The End of Wall Street, Sort Of

“The End of Wall Street,” Roger Lowenstein’s grandly titled account of the collapse of Merrill Lynch, Lehman Brothers and pretty much everything else in the fall of 2008, is instructive in more ways than merely reminding us of just how close to the edge we came in those few dark months.

Written in the classic Roger Lowenstein style—careful, precise, flowing—the book also re-informs us how we got there, which had nothing to do with the short-sellers on whom the whole mess was later blamed. It was subprime mortgages, and everybody wanted in.

But before taking us on that journey, Lowenstein starts the book with a dream—literally.

It is 2006 and ace investment veteran Bob Rodriguez dreams he is on trial, defending his firm’s holdings in Fannie and Freddie paper, which, in his dream, have gone bankrupt.

Rodriguez wakes up and recognizes the dream for the early-warning sign that it is. Having already lost faith in U.S. monetary policy during the reign of Alan Greenspan; and having sold all holdings of “Alt-A” paper in 2005, Rodriguez decides to review the firm’s holdings in Fannie and Freddie paper.

And he begins to sell them. All of them.

And this takes place fully two years before Fannie and Freddie will actually go into bankruptcy—or, at least, the moral equivalent of it: government seizure via “conservatorship.”

Lowenstein then moves the narrative to the subprime story itself: how everybody from Barney Frank to Angelo Mozilo helped subprime launch the first great bubble of the 21st Century; how smart guys like Pete Kelly at Merrill Lynch saw the writing on the wall and were overruled by the dumb guys in control; how brainiac regulators like Ben Bernanke didn’t expect it to come to grief; and how it did, anyway, come to its inevitable grief.

Along the way, Lowenstein brings Rodriguez back into the story as a sort of measuring stick by which the level of reaction to the excesses can be measured. As the book ends, Rodriguez is taking a sabbatical, having guided his FPA Capital Fund to the best 25 year track record of any diversified mutual fund.

Rodriguez’s part in this story is instructive, and it is no stretch to presume that Lowenstein, an early Warren Buffett biographer, includes him in the story to demonstrate that the dangers of subprime were not as opaque as a lot of people—even Wall Street veterans—wanted to pretend they were.

(Bill Miller of Legg Mason, for example, griped at the time that the government’s seizure of Fannie and Freddie was a “monumental policy error” and that the two did not “need capital and [yet] could not get it.” He was flat out wrong: they needed capital in size, and they could not get a new dime of it.)

But instead of focusing on the losers of the crisis—and there were many former investment stars in that category—what Lowenstein does is far more instructive: he puts the reader in the mind of a guy who actually did the careful, detailed work and who figured out, in real time, the dangers of what was transpiring.

There is more to the story, of course. How men like Stan O’Neal of Merrill and Chuck Prince of Citi were paid monumental sums, essentially, for failure ($161 million for O’Neal, $80 million for Prince), for one thing.

For another, how the AIG mastermind behind the biggest black hole in the entire crisis—Joe Cassano—“flew into a rage” when an AIG auditor “found errors in the way AIG had accounted for hedging transactions.” Unfortunately, the rage was directed at the poor auditor for pointing out errors, not at the errors themselves.

And how AIG CEO Martin Sullivan—another guy who would later get paid for failure, $47 million worth—and Cassano hid the company’s problems during a presentation to Wall Street’s Finest.

Oh, yes: and how some of the key players who brought this all on themselves tried to blame short-sellers as their handiwork unraveled.

If there is one aspect to Roger’s splendid re-telling of the whole, sordid story that we’d argue with, it’s the title (although authors do not necessarily choose their own titles). “The End of Wall Street” seems a bit over-dramatic. After all, Wall Street controls money. And when you control money, you control the show.

And, last we checked, the show goes on.

But for a reminder of what to look for the next time a bubble pops up yet nobody seems too worried about it, read Roger’s book.

And if you should have a bad dream about that bubble, pay attention to it. Bob Rodriguez did, and his investors are grateful.

Jeff Matthews

I Am Not Making This Up

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The content contained in this blog represents only the opinions of Mr. Matthews, who also acts as an advisor: clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.