People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public...
John Gutfreund did violence to the Wall Street social order—and got himself dubbed the King of Wall Street—when he turned Salomon Brothers from a private partnership into Wall Street’s first public corporation. He ignored the outrage of Salomon’s retired partners. (“I was disgusted by his materialism,” William Salomon, the son of the firm’s founder, who had made Gutfreund C.E.O. only after he’d promised never to sell the firm, had told me.)
He lifted a giant middle finger at the moral disapproval of his fellow Wall Street C.E.O.s. And he seized the day. He and the other partners not only made a quick killing; they transferred the ultimate financial risk from themselves to their shareholders. It didn’t, in the end, make a great deal of sense for the shareholders.
But it made fantastic sense for the investment bankers. From that moment, though, the Wall Street firm became a black box. The shareholders who financed the risks had no real understanding of what the risk takers were doing, and as the risk-taking grew ever more complex, their understanding diminished. The moment Salomon Brothers demonstrated the potential gains to be had by the investment bank as public corporation, the psychological foundations of Wall Street shifted from trust to blind faith.
No investment bank owned by its employees would have levered itself 35 to 1 or bought and held $50 billion in mezzanine C.D.O.s. I doubt any partnership would have sought to game the rating agencies or leap into bed with loan sharks or even allow mezzanine C.D.O.s to be sold to its customers. The hoped-for short-term gain would not have justified the long-term hit.
Now I asked Gutfreund about his biggest decision. “Yes,” he said. “They—the heads of the other Wall Street firms—all said what an awful thing it was to go public and how could you do such a thing. But when the temptation arose, they all gave in to it.” He agreed that the main effect of turning a partnership into a corporation was to transfer the financial risk to the shareholders. “When things go wrong, it’s their problem,” he said—and obviously not theirs alone. When a Wall Street investment bank screwed up badly enough, its risks became the problem of the U.S. government . “It’s laissez-faire until you get in deep shit,” he said, with a half chuckle. He was out of the game.
In what could set an important precedent, federal officials assured a big Japanese bank late Sunday that its planned investment in the embattled Wall Street giant Morgan Stanley would be protected, according to people involved in the talks...Paulson has found another formula that protects his cronies, their jobs and their stock positions, while funneling them money. Remember the days, oh so long ago, of Freddie Mac and Fannie Mae officers losing their jobs because they needed cash injections? Remember the days when these poorly managed companies' stock turned to dust when the government put in rescue money? Those days are gone. For Paulson's elite, they will show up this morning with their jobs intact, their stock positions intact (in fact, thanks to the government guaranty, a likely soaring Morgan Stanley stock). Somewhere, Dick Fuld, former Lehman CEO, is fuming.
The Treasury’s assurances amount to another extraordinary move by the government and could serve as a model for future deals. The tense, weekend talks were so critical to the financial markets that they drew in both the Treasury and the Japanese government...Mitsubishi and the Japanese government pressed the Treasury Department over the weekend to guarantee that if the United States were to inject money into Morgan Stanley at a later time — a step the Treasury has ruled out for now — the move would not wipe out Mitsubishi’s investment.
Bankers Trust, Barclays, Bear Stearns, Chase, Credit Suisse First Boston, Deutsche Bank, Lehman Brothers, Morgan Stanley, Credit Agricole, Banque Paribas, Salomon Smith Barney, Societe Generale, Merrill Lynch, Goldman Sachs, UBS and JPMorganOf this group, Bear Stearns is gone, Lehman will be buried on Sunday and Merrill Lynch is on the edge. The only other independent investment banks still standing are Goldman Sacks and Morgan Stanley.
On June 19, 2008 Ralph Cioffi and Matthew Tannin, formerly of Bear Stearns, were led out of their homes at 5 AM to be indicted for conspiracy and fraud regarding their management of two Bear Stearns Asset Management hedge funds. Later that day, in handcuffs, they were perp walked in front of just about every news service that had a camera. They face up to twenty years in prison. At the time Mark Mershon, head of the New York FBI office stated to reporters;
"This is not about mismanagement of a hedge fund. It is about premeditated lies to investors and lenders"
Hmm, "premeditated lies to investors and lenders". It's a good thing that this has been an isolated incident on Wall Street over the last two years, or has it?
Over the last few days, Merrill Lynch, Citigroup and UBS have, under pressure from both the New York and Massachusetts Attorney Generals offices, bought back billions of Auction Rate Securities ("ARS"), that they sold to retail investors, paid hundreds of millions in fines, and "neither admitted nor denied allegations of wrongdoing." Morgan Stanley yesterday, notified the NY AG office that they were willing to buy back $4.5 billion of ARS that they sold to retail investors. The NY AG told them essentially to "go get their shine-box, not enough." Ask yourself these two questions with regard to the entire ARS business and the firms that ran them;
Did these firms tell "premeditated lies" to investors?
Did these firms tell "premeditated lies" to issuers (substituting for "lenders")?
The answer to both these questions is a resounding yes. The NY and Massachusetts AG have dozens and dozens of emails from senior people at these firms directing their sales forces to move these securities to retail investors and represent them as cash-like with a little incremental yield. Meanwhile they knew beyond a shadow of a doubt that the liquidity of these securities was nil. They knew this because they were the ones conducting sham auctions for years to give the appearance of liquidity. The fact was, the banks running the auctions were routinely taking down 20-30% of the "auctions. Therefore, as their balance sheets crumbled, these banks knew with absolute certainty that they were going to cease "providing liquidity" resulting in a the end of the "auction process". The firms used their retail sales force, often without providing the sales force with the proper information which would have been something like this. "You are selling roach motels gentlemen. You can get in, but you can't get out! Now lets get out there and MOOOOVE these pigs!" The banks, after sticking retail with these bonds, left them twisting in the wind for six months, unable to get their money back. Additionally, in at least one case, the head of fixed income sales was SELLING HIS ARS while exhorting his sales force to move the paper retail.
With regard to the question "did these firms lie to issuers?" Hell yes! The banks approach to "Municipal Finance" was to use it as a shill to get "less than financially astute", state and local government officials into a fun house that picked them up by their feet, turned them upside-down, and shook every last nickle out of them. The ARS programs were like any other "boiler room" operation. They gave the false appearance of universal liquidity when it was not the case. I'm going to give the banks credit that none of them thought things could get so bad that they would be on the hook for the entire $300 billion market, but supporting years of auctions and giving the appearance that they were fail-proof, misled the issuers. The banks collected hundreds of millions of fees on these auctions and moved issuing municipalities into interest rate swaps that were mismarked by hundreds of millions (like the $120 million swap "fees" that Jefferson County Alabama paid). The banks created a nightmare basis trade where municipalities were paying ARS rates and receiving LIBOR. That didn't work out too well when the ARS rate went to 20% and LIBOR went to 2.75%.
My question is this; Why are these firms able to pay a fine, repurchase the ARS from retail, admit no wrong doing, and close the issue without a criminal investigation? The damage these banks caused to the municipal finances of this country were catastrophic. Surely at a minimum, this is equal to what Cioffi and Tannin did with regard to the BSAM fund investors. Why do they go to jail and no one from any of the offending banks get bracelets? Fraud is fraud right? Shouldn't everyone get treated equally? I'm not even going to get into to John Thain and his little $5.7 billion "oops" on his last 10Q. Talk about telling premeditated lies to investors and lenders!
Morgan Stanley ... told several thousand clients this week that they won't be allowed to withdraw money on their home- equity credit lines ...
``Consistent with the terms of the HELOC, or home-equity line of credit, Morgan Stanley periodically reassesses client property values and risk profiles,'' said Christine Pollak, a Morgan Stanley spokeswoman in New York. ``A segment of clients was recently notified of a change in the status of their home equity line of credit or HELOC due to a change in the value of their property and/or their credit profile.''
