As a girl Warren had known what debt meant. Now she began to see financial ruin through her father’s eyes rather than her mother’s—not as a social shame, but as a personal tragedy that was seldom the result of weak character. If anything, it was the result of weak regulations. The more the banks pushed Congress to get rid of the rules, the more people went broke. The numbers were exploding.
This work changed Warren’s life. She continued her research and writing for the next two decades (Harvard hired her in 1992). She was asked to advise a commission on federal bankruptcy law. She watched as the credit card companies and banks rolled over the consumer groups, pouring millions of dollars into Congress. In 2005, with the help of Democrats like Joe Biden and Chris Dodd and Hillary Clinton, Congress passed a law restricting the right to file for bankruptcy. It was a huge win for the business lobby. She learned something about the ways of Washington.
And the second story continued.
In 1998, Long-Term Capital Management collapsed and almost took the investment banks with it, showing that this increasingly autonomous financial world was perilously linked together around the globe. A few years later, Enron fell, revealing that the books were dirty. And the White House and Congress kept unraveling the fabric.
As wages stayed flat, debt kept more and more families afloat. As schools deteriorated, the struggle of parents to keep their children in the middle class came down to owning a house in the right school district. As the cost of those houses soared, parents worked harder than ever. (With her daughter, Warren wrote a book about this cycle of effort.) The banks realized that the middle class was the largest profit center of all. They started pulling at the threads supporting mortgages, credit cards, and consumer lending, and those, too, gave way. The regulators were spread out over seven agencies, moving in seven different directions, and none of them had the consumer as a main focus. It wasn’t hard for the banks to get these cops off the beat and start selling increasingly dangerous mortgages, credit cards, even car loans. The banks turned the promises American families made to pay them back into tranches of debt, which they packaged and repackaged as securities, and sold off to investors.
Three things happened:
Profits soared.
Bonuses soared higher.
Risk entered the stratosphere.
Then everything fell to earth, and the bankers turned back to the American people and said, “Whoa, there’s a real problem here, and you better bail us out or we’re all gonna die.” So the American people bailed them out.
It took Warren thirty years to be able to tell this story in five minutes on The Daily Show.
By then, the country was deep in crisis, and the crisis was the stuff of her life’s work. President Obama had met her in 2004, and he knew his way around “predatory lending.” He read an article that she published in 2007, at the start of the foreclosure crisis, proposing a new consumer financial protection agency. “It is impossible to buy a toaster that has a one-in-five chance of bursting into flames and burning down your house,” Warren began the article. “But it is possible to refinance an existing home with a mortgage that has the same one-in-five chance of putting the family out on the street—and the mortgage won’t even carry a disclosure of that fact to the homeowner.” Warren’s idea was for a new federal agency, independent of Congress, that would force the banks and credit card companies to disclose the risks and penalties in their financial products in clear terms. Obama liked the idea. Shortly after he was elected president, Warren was named the chair of the panel that oversaw the bailout fund.
So Warren went down to Washington. She was something unfamiliar there. First of all, she didn’t look like a Washington woman. She had her hair cut in a simple bob. She wore rimless glasses, not much makeup, and a teacher’s shapeless sweaters and turtlenecks hanging loose on her slight frame.
She didn’t sound like a creature of the capital, either. She was a professor of bankruptcy law, but her language was as plain as her coiffure. She made no attempt to conciliate or ingratiate. She actually seemed to hate the banks. She had arrived at radicalism, like many conservatives before her, by seeing the institutions that had sustained the old way of life collapse. Sometimes she was cutting or angry, and spoke of leaving “plenty of blood and teeth” on the floor. Even though she badly wanted to run the new consumer agency that she had invented, she did nothing to help her own political cause, subjecting the very people whose support she needed to tough questions about the taxpayers’ money. She didn’t play the game.
She seemed to have walked into the hearing room and taken her seat at the dais out of the past, from the era when the American prairie raised angry and eloquent champions of the common people, William Jennings Bryan and Robert LaFollette, George Norris and Hubert Humphrey. Her very presence made insiders uneasy because it reminded them of the cozy corruption that had become the normal way of doing business around Capitol Hill. And that was unforgivable.
The bankers could never forgive her. They saw her as “the Devil incarnate,” and they threw money all over Congress to keep her out of the consumer agency job. They called her naïve, but what they couldn’t forgive was how well she knew their game.
The Republicans could never forgive her. She didn’t back down or extend the usual courtesies, and so they hectored her, called her a liar to her face, and devoted themselves to killing the consumer agency almost as if they were pointing the knife at this woman who dared.
Some of the Democrats could never forgive her. The White House considered her “a pain in the ass.” Dodd suggested that her ego was the problem. Timothy Geithner, aggravated almost to shouting in an oversight hearing, couldn’t stand her.
And the president didn’t know what to do with a woman like this. They had Harvard Law School in common, and Warren talked about the same things Obama did—the hard-pressed middle class, the need for a fair playing field, the excesses of finance. But she did not talk about these things as one of the elites. She did not say, in the same breath, “It’s not personal, guys—let’s be reasonable and get a deal.” For that reason, some of Obama’s most passionate supporters were moving away from him, and toward her.
In the summer of 2011, the president emerged in the Rose Garden from an extended negotiation with himself and, to avoid an unwinnable fight, announced that he would nominate Warren’s deputy, Richard Cordray, to be chief of the new consumer agency. Then he bestowed an affectionate kiss on Warren’s cheek.
But she was already gone, back to Massachusetts, to run for a seat in the chamber where the voices of Fighting Bob and the Happy Warrior had once stirred the souls of ordinary men and women.
WALL STREET
Kevin Moore1 was born and raised in Manhattan, and he went to work at a top American bank right out of college, in 1998. That was the year Long-Term Capital Management went down, almost taking Wall Street with it, the year before Glass-Steagall was repealed. None of it meant much to Kevin then; it was years before he understood the significance. He was the last person hired for his training class—he only got the job because most of the competition out of college was flocking west to the gold rush in Silicon Valley—and he was voted most likely to be cut loose first.
But Kevin found out pretty quickly that banking wasn’t that hard. Wall Street used this purposefully opaque language to intimidate outsiders, but to succeed you just had to be somewhat comfortable with math or else with bullshit—the former went into trading, the latter into sales, and a quant who could lie made the big money. To reach the top you had to be a fucking dirtbag and knife fifty-seven other people—that was the only thing separating them from the next ten guys down—and Kevin had no interest in getting there. His goal was to work as little as possible and live the life he wanted, which meant lots of foreign travel, good food, music, design, and funky friends. He started at the bank’s offices in the financial district making eighty grand a year with an eight-thousand-dollar bonus. The most he earned in his first six years was maybe a quarter mil.
The crazy money came after that.
On the morning of September 11, 2001, Kevin was at the office talking about the day’s trades when he felt the ground shake. Suddenly all this paper started fluttering past the windows. From one side of the building there was a direct view of the flames billowing out of the North Tower. All the TV sets at the trading desk were on CNBC, which had a monopoly on the Street—CNN wasn’t robust enough on finance, the BBC was too soft and international, Reuters had no network, nobody took Fox seriously—and CNBC began showing video of the tower. They were saying it was a small plane, but Kevin could tell from looking out the window at the exit wounds that it wasn’t a fucking small plane. The flight path wasn’t normal—it didn’t look right at all.
He went back to work, and he was on the phone when U.S. treasuries suddenly spiked—London was buying them. He told the guy on the line, “I think we’re done here,” and tore up the ticket. Outside the window it looked like a ticker tape parade, burning shreds floating past. The fire was getting worse. The TVs on the trading desk had been switched to CNN, and suddenly on the live video a second plane flew by. Holy shit, another fucking plane! And … boom. It felt like an earthquake.
“Everybody stay calm,” said the head of the desk.
“I’m not staying calm,” Kevin said. “I’m getting the fuck out of here.” People were saying that the fire marshal was on his way, everyone should follow the fire drill procedure, but Kevin had already started toward the elevators. “Fuck you and your fire drill procedure,” he said. “You want to fire me, fire me. I’m done.” No one else moved. Brilliant traders making a couple of million a year, and they stood around waiting for directions from some buffoon who had no information. They mispriced the two planes.
On the street, crowds were coming up out of the subways without a clue. Everything looked normal. Kevin got on an uptown train headed toward his parents’ apartment, and he was probably the only person on board who knew what had just happened. His coworkers eventually got evacuated, and they were standing on the street when the South Tower came down and covered them in dust. In a crisis you realized that society operated without anyone knowing deep down what the hell was really going on.
The bank had to move its operations out of the city for a couple of weeks. Markets were a buy surprisingly quickly, and they were right—the attacks didn’t change that much. The airlines were fucked, but not necessarily that much worse than after four terrible plane crashes. The Fed kept cutting rates. Before long, a financial boom was on.
In 2004, Kevin left his safe and boring job to join the proprietary trading desk at a big European bank, with zero job security and huge potential—one of the ballsier and more correct decisions of his life. The European bank was about to get into collateralized debt obligations. The stock market determined the size of your apartment and whether you had a Viking stove—who was rich and who wasn’t. The bond market determined if shit worked or everyone was eating sand, who was alive and who wasn’t. Ever since the eighties, credit had been the biggest driver. All the things that would later go wrong, structured credit, default swaps, were good inventions; they mitigated risk or offered financial solutions to companies and investors. The problem was the execution. In the mid-2000s, when there was just too much money on the table, the moral compass moved.
The culture of the prop desk was extremely aggressive. The dopey bankers in Europe wanted to leverage their deposit base, so they turned control over to the cowboys in New York and London, who started driving around drinking and shooting out the windows. The prop desk was on a lower floor—after 9/11 the trading desks were moved down there to keep the moneymakers alive, so the guys earning millions stared out at the sandwich shop across the street while the HR chicks making forty grand sat in cubicles on the upper floors with amazing views of the river. On the prop desk there was no team, just a bunch of guys all playing with a piece of the bank’s balance sheet for a shot at enormous rewards. Kevin traded credit derivatives and corporate bonds—things like airline debt.
When you were on a prop desk and getting it right, there was nothing better on Wall Street, and for two years he got it right. He earned close to a million dollars a year, most of it his bonus—multiples of his previous pay—and he would have made more if he had cared more. He paid off the mortgage on his apartment in the East Village, lived off his salary, and saved the bonus. He didn’t own a car or a boat. He became a connoisseur of New York’s best restaurants and picked up the tab for his starving-artist friends. He didn’t need more.
It wasn’t just American mortgages that blew up the world—it was global credit. Kevin was part of that, and during the middle years of the decade he watched the credit bubble inflate. He wasn’t doing anything wrong—he had a great deal going on the prop desk and didn’t want to screw it up. He wasn’t like the guys saying “Just print the fucking CDO, we’ll get the bonuses this year and when it blows up in three years we won’t even be here.” But he knew that something was off kilter. He had a girlfriend in the European country where the bank was based, and on one visit he saw all these people using its ATM cards, and he thought, “This is a fucking regular bank. This isn’t Bear or Merrill.” For every dollar his girlfriend put in her savings account, Kevin was buying forty dollars’ worth of bonds. At one point in 2005, he was shown a huge trade by a salesperson from Deutsche Bank. Greg Lippmann, the head of Deutsche’s CDO desk, was short the housing market—he might have been the only bond trader at a big Wall Street firm who saw that everyone in Florida and Nevada was about to start defaulting on their mortgages—and he needed someone to take on some of his credit derivative risk. “Look, here’s the deal,” the salesperson said, “there’s all these fucking mortgages and they’re all full of shit.” But Kevin passed. It all made sense—he never understood why all those houses in places like Tampa were worth anything—but he didn’t know mortgages well enough to get in that deep and then time getting out right. And it turned out to be the right call, because he would have lost a ton of money at the start, and he left the prop desk well before the trade made Lippmann millions and Deutsche Bank $1.5 billion.
At the end of 2005, when Kevin was almost thirty, he followed his boss to the emerging markets desk, working between London and New York, trading corporate bonds and traveling to fun places like Buenos Aires and Kiev. He had platinum status on every airline and knew some foreign cities a lot better than the places in America where people filled their pickup trucks with subsidized gas and drove thirty miles to a job. In 2006 everything took off, people were buying any financial asset they could get. Prices in London were so retarded that Kevin would buy a month’s worth of socks at Century 21 in lower Manhattan, take them to London, and then throw them away after wearing them because it was more expensive to wash them in Mayfair than buy them in New York. It said that something was fucking wrong, that it couldn’t last, and at the end of the year he went short.
He thought the world was going to bust three or four times before it finally did. The credit market was such a confidence game that when it started to wobble, everyone got really scared, because they knew it was too big for them to get out. The first wobble came in February 2007, when there was a collateral dispute between Merrill Lynch and a Bear Stearns hedge fund. The market shat itself for a week—you didn’t want to be the last guy in the swimming pool with a bunch of toasters. Kevin thought it was the beginning of the end and didn’t cover his short, but the market came roaring back for five months—he got it completely wrong. If he’d gotten it right he’d be living in twenty thousand square feet.
In July, just after Kevin had sold a bunch of crappy Ukrainian bonds, a guy in his department came up to him and said, “You are the only person on this whole floor who is short. You are such a pussy.”
“There are more than three hundred people on this floor,” Kevin said. “Don’t you think more than one guy ought to be short? Go ahead, here’s the prices—you can have five million of everything you want up to a hundred million, I�
��ll sell you everything.” The guy said he’d get back to him, but Kevin never heard a thing—so who was the pussy?
That month brought the second wobble. The Bear Stearns hedge fund got another margin call, and this time the shit was so worthless that Bear had to step in and shut the fund down. Instead of eating the loss, the bank decided to assume the financing, which meant that Bear now had the virus and led directly to the third wobble, in March 2008, when Bear went down and Kevin’s desk was one of the first to pull the wire.
Kevin spent the summer of 2008 traveling all the time, some for work, some for fun—Argentina, China, Ukraine. In mid-September, he landed in a former Soviet republic at 4:00 a.m., turned on his BlackBerry, and saw on his Bloomberg application that Lehman had filed for bankruptcy. Bear had just been a mortgage bucket shop; Lehman was a completely different animal, a global player in derivatives, and Kevin’s bank had a ton of shit with them. It took him twenty-four hours to get back to London, then on to New York, where he had a good seat for the end of the world.
Within a few weeks he realized the scale of the destruction, the number of trades that had to be unwound, and it was a fascinating time to wake up and go in to work. It was the kind of seminal moment that few people got to experience. You found out what people were really like. The rank-and-file guys in the trenches next to him pretty much hung together, and his boss stayed loyal, but the ethical cream didn’t rise to the top. Because of the bank’s exposure to Lehman, someone from senior management came in one day looking for scapegoats and said, “Who the fuck did this?” Guys at the top were shoving one another out of the way to get in a lifeboat, all the while saying, “You’ll be fine. Stay right here and help that book out of its risk and we’ll have you with a fresh start next year.” Kevin wasn’t fooled: “Dude, I can feel the red dot on my forehead.” He was a rook and the game was all about what the queens and kings decided. By the end of the year half the people in trading were gone, with good severance pay, including Kevin.
The Unwinding Page 41
