Real Losses Have Nothing to Do With Money (NYTimes, 10/21/07)

October 21, 2007
Dealbook
Real Losses Have Nothing to Do With Money
By ANDREW ROSS SORKIN
SEVEN years ago, I received a call on a Sunday afternoon from Donald Meltzer, then the co-head of mergers and acquisitions at what was then Credit Suisse First Boston. I was hoping that he was calling with news about a deal. Instead, his voice cracked as he told me that Gordon A. Rich, a 43-year-old star at the firm, had died in a car accident the night before.
A lump rose in my throat. I had known Mr. Rich well — to friends he was known as Gordo. At his funeral, an overflowing room of hardened Masters of the Universe — the biggest names in the business — turned to mush; they didn’t just cry, they bawled. I sobbed, too.
Two weeks ago, I got a similar call. This time, Douglas Braunstein, the head of investment banking at JPMorgan Chase, called to tell me about another death, of someone else I knew well: Shane Wallace, a 38-year-old telecommunications banker at JPMorgan Chase. Mr. Wallace had been fighting brain cancer for more than a year.
Over the next 24 hours, I received more than a dozen other Kleenex-filled calls from Wall Street titans to commiserate about Mr. Wallace. Each time I choked up. Nobody talked about deal making or stock prices; they talked about his life, his family and his love of fishing.
And on Friday, I got an early-morning call that James M. Allwin, a 54-year-old former Morgan Stanley banker who was president of Aetos Capital, had died. Another good person, struck down too early.
I tell these stories not to be sappy, but because most Sundays this column examines the ups and downs of Wall Street. Usually, it is inspired by the news of the week, and that means the human beings behind the headlines can sometimes become lost.
So I thought it was worth taking the time to point out that the “titans of finance” don’t wear their suspenders 24 hours a day (except when they pull all-nighters). The mythical table-pounding banker for whom dollars and deals trump all else is, more often than not, exactly that: mythical. And the suspender-wearing thing is mythical, too — or at least probably out of fashion.
On Thursday night, I was reminded of those myths when I attended an annual memorial dinner for Mr. Rich, an event that always brings out some of the biggest names on Wall Street. Mr. Rich was the antithesis of the Gordon Gekko archetype and, even seven years after his death, he still commands a special loyalty.
In attendance was Joseph R. Perella, who founded First Boston’s mergers and acquisitions group in the 1970s; Charles G. Ward III, the president of Lazard; Raymond McGuire, co-head of Citigroup’s investment bank; Mr. Braunstein; and dozens of Credit Suisse colleagues.
The group, of about 175 people, has been getting together for the last five years to celebrate the life of Mr. Rich and to raise money for a scholarship fund they started in his name. It has become like a family reunion for the close-knit fraternity of merger specialists. Virtually everybody either once worked with or across the negotiating table from Mr. Rich.
And everyone was his friend. That’s a rarity on Wall Street; Mr. Rich had a Clintonesque ability to make anyone feel like the most important person in the room.
Mr. Rich commands this almost Pied Piper-like loyalty because he was the last person you would expect to find on Wall Street. Sure, he made millions of dollars. He made a cameo appearance in “Barbarians at the Gate,” the book that chronicled the battle for RJR Nabisco.
But he was a blue-collar investment banker. He was in on the joke; he regularly used to laugh about how he was overpaid. He was a prankster who lived for his family, cooking and the Yankees — an irreverent man shot through with personality who might actually have a tough time getting a job in finance today.
HIS former colleagues started the Gordon A. Rich Memorial Fund to help pay college tuition for needy students who are the sons or daughters of secretaries, janitors and other working-class members of the financial services industry. It reflects Mr. Rich’s own priorities — he often enjoyed gossiping with his staff more than his clients.
The memorial group has raised about $4 million since it started the scholarships. It helps send four new needy students to college annually, providing each of them with a $12,500 stipend. (Surprisingly, the foundation has too few applicants, so if you are reading this and you know someone who qualifies, tell them to apply.)
It may be sad that what humanizes bankers and brings Wall Street together the most is death, especially of people still young and in their prime. At Mr. Wallace’s funeral, it wasn’t just his colleagues in attendance. All his competitors were there, too.
Mr. Wallace received a diagnosis of brain cancer a year ago. It was amazing to watch an institution like JPMorgan, and all of his clients — he worked for MCI on its sale to Verizon — rally around one of its rising stars when he was falling. He drifted in and out of the office for the last year, working on the $27 billion buyout of Alltel until nearly the very end.
Shane Wallace may have been a deal devotee, but like some others on Wall Street, he was hardly in it just for the deal.
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The Gloomsayers Should Look Up (NYTimes, 10/21/07)

October 21, 2007
Everybody's Business
The Gloomsayers Should Look Up
By BEN STEIN
BEFORE I start on this little tour d’horizon, I just want to say that a good, fresh Taco Supreme from Taco Bell is more tasty than just about anything at any fancy-pants restaurant anywhere in the world. And they didn’t pay me, and they don’t even know me. Just for perspective.
And really, the whole story about the economy, credit, morality and rescues is about perspective. Start with the good news about perspective: The economy is basically in fine shape. Not perfect, but darned good. Almost all mortgages are not in default. Almost all workers in the labor force who care to work are not unemployed. The largest percentage ever of American household units, what were called “families” in the old days, own their own homes.
The stock market, in both absolute terms (the number on the Dow) and relative terms (the relationship of price to earnings), reflects optimism and an extraordinary, robust level of profits.
On a more sophisticated note of analysis, the spread between the interest rate paid on risk-free Treasury issues and on the Merrill Lynch master junk-bond index is far, far less than it was in the dark days of the tech meltdown from 2000 to 2002. (This data comes from Marty Fridson of FridsonVision, le dernier cri when it comes to junk.) This is a sign of less than horrific fear about high-risk debt.
Newspapers (which often sell on fear, not on fact) talk frequently about a mortgage freeze. However, for all but the least qualified buyers, mortgage money is plentiful, and in fact the potential borrower is bombarded with offers. Hotels and airplanes are full. Casinos in Las Vegas are jam-packed. There is still a long waiting list for Bentleys in Beverly Hills.
This country does not look like a country in economic trouble. Nevertheless, some extremely worrisome things have happened and are now being revealed, and worse are to come.
As everyone knows, we have a housing correction on a large scale. True, it’s a correction from a high level, but it’s still a big correction. There has been a spectacular upsurge in mortgage delinquencies among subprime borrowers. While the sums involved are tiny, compared with the dimensions of our lusciously huge economy, they are unfortunate in many ways, as we will see.
There has been a stupendous wave of fear washing over Wall Street and the large “money center” banks because of commitments to finance mergers and leveraged buyouts that now look questionable. The large banks and investment banks are committed to lend hundreds of billions of dollars for deals that looked sweet when deal guys were playing musical chairs but look dicey now that the music has stopped. Some people think that the game won’t start again for a while (although I happen to think it will restart very, very soon — the fees are just too good for this game to stop).
In recent weeks, there has been another tsunami of fear about money tied up in so-called conduits. These are basically incredibly risky and foolish instruments in which money is borrowed short to be lent long. Every finance student in the world is taught to be wary of this deal because when it goes bad, it goes really bad, but nevertheless, there are many big players in Europe and the United States who have done these deals.
There is deep worry that lenders caught up in bad loans to subprime borrowers, failed conduits and Wall Street deal makers will have to take big losses that will impair the capital of the lenders and shake the foundations of the nation, credit-wise.
Now comes the “and there is worse to come” part. It certainly looks to little me as if the top dogs on Wall Street made some staggering mistakes. They took on very risky loans. They tried to juice returns in a low-interest-rate world by maneuvers so dicey that the maneuvers would not survive scrutiny and had to be hidden on off-balance-sheet entities, sometimes outside the country.
All those titans of the Street at Merrill Lynch, Citigroup and elsewhere can fire their underlings and blame them for their losses. But the C.E.O.’s are paid big bucks to know what’s happening and to run their companies prudently (as Goldman Sachs and JPMorgan apparently did). Clearly, with immense losses in a wide variety of investments, prudence was not used in the last several years at some of our most esteemed money houses.
As I have said for 20 years, it’s basic when you are lending to subprime borrowers to take substantial reserves for likely defaults. Obviously, this was not done. When you borrow short and secure and lend long and risky, you take huge reserves for the day when the trade turns sour. This was apparently not done. If it had been done, there would be no problem.
Those at the top can blame anyone they like for their companies’ imprudence, but they are ultimately responsible. Why are they still in their jobs? Not one C.E.O. of a major commercial or investment bank has lost his job despite some staggering write-downs. Why? Is this the board of directors’ old buddy system at work? Sure looks like it.
Now, the ultimate Wall Street player and insider, Henry M. Paulson Jr., the Treasury secretary, has bestirred himself to take serious notice of the credit problems faced by some very big lenders. He wants to create a bailout fund in which banks that still appear sound buy some of the debt of the troubled players like Citigroup.
THE deal, as far as I can tell, is that they buy the most secure levels of debt that Citigroup and others own, get large fees and allow Citigroup and the others to keep the debts off their balance sheets. But there are at least two giant issues here.
One is that it’s a bit too predictable that Mr. Paulson would basically pooh-pooh the subprime problems until major Wall Street powers got in trouble and then — presto! — swing into action. It might have been inspiring had he stepped up to the plate when smaller players like home buyers were getting burned, but that’s not really his style.
The other is that it’s hard to see what good the maneuver would do. Suppose Citigroup or some other lender has a perfectly good loan to sell. Why does Citigroup need a big Treasury-sponsored organization to sell it? They can sell it to anyone right now. The problem is with the questionable loans. And they seemingly are not part of the plan from the Treasury.
The Treasury plan is either just plain foolish (an explanation not to be sneered at) or it’s the thin edge of the wedge: what may follow is to have a government fund to buy the slightly less fragrant parts of the portfolio. Indeed, that would seem inevitable to me, and I’ll tell you why.
The goal is to keep Citigroup and others from taking large losses on bad loans. If the loans are sold to supershrewd buyers of debt like Leon Black or David Tepper or our resident megagenius, Warren E. Buffett, those buyers will demand a big haircut on the deal. Losses will have to be taken. The only buyers who might step in to pay full price are — drumroll, please — you and I, the taxpaying suckers.
I could easily be wrong, but I suspect that at the end of the day, you and I will be bailing out the hundred-million-a-year finance titans who messed this up in the first place. This is what happened with the savings-and-loan disaster. The S.& L. chieftains — very often connected with Michael R. Milken and Drexel’s junk-bond world — became multimillionaires and billionaires by wheeling and dealing with government-insured money. When the loans went bad, you and I picked up the bill while the bankers went shopping for their Bentleys.
NOW, let me go back to my role as Little Benjy Sunshine. None of this will sink our glorious economy. The losses are nothing compared with the losses in the tech debacle. They will be nothing like the numbers bandied about in the fear-mongering media. If there is a questionable $200 billion pool of loans, that means a small percent will be lost, not all of it. This big, strong economy will sail on through.
But the vicious, cruel truth is that some very greedy, selfish and, yes, stupid men made fortunes on deals that were economically and/or ethically wrong. (Why else hide them off balance sheet or abroad?) They got immense fees, stunning paychecks and the inheritance of maharajahs. Their great-grandchildren will be rich from their deeds and misdeeds. As far as I can tell, they are not being called to account in any major way. The ones at the top aren’t fired or, if they are fired, are fired very rich. (Never mind that silly mouth music from Citigroup about “the year of no excuses.”) Despite what looks to me like a breathtaking lack of disclosure, I have not seen any lawsuits by the Securities and Exchange Commission against any of these big money-center princes or principalities — not to mention criminal investigations from other law enforcement authorities.
And we stockholders and taxpayers foot the bill, of course. But even this is not the worst part: there are still lots of people who can say with a straight face that the world of finance is overregulated, that we should trust the power players to do the right thing, that if we put finance under a microscope, or allow financial miscreants to be sued for misconduct, America will be harmed. There are still people, and I know many of them well, who believe that old myth that you can trust the markets to fix everything — that old magical thinking that some thieves will stop other thieves from robbing the sheep like us. That’s the really sad part. Some babies never learn.
But in the meantime, try that Taco Supreme. It’s awfully good. Wall Street hasn’t figured out how to ruin that one yet.

Banks May Pool Billions to Avert Securities Sell-Off (NYTimes, 10/14/07)

October 14, 2007
Banks May Pool Billions to Avert Securities Sell-Off
By ERIC DASH
Several of the world’s biggest banks are in talks to put up about $75 billion in a backup fund that could be used to buy risky mortgage securities and other assets, a move designed to ease pressure on a crucial part of the credit markets that threatens the broader economy.
Citigroup, Bank of America and JPMorgan Chase, along with several other financial institutions, have been meeting to come up with a plan to create a fund that could prevent a sharp sell-off in securities owned by bank-affiliated investment vehicles. The meetings, which began three weeks ago, have been orchestrated by senior officials at the Treasury Department, and the discussions have intensified in the last few days.
A broad framework for an agreement could be reached as early as tomorrow, according to people with knowledge of the discussions, but many important details still need to be hammered out. Another round of discussions is taking place this weekend, and it is still possible that the parties will not reach an agreement.
“Treasury is very serious about getting some solution in place to take away the fear hanging over the markets,” said Alex Roever, a credit analyst at JPMorgan Chase who has been following the discussions but is not involved in them. “It is a very challenging thing to do. There are so many parties involved and they all don’t agree.
The proposal echoes the 1998 bailout of the hedge fund Long Term Capital Management, when a group of big banks came together to prevent the fund from collapsing after it made a series of bad bets. And the current round of crisis-driven collaboration illustrates the heightened level of concern among both government and financial players.
While there are signs that the broader credit markets have begun to stabilize after the Federal Reserve lowered interest rates last month, a pocket of the commercial paper market remains under siege: structured investment vehicles, known as SIVs. The fear is that problems with these vehicles could infect the broader economy.
SIVs, which issue short-term notes to invest in longer-term securities with higher yields, are often organized by banks but are not actually owned or held by them. They are supposed to be financed through the issuance of commercial paper backed by pools of home loans and credit card debt, but the loss of confidence in the quality of subprime mortgage bonds has also tainted these securities.
Analysts say that investors have all but stopped buying SIV-affiliated commercial paper, and the worry is that the 30 or so SIVs will unload billions of dollars of mortgage-related assets all at once. That would put intense pressure on prices. As Wall Street firms and hedge funds mark value of similar investments they held to their new lower values, they face potentially huge hits to their profits.
Still, the impact on the biggest banks is even more severe. In times of crisis, they are committed — either legally or to maintain their reputations — to stepping in to buy those securities. Banks have already been buying significant amounts of commercial paper in recent weeks, even though they did not have to. But if they are forced to bring those assets onto their balance sheets, they might be less willing to lend to businesses and consumers. That could set off a credit crunch and thrust the economy into a recession.
The proposal being floated calls for the creation of a “Super-SIV,” or a SIV-like fund fully backed by several of the world’s biggest banks to provide emergency financing. The Super-SIV would issue short-term notes to finance the purchase of assets held by the SIVs affiliated with the banks, with the hope of reassuring investors.
But whether the banks would buy the assets directly or just buy the short-term debt is still unclear, according to people briefed on the situation. So are other aspects, like the amount of capital each bank would need to contribute, how it would be administrated, and the fee structures and cost burdens.
The effort to create a backup fund began about three weeks ago, when the Treasury secretary, Henry M. Paulson, called a meeting in Washington that included the chief executives of Citigroup, Bank of America, JPMorgan and other big banks. With Wall Street firms having almost no luck finding buyers for mortgage-backed securities and derivatives, Mr. Paulson wanted to see what could be done to relieve the bottleneck.
Several rounds of discussions followed — in Washington, New York and on conference calls — led by two senior Treasury Department officials: Robert Steel, the under secretary for domestic finance and a former Goldman Sachs executive who is a close adviser Mr. Paulson; and Anthony Ryan, a former investment banker who is now assistant Treasury secretary for financial markets.
Besides hearing from senior executives from each of the big banks, the group also sought ideas from others. Several big international banks, including Barclays and HSBC, have been asked about their interest in participating. The group also reached out to several of the major structured investment funds, as well as big institutional investors in the commercial paper markets.
Edmund L. Andrews contributed reporting.

The Man Who Won as Others Lost (NYTimes, 10/13/07)

October 13, 2007
The Man Who Won as Others Lost
By LANDON THOMAS Jr.
Paul Tudor Jones II leans back in his chair and grins. The stock market is going to crash, and he knows it. “There will be some type of a decline, without a question, in the next 10, 20 months,” he says in his rich Memphis drawl. “And it will be earth-shaking; it will be saber-rattling.”
Coming from a financial speculator as prominent as Mr. Jones, a man with about $19 billion of short-term trading capital at his disposal, the words might be enough to send ripples through a stock market that, apparently defying logic, has been hitting new highs each day.
Except that the crash to which Mr. Jones refers occurred Oct. 19, 1987. His prognostication — brazen, and as impudent as the man himself — was made in a documentary called “Trader,” which was filmed in the year preceding that day.
Now, 20 years after the 508-point decline, several strategists are anticipating that the earth will shake again. Valuations are stretched beyond historical comparisons. The market, ever more volatile, is reaching new highs, ignoring a buildup of bad news. Most crucially, the strategists say, the sentiment that the market’s rise is infinite seems to have taken permanent hold.
“The overvaluation of stocks is more extreme than the 1929 high,” said Robert R. Prechter Jr., an independent market forecaster in Gainesville, Ga., and a well-known follower of Elliott Wave theory, which examines the extent to which investor psychology creates stock market patterns. “Which tells me the next bear market will be the biggest in many years, probably since 1929-32.”
At the end of the day Oct. 19, 1987, stocks were down 22 percent — precisely the “Acapulco cliff dive” predicted by Mr. Jones in the video. The day ruined the careers of many, but it made the reputations of Mr. Jones and Mr. Prechter, whose professional relationship dates to the mid-1980s.
In the video, Mr. Jones can be seen huddled over a graph, comparing the market’s peak in 1987 with a previous high in 1929.
As Elliott Wave theory would have it, the two market tops may have been 60 years apart but the herdlike exuberance of investors pushing stocks ever upward was the same. On Oct. 5, 1987, Mr. Prechter, then and now the best-known proponent of the theory, told his subscribers to sell.
While the rest of Wall Street counted its losses, Mr. Jones, at age 32, returned 200 percent for his investors that year and drew a payday of an estimated $100 million for the year, an almost unheard-of sum at the time.
No one, including Mr. Prechter himself, claims that Mr. Jones relied solely on Mr. Prechter’s call. Indeed, in the video Mr. Jones can be seen as early as 1986 making a case that the market would fall. But the crash did not last long. Prices rebounded the next day, and within two years, the market had regained all that it had lost that day.
Now, Mr. Prechter is suggesting that the country is facing not just a market crash, but also a depression. On every measure, he says, the market is more overvalued than it was in 1987 before the reversal. The price-to-book ratio of the S.&. P 500-stock index today is 4.04, compared with 1.73 in 1987. And measures of the bullishness of Wall Street traders confirm Mr. Prechter’s assessment of the overvaluation.
To be sure, the one feature of every long-running bull market is the small clutch of market pessimists whose clamor that the end is nigh seems to rise in pitch with each successive peak.
But Mr. Prechter’s gloominess may resonate, especially in light of Mr. Jones’s high regard for him. “Prechter is the best because he is the ultimate market opportunist,” Mr. Jones said in the book “Market Wizards,” a collection of interviews with successful traders compiled by Jack D. Schwager.
That is not to say that Mr. Prechter has any undue sway over Mr. Jones, who since he started Tudor Investment in 1986 has generated a return of 26 percent a year and has seen his assets grow from $125 million to $19 billion. Indeed, Mr. Prechter’s relentless bearishness has not made him a favorite of bullish hedge fund managers.
At a time when hedge fund trading is dominated by computer trading programs and traders with Ph.D.’s, Mr. Jones, who got his start trading bales of cotton on the New York Cotton Exchange, is of the older style, relying on intuition, market smarts and the force of his personality. A macro trader, he is known for making big sweeping bets on the direction of stock exchange indexes, commodities and currencies.
As for his view on the market, Mr. Jones declined to comment for this article. Over the last 17 years, he has rarely publicly expressed an opinion about stocks, bonds or currencies — a reflection of his influence as a trader.
This summer, his funds were hit by the credit crisis and lost 5 percent in August. Through September, Mr. Jones is barely ahead, up 2.5 percent, and he could end up having his worst year in more than a decade.
“He has had a tough time lately,” said Byron R. Wien, a friend of Mr. Jones and a strategist at Pequot Capital Management, a rival hedge fund. “But he is a talent. You go through cold periods, but you don’t lose it.”
It happens to every fund manager, the spell when the magic touch disappears. And although all the top traders preach the discipline of not letting your losses get to you, the video suggests that even the best feel the almost physical pain of trading defeats.
In one scene, Mr. Jones, his knee jiggling with such violence that his tie sways, is shown losing $6 million in one day, in December 1986. It was a big loss, given that he had only $125 million under management at the time. “This is what is known as the agony,” he says, slumping in his chair. “This is devastating. An intellectual blow.” He stops talking. He looks distant and distracted. “I hate it.”
Mr. Prechter, who keeps in touch with Mr. Jones through e-mail and the occasional phone call, says that Mr. Jones, his recent rough stretch notwithstanding, is best placed to survive a crash.
“He does not go cold and clammy,” Mr. Prechter said. He does not know if Mr. Jones shares his dark view of the market, though he allows that “Paul is certainly aware of the risk of an extensive bear market” and “is well aware that stocks are vulnerable.”
But don’t expect Mr. Jones to relive his 1987 glory. One investor who has spoken with him in the last week, who asked not to be identified because he is not authorized to speak publicly about Mr. Jones’s investment strategies, said that the recent rate cut had made Mr. Jones increasingly bullish. Indeed, as opposed to 1987, Mr. Jones is said to be reminded of 1998, when cuts by the Federal Reserve led to the stock market boom of the late 1990s. “I have not heard him mention Prechter in a long time,” this investor said.
The 1987 video offers an intriguing window into the everyday life of big-league traders, and it has the feel of a time capsule. Full of swagger and braggadocio, Mr. Jones can be seen skiing in Gstaad, Switzerland, or riding a horse on his estate overlooking the Chesapeake Bay — when he is not screaming out orders to his traders. He comes across as a young Gordon Gekko. Greed was not only good; it was fun.
Although the video was shown on public television in November 1987, very few copies exist. Those that do are hoarded by traders who watch the hourlong movie in the hope of gleaning possible trading tips from Mr. Jones. On the Internet, bids for the video start at $295. According to Michael Glyn, the video’s director, Mr. Jones requested in the 1990s that the documentary be removed from circulation.
It is no surprise that Mr. Jones wants some distance from that version of himself. He was a bit of a cowboy, out to prove he was the best. Now, 20 years later, he sits atop the new hedge fund rich. He is married to a former model from Australia, has a mansion in Greenwich, Conn., and owns a big-game reserve in Tanzania. Forbes estimates his net worth to be $3.3 billion.
On Wall Street, the roles are reversed. Mr. Prechter foresees a return to the Depression; Mr. Jones, who himself said a depression would follow the 1987 crash, may well be fully invested.
“People will be gasping,” Mr. Jones says with glee in the video, referring to the 1987 crash that he was sure would come. “It will be total rock ’n’ roll.”