm had labored to repair its balance sheet and improve its financing. “Our capital position is strong,” said Bear’s CFO, Sam Molinaro, at an investors’ conference in February. “Balance-sheet liquidity has continued to improve throughout the course of the year. We spent an awful lot of time trying to reduce our higher-risk asset categories.”

So, could Bear Stearns have weathered the storm?  Then Treasury Secretary Henry Paulson’s old company didn’t think so.  On March 11, an email sent by Goldman Sach’s derivatives group to its hedge fund clients, saying they would no longer back them on Bear Stearns deals, was the nail in the company’s coffin.

While I am not prepared to suggest that there was a direct “cause and effect” relative to the currently discussed events, I do think it’s helpful to bear in mind that the financial “crisis” evolved against the backdrop of the presidential campaign.  Would Bear have “collapsed” had the results of Super Tuesday been different?  Who knows?  It is something to think about, though.

On March 28, the Chicago Tribune and Reuters, among others reported that rumors that the company was claiming were “totally unfounded,” were swirling about Lehman Brothers, too.  By August 25, on the day the Democratic National convention started, The Deal.com was reporting that the rumors had become a full-fledged storm amid suggestions of a hostile takeover by Korea Development Bank and intra-company planned coup against CEO Richard Fuld.

On September 15, Lehman Brothers filed for bankruptcy after the government, presumably weary of going to bat for “failing” Wall Street companies, like Bear, having bailed out Fannie Mae and Freddie Mac the week before, refused to intervene this time.  Interestingly, one of Lehman’s holdings, Neuberger Berman, headed by then President, George W. Bush’s second cousin, George Herbert Walker IV, was exempted from the bankruptcy filing:

Neuberger Berman LLC and Lehman Brothers Asset Management will continue to conduct business as usual and will not be subject to the bankruptcy case of the parent company, and its portfolio management, research and operating functions remain intact. In addition, fully paid securities of customers of Neuberger Berman are segregated from the assets of Lehman Brothers and aren’t subject to the claims of Lehman Brothers Holdings’ creditors, Lehman said.

According to Wikipedia, and corroborated here, on September 13, Turbo Tax Timmy Geithner, tax cheat (TTTG, tc,) then President of the New York Federal Reserve, now Secretary of the Treasury, convened a meeting about Lehman’s future that Lehman wasn’t invited to, after Lehman suffered substantial losses starting September 9:

An official from the Federal Reserve Bank of New York said participants include Treasury Secretary Henry Paulson, Timothy Geithner, president of the Federal Reserve Bank of New York, and Securities and Exchange Commission Chairman Christopher Cox. The New York Fed official asked not to be named due to the sensitivity of the talks.

Participants in today’s discussions at the offices of the New York Fed also include executives from Goldman Sachs, JPMorgan Chase, Morgan Stanley, Citigroup and Merrill Lynch. Representatives for Lehman Brothers were not present during the discussions.

Lehman claimed to be in negotiations for sale with Barclays and Bank of America, both of whom backed out.  Bank of America bought Merill Lynch on September 14, instead.  Barclays bought Lehman’s North American investment-banking and trading divisions along with its New York headquarters building, the next day, after Lehman was, for all intents and purposes, dead.

After the fact, in October, former CEO Richard Fuld said in prepared testimony before the House Committee on Oversight and Government Reform, that rumor-mongering was a big part of the problem that brought Lehman down. However, Fuld’s first contention was that the Federal Reserve’s refusal to allow Lehman an exemption to become a bank holding company, or commercial bank, was a body blow to the company.   On September 22, a week after Lehman filed bankruptcy, The Fed allowed Goldman Sachs and JP Morgan Chase, “the last two major investment banks” to switch.  According to the New York Times, this was a major big deal. The Washington Post reported at the time that the Fed had approved the conversion with “unusual haste.”

On September 27, the New York Times* reported that one of the members at the meeting that decided Lehman’s fate was Lloyd C. Blankfeld of Goldman Sachs, Henry Paulson’s old firm.  At that meeting, the state of A.I.G., Goldman Sach’s largest trading partner, was discussed.  As we know now, the government bailed out A.I.G., yet let Lehman die.  Naked Capitalism asserts that the Goldman Sachs/Paulson relationship might have been more than a factor.  In October, Bloomberg claimed that Lehman’s collapse was the fault of JP Morgan Chase, purchasers of Bear Stearns.

It bears remembering that in the midst of this Lehman Brothers/A.I.G./Fannie Mae/Freddie Mac financial upheaval, Barack Obama and John McCain were involved in a pitched battle for the presidency.  It is also worth noting that Obama was reported at the time to have been in daily contact with Henry Paulson, Treasury Secretary and former head of Goldman Sachs, one of Obama’s largest campaign donors.  FYI, Paulson was raised in Barrington, Illinois, outside of Chicago, was also head of Goldman’s Midwestern Division, headquartered there.  Worthy of equal or better note, Obama’s campaign economic team included William Daley, Mayor Richard Daley’s brother, and Midwest Chairman of JP Morgan Chase, as well as its CEO and New York Fed Board of Directors member, Jamie Dimon, who parlayed his turnaround of Bank One, after being dumped by his mentor, Sandy Weill of Citigroup, into the JP Morgan gig.  Oh, gosh, did I forget to mention Bank One is in Chicago?  My bad.  One other noteworthy Obama advisor at that time was Turbo Tax Timmy Geithner, tax cheat (TTTG, tc).  I have done a series of posts chronicling Jamie Dimon’s involvement in the Obamenon, I humbly advise readers to check them out, here, here, here, and here,to name just a few posts, not so much for my opinions, but for the links to information they provide.

By November, when Obama secured the presidency, Paulson’s TARP had distributed about half of the allotted funds to “troubled” banks, more than half of it to the country’s largest, including Goldman and JP Morgan.  According to reports, most of which came to light after Obama was inaugurated, the banksters were forced to accept the funds the Treasury was giving away, whether they wanted to or not, yet were later called on the carpet to explain how they spent them.  At the hearing in the House, they, like their counterparts in the beleaguered auto industry, were castigated for frivolous financial excess, even though, not all of them requested government funds.  As president, Obama had by that point, already railed against the ” shameful” bankers, and issued a “salary cap,” generally considered to be window dressing, since it only applied to those financial institutions receiving future government assistance from the second half of TARP, not the ones funded in the first bailout.  TTTG, tc was said to have prevailed against other Obama administration advisers, namely David Axelrod, in the president’s ultimate soft bailout stance.

The TARP program, or Paulson Plan, is not universally loved by bankers, some say it’s a sneaky attempt at nationalization, or in the words of Elizabeth Warren, Chair of the TARP Congressional Oversight Panel, “subsidization.”   The Brookings Institute called for more Congressional oversight in December, calling the plan “frayed” and “rushed into law.”  At any rate, the relatively ineffective, previous admonition is now a moot point, having been trumped by the new, stricter “salary cap” guidelines supposedly snuck into the president’s “stimulus plan” by Chris Dodd when nobody was looking.

The new rules require all banks recieving government assistence to be subject to the new, stricter salary cap rules.  That means, even banks forced into the bailout program are now under government supervision.  And, though Obama has made, “the discussion’s not over” noises, as Politico pointed out, it’s not credible that the administration was blindsided:

The tougher rules that passed in Congress were no last-minute surprise. Dodd talked them up in a February 5 press release, and in another released on Thursday, just hours before the bill was filed. The rules were debated in the Senate.

Okay, I know this is a long post, and to be honest, I’ve only scratched the surface of the mountains of information and questions that arise from it, here.  But, for a series of rumors to be the catalyst for events that end up in the “nationalization” and/or “subsidization” of the nation’s banks, at the expense of the global economy, is a mindboggling thing to consider, even if it’s ultimately untrue, or unprovable, if it is.

As I’ve said before, it’s reminiscent of a John Grisham novel, The Appeal, to be exact, so maybe my skepticism is born of an overactive imagination.  But all things considered, the more pertinent question is, what if it’s not?

*The New York Times printed a correction clarifying the dates and participants of 2 separate meetings re: Lehman/A.I.G.:

Because of an editing error, an article on Sunday about the financial problems of American International Group referred incorrectly to the timing and participants at meetings at the New York Federal Reserve between Saturday, Sept. 13, and Monday, Sept. 15. Although there were indeed meetings that weekend, there was also a separate meeting on Monday to discuss financial aid for A.I.G. Lloyd C. Blankfein, the chief executive of Goldman Sachs, was the only Wall Street chief executive who attended the Monday meeting, not the only chief executive who attended weekend meetings. Also, Henry M. Paulson Jr., the Treasury secretary, did not lead or attend the Monday meeting. (Both Mr. Blankfein and Mr. Paulson did attend the weekend meetings.)