Читать книгу Conversations With Wall Street - Peter Ressler - Страница 15

“Guys were getting richer than they had ever dreamed. It was surreal. I knew at some point it had to end, but I never thought it would end like this.”

- Lehman Subprime Mortgage Trader

“So how did we get here?” I asked Jeff, the Lehman Brothers mortgage trader. “How did we go from giving people a second chance at home ownership to destroying the global economy?” As Jeff had explained in Chapter One, when the subprime mortgage product was first created, it had a genuine purpose. It provided a service to people who experienced unexpected hardship, yet had the ability to rise above their circumstances. Jeff continued: “Everyone got carried away with the amount of money there was to be made. The Street was printing money because the demand for these securities was so high. In order to meet that demand, we had to lower some of the standards for who qualified for these loans. It was not just the Street: banks were printing money; brokers were printing money; investors were printing money; and borrowers were using their homes as cash machines. Guys were getting richer than they ever dreamed. It was surreal. I knew at some point it had to end, but I never thought it would end like this. I guess no one really understood how big this had gotten. No one ever thought it would end like this.”

In the months to come, I would hear that statement from industry pros repeatedly. No one thought it would end the way it did. Another managing director who worked at Lehman for fifteen years told me: “I saw it coming due to the competitiveness. The returns were off the charts. It was money chasing money chasing money. No one knew or cared about the deals because there were investors behind investors behind investors.” Everyone involved was chasing money and going after the big bucks, yet forgot how they were making it. From Wall Street to Main Street, profits were made so fast that no one stopped to think about where they came from. Few understood the consequences of their actions would lead to a global meltdown and a threat to the American way of life. Many on Wall Street did not think the industry did anything wrong; after all, it was just making money the way it always had. Wasn’t that what it was supposed to do? Did the system function on “evil and greed,” as many ordinary Americans believed, or was there a basis of value that supported finance—a system of credit and debt that creates prosperity for hundreds of millions of people, or so Wall Street believed?

A senior executive at Bear Stearns said: “Making loans to creditworthy borrowers was one of the easiest ways to make money on Wall Street. The securitization machine became like an assembly line that produced massive amounts of bonds, which in turn produced massive profits for the industry. As long as there were borrowers who wanted loans, there was money to be made. As the market for prime mortgage loans became saturated, guys in the industry started looking for new ways to make money. The subprime markets presented that opportunity. Even though subprime loans were riskier than prime loans, the banks and Wall Street firms would not have to keep them on their books for long. This meant that they would not have to worry about the risk. Lending money to anyone who would take it regardless of their ability to service the debt became the norm.”

Risk is something that Americans understand well. It is part of our DNA. We have a love-hate relationship with it more than any other developed nation. You cannot be more of a risk taker than our founders were when they decided to overthrow the greatest military and economic power in the world. They took a risk that not only could they win a war against imperial England, but also that they could survive without the hand that fed them. (Great Britain was the main source of credit for the emerging nation before and after the Revolution.) Many of the comments in the aftermath of the financial crisis revolved around the “reckless risk taking of Wall Street.” Pundits, politicians, bloggers, journalists, and ordinary citizens fumed about the casino-like state of the mortgage markets. The battle of risk and reward dates back two centuries to Hamilton and Jefferson. The first credit crisis in America occurred in 1792 in the wake of a government bond scandal. Jefferson remarked, “The credit and fate of the nation seem to hang on the desperate throws and plunges of gambling scoundrels.”¹ Some two hundred and eighteen-years later, in the spring of 2010, one senator echoed Jefferson’s words when discussing the CDO markets: “It’s gambling, pure and simple, raw gambling.”²

Nearly one hundred years ago in 1908, the Economist wrote: “The financial crisis in America is really a moral crisis, caused by the series of proofs which the American public has received that the leading financiers who control banks, trust companies and industrial corporations are often imprudent, and not seldom dishonest. They have mismanaged trust funds and used them freely for speculative purposes. Hence, the alarm of depositors, and a general collapse of credit.”³; A century later we found ourselves in the middle of yet another collapse of credit and moral dilemma. This financial crisis was no different than those before it. Profits had become more important than people once again. The industry forgot their foundation of service in the quest for profit. Who benefited from their product beyond a small group of financiers? What value did these financial instruments provide to society? Ordinary folks got wrapped up in the Street’s euphoria and took advantage of the easy money. They were the first ones to take the fall. Americans are risk takers by nature. Pioneers drove wagon trains through unknown lands facing enormous danger as they settled the West; speculators risked it all to cross the Rockies to pan for gold; immigrants, by the millions, came to our shores with nothing in their pockets to create fortunes except a wish and a prayer. The belief that you cannot have reward without risk is an inherent part of the American psyche. So where had that gone wrong? In the risk that our forefathers and mothers took, there was an element of sacrifice in it. They experienced hardship for gain. The end result was not always clear, but hard work, resilience and resourcefulness were part of the plan.

In the later subprime mortgage products, no effort went into creating these loans or securities. One loan underwriter at a big commercial bank said: “We were under pressure by top management to produce more products and post bigger profits. After a while, prime borrower demand for loans diminished, and we lowered standards for subprime borrowers. When the original subprime loan demands decreased, the industry reduced standards again. In the end, there were few standards remaining.” As I interviewed dozens of unemployed and worried professionals, a picture of market chaos appeared. Producers and management ran a race to the finish but had not realized the prize at the end was not worth the price. Wall Street was set up for profit, not philosophy. Yet the human connection was precisely the missing ingredient. Profits had obscured people. From Main Street to Wall Street, the human aspect of money had been neglected; more to the point, it had been completely ignored. Somehow the nature of the financial industry, or business itself, had written into the code that none of it was personal. The mortgage industry forgot that human beings were tied to the end of the loans. It was a simple fact ignored by too many. I sat and discussed this omission with industry pros, some of whom I had known and respected for years. While there were and are self-serving and ruthless people in finance, there are good guys too. Some are devoted fathers; others are great philanthropists. Many, as hard as it may be to believe for those outside the industry, are truly honorable people who simply never added two plus two to get four. They missed the obvious, thinking only of the bottom line and the push for profit. The profit margins had not represented people or family homes; they were simply numbers on a screen. When the dust cleared, the good guys in the industry were as shocked and horrified as everyone else.

A clear picture of Wall Street as both a perpetrator and victim of a fundamentally flawed model emerged. The financial industry had not seen itself as a public service directly tied to Main Street. Yet the industry functioned on service—to clients, customers, investors and consumers. If it forgot that human connection, its purpose was obscured. And therein lay the inherent misunderstanding, the false principle that finance is based solely on bottom line profits. Where were people in this bottom line? That was the financial model’s greatest flaw - its neglect of the direct connection to society. In a real sense it was a moral crisis, one that few in America and fewer still in the industry had recognized.