TOO BIG TO FAIL
Discussion Questions
Note: I did not use questions but decided instead to make a visual presentation for this book. I made strips printed with each of the company names and handed out one or two to each member. Then I gave a really fast rundown as outlined below of what happened.
As each company/person was mentioned, I had that person raise their strip high. I kept it going at a fast pace. It got our group a lot of laughs and it took me about 20 minutes to do this exercise. It also brought home very clearly for us how much occurred in such a short amount of time.
One of our member (a financial planner) also gave a presentation to coincide with the topic.
Needless to say, the “discussion” of this book was one of our more lively!!
OUTLINE:
Aug. 9, 2007 – pg. 88, p 2 - first major indication of serious financial trouble – BNP Paribus announced that it would halt investors from withdrawing their money from 3 MMK’s w/ assets of some $2B, particularly those assets that were backed by American mtg. loans…the loans had dried up! Prior indicators included S. Korean economy near collapse in the fall of 1997 and the Russian ruble in 1998.
First in US to fail in March 2008, was BEAR STEARNS – pg. 14, last p. – hedge fund managers pulled their brokerage accounts, bought insurance against the bank using an instrument called CDS, or Credit Default Swap – and then shorted the bank. The Fed constructed a $29B backstop that convinced (Dimon) JP Morgan Chase to assume the firm’s obligations.
3/28/08, Friday – pgs. 54-57 - Lehman Brothers (Fuld) contacts Warren Buffet to try and raise $ 3-5B. Buffet initially indicates he might be interested in investing in preferred shares w/a dividend of 9% and warrants to buy shares of Lehman @ $30. The next day, the talks ended – Lehman’s annual report seemed “orchestrated. Plus, Lehman had been hit by a $355 M fraud by 2 employees at Marubini Bank in Japan, who used forged documents and imposters to carry out their crimes. Still, Lehman is able to raise $4B from a group of big investment funds already connected to Lehman.
04/02/08, Wed. – pgs 66 – 69 - Geithner of NY Federal Reserve, Bernanke (Fed. Res.), Steel (US Tres.) & Cox (SEC), also Bear Stearns & JPMC prepare to testify at Senate hearing regarding Bear Stearns/JPMC and govt’s role.
04/03/08, Thurs. pg 69/70 - Testimonies & Sen. Christopher Dodd asking: Was this a justified rescue to prevent a system collapse of financial markets, or a $30B taxpayer bailout…for a Wall Street firm while people on Main Street struggle to pay their mortgages?”
Question: pg. 80/81 explain the way business in 1997 were done that would further the problem – The way firms like JPMC or a Lehman now operated bore little resemblance to the way banks had traditionally done business. No longer would a bank simply make a loan and keep it on its books. Now lending was about origination – establishing the first link in a chain of securitization that spread risk of the loan among dozens if not hundreds and thousands of parties. (It) supposedly reduced the risk and increased liquidity, but what it meant in reality is that institutions & investors were now interconnected. Many financial firms had borrowed against these securities aka “leverage” to amplify their returns. Regulators around the world were having trouble understanding how all the pieces fit together.
Question: pg 91 What did you think of “Break the Glass” -- outlined how the govt is going to first address the problem by buying via securities in excess of $500B the toxic assets from financial institutions and unwind the positions over (up to) 10 years and to be managed by solicit qualified investors in the private sector for the govt. (And that the govt wasn’t too concerned as yet about passing it through Congress.)
April, 2008 - Pg. 94 – Treas. (Steel) unofficially contacts London’s Barclays Capital (Bob Diamond) to invest in Lehman’s.
Question: pg 97 – How had The Uptick Rule failed? – a regulation that had been introduce by the SEC in 1938 to prevent investors from continually shorting a stock that was falling. Ie: before a stock could be shorted, it first had to rise, indicating active buyers for it in the market.
Question: pg 98 - Gerald Donini head of global equities questions Jim Cramer (CNBC) of the Uptick Rule verses “naked shorting” in try to stop firms from shorting stocks. “Naked shorting” being when investors sell shares short, the investor first borrows the shares from a broker, sells them, and then hopes they drop in value so the investor can buy them at a lower price, replace the borrowed shares and pocket the difference as a profit… which is illegal – the investor never borrows the underlying shares, potentially allowing them to manipulate the market. Was Lehman doing this with the Peloton assets they had just bought…they said they were deleveraging but Cramer knew most of the assets were “bad stuff”.
April 9, 2007 pg 101/105 - Einhorn of Greenlight Capital launches Proj. code “The Credit Basket” and begins shorting 25 firms (incl. Lehman) and then over the next several weeks closed them out. But problems with Lehman become evident and he warns attendees at the Ira W. Sohn Investment Research Conference on May 21 of what was coming. What follows is Lehman’s stock drops 22.6% (pg. 110)
June 3, 2008, Tuesday -- Wall Street Journal reports “Losses Push Lehman to Weigh Raising New Capital” – Lehman had been in discussions with Korea Development Bank but it fails within days.
Question, pg 117 - One of Lehman’s own employees raises a question to Ernst & Young, CPA about one of Lehman’s accounting practices known as Repo 105 (repurchasing agreement)… At the end of every quarter, Lehman’s govt securities business would “sell” securities to a counter party in an exchange for cash, which they’d use to pay down debt. But days after the quarter ended, Leman would turn around and take the securities back onto their balance sheet and return the cash. (How could they if they used the $ to pay down debt?) These “repos” where instead being reported as “sales” which made the firm’s leverage look lower than it really was…. Employee became what Lehman thought was a Whistleblower!!!
June 11, 2008, Wed. pg135/137 – BlackRock (Fink) might buy Lehman, but inadvertently Merrill Lynch (Thain), had said and was misunderstood on CNBC that ML was “going to use valuable assets like, like Bloomberg & BlackRock, two of its critical assets to raise capital since ML was also feeling the stress. (By 2005, ML was considered the biggest CDO issuer on Wall Street. ) NOTE pg 160 – A banker creates a CDO (collateralized debt obligation) by assembling pieces of debt according to their credit ratings and their yields.
JUNE 15, 2008 pg 154 – Willumstad takes job as CEO of AIG which is on the brink of disaster due to its financial “shenanigans” of it AIG Financial Products Corp., pg 157.
Note: in the early Clinton years (he took office 1993 -2001) Goldman Sachs had lobbied for the Gramm-Leach_Bliley Act of 1999 that repealed the Glass-Steagall Act of 1933 that divided banks, brokers, and other financial businesses. The GLB included, however, a provision that allowed any bank that owned a physical power plant to continue to own it as a bank holding company. Goldman was the only bank that owned a power business.)
June 27, 2008 pgs 168/177 -- While at a meeting in Russia, Goldman Sachs considers partnering with AIG but did not make the critical connection that it too was in serious trouble.
July 4th weekend, pg 182/187 – Steel (US Treas.) leaves to become CEO of Wachovia, and Fannie Mae & Freddie Mac (govt sponsored enterprises GSE), which he oversaw, were coming undone. History: FMAE formed in 1938 by FDR, FMAC in 1970 by LBJ. In 1999, Clinton pressured both to underwrite subprime mgts. 2004-2008 they manipulated their earnings and were forced to restate years of results, both CEOS’s fired. March 2008, they stepped up their purchases of mtgs and by Wed., July 10, 2008 investors were unloading the stocks in droves.
July 11, 2008, Thurs, pg 189 -- Fuld (Lehman) contacts John Mack (Morgan Stanley), can we do a deal?
July 13, 2008, Sat. pg 192 – Paulson (US Treas.) gets Bush’s approval to stabilize Mae & Mac. FDIC (Bair) tells Paulson it is about to seize IndyMac Bancorp, a mtg lender, marking the 5th FDIC-insured bank failure that year and the biggest since the savings & loan debacle.
July 13, 2008, Sat. pg. 193/197 – Fuld offers to sell Mack (Morgan Stanley) its Neuberger Berman asset-management business and suggests MS buy its headquarters building on 7th Ave. He leaves with no agreement and neither party having the incentive to keep talking. (Previously, Lehman’s atty advises Fuld to turn Lehman into a bank holding co, giving it access to the Fed’s discount window indefinitely same as MS & Citigroup but making it regulated by the Fed. Reserve of NY.) Same day, Fuld talks with NY FedRes. (Geithner) who leaves him deflated on that idea. That night Fuld talks with atty asking if they should contact Bank of America.) ATTY & Fuld call Curl (BofA) who after a conf call w/Lewis CEO agrees to meet with Lehman. Pg 197.
July 14, 2008, Sun. 199 -- Fuld offers BofA up to 1/3 of Lehman and a merger of their investment bkg ops under the Lehman umbrella. BofA sees this as a reverse takeover: BofA would be paying LB to run its investment baking franchise… Curl of BofA says he would rather deal with LB but his CEO (Lewis) would probably prefer to buy Merrill or Morgan, leaving Fuld/atty wondering what was he signaling?
July 14, 2008, Sun pg 201 – Paulson announces on news that Treas. will purchase equity in MAE/MAC if needed. On Tuesday, the 16th he faces Congress who makes him acknowledge that it will be the taxpayer who funds this purchase. They are not happy.
July 21, Monday pg 206 – At a dinner for Paulson, Lehman (Fuld) reiterates deal with BofA (Lewis) & that he can buy Lehman at $25/share. Lewis thinks this is too high but holds his tongue. Two days later on the 23rd, Lewis tells Fuld no but leaves the door open to talk again.
July 29, Tues, pg 209/11 -- Willumstad (AIG) goes to NY Fed to ask for loan assistance thru its discount window as a bank holding company if the markets turn against it even though it is an insurance comp. but was intricately connected to the financial end with selling securities. Willumstad gets nowhere.
July 29, Tues, pg 211/212 – Fuld & team return from Korea after meeting with Korean Development Bank, which would continue to “talk” about a deal w/LB.
Aug. 6, Wed., pg 212/ -- Treas Dept. hires Morgan Stanley to help solve MAE/MAC problems. Same week KDC visits Lehman but decides “no deal”.
Aug 28, Thurs pg 227/229 -- AIG goes to JP Morgan to raise capital & extend company’s credit lines. Same day, the Treas. forces takeover of Fannie Mae/Freddie Mac.
Sept. 2, Tues pgs 238/240 – AIG returns to NY Fed asking to be anointed a primary dealer and have access to the Fed window. In its report left w/Fed, it clearly outlines that “if AIG went under, it could take the entire financial system along with it.”
Sept 3, Wed, pg 249 – JP Morgan and Citigroup meet w/Lehman but do not extend credit lines.
Sept. 10, Wed, pg 253/254 – Goldman Sachs wants to look at Lehman. Lehman announces via webcast its “bad bank/good bank” ie SpinCo. Plan to be called REI Global. But how would it be funded? One analyst says it would take $7B! Barclay’s London hears the webcast and redetermines to do a deal with Lehman “for a song”. Lehman, meanwhile, calls Morgan Stanley again and wants to deal and they agree to talk that night. After reviewing the numbers, MS decides no.
Sept 11, Thurs pg 270 – Analysts turn against Lehman’s SpinCo – and Lehman – en masse. Through Treas, however, Lehman and Barclay’s open talks. NY Fed asks that Fuld resign from the board of the NY Fed due to conflict of interest in any deal Fed arranges for Lehman, which he does. AIG calls Treasury again for assistance.
Sept 12, Fri pg 288/290 – CNBC announces there w/b no govt money in the resolution of LEH situation.” Merrill Lynch recognizes the shorts would be coming after them next! Fuld tells Barclay’s he would leave company to make the deal that Barclays finds odd since they don’t want him anyway. Analyst suggests AIG file for bankruptcy and then works to try and team AIG up with Buffett who says no but offers to buy some assets if they are interested but they are not. Buffett refuses again when they call back to sell assets for $25M.
Sept 12-14, Fri-Sun pg 299/ 375-- CEO’s (excluding Fuld) called to the Fed for a meeting on what to do about Lehman. They had the weekend to “figure it out,” otherwise they were “on their own.” CEO’s cannot come up with a plan for Lehman because they could not determine what Lehman’s asset were actually worth. Bu Sun. eve, Fed suggests $100B emergency fund, funded by each bank to help next emergency.
AIG presses Fed again for disc window but is ignored… meanwhile due diligence is being done on them by KKR, Salomon Brothers, Texas Pacific Grp and Allianz/Axa/Goldman Sachs during AIG “fire sale.” JPMC makes “ridiculous” deal to buy AIG.
Fuld calls Curl repeatedly but BofA refuses his calls. BofA not going to deal with Lehman (316). Fuld told about ML/BofA possible merger. Fed contacts AIG regarding their financial status. Barclay’s can’t get govt help with Lehman deal, so they call Buffett. Meanwhile, Barclays London/UK govt. tell US Fed they are not going to do Lehman deal. Fuld is told about UK not funding deal w/Barclays. Fed tells Lehman they have to file for bankruptcy (359) before midnight, Sunday night. By dinner, LB contacts Barclays about bankruptcy it buying US broker-dealer portion that is what Barclays wanted all along (366). After 7 PM, SEC tells LB to file bankruptcy. Fuld leaves LB and by 2 AM tells his wife it is over for LB.
Merrill Lynch (311 on Sat.) discuss to no conclusion to call BofA for a deal but then they talk only after Morgan Stanley suggests ML & MS talk merger, too, which they do in a secret meeting, same day. Later that night MS discuss looking to Wachovia, China Investment Corp and Mitsubishi. Meanwhile another member of ML is talking with Goldman Sachs that they should deal. By midday, ML and BofA have a deal and by 9:49 PM Fed is notified.
Sept. 15, Mon. 376/392 -- WSJ headlines: “Crisis on Wall Street as Lehman Totters, Merrill is sold and AIG seeks to raise cash.” LB had filed for bankruptcy at 1:45 AM.
Fed asks JPMC and GS to help save AIG and MS to protect the Fed’s interests. NY State Ins. Dept. formally agrees to allow AIG to use up to $20B as collateral to help stabilize the company. By 11 AM JPMC, GS & MS meet at the Fed. By 1 AM, they depart without a solution.
Sept. 16, Tues 392/411 -- Fed herald for not using taxpayers $ to bail out LB. At group meeting with GS/MS/JPMC tells Fed “AIG out of cash and deal stands little chance.” 10:45 AM – Fed suggest lending AIG $ using Fed Resv Act 18, pt 3 that permitted them to do this under “unusual & exigent circumstances.” Same morning, Treas hires Ed Liddy as new potential CEO for AIG. Fed loans $14B to AIG but AIG had to come up with the same in collateral that they do with forgotten stock certificates in their “unofficial vaults.” WHAT???? At 4 PM, Fed’s deal comes through the fax at $85B credit line but govt taking 79.9% ownership stake in warrants. AIG board approves deal with the understanding if it pays back govt, it lives again
Treas. notified by GS that Lehman’s European and Asian operations were forced by law to file for bankruptcy immediately, in part due to rehypothecation of LB’s US company…sorting assets was a logistical nightmare.
Sept. 17, Wed 412/ 432 --- Morgan Stanley sees a run on its money $20B, lowering it stock value by 28%. Citigroup offers help but by end of day says no.
Markets continue to drastically fall “Lehman-induced panic was spreading like a plague, the black death of Wall St.” Fed thinks of using $50B in the Treas under the Gold Reserve Act of 1934 to stabilize economy without Congressional approval but with Pres. Approval.
MS talks with Wachovia.
Sept 18, Thurs 433/ 448 -- Fed Resv, along with other central banks, announces plans to pump $180B to stimulate the financial system, but the scheme did not seem to be having any appreciable effect. GS stocks were down by another 7.4%.
US dept ceiling (amt US could take on) was currently at $10.615 Trillion (439), would Fed have to ask Congress to raise it again to save the economy?
UK announces a 30-day ban on short selling 29 stocks incl GS! Stock Market rises.
Treas., Fed & Fed Res Bk meet with President Bush suggesting govt buy $500B in toxic assets (443). That evening, they then meet with Pelosi for congressional approval.
MS asks Treas to contact China Investment Corp and invite them to do a deal with MS.
Sept 19, Fri 449/ 458-- Fed announces TARP – Troubled Asset Relief Program of buying up to $500B in toxic assets. (which turns into $700B next day pg 468)
MS learns of Wachovia’s real financial situation. Wachovia doubts MS. Both agree to do put a hold on the deal w/o announcing it. At lunch, MS pres. discuss amongst itself the China Invest Corp when Mitsubishi calls to do a deal. CIC arrives at MS, 9 PM and offers Mack $50B credit line & $B equity inv. (ridiculous!)
Fed suggest GS do a deal with Wachovia.
Barclay’s buys LB /4639B assets at bankruptcy court for $1.75B.
Sept. 20, Sat 459/473 -- Wachovia calls GS about a deal.
Fed instructs JPMC to deal with MS, which it does offering a $50B line of credit at the request of MS. Now Fed wants MS and Citigroup to merge. At 2 PM MS, the CIC deal is stalling, so another MS team contacts Mitsubishi to get a deal going in the middle of the night Tokyo time.
GS was meeting with General Electric/GE Capital telling them to raise capital since they were worried GS was going out of business.
MS meets with Fed to become a bank holding company and gets it (486).
GS meets and picks up Wachovia at airport.
Sept. 21, Sun. 473/ 488 -- MS prepares to meet with JPMC (urged indirectly by Fed) and decide to be selective about what they would and wouldn’t feature in the presentation and included only the bank’s collateral that they wouldn’t be able to pledge to the Fed, it represented some of the worst holding on its books! This causes JPMC to pull the plug within 2 hours!
GS & Wachovia meet again to try and work out a deal with Fed gty while a GS vice chair calls Buffett to see if he wants to get in on it. Buffett says the deal won’t happen. Fed will not gty toxic assets in GS/Wachovia deal (480). Deal off.
MS starts to feel strongly about Mitsubishi deal for $9B Mits gets 20% of MS. But when CIC gets wind of it, they walk out of deal.
GS is getting bank holding status with Fed. (484 & 486).
Sept 23, Tues. 489/ 491-- GS offers to sell Buffett $5B stock as preferred shares that paid 10% dividend and warrants up to $5B at $115/share price, provided GS’s top 4 officers not sell more than 10% of their shares until 2011 (even if they left the firm) or until Buffett sold his own. Buffett agrees. On that news alone, GS is able to sell another $5B of shares to investors…”wolves no longer at the GS door.”
TARP in trouble with Congress.
Sept 25, Thurs 492/ 493 – Paulson (Treas) gets down on bended knee and begs Pelosi to not break up TARP.
Sept 26, Fri 493/ -- FDIC seizes Washington Mutual making it the biggest bank failure in nation’s history. JPMC had won the auction for WaMu assets valued at $300B for $1.9M.
Citigroup wants to talk a deal with Wachovia but after meeting with them Fri and Sat, decide they can’t do it without govt assist after offering only $1 share for Wachovia.
Sept 28, Sun. 494/502 -- TARP discussions take all day until Eureka moment at night to block new golden parachutes, which was a sticking point for congress. Bail out rejected at 2:10 PM, 228 - 205.
Wachovia meets with Wells Fargo to do a deal. But after initially saying they were interested and would do it w/o govt assist, WF later that day says it won’t do it w/o govt assist (500). At 4 PM, FDIC tells Wachovia it had been sold to Citigroup by the govt for $1 per share, the govt would gty toxic assets after Citigroup accepted the first $42B in losses, declaring the firm was “systemically important.”
Sept 29, Mon 504/ -- FDIC calls Wachovia and tells them Wells Fargo interested in buying them for $7 a share w/o govt. assistance. Board accepts deal just after midnight. They call WF and FDIC, together they wake Citigroup and tell them. They are not happy.
Oct 3, Friday 507/ -- TARP is changed to use the $700B to invest directly into banks. Congress passes with tax breaks and FDIC increasing individual bank accts up to $250,000 from $100,000.
Oct 6, Mon. 508 -- Fuld faces Congressional hearing and says he will never understand what he could have done differently when the govt helped others but not LB.
Buffett contacts Treas regarding TARP offering help in getting Wall St. to accept it that would pay back the treas w/interest and be a Public-Private Partnership Fund (PPPF). Buffet, too, would invest $100M in stock offerings.
Oct. 8, Wed. 513/ -- UK announces plans to invest $87B in Barclays, Royal Bank of Scotland Grp, and six other banks in an effort to instill confidence after a near Lehman-like meltdown there.
Oct. 12, Sun 516/ -- Mitsubishi agrees to $9B deal with MS.
Feds meet again to further tweak TARP and call all the big 9 CEO’S to be ready to meet on Monday (Bank of America $25B, Citigroup $25B, JPMC $25B, GS $10B, MS $10B, Merrill Lynch, Wells Fargo $25B, Bank of NY, and State Street Bank $10B…all of which would get $ from TARP whether they liked it or not!) They had effectively nationalized the nation’s financial system (530).
Oct 13, Mon. 520/ Mitsubishi arrives in style at MS to present a $9B check, no one there except Rob Kindler, disheveled and dressed in khakis and flip flops.
EPILOGUE:
All the efforts did not immediately end the chaos. DOW went on to loose 37% of its value and even up to 1 year later, the public outcry was over what the tumult in the financial industry meant for the future of capitalism and about the govt’s role in the economy and whether that role had changed permanently.