Fixers

by Michael M. Thomas

  Let me make clear how I personally think about money. Think about it morally, if you will. It’s a tricky part of my business and frequently requires fairly agile rhetorical footwork.

  Frankly, I keep my thoughts on the subject of wealth and its concomitants to myself. Perhaps that’s a bit cowardly, but I have a living to make. We live in an age that worships money and has forced it into every crack and cranny of existence. Nothing is examined, nothing is evaluated, nothing is thought about without attention being devoted to its pecuniary aspects. Professionally, I respect money; I appreciate what it can make happen; 99 percent of my work at one stage or another involves wealthy people, and I have to take into account their attitudes toward their money, which tend on the whole to be pretty worshipful and not always attractive.

  But I will never become rich, because I lack that love of money that is essential to attaining or maintaining great wealth. In the chapels of my soul, I have built no altars to Mammon. When asked by someone I trust with my confidences whether I wish I were as rich as so-and-so, I usually answer, “Not really—because then I would have to be so-and-so,” and leave it at that.

  I can say fairly that my business is a success. Between family offices, wealth managers, sovereign funds, humongous overseas investors, and nonfinancial corporations, there’s more business out there than was ever dreamt of in my initial philosophy. Take my two Russian clients, who until Putin came in had a net worth of zero and are now worth billions. People tend to be snotty about them, but you have to put yourself in their brand-new bespoke driving shoes. How would you handle it if on Tuesday you were scrabbling for crusts in the dumpsters of Moscow and on Thursday, thanks to your friend Vladimir, you controlled all the phosphate in Russia and were booking a suite at the Ritz in Paris and leafing through books of yacht designs and Gulfstream configurations. The adjustment must be traumatic, like PTSD.

  My clients don’t complain about my fees: a monthly retainer cancelable on ninety days’ notice, plus an hourly charge of $300 an hour for me, less than that for my senior associates. I employ roughly a dozen people. I give them their heads, pretty much, and pay them decently, usually with a nice bonus. School and college taught me to be a team player, with morale and leadership the captain’s responsibility.

  I do well enough. This year on the basis of projects in hand and my existing client base I may bring down a half-million dollars-plus to the annual bottom line after paying myself $450K for personal living and taxes. That’s plenty for me. “Sniff at” money on Wall Street, I know, but very good pay for work I enjoy and that gratifies me, that allows me to see marvelous things and meet interesting people. If I do say so myself, the key to my success has been skillful management of the social aspects of the business: I’ll play the extra man when I absolutely have to, and I’m not averse to the odd cruise in the Baltic or Mediterranean on a client’s yacht, but I don’t overdo it. My female associates are extremely attractive, but I keep my pen out of the company inkwell. I’ve had a couple of clients and clients’ wives make passes at me that would have to be classified as more than tentative; usually these can be dealt with without becoming deal-breakers, but when it’s been clear that’s not the case, the deal has been broken. Oh, yes, one other thing: I don’t stage or attend parties in stores.

  Which doesn’t mean my work doesn’t have its social drawbacks. I have to go to more charity benefits and awards ceremonies than any right-minded person totally in control of his or her professional destiny would put up with. Friends aware of this used to ask, “How can you—how can these people—suffer each other’s company night after night after night? Always the same faces in the Times Styles section?” You have to understand about the rich, especially those with newer money: it’s only in the company of people like themselves that they feel secure.

  All in all, my life is pretty much my own, which is a pretty high standard for a business like mine. I was brought up to know who I am and where I came from and what the good life properly lived looks like, mostly if not entirely thanks to my old man, so I have no need for the trappings of self-validation that so many of my clients crave. My household overhead is limited to myself and a twice-weekly housekeeper; if I entertain, I bring in a caterer.

  If I ever find Ms. or Miss Right, that may require some upward budgetary adjustment, but no luck so far—and by now I’m so habituated to living alone, with every element just so, it may be too late. Still, you never know, do you?

  But enough about Chauncey. Let’s get back to Mankoff. You need to know more about him.

  After the CIA, he hit the ground running at STST and never looked back, a star from day one. Imagine Mozart being recruited to the Juilliard faculty to teach composition and you’ll get the idea. Within a month of starting at STST he’d found his true calling: risk management, which seemed closest to the kind of work he’d starred in at Langley. Within six weeks, he’d persuaded the senior partners to let him set up an independent risk evaluation department to ensure that STST avoided a repeat of 1987, when its huge bet on something called “portfolio insurance” blew up.

  His breakout year was 1998, when the foreign-exchange trading desk at STST ignored his red flags and lost $250 million in the collapse of Long-Term Capital Management. Even so, if it hadn’t been for Mankoff and his finger-in-the-wind risk calculations, the firm’s loss could have run into the billions, and he was delegated to represent the firm at the LTCM bailout negotiations.

  The reports that came back of the imagination and authority with which he handled himself only added to the glow. In 1999, when it was clear that the capital the firm needed could no longer be supplied by the partners’ personal fortunes, Mankoff did the planning that took STST public in the year 2000. Two years after that, following the 2001 dot-com bust when, largely thanks to him, STST missed the worst of the Street-gutting calamities like Enron, WorldCom, and Global Crossing, he became head boy. He was only fifty-five at the time, the youngest person ever to run STST.

  LTCM was merely the most glaring among several theory-based busts that Mankoff would spot before they happened. One reason that Mankoff had quit the CIA was that the agency was shifting from operations to analysis, which is another way of saying from practice to theory, from what they call “humint,” as in “human intelligence”—spies in dark corners whispering secrets observed or gleaned firsthand—to serried ranks of MBAs in cubicles staring at computer screens with half their minds fixed on tonight’s blind date and where to eat in Georgetown. The same was happening on Wall Street, as it turned out, with the ascendancy of the “quants,” or quantitative analysts, and computer-driven mathematical formulas taking over from human judgment based on instinct, common sense, and experience with occasional lashings of fair dealing.

  As Mankoff is fond of pointing out, the mathematical fun and games that the Street’s quants revel in—these are people who show up at industry get-togethers wearing T-shirts that say “Algorithm Terrorist”—tend to be true and accurate in proportion to their initial utility. In other words, to the early bird fall whatever worms there may be. But then, once everyone starts using a certain formula, it gets absorbed into the problem it was devised to solve or elucidate and becomes a self-referential, back-looping integral part of the phenomenon it’s supposed to measure externally and objectively. Synecdoche turned inside out, you might call it. At least, that’s what I think happens. I think it’s what George Soros means by “reflexivity.”

  Under Mankoff’s leadership, STST has moved from strength to strength. The price of the stock has more than tripled—from around $60 when he took over to close to $200 at yesterday’s close. Three years from now, in 2010, people are saying the stock could sell at $500. Why not? To the world, for better or worse, STST represents Capitalism Triumphant.

  Now let’s move to what transpired at Three Guys this morning.

  I got to the restaurant precisely on time. With me, punctuality rules. Mankoff was already in his usual booth, tucked off to the left behind the front
door, with an egg-white omelet, sausage, and toast teed up in front of him. How he stays as skinny as he does is a mystery. I slid in across from him and ordered a macchiato (Three Guys is now that kind of coffee shop), grapefruit juice, and a dry English muffin, then looked at him expectantly.

  “Here’s the story,” he said. “Basically, I’m worried about the political and financial situation. Something needs to be done.”

  “And that something includes me, right?”

  He nodded.

  “So what do you have in mind?”

  “I want you to fix next year’s presidential election for me,” he said matter-of-factly.

  After I picked myself off the floor, he spelled out his game plan. He thinks there’s going to be a huge implosion in the financial markets sometime before the election. The portents are already there. Add this to the mess in Iraq, and the GOP’s dead. Whoever the Democratic candidate is—and at this point it looks like Hillary Clinton—will go after Wall Street the way FDR did in 1932: with a lynch-mob agenda calling for both prosecution and reform. There will be a hue and cry for a pushback of the deregulation that has made the past decade the fattest in the Street’s history. “Reregulation” will be the rallying cry.

  Mankoff has devised a scheme to sabotage any such effort. He wants me to execute it, using tradecraft I acquired during my time at the CIA. I said I’d need to think it over.

  I’ll explain all this in further detail, but right now I have to go to an old friend’s birthday dance at the Stuyvesant Club and when I get home I’m sure I won’t be in any shape or disposition to do the chapter-and-verse bit about Mankoff’s plan.

  Let me just close by saying that as I listened to Mankoff elucidate the whys and wherefores of his grand design I was reminded of a famous episode in the annals of Wall Street, starring J. Pierpont Morgan—who is to Wall Street what Babe Ruth is to Cooperstown—and Theodore Roosevelt, one of our most admired presidents. It occurred in 1902, when Morgan got crossways with Washington on some dubious financing scheme. He sent the following message to President Theodore Roosevelt: “If we have done anything wrong, send your man to my man and they will fix it up.”

  I am to be Mankoff’s “man.” More anon.

  FEBRUARY 18, 2007

  OK: last night was a riotous evening, as expected, but I couldn’t tear my mind away from my meeting with Mankoff. Who could?

  Back to Three Guys.

  According to Mankoff, the admission last week by the world’s third-largest bank that they’re taking a big write-down on their mortgage assets signals the beginning of real trouble. Mankoff reads this as the first of a series of discrete blips that are going to compound into something the size of that giant stone ball that chases Harrison Ford through the jungle in the first Indiana Jones movie. Unlike in the film, however, the ball’s going to catch up and Wall Street is going to get crushed.

  To summarize Mankoff’s take in a very few words: a number of factors are in the process of coalescing into a perfect storm. These include Greenspan’s (and now Bernanke’s) free-money policies at the Federal Reserve, which are straight-out pandering to Wall Street; a decline in the housing market bordering on collapse; and the utter corruption of Washington that has followed the massive rollback of regulation that took place under Clinton. Wall Street has been allowed to totally blow through any commonsensical—forget prudent—risk parameters. The big banks have been allowed to become too enormous and complicated to manage. To summarize: Mankoff foresees a huge chain-reaction shit storm breaking over the collective head of Wall Street and the other financial markets, spilling over into the general economy of making, doing, and serving. He’s predicting every kind of computer-driven financial calamity you can think of: credit freeze, bank insolvencies, a foreclosure pandemic, a liquidity crisis, accounting scandals, balance sheet implosions, a few big firms driven to the wall, total breakdown of trust between institutions, all adding up to something on the order of the 1929 bust—only bigger and more violent thanks to the bubble-inflating technology the Street depends on.

  As Mankoff tells it, what’s going to send the markets crashing is basically theme-and-variations on the cardinal sin of finance: borrowing short to lend long with the collateral being recirculated so that sometimes you have the same billion-dollar stack of Treasuries pledged to secure four or five entirely discrete billion-dollar loans involving different sets of lenders and borrowers. This is what Mankoff calls “chain-letter collateralization,” where the same security is pledged serially: A borrows from B, securing the loan with derivative X, a third-party contract to make B whole if A goes belly-up; B turns around and uses X to collateralize a loan from C, which B then uses to fund its loan to A—and so on and so on, back and forth and in circles.

  The Great Deregulation of the Clinton years, the repeal of Glass-Steagall, the untethering of derivatives, etc., etc., was literally like yanking open the lid of Pandora’s box. Every malign and mischievous imp of finance burst free and began to work its evil spells. Access to unlimited short-term credit, thanks to the Fed flooding the market with crisp new greenbacks, gave essentially second-rate firms like Bear Stearns and Lehman Brothers the wherewithal to compete against the big banks, which up to then had huge reserves of federally insured deposits to finance their lending.

  Specifically, according to Mankoff, the credit markets have put themselves terribly at risk. The world economy runs on two principal fuels: fossil (as in gas/oil/coal) and credit. Shut either down and you’re looking at economic catastrophe, and it can happen virtually overnight. Wall Street got a taste of how that feels back in the seventies, when OPEC tightened the oil flow. The old boys at San Calisto still shake their heads at how bad it got in 1973 and ’74.

  And not only Wall Street. The American Way was predicated on a high level of cheap creature comforts. The privations of World War II were in the distant past, fodder for the reminiscences of old men. The word “rationing,” barely uttered for three decades, was once again a common usage, as lines began to form at 4:00 a.m. at gas pumps. Everything suddenly seemed inside out. The country went on year-round daylight saving time. That the same thing might happen now to the worldwide flow of money and credit seems unthinkable. But the way Mankoff spells it out, it seems not only possible, but likely.

  There’s other stuff that makes Mankoff’s gloomy picture even more dire. He thinks the Street’s going to drown in the viscous alphabet soup of “securitizations”—pools of credit instruments known as MBS, CDS, CDO, CLO, and whatever—that has been brewed in the past ten years. Deals have gotten so complicated that the parties to them often don’t have a clear picture of what they’ve bought or sold, especially when you add derivatives to the volatile mix. Mankoff thinks derivatives—options that are often generically called “swaps,” even though many are custom-tailored to fit the components of a trade—will make everything worse. He’s not alone: the multibillionaire Merlin Gerrett, easily America’s best-beloved capitalist, calls derivatives the financial equivalent of thermonuclear bombs.

  So what are derivatives—or “swaps,” as they’re often generically called? All that you and I need to know, Gentle Reader, is that they’re contracts between two or more “counterparties” that are supposed to protect price and value on one side, with the other side assuming the risk for a nice fee. Say I take a position of $50 million ABC bonds. My next step is to find someone who’ll make me whole on that $50 million should prices decline. I want to limit my risk, so I need to seek out someone who, for a price, will insure me against loss. We do a deal, then what usually happens next nowadays is that the person from whom I bought protection goes and buys protection on the protection he sold me. And so on and so on, round and around and up and down, until you’re looking at a pyramid of offsets and make-wholes balanced precariously upside down on its tip. You can imagine what happens if my original $50 million position craters. Crash!

  From what I’ve heard, a key element of these swaps deals is that they’re designed to make it
difficult to figure out exactly who’s obligated to whom, under what circumstances, and for how much. Mankoff says a ton of swaps-backed loans have been made to cities, towns, and educational establishments with the assurance that they’re buying safety when, depending on the way interest rates move, they could be taking on a lethal degree of risk. These borrowers have no idea of what their potential liability might be if the markets experience a serious sell-off and chain letter turns into chain reaction.

  The big problem, according to Mankoff, is that it used to be that the collateral supporting the overnight loans that the banks use to finance their term lending and other operations was good as gold: U.S. Treasury bills and notes, sometimes gold itself. Lenders could cash in that collateral instantly if they had to. But in the frenzy of the last few years, these overnight loans have come to be supported by collateral that incorporates many more degrees of risk than Treasuries. Mortgage-backed paper, auto loans, credit card receivables, stuff like that. Security a lender can’t “realize on” by snapping his fingers. Stuff that could lose 10 percent, 20 percent of its value overnight, maybe more, maybe to the point where no one will bid for it or lend against it.

  He let me digest that, then added, “And that doesn’t cover the worst part.”

  “Which is?”

  “God help us if this credit crisis goes retail.”

  “What do you mean, ‘retail’?”

  “All the debt individuals have taken on to bridge the gap between the money they make and the cost of what they think they’re entitled to: more luxurious houses in better neighborhoods, flashier cars, Ivy League educations for the kids, bigger flat screens, vacations in the south of France. How much consumer debt do you think is out there?”