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November 17 - November 26, 2022
At the end of every quarter, Lehman’s government securities business would “sell” securities to a counterparty in exchange for cash, which they’d use to pay down debt. But days after the quarter ended, Lehman would turn around and take the securities back onto their balance sheet and return the cash.
A land speculator that bought property primarily outside Los Angeles, SunCal secured approvals for residential development and then sold them to home builders at a hefty markup. Lehman pumped $2 billion into what appeared to be its can’t-fail transactions.
The firm was making bigger bets than it would ever be good for and nobody in the executive office seemed to understand or care.
“There will be a domino effect,” he said. “And the very next domino to fall sideways will be the commercial banks, who will swiftly become scared and start deleveraging, causing consumer borrowing to contract,
Lehman had in fact been pushing through a number of deals that didn’t make much sense. They were piling up too much leverage, taking on too much risk, and getting into businesses in which they lacked expertise. At times there appeared to be no strategy whatsoever guiding the firm.
the firm seemed willing to finance buyouts indiscriminately; loans to private-equity firms were piling up on the books. Some would get securitized and sold, but the pipeline was clogging up.
Gregory would also be staying on, allowed by Fuld to remain on the Lehman payroll as an out-of-the-way consultant, so that he could continue to qualify for his pension and deferred compensation.
Merrill’s balance sheet had continued to deteriorate—it was loaded with subprime loans the company had been unable to get rid of, and it likely needed to raise more money.
Thain didn’t pay much attention to the details, focusing mainly on the fact that Smith had happily brought over his favorite desk from his old office at the NYSE. But Smith billed the firm $800,000 for his services and submitted an itemized list of goods that included an $87,000 area rug, a $68,000 credenza, and a $35,115 commode.
At what point do you say let’s just get far ahead of anything that could come our way?”
Merrill sought to be a full-line producer: issuing mortgages, packaging them into securities, and then slicing and dicing them to CDOs. The firm began buying up mortgage servicers and commercial real estate firms, more than thirty in all, and in December 2006, it acquired one of the biggest subprime mortgage lenders in the nation, First Franklin, for $1.3 billion.
O’Neal had overlooked one critical factor—he hadn’t made any preparations for an inevitable downturn, having never paid much attention to risk management until it was too late.
With BISTROs, a bank took a basket of hundreds of corporate loans on its books, calculated the risk of the loans defaulting, and then tried to minimize its exposure by creating a special-purpose vehicle and selling slices of it to investors.
JP Morgan was protected from the risk of the loans going bad, and investors were paid premiums for taking on the risk.
Buoyed by their earnings, AIG executives stubbornly clung to the belief that their firm was invulnerable. They thought they’d dodged a bullet when, toward the end of 2005, they stopped underwriting insurance on CDOs that had pieces tied to subprime mortgage-backed securities.
That decision enabled them to avoid the most toxic CDOs, issued over the following two years.
The FP group had insured some $500 billion in assets, including more than $61 billion in subprime mortgages—most of that for European banks.
The beauty of AIG’s insurance—for a short time, at least—was that it enabled banks to step up their leverage without raising new money because they had insurance.
In early March, AIG’s board, after requiring Sullivan to redraft the proposed retention program more than once, approved a plan that would pay out $165 million in 2009 and $235 million in 2010.
repurchase agreements that enabled firms to use financial securities as collateral to borrow funds.
Insurers use premiums from ordinary customers, just as bankers use deposits from customers, to make investments.
For $150 million, Goldman could insure some $2.5 billion worth of debt.
“To address the perception that some institutions are too big to fail, we must improve the tools at our disposal for facilitating the orderly failure of a large, complex financial institution,”
he liked it so much that the Paulsons bought up three quarters of the ten-thousand-acre property starting in 2003 for $32.65 million.
Wachovia, the giant Charlotte-based bank that had just ousted its CEO after reporting a $708 million loss tied to the housing market.
Fannie and Freddie played the political game even more fiercely than their opponents, spending millions of dollars on armies of lobbyists on Capitol Hill.
But in 1999, under pressure from the Clinton administration, Fannie and Freddie began underwriting subprime mortgages.
“In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980s.”
the Bush administration lowered the amount of capital the two companies were required to have as a cushion against losses.
“We’re going to need broader emergency authorities too—for the resolution or wind-down of complex financial institutions that don’t have federal deposit insurance,”
The FDIC was about to seize IndyMac Bancorp, a mortgage lender, marking the fifth FDIC-insured bank failure that year and the biggest since the savings and loan debacle.
“We have a new kind of bank,” Stewart McKinney, U.S. representative from Connecticut, announced that year. “It is called ‘too big to fail.’ TBTF, and it is a wonderful bank.”
even though this massive insurance conglomerate had hundreds of billions of dollars’ worth of securities and collateral, given the credit crisis, it could find itself struggling to sell them fast enough or at high enough prices to meet its obligations.
how closely AIG was interconnected with the rest of Wall Street, having written insurance policies worth hundreds of billions of dollars that the brokerage firms relied on as a hedge against other trades.
half their book is the U.K.,”
“And their counterparties are outside the United States, and we don’t have jurisdiction over them.”
“To guarantee all the obligations of the holding company, we would have to ask Congress to use taxpayer money to guarantee obligations that are outside the U.S.,”
Russia had approached some Chinese officials to suggest that both countries start selling large amounts of Freddie and Fannie debt to force the United States to prop them up.
For Democrats, the pitch was that the step had to be taken to keep the system of mortgage financing functioning, while for Republicans the emphasis was on the systemic risk that Fannie and Freddie posed.
