What I am concerned with, is what hard working bankers really didn’t know, when with hindsight, we can see it was astounding that they didn’t know. Because that points the finger at the whole system. To gaol a few of the more flagrantly repulsive bankers, while invigorating, leaves the system untouched. It allows the guilty-but-uncaught to heave a sigh of relief and be able to talk of ‘a few bad apples’ and ‘lessons learned’ and ‘by the way, where’s my bonus?’
I want to look at the truely breath-taking extent of what bankers really didn’t know and show that the banking system itself ,was and still is so genetically malformed that not only is it a breeding ground for the cancerously corrupt, the vicious, the venal and the morally stunted, but that the system itself, in its entirity, would have collapsed even without them. The problem is not the corruption of a good system but the flourishing of a thoroughly bad one.
The Stupidity that was.
Let’s start with some of the most astonishingly stupid things that were done in the early days of the bank crisis:
2007 (October) Royal Bank of Scotland (RBS) bought a very large part of Dutch banking giant, ABN Ambro for an eye-watering £49 billion.
2007 (October) German bank HypoReal Estate bought another German Bank Depfa for €2 billion ABOVE what even Depfa itself thought it was worth (personal communication from a former Depfa director).
2008 (Sept) Bank of America (BoA) bought Merrill Lynch
2009 (May) Commerzbank bought Dresdner Bank.
There are many others of course, but these are the recent ones, which were clearly commercial decisions and not, like the 2009 Lloyds Bank purchse of HBOS (Halifax/Bank of Scotland) or the ‘rescue’ of Bear Sterns, a government backed TBTF operation.
Each and everyone of these deals ended in bankruptcy and a vast public bail-out. How could they have been so stupid? Let’s ask them.
Here is an email (taken from p. 197 of the Consolidated Class Action filed in NY District Court against Citi) sent on 3rd March 2007 from a senior Bear Stearns Fund Manager Ralph Cioffi to his fellow Fund Manager Matt Tannin.
“…the worry for me is that subprime losses will be far worse than anything people have modeled”
Yet four days later on the 7th March Mr Cioffi wrote to another colleague,
Matt [Tannin – Cioffi’s fellow Fund Manager at Bear Stearns] said it’s either a meltdown or the greatest buying opportunity ever.
And there you have it. In 2007 Matt Tannin, senior Hedge Fund Manager at one of Wall Street’s oldest banks, Bear Stearns, didn’t know if it was going to be a meltdown or the greatest buying opportunity ever. And this is despite the fact that Tannin and Cioffi and everyone on Wall Street, had already had a couple of years worth of clear evidence that asset values were collapsing and the securities based on those valuations were becoming unsellable. Don’t take my word for it, you can read page after page of first hand testimony from the dealers and senior executives themselves, in every section of the financial industry, in the Class Action linked above.
Thus this isn’t the corruption of a good system by a few crooks. This is clever, though probably morally stunted people, hard at work in an utterly dysfunctional and destructive system. The same system we still have. No matter what evidence was piling up the priests of global finance just could not believe it was all a disaster or that there was anything fundamentally wrong with what they were doing or the system in which they were doing it. They just could not see that it could be anything more serious than a massive market ‘correction’ in which case there would be equally massive rewards for those greedy enough to take the gamble. As late as 2009 RBS, BoA, Commerzbank and Hypo Real Estate all still thought it was the perfect moment to borrow tens of billions in order to buy hundreds of billions worth of another banks’ loans, assets and libilities.
But back to Mr Cioffi who has more to teach us. By 23rd March 2007 Mr Cioffi had come to a personal conclusion and started to move his own money ($2 million) OUT of the funds he was managing. By 19th April, Bear Stearns had commissioned and received a report on its CDO Sub-Prime holdings. Matt Tannin emailed Ralph Cioffi and said,
…the subprime market looks pretty damn ugly… If we believe the [CDOs report is] ANYWHERE CLOSE to accurate I think we should close the funds now. (My emphasis)
But he and Mr Tannin did not close those funds nor advise investors to get their money out. To the contrary, in a conference call to the fund’s clients Mr Cioffi said,
”there’s no basis for thinking this is one big disaster,”
Sadly it was for the investors who listened to him. Those people stayed in until the funds imploded as did the entire bank shortly after. Matt and Ralph were charged with fraud by the SEC and taken to Federal Court. Where they were aquitted.
Why were they aquitted? Were the jurers knobbled? I don’t think so. One of the jurors Serphaine Stimpson, said afterwards,
“They were scapegoats for Wall Street.”
I think Ms Stimpson was correct. Cioffi and Tannin were revolting creatures who protected themselves from a looming disaster but ‘honestly’ (On Wall Street it’s a relative term) couldn’t bring themselves to believe that the entire Wall Street, global financial edifice was a suppurating pustule. They also knew full well that if they advised clients to get out and closed their funds it would reveal the truth and that in turn would unleash panic. So they didn’t.
They no doubt felt that while there would be a disaster for some, there would still be money to be made for a few of the, luckier or ‘smarter’, ones. I suspect they would still count themselves as among the ‘smarter’ and acted accordingly.
What’s more, no matter how massive the losses that would be inflicted, I suspect our loathsome twosome also thought there had to be someone who had to take the risks and suffer the losses, in order that the system itself be preserved to profit another day. Only they wanted to make sure that that ‘someone’ was not them personally. On this, the rest of the Global Financial class agreed with them. Today, five years in to the cataclysm, it is clear that that ‘someone’ was only ever going to be you and me. Someone had to be frogmarched up to ‘save’ the system but it was never going to be the wealthy. Those senior bond holders are oh so sacrosanct. Whereas depositors, well they can be bailed in can’t they.
I have dredged Mr Cioffi and Mr Tannin back into the light not simply to pour more scorn on them but to make it clear they were not unusual. They were not guilty of anything that the whole of the global financial system was not guilty of. The larger point about them is not their personal repulsiveness but their averageness. They were two Mr Normals in the workings of the financial and banking system. They did nothing ‘wrong’, nor even unusual. They were not rogue traders. What was wrong is the normal working of the system.
The wider picture.
Let’s go back to that roll call of takeovers. What we need to keep firmly in mind is that these takeovers were done by people who were earning millions and who insisted they were so clever, so ‘smart’ they were worth every penny and cent. They did what they did at their own pace with no constraints or outside pressures.
What this means in practice is that all the buyers, RBS, Hypo. BoA and Commerzbank had full and unfettered access to all the information they needed to understand fully what they were going to buy. For example when Hypo bought Depfa I know from a someone who was at board level at the time, that a special room was created which contained all the information DEPFA had. The books were open for scrutiny. Hypo executives had full and unfettered access. There were experts on hand to answer any question. I wrote about it in the second part of ‘Ireland was Germany’s Off-shore Tart.’
And yet, they paid €2 billion over the odds and it led very quickly to the absolutely titanic collapse of both and a bail out of Hypo to the tune of something in the region of €180B.
I have talked of Depfa because I have been told what happened by someone who was involved. But the same, or something very similar, would have happened in all the takeovers. It is required by law. It is Due Diligence. You cannot spend share holders money without being able to tell them you know what it is you are buying. Thus we know that Commerzbank executives looked at the opened books of Dresdner. That RBS experts looked closely at ABM Ambro’s assets and loans and came to the highly paid view that this was worth spending £49 billion on, and that BoA top brass pored over the inner most secrets of Merrrill Lynch and CountryWide. To suggest anything less would be to accuse them of dereliction of their duty, of something very near to fraud, and that would be libelous would it not? And yet each and every one of these deals ended in disaster on a global scale.
So where does this leave us? To my mind there are only two possible scenarios. Either DEPFA, ABN Ambro, Merrill, Dresdner and Countrwide executives all lied and concealed and thus all the information Hypo and the other buyers were seeing was a pack of lies, in which case the Hypo et al bankers did their jobs but were misled by crooks. Or, Depfa and the other sellers did faithfully lay bare the truth but the buyer bankers were either too stupid to see or did not care. You tell me is there a third, happier scenario I am missing? I know many banks log on and read this blog so one of you write in and tell us what the third, missing scenario is. Write to me confidentially. I really would like to know if I am missing the obvious.
But before anyone suggests that everything was honestly revealed by the sellers and all competently understood by the buyers, but that both were foxed by unforseen events which so changed cirumstances that a few deals did go bad – before you try to tell us anything like that – please refer back to the Tannin and Cioffi emails above and in fact to the rest of the evidence in the Citi indictment. Events were certainly NOT unforeseen. And please also remember that it wasn’t just a few deals that went bad, it was in many cases 100% of whole groups of securities and thousands of deals which went bad and turned out not to be anything at all like they were supposed to be -as the paperwork claimed they were. Citi lied. It’s there in the indictment. So did Merrill. So did all of them.
So am I saying it was all the sellers fault? No I am not. We cannot know that for sure in every case. We only know it for sure in some cases. In the rest we don’t know who was more to blame buyers or sellers. But it doesn’t matter does it? That is the point. Stand back and what do we have? Either we have banks full of bankers who are corrupt liars or we have banks full of the slow witted and guillible who do not understand the financial deals it is their job to understand…or both. Either way we are left with an industry that did not and – unless everything has magically improved – cannot and will not do its job. We have a financial system which in very important ways, critical ways, is staffed and run by people who, whether by criminal and moral degeneracy or simple stupidity, are not fit for their jobs.
It seems a terribly sweeping statement I know. But run back over how we got here and tell me where we, I, went wrong. Unless you can find the place we lost the thread, then what else can we conclude other than that we have a banking system which is not fit for purpose? Or perhaps I should say, is not fit for the purpose we were expecting. It does leave the possible conclusion that our bankers and regulators are all very fit for purpose it ‘s just a rather different purpose from the one we expected.
What one banker didn’t know.
Before I conclude, I want to return from the general to the specific. Let us hear from another insider, this time the Chief Risk Officer of Bank of America during the time it was buying Merrill and CountryWide. Please welcome Amy Woods Brinkley. She was once considered one of the 25 most powerful women in banking (according to US Banker magazine).
BoA bought CountryWide in July 2008 and Merrill Lynch in Spetember 2008. In Late September 2008 just as the ink of both deals was about dry, Amy Woods Brinkly gave an extensive interview to Forbes Magazine. In it she was asked why BoA bought Countrywide. She replied,
Our company did very extensive due diligence. I’ve been involved in a lot of our acquisitions and I don’t recall one that was more thorough. During that process I became increasingly comfortable; the problems at Countrywide were real, but they were also manageable.
Forbes pressed the point asking surely she was worried about the estimates of the write downs on Countrywide assets which were already being talked about as being between $8 -$30 billion. I should also mention that in March 2008, five months before BoA bought it, The FBI announced it was investigating CountryWide for fraud on mortgages and home loans. It didn’t stop BoA going ahead and buying, but presumably it did make them even more diligent. Ms Brinkley’s reply –
As we said a number of times, we did very extensive due diligence on the transaction, not only before signing but going back in before closing the transaction, and we believe the economics made sense and the market-share opportunity is worth the risk…So again, just before closing the transaction we revisited the economics and we are comfortable with what they tell us.
Brinkley was rated by her peers as one of the best. Was she lied to? Were the lies so clever, so convoluted that she just missed them – all the many thousands of them? Or was she actually quite a stupid person seen as a genius by other fairly thick people? Or were they all, collectively, so cock-sure of themselves and the system which had made them rich and powerful, that none of them could see clearly any more? I think it is this last explanation which rings true. I am sure lies were told. We know from court documents and extensive anaysis of thousands of deals which were done and sold in the bubble years, that there was systemic fraud. What we don’t know is if everyone could see it was fraud or if they all had become captured by an ideology which said fraud is just ‘good’ business.
It’s worth bearing in mind that however senior and clever Ms Brinkley was, she was not the only one who was responsible for vetting the deal and doing the due diligence. Every deal has ranks of lawyers and experts who are handsomely paid to pour over the details and make sure the deal is sound. In the case of BoA and CountryWide the Washington DC law firm K&L Gates advised. Just as in the Depfa/Hypo case Goldmand advised.
However, it was Ms Brinkley who was thrown under the bus. She lost her job. She was replaced by Mr Greg Curl who had been the senior deal maker for the Merrill deal. The Merrill deal has cost BoA $30B and counting. He too has now left the bank though he’s still in finance.
Is this all history? No it’s not. Most of the people who lied and/or “didn’t know” back then are still in the financial system, still lying to us, the regulators or themselves. Just this week one of the only really ethical banks in the UK the Co-operative Bank has had to come clean about the scale of losses it inherited when it bought the Britiannia Building society (at the time the second largest in the UK) …in April 2009.
I may be biased, I bank with the Co-operative, but I don’t think they are a fraudulent organization. I think they really do operate more ethically than most. Possibly running second, among UK banks, only to Triodos bank. But the fact is the Cooperative bought Britannia at the height of the crisis after doing its due diligence. And yet the losses the Cooperative bankers didn’t see are so large the Coop bank has found its debt downgraded to junk.
I suggest, if you are willing to consider that the Co-operative bank and its bankers are a little more honest than most, that this indicates that it is the system itself, the origination of loans, how they are structured, how securitization works, how bankers are trained, how complex the financial products and deals are, that is the problem. Beyond even corruption, of which there is no shortage, the system itself is crap. It is not fit for any positive social purpose. It enriches the few while systematically endangering and then impoverishing the many. It concentrates power in a few hands who then insist that democratic power should be taken out of the hands of the many and given instead to technocrats drawn from the ranks of the few.
Our financial system would have collapsed simply because IT DOESN’T WORK, not as an open and equitable system. Sure it makes profits… for some. But so does riding around in a Mongol Hoard sacking cities. The present financial system is NOT a fair and open system where by dint of hard work, insight, research and expertese anyone can have a reasonable chance of prospering. It has not and will not NOT work as a repository for hard earned savings and pensions. Both are being systemaitcally pillaged for the ‘good’ of the major banks.
Whether one believes the capitalist system is a good thing or not, or even a potentially good thing, what we can perhaps all agree on is that it – our financial system – is NOT at the moment good for the many, and will not be in the future, if left in the hands of the repulsive elite who presently run it, defend it, facilitate it and profit by it.