The Weekend That Changed Wall Street
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This is the bottom line: Capitalism—for all its flaws—is the system that protects our individual rights. The alternatives—communism, socialism, monarchy—have all proven less effective, and in some cases have led to a systemic breakdown manifested in poverty, terror, and the deaths of millions. Consider those societies that don’t embrace capitalism—and freedom. So many of them do not advance. Even quasi-capitalist systems, such as those of China and Russia, have proved effective in raising up the downtrodden and chronically poor. On the other hand, North Korea and Cuba are examples of nations whose anticapitalist systems have led to decades of underdevelopment and misery. Capitalism, and the freedom it implies, has the power to give people hope and help them rise above restrictive regimes. For my part, I choose to be on the side of freedom.
Each afternoon, when I alight from my car on Broad Street in front of the New York Stock Exchange, I pause for a moment to look up. I have been doing this for sixteen years; it’s an automatic response. There is majesty to the edifice, and its architectural grace is breathtaking. A massive American flag stretches across its portals, and above six sturdy Corinthian pillars is a marble sculpture by the artist John Quincy Adams Ward, titled Integrity Protecting the Works of Man. I have often reflected that the financial crisis happened because we entered a period when the system itself lacked integrity. The stratospheric rise of wealth, the high-risk leveraging, the absence of a stabilizing philosophy, brought even the mightiest firms to their knees. Now, as we struggle to recover, we must restore the fundamental principles. We must, once again, allow integrity to guide and protect us.
EPILOGUE
It has been almost three years since the weekend of September 15, 2008, but to me, it feels like it has been a lot longer. Three years after the worst beating the financial markets and global economy have sustained in decades, money is moving once again into all sorts of asset classes, liquidity is back in most markets, and things feel much better. On its face, it might feel as though Wall Street is back to business as usual. The Dow has made an amazing recovery since the dark days of September 2008. The big banks still have some problems, but there is no longer fear of massive failure. The AIG scare is over, and even the left-for-dead auto companies are experiencing some renewal. The ranks of big Wall Street firms have thinned, and there are far fewer hedge funds, but things have pretty much stabilized. Some people are still enjoying record paydays. In fact, it might be easy to forget how tough it felt when the market was down an amazing 50 percent from its 2008 highs to the lows reached on March 9, 2009.
So, America, has Wall Street really changed?
I believe the answer is yes. First, massive capital raises followed the government support and stimulus package, making the financial industry better capitalized and financially stronger. Capital levels are now solid at many banks and credit is improving. When the Treasury conducted its so-called stress tests in February of 2009, it raised the minimum Tier 1 common capital requirement from 2 percent to 4 percent, then raised it again to 5 percent and imposed a more stringent test. Banks now must demonstrate they can maintain a capital level of 5 percent throughout a highly stressed environment. The new international Basel 3 requirements may effectively raise that number to 10 percent for global banks. The government established a financial stability oversight council with the mandate of monitoring the financial system in its entirety. Vikram Pandit, CEO of Citigroup, called 2010 a turnaround year for the bank. It posted a profit once again and the government sold the rest of the more than 30 percent stake it acquired during the crisis. The government still owns the majority of AIG, but CEO Bob Benmosche has announced a plan to pay the money back, including a re-IPO in May of 2011. Many banks have begun raising dividends once again.
Liquidity and growth in markets outside of the United States have led to rapid global consolidation. Of course, in some cases, the consolidation was forced. After all, if someone had told me three years ago that in 2008 Lehman Brothers would declare bankruptcy, I would have thought that extraordinary enough. And yet to think about the number of failed or crippled firms that were either acquired, taken over by the government, bankrupt, or severely squeezed is extraordinary and a reminder of just how challenging this moment truly was. In no particular order: Bear Stearns, Lehman Brothers, Fannie Mae, Freddie Mac, AIG, Washington Mutual, Merrill Lynch, Countrywide Financial, Citigroup, GM, Chrysler, GMAC, and Northern Rock, among many others. One of the things that made this crisis so deep was the fact that Lehman’s failure came after the failure of Bear Stearns and Fannie Mae and Freddie Mac. And of course just days before the government takeover of AIG. It was the cumulative collapse of all of these institutions, many of which were overleveraged, that was so damaging.
These were among the most extraordinary and difficult years for the country and its financial system. As Jamie Dimon wrote in JPMorgan’s annual letter to shareholders in 2010, “We have endured a once-in-a-generation economic, political, and social storm, the impact of which will continue to be felt for years or even decades to come.” This moment in time was so dramatic, filmmakers have tried to bring the story to life in many movies. I have even played myself in three of them!
Three years later we are still feeling the impact of this epic period. More than 8 million jobs were lost in the 2008 recession. Today the unemployment rate remains at stubbornly high levels and wages have not moved much. The Federal Reserve was still at work stimulating the economy and financial markets in 2011. It grew its balance sheet to a record size, first during the crisis then after, as the central bank bought bonds as part of its $600 billion second quantitative easing program, dubbed QE2, with the goal of stimulating investments and economic activity. The Fed’s balance sheet—a broad gauge of Fed lending to the financial system—expanded to $2.670 trillion in April 2011. The Fed’s holding of U.S. government securities grew to $1.402 trillion. The Fed’s bond-buying program helped confidence and the markets trade higher, even in the face of a slow economy, although many critics have complained so much easy money will lead to a new set of problems, including inflation.
The most persistent and toughest part of the recovery has been housing. Because of the mistakes in writing mortgages, the pipeline of foreclosures is steep. This part of the business remains weak throughout the economy. The banks will be fighting lawsuits for many years, from individuals, municipalities, and anyone else impacted by the bankruptcies and failed mortgages. Certainly one huge—and controversial—change is the regulatory environment. It has gotten tighter, and there is a parade of new enforcers on the scene, like Elizabeth Warren, who heads the new consumer protection agency. And at the Securities & Exchange Commission, chairman Mary Schapiro is putting more teeth into a regulator tarnished by scandals like the Bernie Madoff affair. The Dodd-Frank legislation created several additional regulators and set forth more than four hundred rules and regulations that need to be implemented by various regulatory bodies. Additional rules are coming from European regulators on liquidity and capital requirements emanating from Basel 3. Not that more rules and overseers are necessarily effective, as we have learned from the hundreds of overseers of AIG during the boom years. But even as Dodd-Frank is the freshly minted law of the land, many of the regulations are still being written and argued. We have not yet seen the effects of the new consumer protection agency nor has the “resolution authority,” which essentially provides a bankruptcy process for big banks and is intended to isolate troubled institutions from impacting the rest of the economy, been tested. Many would say that today, we still face the myth of “too big to fail” after massive consolidations of financial giants. Among the consolidations: JPMorgan acquired Bear Stearns and Washington Mutual; Bank of America owns Merrill Lynch and Countrywide; Wells Fargo owns Wachovia; Morgan Stanley is a third owned by Asian companies; Morgan Stanley and Smith Barney combined their brokerage force; Citigroup has sold assets and is looking at emerging markets to grow.
The banks are still debating parts of Dodd-Frank, such as the Durb
in Amendment capping debit card fees, derivatives legislation, and the international capital requirements. The resolution of some of these items will dictate how much consumers pay for general banking. Banks say the Durbin Amendment will cut $14 billion in revenue. Jamie Dimon told me once again in January 2011 that such reforms might actually end up being more expensive for customers as banks look for alternative ways to cover their expenses. “There is a cost of doing business,” he said. “One of the ways you got paid was by charging on debit…. So banks will have to figure out other ways to charge for their product. I don’t think the consumer is going to benefit at all from this change.” He suggested that the Durbin Amendment could force minimum balances to go up, force cuts in reward programs, and maybe even limit the use of debit cards. There is also concern about the implications of derivatives legislation and its impact on market liquidity. Even as the economy stabilizes, the public remains skeptical of the investment community.
Many Americans still believe the game is rigged, and they want more acknowledgment from the banks that it was the hardworking taxpayers that came to their rescue. People are still upset by the bailouts. I have been surprised by how many people stop me—as happened at a recent dinner—to say things like, “Make sure you ask Vikram Pandit to thank us for bailing him out.” At a recent conference, even a highly paid entertainment executive complained to me that Jamie Dimon had not shown enough humility over the mistakes his bank and others made during the boom times. Dimon was once the wonder boy of the crisis, and was still considered a winner in the upset, but he too finds himself at times on the hot seat, answering questions about JPMorgan Chase’s connection to Bernie Madoff, and why the bank squeezed competitors during their toughest times in 2008.
Part of the negative public mood stems from the fact that three years after the financial disaster, there have been very few indictments, and even fewer convictions, over events that nearly sent the nation into another Great Depression. Added to that are some 8.4 million jobs lost in the recession, many of which have yet to come back. The Financial Crisis Inquiry Commission, headed by Philip Angelides, charged with investigating what went wrong in 2008, released its report in early 2011, and it was highly critical of both the banks and the government overseers. Ominously, Angelides told me this March that without government help, thirteen out of fourteen financial institutions would have gone broke. Angelides has been among those calling for further investigations and even criminal charges, but so far there have been no serious consequences for the people involved.
It does not help the public perception of Wall Street and business to see insider trading trials, such as Raj Rajaratnam’s of Galleon Group, who was convicted of fraud in 2011, where prosecutors have pounded away at what they called a “network of greed and corruption.” Likewise, confidence is tested when a lieutenant of one of the nation’s most revered business leaders, Warren Buffett, is forced to resign for buying stock in a company Buffett’s Berkshire Hathaway was to acquire weeks later. Scenarios like these have empowered a heavier hand of government as well. For example, using FBI wiretaps in the Galleon trial, similar to mob trials, prosecutors probed Rajaratnam’s connections, which reached into some of the very highest echelons of corporate America and the financial community. These examples stoke the deeply held fears on Main Street that Wall Street can’t be trusted. They also feed the political rhetoric that makes the Street a whipping post for all of America’s troubles. For example, at Goldman, despite the best efforts of Lloyd Blankfein, the fear and loathing just won’t stop. Even Jeff Immelt, the head of GE, who was appointed to President Obama’s Jobs Council, has defended GE over its taxes in the wake of a New York Times article that questioned whether the company had skirted paying them in 2010. The familiar rhetoric of class warfare is still simmering and will undoubtedly come to a full boil before next year’s presidential election.
Ken Lewis, who for a brief moment in the financial crisis looked like a hero when his Bank of America bought Merrill Lynch, is, of course, history. The new Bank of America chief executive, Brian Moynihan, is still struggling to fix a mortgage business crippled by foreclosures. The robo signings at Countrywide and other lenders continue to stifle earnings and economic growth. Moynihan told me in March 2011 that in spite of encouraging signs in the bank’s other business, the housing crisis lingers. “Housing may go up or down, but it’s had a big fall off, and now we have to work our way through it,” he said. “We have a bubble of foreclosures and modifications that we’ve got to get through. We have consumers we’ve got to work with to restructure home ownership.” In other words, there’s a long slog ahead. The housing market has not participated in the economic recovery, and home prices are still falling. This in turn drags down other sectors of the economy and limits job growth.
But even with all of the questions, at the end of the day, America and its strong financial system survived. The last three years have been challenging and dramatic but also defining. Debt has taken on a greater negative connotation. Individuals are applying for less of it and paying down their credit more responsibly. People are also starting to save again. Nest eggs were up 9.2 percent in 2010, and total U.S. retirement assets rose to $17.5 trillion, the most since the end of 2007, when they totaled $17.9 trillion. The conversation over debt has shifted away from Wall Street and the individual to the government and its spending. As I write this, Congress is in the middle of an unprecedented discussion about raising the $14.3 trillion debt limit. This has become part of the national conversation, after a persistent debt crisis throughout Europe and austerity measures taking place throughout the world. People are asking, after what we experienced in 2008, can we keep borrowing more money than we take in?
Still, the economic story is much different, and much stronger today than it was three years ago, even as the debate continues over some of the decisions made during that fateful weekend. There are still those who believe the biggest mistake government made was not saving Lehman Brothers. In hindsight, these decisions all seem easy. But of course this moment in time was anything but. As former Federal Reserve chairman Alan Greenspan wrote in the spring of 2011, “The Lehman Brothers Bankruptcy in September of 2008 appears to have triggered the greatest global financial crisis ever…[when] global trade credit, commercial paper, and other key short term financial markets effectively closed.” This is a cautionary tale about the fallibility of even the best and the brightest among us. This extraordinary period of economic crisis will be remembered for many decades to come. I hope that this book, and this new epilogue, can put the weekend that changed it all into context for you.
ACKNOWLEDGMENTS
I feel privileged that my work takes me daily inside the vital heart of the financial system and gives me an eyewitness perch from which to view events that will shape the nation for decades to come. Between personal interviews, interviews on my shows, Closing Bell and Wall Street Journal Report, and my column in BusinessWeek I was able to be an eyewitness to this crisis. Because of such rare access, I have been able to write this account of the most significant financial upheaval in modern memory.
I could not have done it alone. I am grateful to the many people who helped make this book a reality. My collaborator, Catherine Whitney, provided invaluable assistance in helping me tell the story in the most powerful way. She helped shape and write this book and allowed the interviews with the players to come alive. My agent, Wayne Kabak, once again demonstrated his belief in me and supported this project from the start. Thanks, too, to Ciro Scotti, whose contribution to the concept and the text was important at every stage. From his help editing my column at BusinessWeek magazine for five years, always trusting me about who we needed to hear from to his knowledge of this subject and editing this book, he helped carve and refine it. Adrian Zackheim at Portfolio / Penguin embraced this idea from the start and gave me the room to explore my ideas. Along with Adrian, Brooke Carey, and Natalie Horbachevsky helped to shepherd this project to its conclusion with great patience
and resolve. The marketing and publicity teams were instrumental, especially Will Weisser and Amanda Pritzker.
I am particularly grateful to all the men and women inside the financial industry and government who shared their insights and recollections with me during the crisis and in its aftermath. They have been generous with their time in personal interviews as well as in their willingness to come on my shows, Closing Bell and Wall Street Journal Report, to help people understand events and what they mean. I would like to offer special thanks to Josef Ackerman, Amar Bhide, Richard Bove, Bill Clinton, Bob Diamond, Jamie Dimon, Mohamed El-Erian, Larry Fink, Barney Frank, Scott Friedheim, Tim Geithner, Ace Greenberg, Hank Greenberg, Alan Greenspan, Brad Hintz, Bob Hormats, Jeff Immelt, Garry Kasparov, Dick Kovacevich, Christine Lagarde, Ed Lazear, Ken Lewis, John Mack, Dan Mudd, Vikram Pandit, Paolo Pellegrini, Hank Paulson, Jim Rogers, Ken Rogoff, David Rubenstein, Mary Schapiro, Stephen Schwarzman, Robert Steel, John Thain, Paul Volcker, Axel Weber, Jack Welch, Jim Wilkinson, Meredith Whitney, and Robert Wolf. As always, I am thankful to those at the New York Stock Exchange who have allowed me such remarkable access.
I am deeply grateful to all the people at CNBC who make my work possible. Thanks to Mark Hoffman, who made it one of his priorities to increase the number of guests on CNBC every day. As anyone who is covering a story in real time knows, it is essential to speak to the insiders, and CNBC did just that during this crisis, and provided viewers with real perspective with extra live global coverage and the biggest names in business and government weighing in. CNBC helped put the crisis in context for millions. In particular, I could not do what I do without the daily commitment and creativity of the people on my team. Lulu Chiang makes it hapen every day with her amazing dedication and talent. She and Donna Burton have been instrumental in landing the kinds of guests everyone needs to hear from to best understand what is happening. The entire Closing Bell team, led by Alex Crippen and Han-Ting Wang, covered this story in real time. Thanks to Joel Franklin, Katie Kramer, and everyone on the Wall Street Journal Report for putting this unprecedented moment in time in real perspective. Thanks to Deborah Nikiper for providing unwavering daily support. I am lucky to have such a fantastic team, including everyone at cnbc.com who also covered this crisis on a daily basis.