Let’s spend some time discussing wealth and what the Bible has to say on this subject. It seems our society has become focused on wealth and becoming rich. We’re constantly reminded in this world that being rich is a good and desirable goal. We see this in the Wall Street Journal and listed on the Fortune 500. We read about it in daily newspapers and listen to ‘experts’ talk about wealth on programs such as CNN and Fox News. Most of us invest in the stock market with the hopes that we’ll one day strike it rich or at least receive high enough returns to retire comfortably. American CEO’s are the highest paid corporate leaders in the world with some earning 400-500 times what the average worker takes home. If you’re like me and have managed a business whether on your own or for a corporation, then you know that in today’s world, you’re only as good as your last week, month, quarter, year. Have a good week? Great, now have a good quarter. Have a good quarter? Spend an hour celebrating and then focus on the year. Have a good year? Better start planning a strategy to do even better next year. If you are successful, you receive rewards in the form of raises, bonuses, better benefits, etc. Have you ever wondered, as I have, whether all the time spent on the pursuit of business/working success is worth the time? Of course you don’t need to manage a business to feel the stress of the working world today. All of us are concerned with earning more money, working our way up, receiving better benefits…..and we’re all concerned with job security considering that we could be ‘downsized’, ‘reassigned’ or fired due to ‘synergies’ created by a merger. Even if you’ve been successful and have reached your financial goals, my guess is that you’ve reached the goal and thought - ‘Is this it?’ It probably hasn’t been as satisfying as you thought it would be. Regardless, it’s as though we’re all on this big treadmill that seems to be going faster and faster and we can’t get off and we can’t slow down. It’s as though someone is dangling a carrot in front of our faces that we can never quite reach. What does the Bible teach us about the pursuit of wealth?
“But if we have food and clothing, we will be content with that. People who want to get rich fall into temptation and a trap and into many foolish and harmful desires that plunge men into ruin and destruction. For the love of money is a root of all kinds of evil. Some people, eager for money, have wandered from the faith and pierced themselves with many griefs.” (1 Timothy 6:8-10)
The Bible teaches us that money isn’t the root of all evil (as is often quoted), but the love of money. If you believe that everything in the world is the Lord’s and you’re simply a steward of His possessions, then you won’t fall into the devil’s trap of falling in love with money and wealth. If you begin to view your money as only yours, to do with as you please, then you are starting down a dark path....which is what we, as a nation, have done.
Since public corporations seem to make up over 90% of what we read about in the business world, let’s take a moment and look at the decisions they make and why they make those decisions. As I’ve mentioned before, I have some experience with corporate decision-making. I’ve never been a CEO of a company, but like many others in middle management, I’ve had to execute senior management decisions within my area of responsibility. Let’s start by asking some basic, high level questions. What is the purpose of a corporation? What are the goals of a corporation? What influences the majority of high level decisions within a company?
Don’t worry, I won’t go into a long-winded discussion on microeconomics and financial statements. For our purposes here, we’ll stick to the basics. Obviously, public companies are focused on their stock price and the company’s return to shareholders. Companies initially issue stock in return for capital (cash) that they can use to grow their business, invest in research, etc. They want their stock price to rise so that their shareholders are satisfied and that, in return, benefits the employees of the company in many ways…increased salary, bonuses, stock options, career advancement, etc. The stock price is the focus of any publicly traded company. It is certainly the focus of anyone who invests in stocks or mutual funds.
Have you ever thought about what really affects stock prices? The answer is ....just about everything. Obviously, how well a company is performing financially and operationally impacts their stock price. The problem with stocks is that there are many other things that affect their prices - scandals, fraud, wars, terrorist activity, the overall economy, the overall stock market, interest rates, inflation, Federal Reserve decisions, Federal legislation, etc. If a big investment institution (private equity funds, hedge funds or the big Wall St. banks) buys or sells a big chunk of stock in a company, they have the power to raise or lower the price to some degree (regardless of what you're told, all investors are not the same). Mergers & acquisitions can have a big impact on stock prices. So, even though our society consistently tells us that we should invest in stocks because of past history (we always hear about past 5, 10, 30 years trends), does the past really give us a true indication of the future? As it relates to something as risky as the stock market, the past has absolutely no bearing on the future. Yes, you can see trends, but you can't see if a war is going to break-out tomorrow. You can't see if a terrorist event is going to happen tomorrow. Did 9/11 affect your checking account or savings account? Did the value of your CD's drop? No. How did your stocks do? We are blindly following flawed advice that says you have to invest in stocks in order to save for retirement. The U.S. has invested trillions in the stock market. Where is our faith? Are you placing faith in things of this world or your Creator? What do you think God sees when He looks at the stock market? I have an idea - greed. The truth is that the stock market is a house of cards and it's going to fall. How? I don't know specifically, but remember, only one card (a negative event) needs to fall for the whole house to come down.
For simplicity, if we were to point to one, overriding factor in a company’s stock price, I believe it would be growth. Stock analysts always point to a company’s sales/revenue growth, profit growth, prospects for growth, hindrances to growth, etc. when discussing stocks. Sales and revenue must continue to grow at an acceptable level (10%, 20%, 30+%), profits must grow, etc……in order for investors to continue to invest in a company’s stock. If you’re a CEO of a publicly traded company, you’re focused on (among many other things) how to grow your business through internal growth, acquisitions, etc., while keeping costs as low as possible. You're constantly under pressure to find ways to grow your business. You can't just run a nice profitable business, you must get bigger. The treadmill never stops running.
So, with these things in mind, let’s answer the questions above. What is the purpose of any corporation? We could say that companies provide products and services that benefit us…and that’s a good thing. This is certainly true for some companies, but the one overriding purpose for any publicly traded company is to make money. If you aren’t profitable, how long will your investors continue to support you? I think the Dot Com bust of 2000 showed us the answer. If you have a great idea, you better turn the idea into a profitable business within a couple of years (depending on the industry) or you’re going to find yourself under ever increasing pressure to do so. What are the goals of a corporation? Every publicly traded company has operational and financial objectives that will meet or exceed expectations. They must meet sales, revenue, cost and profit expectations or their stock could decline. What influences decisions within the company? Most high level decisions revolve around whether the outcome of these decisions will have a positive or negative impact on these same metrics – sales, revenue, costs and profits. If we step back for a moment and really think about what drives corporations and their decisions, we see one overriding theme - the pursuit of money. What does the Bible say about spending our lives in pursuit of money? God's Word is clear - pursue God, not money. The love and pursuit of money will lead you into all kinds of evil. If you're wondering how corporations can do evil, you won't have to look far. Remember, the measuring stick is not the world - don't compare yourself or your business to the world and think you're a-ok. The measuring stick is God's Word. Pollution, deforestation, fraud, embezzlement, bribes, 'creative' accounting, oppressing the poor, pursuit of profits above all else, etc. Think about the structure of a corporation. The people at the top are usually wealthy, while the people at the bottom struggle to get by. In fact, corporations are consistently rewarded for paying the lowest wages possible (an example is outsourcing) regardless of whether they are doing fine financially. Yes, people with more responsibility should make more, but not 400 times more and not at the expense of others. Every time you read about layoffs, outsourcing or 'downsizing', who usually loses their jobs? Those at the bottom of the corporate ladder are usually the most affected. Who usually benefits? The people at the top. Wall Street normally applauds these 'cost reductions'....which many times leads to more compensation to those making these decisions. They never mention the lives that are turned upside down because of these decisions. For weeks now (April 2007), I have been reading about how the downturn in the subprime market is causing a spike in foreclosures and mortgage company bankrupcies. Many articles have discussed how this could trickle down to affect many areas of the economy. Not one article I have seen (in the Wall St. Journal or other publications) has discussed the impact to the families who are being evicted due to the foreclosures. I'm sure their are many reasons for the problems - people taking on too much debt, economic downturn in some areas, overzealous mortgage salespeople & companies, etc., but this is how the world looks at things. Very rarely do we read about the human cost. This cost doesn't affect the bottom line. The corporate working world can chew you up and spit you out. God tells us this in His Word - you and I are going to have problems throughout our time on earth (work included). The difference for those that believe in Him is that we know He's watching over us. We will always receive what we need according to His will.
‘Keep your lives free from the love of money and be content with what you have, because God has said, "Never will I leave you; never will I forsake you."’ (Hebrews 13:5)
With all of this said, let’s ask the toughest question of all – is it easy to run a company in today's world based on the principles in God’s Word? I believe the short answer is no. Why? Because the #1 focus of most companies is the pursuit of money. If you were to listen to any publicly traded company’s quarterly earnings call, would the CEO begin talking about how they were following God’s plan? Would the CEO talk about how their success this quarter contributed to the company’s ability to give back to God? It seems a little strange to us to even suggest something like this. In today’s world, we inherently want to separate our working world from our personal world. We don’t think in terms of blessing and cursing as it applies to the companies we work for. Why? We like to think that if I live my personal life according to God’s Word, it’s ok if I let things slip when making decisions for my company. The truth is that God asks us to stand against our enemy in every aspect of our life. One of the benefits of forming a corporation is that employees of the corporation are shielded from liability (this changed to some degree with the Sarbanes-Oxley legislation, but we won’t go into details here). If a defect on a car causes an accident, the people involved in the accident don’t personally sue the CEO of the company who built the car, they sue the corporation. This is one of the ‘benefits’ of creating a corporation. In the same way, we feel that God (I was certainly included) wouldn’t ask us to stand against such overwhelming worldly thinking and actions at work. What if we were fired because we didn’t conform? Instead of relying on Him, we rely on ourselves and worry about how the world will react. Never forget, the world wants you to conform to its way of thinking and our workplace is just another conduit for our enemy to get to us. The Bible tells us that we must stand against our enemy - always. God is always faithful and will provide for us.
Let’s look at an example. If you’ve read my initial letters, then you know that I spent a few years working for a cable company. When our company launched our services in Knoxville, we had a few ‘adult’ channels as part of our channel lineup. I simply accepted this as part of being in this business. A couple of years after we launched, our company decided to launch ‘level 2’ adult channels. These are more graphic and the price is higher. I held out on offering these channels until we were the only division without them. Eventually, I gave in because ‘every other division offered them’ and they offered us more ‘revenue’. Once the Lord began to change me, I no longer viewed these channels as ‘revenue’. I viewed them as they truly were – a way for our enemy to lead people down dark paths. What came to mind for me was this – a family man who has never viewed pornography sees an ad for the Playboy channel late at night while watching ESPN. He decides to order one movie…which leads to other movies and possibly the Internet. After awhile, his wife discovers that he’s viewing these things and ……you can guess the rest. All of us are susceptible to this temptation (yes gentlemen, the Lord knows we are weak in this area. He created us to be visual, but only to look at our wives!). If someone is not a strong believer in God, all they need is a little push to get hooked on this stuff. Ask any pastor and they’ll tell you how damaging pornography can be. It can destroy marriages, families, homes.
“Your eye is the lamp of your body. When your eyes are good, your whole body also is full of light. But when they are bad, your body also is full of darkness.” (Luke 11:34).
Of course, it only starts out with a movie. This is how the enemy works. It became very clear that I was going right along with the plan. I can tell you that it is a very sobering moment when you see that you are being used by the enemy. Would I have felt responsible if the marriage of someone I knew ended because I decided to show these movies? Of course not, I’m simply trying to earn a living – who am I to push my values on someone else? This line of reasoning doesn’t make much sense to me now. I thought I was doing ok in this world, but I was not strong enough to resist our enemy because I was relying on my own understanding and strength…I failed time and again to resist.
“Trust in the LORD with all your heart and lean not on your own understanding; in all your ways acknowledge him, and he will make your paths straight.” (Proverbs 3:5-6)
Once I began following the Lord, I was led to this verse:
"Return, faithless people," declares the LORD, "for I am your husband. I will choose you—one from a town and two from a clan—and bring you to Zion. Then I will give you shepherds after my own heart, who will lead you with knowledge and understanding.” (Jeremiah 3:14-15)
Let’s briefly take a look at a few Bible verses that comment on wealth and the pursuit of wealth:
“Then Jesus said to his disciples, I tell you the truth, it is hard for a rich man to enter the kingdom of heaven. Again I tell you, it is easier for a camel to go through the eye of a needle than for a rich man to enter the kingdom of heaven." (Matthew 19:23-24)
Is Jesus telling us that if you are wealthy it is impossible to enter God’s kingdom? No. It is difficult for wealthy people to enter heaven because in most cases, wealth and the pursuit of riches becomes their master. They put their pursuit of wealth ahead of God and money becomes the focus of their lives. Are we warned about this? Absolutely.
"No one can serve two masters. Either he will hate the one and love the other, or he will be devoted to the one and despise the other. You cannot serve both God and Money.” (Matthew 6:24)
"Do not store up for yourselves treasures on earth, where moth and rust destroy, and where thieves break in and steal. But store up for yourselves treasures in heaven, where moth and rust do not destroy, and where thieves do not break in and steal. For where your treasure is, there your heart will be also." (Matthew 6:19-21)
How do you know who you’re serving? It’s not hard. If God asked you to give up everything as part of His plan for you, could you do it? Be honest. Two years ago I could not have done it. If you seek God and allow Him to change you, money will no longer be your master because He will give you true faith. The Lord may bless you with wealth, but you’ll view it as His – you will only be a steward of His money to use for His kingdom. This is how you determine whether money is your master. Do you view it as yours or His?
We are given many warnings about pursuing wealth:
“Looking at his disciples, he said: "Blessed are you who are poor, for yours is the kingdom of heaven. Blessed are you who hunger now, for you will be satisfied. Blessed are you who weep now, for you will laugh. Blessed are you when men hate you, when they exclude you and insult you and reject your name as evil, because of the Son of Man. "Rejoice in that day and leap for joy, because great is your reward in heaven. For that is how their fathers treated the prophets. "But woe to you who are rich, for you have already received your comfort. Woe to you who are well fed now, for you will go hungry. Woe to you who laugh now, for you will mourn and weep.” (Luke 6:20-25)
Don’t let the riches and pleasures of this world keep you from maturing spiritually:
“While a large crowd was gathering and people were coming to Jesus from town after town, he told this parable: "A farmer went out to sow his seed. As he was scattering the seed, some fell along the path; it was trampled on, and the birds of the air ate it up. Some fell on rock, and when it came up, the plants withered because they had no moisture. Other seed fell among thorns, which grew up with it and choked the plants. Still other seed fell on good soil. It came up and yielded a crop, a hundred times more than was sown." When he said this, he called out, "He who has ears to hear, let him hear." His disciples asked him what this parable meant. He said, "The knowledge of the secrets of the kingdom of God has been given to you, but to others I speak in parables, so that, " 'though seeing, they may not see; though hearing, they may not understand.'
"This is the meaning of the parable: The seed is the word of God. Those along the path are the ones who hear, and then the devil comes and takes away the word from their hearts, so that they may not believe and be saved. Those on the rock are the ones who receive the word with joy when they hear it, but they have no root. They believe for a while, but in the time of testing they fall away. The seed that fell among thorns stands for those who hear, but as they go on their way they are choked by life's worries, riches and pleasures, and they do not mature. But the seed on good soil stands for those with a noble and good heart, who hear the word, retain it, and by persevering produce a crop.” (Luke 8:4-15)
This is another parable that certainly applies to us today:
"Then he said to them, "Watch out! Be on your guard against all kinds of greed; a man's life does not consist in the abundance of his possessions." And he told them this parable: "The ground of a certain rich man produced a good crop. He thought to himself, 'What shall I do? I have no place to store my crops.' "Then he said, 'This is what I'll do. I will tear down my barns and build bigger ones, and there I will store all my grain and my goods. And I'll say to myself, "You have plenty of good things laid up for many years. Take life easy; eat, drink and be merry.” "But God said to him, 'You fool! This very night your life will be demanded from you. Then who will get what you have prepared for yourself?' "This is how it will be with anyone who stores up things for himself but is not rich toward God." (Luke 12:15-21)
What does the world tell us? Acquire all the money you can. There is certainly nothing wrong with having a reserve for tough times, but we are constantly told to store up as much as we can. This doesn’t mean that you should spend everything you earn, but seek God’s guidance on how He wants to use what has been given to you. Don’t store up a lot of money and then sit back and take it easy. We don’t know what’s going to happen tomorrow, so stay close to the Lord, do not put your faith in money.
"Whoever can be trusted with very little can also be trusted with much, and whoever is dishonest with very little will also be dishonest with much. So if you have not been trustworthy in handling worldly wealth, who will trust you with true riches? And if you have not been trustworthy with someone else's property, who will give you property of your own? (Luke 16:10-12)
We’re being told here that if you are faithful with a little, the Lord will give you more to manage for him…and not just wealth, but ‘true riches’. He will give you more authority to carry out His will. Most importantly, we are told that you cannot serve God and money. Don’t think that making lots of money and giving small amounts on Sunday means that you are serving God. If you are truly following the Lord, you are tithing on Sundays and giving when and where He asks you to give. Your focus is on Him.
There are many lessons given to us in James chapter 4. One of them speaks directly to us today regarding how we are living our lives. We pursue worldly business and things with no thought about what the Lord wishes us to do. We don’t ask God for what we need, we try to do it all ourselves.
“What causes fights and quarrels among you? Don't they come from your desires that battle within you? You want something but don't get it. You kill and covet, but you cannot have what you want. You quarrel and fight. You do not have, because you do not ask God. When you ask, you do not receive, because you ask with wrong motives, that you may spend what you get on your pleasures.
You adulterous people, don't you know that friendship with the world is hatred toward God? Anyone who chooses to be a friend of the world becomes an enemy of God. Or do you think Scripture says without reason that the spirit he caused to live in us envies intensely? But he gives us more grace. That is why Scripture says:
"God opposes the proud
but gives grace to the humble."
Submit yourselves, then, to God. Resist the devil, and he will flee from you. Come near to God and he will come near to you. Wash your hands, you sinners, and purify your hearts, you double-minded. Grieve, mourn and wail. Change your laughter to mourning and your joy to gloom. Humble yourselves before the Lord, and he will lift you up.
Brothers, do not slander one another. Anyone who speaks against his brother or judges him speaks against the law and judges it. When you judge the law, you are not keeping it, but sitting in judgment on it. There is only one Lawgiver and Judge, the one who is able to save and destroy. But you—who are you to judge your neighbor?
Now listen, you who say, "Today or tomorrow we will go to this or that city, spend a year there, carry on business and make money." Why, you do not even know what will happen tomorrow. What is your life? You are a mist that appears for a little while and then vanishes. Instead, you ought to say, "If it is the Lord's will, we will live and do this or that." As it is, you boast and brag. All such boasting is evil. Anyone, then, who knows the good he ought to do and doesn't do it, sins.” (James chapter 4)
We must overcome the world and our focus on worldly things through faith in Jesus Christ:
“You, dear children, are from God and have overcome them, because the one who is in you is greater than the one who is in the world.” (1 John 4:4)
“This is love for God: to obey his commands. And his commands are not burdensome, for everyone born of God overcomes the world. This is the victory that has overcome the world, even our faith. Who is it that overcomes the world? Only he who believes that Jesus is the Son of God.” (1 John 5:3-5)
"I have told you these things, so that in me you may have peace. In this world you will have trouble. But take heart! I have overcome the world." (John 16:33)
And finally, we are given warnings to those who are focused on wealth in this world and those that have taken advantage of the poor:
“Now listen, you rich people, weep and wail because of the misery that is coming upon you. Your wealth has rotted, and moths have eaten your clothes. Your gold and silver are corroded. Their corrosion will testify against you and eat your flesh like fire. You have hoarded wealth in the last days. Look! The wages you failed to pay the workmen who mowed your fields are crying out against you. The cries of the harvesters have reached the ears of the Lord Almighty. You have lived on earth in luxury and self-indulgence. You have fattened yourselves in the day of slaughter. You have condemned and murdered innocent men, who were not opposing you.” (James 5:1-6)
As you think about these things, remember what we’re told from this passage in Luke. No matter what you have done to this point, it’s never too late to allow God to change your life and accept His offer of salvation - until you leave this world. Once we die in this world, there are no more chances. The Bible is clear on this subject.
"There was a rich man who was dressed in purple and fine linen and lived in luxury every day. At his gate was laid a beggar named Lazarus, covered with sores and longing to eat what fell from the rich man's table. Even the dogs came and licked his sores.
"The time came when the beggar died and the angels carried him to Abraham's side. The rich man also died and was buried. In hell, where he was in torment, he looked up and saw Abraham far away, with Lazarus by his side. So he called to him, 'Father Abraham, have pity on me and send Lazarus to dip the tip of his finger in water and cool my tongue, because I am in agony in this fire.'
"But Abraham replied, 'Son, remember that in your lifetime you received your good things, while Lazarus received bad things, but now he is comforted here and you are in agony. And besides all this, between us and you a great chasm has been fixed, so that those who want to go from here to you cannot, nor can anyone cross over from there to us.'
"He answered, 'Then I beg you, father, send Lazarus to my father's house, for I have five brothers. Let him warn them, so that they will not also come to this place of torment.'
"Abraham replied, 'They have Moses and the Prophets; let them listen to them.'
" 'No, father Abraham,' he said, 'but if someone from the dead goes to them, they will repent.'
"He said to him, 'If they do not listen to Moses and the Prophets, they will not be convinced even if someone rises from the dead.' " (Luke 16:19-31)
I just read a couple of articles about why Americans are never satisfied with what we have. Even though we are the richest nation on earth, we want more. It’s always interesting to read secular articles try to explain these things when the Bible does a much better job in one sentence. In the fallen world in which we live, material gain is never good enough.
“…..the eyes of man are never satisfied.” (Proverbs 27:20)
In the end, we all need to remember why we’re here. We’re not here to live nice, comfortable lives and focus on gaining material wealth. We are here to love and serve our Creator in a spiritual war…just as He loves us. If our enemy has diverted you from your true purpose through worldly pursuits, it’s time to ask God for forgiveness and start on His path for your life. Remember, if you’re reading this, you still have time.
Lastly, it doesn’t take a doctoral degree to see what most corporations focus on – the pursuit of money and power. There’s not a whole lot of difference between corporations and governments in the world today (both are in the business of power and money). In some areas, they actually seem to be blending together. Where is this pursuit of money leading us? The above verses spell it out quite clearly. In addition, the Bible tells us that we will not be able to buy or sell unless we accept the mark of the beast. While I don’t believe that the mark of the beast is technology related (previous post – this is a spiritual mark), I do believe that technology will certainly come into play. How else could the coming political beast prevent buying and selling? By removing cash from the world’s economic system. To buy and sell, you will need to be part of the ‘system’. Who will control the ‘system’? In the physical world, it will obviously be this beast. In the spiritual realm, satan will be in control of this. He will put enormous pressure on us to relent and give up – give up our life in eternity. Now think about this – who is inventing the technology to do this? Our government? No. Private enterprise – corporations. Also remember that as larger and larger mergers & acquisitions take place, more control is placed in the hands of fewer people. The same thing is happening as governments grow larger and exert more control over us. So, fewer and fewer people are controlling more and more of our money supply, economic policies, job opportunities, etc. Does this make you a little uneasy? It should. Bible prophecy tells us that power will be consolidated at the very end of this age. It’s happening right in front of us.
Again, this isn’t an attack, it’s the truth. Corporations make decisions on what’s best for the company and pay no attention to whether it’s the correct, Biblical thing to do. In effect, they are not following God’s plan, but our enemy’s. If you are thinking that it is impossible to run a company according to Biblical principles in today’s world, then you believe our enemy’s lies – just as I did. This type of Godless decision-making will ultimately lead to technology that places the world into bondage. There will remain only one way to get free – Jesus Christ.
If you are someone in a leadership position within a company, ask yourself who you are following. Which team are you on? Regardless of what you’ve been told, there are only two teams. Be honest with yourself. Don’t let our enemy tell you that your life should be used to make money and die rich. If you lead a Godless life in the pursuit of money and never ask for forgiveness – never receive God’s offer of salvation, there will be nothing that He can do for you at that point. You will have rejected all that He did to save you from an eternity in desolation. Worldly success is a deception - don’t be deceived. True success is walking in our Father’s perfect will.
“Command those who are rich in this present world not to be arrogant nor to put their hope in wealth, which is so uncertain, but to put their hope in God, who richly provides us with everything for our enjoyment. Command them to do good, to be rich in good deeds, and to be generous and willing to share.” (1 Timothy 6:17-18)
Showing posts with label Wall Street. Show all posts
Showing posts with label Wall Street. Show all posts
Saturday, September 16, 2006
Wealth and the Bible - Wall St. Journal Article
After writing the previous post, I saw this in today's Wall Street Journal:
Wall Street's profit undertow: drugs and anxiety
By Tim McLaughlin 1 hour, 31 minutes ago
NEW YORK (Reuters) - Wall Street's push for record profits is ruining careers, tearing apart families and keeping drug dealers busy, mental health experts say.
While record bonuses make some Wall Street bankers feel invincible, others become emotional wrecks from pressure to perform and some hit rock bottom, experts say.
Harris Stratyner, a psychologist at Caron's New York Recovery Center, said some executives he treats are experimenting with cocaine, opiate-based drugs, Ecstasy and marijuana, as well as abusing alcohol.
"It's like they're chasing a dream. Even when they make tremendous profits, they're still worried," he said.
Alden Cass, a clinical psychologist who counsels Wall Streeters with drug addictions, said drug abuse and high anxiety are undercurrents to the current boom.
"When things are really good, they feel invulnerable," Cass said. "That can lead to adultery, substance abuse, problems with the law."
When it comes to profits, things are really good.
Six of the largest U.S. investment banks -- Goldman Sachs, Lehman Brothers, Citigroup, JPMorgan & Chase Co., Morgan Stanley and Bear Stearns -- combined for $17.6 billion in first-quarter profit this year. That's after shelling out $28.8 billion for pay and benefits, financial statements show.
Those profit and pay figures are more than double those seen in the first quarter of 2000, the last days before the dot-com bubble burst. New York's comptroller estimates Wall Street's 2006 bonuses will generate $1.6 billion in state tax revenue.
COCAINE AND HILLBILLY HEROIN
"To my knowledge, we have not seen an uptick in drug use," Morgan Stanley spokeswoman Jean Marie McFadden said.
The other five firms declined comment or did not return telephone calls.
But Cass said opiate abuse among his clients is rising and they openly talk about being hooked on prescription drugs like OxyContin, known as hillbilly heroin.
"That's what has changed from previous booms on Wall Street," he said.
Cass and Stratyner said their clients sometimes conceal their habits by taking prescription drugs they get for back surgery or sports-related injuries. The Internet has also expanded the black market for drugs.
Wall Street professionals in their 20s use Ritalin and Adderall, prescription drugs used to treat attention-deficit disorder and hyperactivity, to enhance their performance as they grind out 100-hour weeks, Cass said.
Big bonuses and the need to blow off steam have helped invigorate demand for cocaine in Manhattan, according to two junior bankers who did not want to be named.
Juan Rodriguez, convicted of selling drugs to investment bankers and other professionals, said his clients never complained about the price of cocaine, even as it escalated.
"My customers were all business individuals," Rodriguez said, citing Morgan Stanley bankers as among his clients.
Morgan Stanley said the company has a strong policy against substance abuse and uses random drug testing.
PASSING THE TEST
One hiring manager at a major New York bank said new staff must take a urine test, which is typical for the industry. But he said new hires can choose when to schedule the test during a 45-day period before their start date.
"Our drug test is not so much a test of whether you actually take drugs as it is an intelligence test to see if you can figure out how long it takes to get traces of the drug out of your system," said the manager, who asked not to be named.
The hiring manager said his employer also had a policy of random drug tests for employees but that in several years he had never encountered anyone subjected to such a test.
Drugs are not the only reason for executive meltdowns.
Overwhelming pressure and anxiety to meet profit goals undid star trader David Becker as he rose the Citigroup ladder.
Nine months after becoming global commodities chief, Becker found himself on the fast track to prison. The largest U.S. bank discovered in 2004 that Becker and others conspired to overstate profits by $20 million.
Becker, 41, pleaded guilty and is serving a 15-month sentence in federal prison. He declined to comment.
Before he committed his crime, he sought psychiatric help to deal with the pressure of balancing family and career, court papers show.
A metaphor for his life was a painting he owned depicting a man being pulled by all four limbs, Becker's psychiatrist, Dr. Barbara Deutsch, wrote to the judge in the case.
"He felt enormous pressure to make the group's budget at all costs," Deutsch wrote. "He felt identified with this tortured man."
Wall Street's profit undertow: drugs and anxiety
By Tim McLaughlin 1 hour, 31 minutes ago
NEW YORK (Reuters) - Wall Street's push for record profits is ruining careers, tearing apart families and keeping drug dealers busy, mental health experts say.
While record bonuses make some Wall Street bankers feel invincible, others become emotional wrecks from pressure to perform and some hit rock bottom, experts say.
Harris Stratyner, a psychologist at Caron's New York Recovery Center, said some executives he treats are experimenting with cocaine, opiate-based drugs, Ecstasy and marijuana, as well as abusing alcohol.
"It's like they're chasing a dream. Even when they make tremendous profits, they're still worried," he said.
Alden Cass, a clinical psychologist who counsels Wall Streeters with drug addictions, said drug abuse and high anxiety are undercurrents to the current boom.
"When things are really good, they feel invulnerable," Cass said. "That can lead to adultery, substance abuse, problems with the law."
When it comes to profits, things are really good.
Six of the largest U.S. investment banks -- Goldman Sachs, Lehman Brothers, Citigroup, JPMorgan & Chase Co., Morgan Stanley and Bear Stearns -- combined for $17.6 billion in first-quarter profit this year. That's after shelling out $28.8 billion for pay and benefits, financial statements show.
Those profit and pay figures are more than double those seen in the first quarter of 2000, the last days before the dot-com bubble burst. New York's comptroller estimates Wall Street's 2006 bonuses will generate $1.6 billion in state tax revenue.
COCAINE AND HILLBILLY HEROIN
"To my knowledge, we have not seen an uptick in drug use," Morgan Stanley spokeswoman Jean Marie McFadden said.
The other five firms declined comment or did not return telephone calls.
But Cass said opiate abuse among his clients is rising and they openly talk about being hooked on prescription drugs like OxyContin, known as hillbilly heroin.
"That's what has changed from previous booms on Wall Street," he said.
Cass and Stratyner said their clients sometimes conceal their habits by taking prescription drugs they get for back surgery or sports-related injuries. The Internet has also expanded the black market for drugs.
Wall Street professionals in their 20s use Ritalin and Adderall, prescription drugs used to treat attention-deficit disorder and hyperactivity, to enhance their performance as they grind out 100-hour weeks, Cass said.
Big bonuses and the need to blow off steam have helped invigorate demand for cocaine in Manhattan, according to two junior bankers who did not want to be named.
Juan Rodriguez, convicted of selling drugs to investment bankers and other professionals, said his clients never complained about the price of cocaine, even as it escalated.
"My customers were all business individuals," Rodriguez said, citing Morgan Stanley bankers as among his clients.
Morgan Stanley said the company has a strong policy against substance abuse and uses random drug testing.
PASSING THE TEST
One hiring manager at a major New York bank said new staff must take a urine test, which is typical for the industry. But he said new hires can choose when to schedule the test during a 45-day period before their start date.
"Our drug test is not so much a test of whether you actually take drugs as it is an intelligence test to see if you can figure out how long it takes to get traces of the drug out of your system," said the manager, who asked not to be named.
The hiring manager said his employer also had a policy of random drug tests for employees but that in several years he had never encountered anyone subjected to such a test.
Drugs are not the only reason for executive meltdowns.
Overwhelming pressure and anxiety to meet profit goals undid star trader David Becker as he rose the Citigroup ladder.
Nine months after becoming global commodities chief, Becker found himself on the fast track to prison. The largest U.S. bank discovered in 2004 that Becker and others conspired to overstate profits by $20 million.
Becker, 41, pleaded guilty and is serving a 15-month sentence in federal prison. He declined to comment.
Before he committed his crime, he sought psychiatric help to deal with the pressure of balancing family and career, court papers show.
A metaphor for his life was a painting he owned depicting a man being pulled by all four limbs, Becker's psychiatrist, Dr. Barbara Deutsch, wrote to the judge in the case.
"He felt enormous pressure to make the group's budget at all costs," Deutsch wrote. "He felt identified with this tortured man."
Wealth and the Bible - Private Equity & Hedge Funds
If you regularly read the business section in your local newspaper or subscribe to the Wall Street Journal, then you have been reading over the past few years about the rise of ‘Private Equity’ and Hedge Funds. We’re going to spend some time discussing these funds in this post along with an article that was published today in the Wall Street Journal. If you are unfamiliar with these funds, you’ll gain a little insight into what they are and what they do. We’re not going to go into details, we’ll simply look at what they do and apply to them what the Bible says about wealth and the accumulation of wealth. If you are (or were) wealthy and invested in these funds, you are probably starting to feel a little uncomfortable - because you know where this is going……
Hedge funds and private-equity funds are pools of private investor money. They typically boast of very high returns and therefore, attract large amounts of cash from very wealthy investors. There is a high degree of risk involved with these funds, but over recent years, the returns have been large enough to outweigh any perceived risk – and billions of dollars have flowed into them. Because of the promised high returns, they charge very high fees which are typically 2% of assets under management every year and 20% of any profits. So, they must be both aggressive and creative in order to make money for themselves and to keep their investors happy…..and from withdrawing their money. They have made billions of dollars in recent years for themselves and their investors. We’re going to take a brief look at how they have done this.
Have you ever been called by a hedge fund or private equity fund looking for new investment dollars? The answer for the vast majority of us is – no. The reason is that these funds cater to the rich. They are looking for multi-million dollar initial investments, not the few dollars you and I would put into a mutual fund every month. So, they are investment vehicles for the rich and are certainly influenced by very rich people. What does the Bible say about the rich and the pursuit of riches? We have already discussed this, so I will summarize here. The Bible tells us that we should seek the Lord and His Righteousness first – other things we need will be given to us. Do not love money, love the Lord. He will take care of us and give us all we need. What do you think the Lord sees when he looks at Wall Street and these funds? He sees wealthy people pursuing ever more wealth. Do these funds make money at the expense of the poor or less fortunate? Yes – they do. The pursuit of money has blinded us to how this money is made. This is what we’re going to focus on. Do you think the Lord approves of this type of behavior? We’ve already covered this topic in previous posts and the Bible is clear – the love of money is the root of all evil. It can’t get any clearer than this. So, if these funds and Wall Street in general are pursuing riches at all costs, how long do you think the Lord will allow it to continue? Will He allow the rich to continue to exploit the poor forever? I believe we’re about to find out that the answer is no. We are beginning to see this today – July 27, 2007. Let’s take a quick look at events that have transpired over the past few months that are beginning to have a very direct impact on Wall Street.
We discussed the current subprime mortgage problem in a previous post. Let’s do a quick review of what has happened and what may happen in the future as a result of these events. Subprime mortgages are mortgages that are given to homebuyers with poor credit. These mortgages typically have much higher overall interest rates than mortgages given to consumers with good credit. It appears that many of them are not fixed rate loans, but have adjustable interest rates so that the mortgage broker or bank can offer very low initial interest rates that will reset at a much higher rate at a later date. It’s what many would call a ‘teaser’ rate that looks good to the borrower and sells more mortgages. As the Federal Reserve has increased the Federal Funds Rate, many of these mortgages have reset at much higher interest rates which have then increased the monthly payments that many of these subprime borrowers must pay every month. As a result, many of the subprime borrowers have been unable to make these increased payments leading to a very dramatic increase in home foreclosures.
You may be wondering how this has affected Wall Street and hedge funds. Good question. Until recently, a housing downturn could have affected Wall Street due to the overall impact to the U.S. economy, but now there is a much more direct correlation. In recent years these loans have been sold by the banks who initiated the loans to the big Wall Street investment banks. The Wall Street banks have then re-packaged these loans into investment securities called collateralized debt obligations or CDO’s. These CDO’s have then been bought by many different hedge funds. In recent years, these have been attractive to investors because they promised high returns and with the housing boom and low interest rates, the risk involved seemed muted. With the downturn in the housing market and increased interest rates, it has become apparent that many subprime borrowers were issued loans they could not afford. They can’t refinance because the value of their home has not appreciated (in some cases has depreciated) and interest rates are now higher than their initial rate….so they’re trapped. With no options, they lose their homes in foreclosure. We can talk about why this has happened, but the bottom line is that many have taken advantage of the poorest of us in the pursuit of wealth. I’m sure that the borrowers, brokers, banks and Wall Street have all played a part in this, but the bottom line is that many wealthy people were profiting from these loans. From what we read, there is very little concern about the people who have lost their homes as a result of this. The vast majority of articles we read are about how this could affect hedge funds, the housing market and the stock market. Ever wonder what the Bible says about loaning money to the poor at high interest rates? The answer is there and remember, the Lord’s Word applies to us today, just as it applied to everyone alive when it was written.
“He who increases his wealth by exorbitant interest amasses it for another, who will be kind to the poor.” (Proverbs 28:8)
The Lord is clear: if you continue to exploit the poor, your wealth will be taken from you.
“You trample on the poor
and force him to give you grain.
Therefore, though you have built stone mansions,
you will not live in them;
though you have planted lush vineyards,
you will not drink their wine.
For I know how many are your offenses
and how great your sins.
You oppress the righteous and take bribes
and you deprive the poor of justice in the courts.
Therefore the prudent man keeps quiet in such times,
for the times are evil.
Seek good, not evil,
that you may live.
Then the LORD God Almighty will be with you,
just as you say he is. “ (Amos 5:11-14)
“He oppresses the poor and needy.
He commits robbery.
He does not return what he took in pledge.
He looks to the idols.
He does detestable things.
He lends at usury and takes excessive interest. Will such a man live? He will not! Because he has done all these detestable things, he will surely be put to death and his blood will be on his own head.” (Ezekiel 18:12-13)
“The LORD takes his place in court;
he rises to judge the people.
The LORD enters into judgment
against the elders and leaders of his people:
"It is you who have ruined my vineyard;
the plunder from the poor is in your houses.
What do you mean by crushing my people
and grinding the faces of the poor?"
declares the Lord, the LORD Almighty.” (Isaiah 3:13-15)
There are many other verses, but we’ll stop there. Where is this subprime problem leading? Hedge funds that invested heavily in these subprime securities are closing. Debt markets are tightening due to investor’s adversity to the perceived increase in risk. This, in turn, is making it much harder for private equity companies to fund their buyout deals. This issue, coupled with the housing downturn, is causing the stock market to fall (the NYSE dropped over 300 points yesterday). It shouldn’t surprise anyone who is spiritually mature that the exploitation of the poor by the wealthy is turning around to bite the wealthy. Will the current situation end softly or are we facing something much more dramatic? I believe we are seeing the beginning of the end of the financial dominance of the U.S. What we are seeing is only the beginning as the Lord begins to redistribute wealth from those focused on themselves and the pursuit of money to those who are following Him and His kingdom.
The following article appeared in the Wall Street Journal today. Take note of who is benefiting from the efforts of private equity and who is suffering.
IN THE TRENCHES
How a Blackstone Deal
Shook Up a Work Force
Layoffs at Travelport,
Dividend for Investors;
'On Pins and Needles'
By IANTHE JEANNE DUGAN
July 27, 2007; Page A1
CENTENNIAL, Colo. -- Not long after the Blackstone Group bought Travelport Ltd. last August, workers at the company's office campus here began feeling the squeeze.
Two months after the deal closed, scores of employees were lugging boxes of personal belongings to their cars, having lost their jobs. Under Blackstone's ownership, the travel-reservations conglomerate has laid off 841 people, about 10% of its work force. Blackstone, a private-equity firm, has already recouped all of the money it invested in Travelport.
__________________________________
RAPID PACE
• The Situation: After Blackstone Group bought Travelport, changes came swiftly for some workers.
• The Background: To capitalize on their investments more quickly, private-equity firms have been overhauling companies faster.
• The Bottom Line: Travelport has laid off 841 workers, and Blackstone has already recouped its investment.
_______________________________
Similar scenes have been unfolding at companies around the nation, a human toll of the corporate-buyout boom. Private-equity firms, which say they bring sorely needed financial discipline to poorly run companies, have been slashing costs and extracting profits at warp speed. As the cycle of buying and selling companies has intensified, life in the trenches can be unstable and traumatic.
By the end of 2007, Travelport expects to slash costs by $150 million. Last week, it brought public its online reservations unit, Orbitz Worldwide Inc., using the proceeds to pay off debt. Its Galileo unit, which feeds airline information to travel agents, is the focus of much of the overhaul. Many of the job cuts have occurred at the company's data-operations center here outside Denver, where some jobs have been outmoded by shifts in technology and in the way people buy airline tickets and rent cars, executives say.
John Kliegel, 41 years old, a computer-systems analyst, and his twin, Russell, a technical writer, were both laid off. They're selling the house they share because they can no longer afford it. Don Kleppinger, a 46-year-old software engineer with five sons, lost his job, leaving him without health insurance for several months. Grace Covyeau, 63, who lost her job as a telecommunications engineer, took a part-time job last month making sandwiches and coffee at King Soopers grocery store.
"It came as a shock," says Michael Berson, 49, who lost his job as a data engineer in October, three years after receiving a "Super Star" award for saving the company $1.2 million on telecommunications costs. Mr. Berson has moved to Tulsa, where he is looking for a new job.
In addition to the 841 layoffs, 1,500 Travelport workers have left voluntarily since the buyout. The company says it has hired 1,582 new workers during that period, and has invested heavily in new technology.
Travelport Chief Executive Jeff Clarke describes the Centennial operation as the "factory" through which thousands of transactions pass every second. "We need to shift into new technologies," he says. "Some require productivity improvements and often will lead to layoffs."
To complete their $4.3 billion Travelport purchase, Blackstone and Technology Crossover Ventures, a Palo Alto, Calif., venture-capital firm that now owns 11%, invested $1 billion and borrowed the rest. That debt landed on Travelport's balance sheet. In March, Travelport borrowed an additional $1.1 billion and paid it out as a dividend to the two firms, returning all their money in just seven months.
"This is likely one of the quickest returns of invested capital for a private-equity deal of its size," Travelport's new chief financial officer, Michael Rescoe, said in a May conference call with analysts.
The buyout boom has been lucrative for Blackstone partners and investors, which include large institutions such as pension funds. Last year, Blackstone managed assets valued at about $88 billion and earned $2.27 billion, according to a prospectus for its own initial public offering in June. Its chief executive, Stephen Schwarzman, who resides in a 35-room Manhattan apartment, made more than $650 million on the offering and retained a 24% stake now worth more than $5 billion.
Such riches raise hackles among laid-off workers. "These investments are helping the fat cats by hurting the little guys," says Ms. Covyeau. "It'll make you sick."
Over the past five years, private-equity firms have bought more than 10,000 companies. This year, through June, 1,399 deals worth $582 billion have been announced, according to data provider Dealogic.
In order to recoup their investments quickly, buyout firms are speeding up everything -- closing deals more swiftly, cutting jobs and restructuring companies faster, and taking them public sooner. They've also been taking big cash payments out of the companies they buy, as Blackstone did with Travelport. These payments, known as "dividend recapitalizations," reached a record $25 billion in 2006, and are on pace to exceed that amount this year, according to Standard & Poor's Corp. In 2001, they amounted to just $1 billion. The payments increase pressure to cut costs.
"Layoffs are far more likely at firms that pay these dividends," says Steven Bavaria, who oversees bank-loan ratings at Standard & Poor's. "Employees left behind are doing more work, looking over their shoulders, feeling stressed."
At a congressional hearing in May, the Private Equity Council, a lobbying group, testified that buyouts often result in long-term job growth. It cited the Carlyle Group's 2005 purchase of auto-parts company AxleTech International Holdings Inc., which grew to 568 from 425 workers after it began supplying parts to military-vehicle makers.
In other cases, job cuts follow buyouts. After buying Hertz Global Holdings Inc. for $15 billion from Ford Motor Co. in late 2005, Clayton, Dubilier & Rice Inc. and a unit of Merrill Lynch & Co. collected a $1 billion dividend, then took the company public. This year, Hertz cut more than 2,000 jobs, or about 8% of its work force.
Last summer, Blackstone teamed up with Carlyle, Kohlberg Kravis Roberts & Co. and other buyout firms to buy VNU, the parent of Nielsen Media Research and ACNielsen, for about $10 billion. In December, the firm announced 4,100 job cuts, about 10% of its work force.
"None of us wants a single job to be cut," says Paul "Chip" Schorr IV, the Blackstone senior managing director who orchestrated the purchase of Travelport and now serves as its chairman. Mr. Schorr, 40, joined Blackstone in 2005 from the venture-capital arm of Citigroup Inc.
The layoffs at Travelport were one of many steps taken to revamp the company. All told, Travelport has reduced operating costs by 6%, the company says.
Before Blackstone bought it, Travelport was operating as the Travel Distribution Systems unit of Cendant Corp., a travel and real-estate conglomerate based in Parsippany, N.J. Cendant's founder and chief executive, Henry Silverman, a former Blackstone partner, had cobbled together Cendant's travel unit through a series of acquisitions.
Galileo, which Cendant bought in 2001, gets paid by airlines to feed information about airline schedules, pricing and inventory to travel agents. In addition, it runs the reservations system for United Airlines. Galileo is the largest contributor of Travelport revenue, which totaled $2.6 billion last year.
That business has been suffering. The Sept. 11 attacks curtailed airline travel, as did the outbreak of severe acute respiratory syndrome, or SARS. In 2003, struggling airlines reduced the fees they paid to middlemen such as Galileo.
Cendant also had gotten into the online travel-agency business by buying Orbitz, which competes with Travelocity, Expedia and others. Each time consumers use the site to book reservations for flights, rental cars and hotels, Orbitz collects a fee. As more consumers turned to the Internet for travel planning, the business grew.
But as airlines and hotels began handling reservations through their own Web sites, the middlemen lost business. In 2001, systems such as Galileo had handled 70% of airline reservations, according to Forrester Research, a market-research firm. These days, such systems handle just 50%. Cendant began laying off employees, and in 2005, it decided to split itself into four parts.
Mr. Schorr believed that Cendant hadn't fully integrated the systems behind the travel businesses it had acquired. "It was like having a house with eight kitchens," he says. If it eliminated overlapping systems, he believed, the business could become more efficient. He also saw growing opportunities in foreign markets such as the Middle East and Asia.
On Aug. 23, the day Blackstone took over, Mr. Clarke wrote to employees on an internal blog: "For most of us, our jobs won't change." Mr. Clarke, who had become chief executive a few months earlier, previously held senior positions at Computer Associates and at Compaq Computer Corp.
Some employees believed Blackstone's arrival would ease the belt-tightening and stress that had begun under Cendant. "A lot of us thought these layoffs would stop," says Gina Fugazzi, 51, who oversaw the company's voice systems in the U.S. "There was no more to cut."
Others had heard enough about how private-equity firms operate to be concerned about their jobs. Ms. Covyeau, the telecommunications manager, says many employees were "aware that the pattern at private-equity firms was streamlining work forces." Anxiety, she says, began rising.
In the blog, Mr. Clarke noted to employees that Travelport intended to re-engineer operations to reduce overlap and to eliminate "activities that are not contributing to our success."
The company decided to overhaul the telecommunications center housed in Centennial. "We are automating work that was done manually," explains Mr. Clarke.
Within weeks of the buyout, at a meeting with employees in Centennial, some managers warned that more cuts were coming. Ms. Covyeau says she began packing her boxes and told a manager: "Please, just give me a severance package and let me out of here."
One morning in October, managers in Centennial sent emails instructing employees to report to various conference rooms and cafeterias. Ms. Fugazzi says her heart sank when she walked into her designated room and found only about 20 people. "I suddenly realized I was in a group getting laid off," she says. A colleague, she recalls, spotted a tray of bagels and coffee and chortled: "Looks like this is our last supper."
A manager told them their jobs were being cut for economic reasons, according to several people who were there. Some employees burst into tears; others stared stoically. "I was devastated," recalls Ms. Fugazzi, who says she had planned to retire in four years. "I had the mentality that if you worked hard, you could keep your job forever."
When they got back to their desks, their email had been disabled. Guards lingered while employees filled boxes with belongings. The company declined to provide written references. In the confusion, some employees say, they were inadvertently given a wrong number to call about benefits -- it was a sex line. A company spokesman says only eight employees received the incorrect number, and the company corrected the mistake right away.
All told, Travelport laid off about 500 people that month, including veterans in their 50s and 60s who say they had good performance reviews and relatively high salaries of about $100,000.
Most of the layoffs occurred at Galileo. Gordon Wilson, Galileo's London-based chief executive, said in a written statement that many of the jobs had been outmoded by technology. For example, travel agents used to connect to Galileo's system by phone. Now, many of them access it via the Internet.
The company offered laid-off employees two weeks severance for every year they worked, according to several employees. Mr. Wilson declined to provide details about the severance packages, which he called "generous."
In December, Travelport announced the acquisition of Worldspan, one of Galileo's chief competitors, for $1.4 billion. At a Christmas party at the Denver Museum of Nature and Science, a Travelport executive assured remaining employees that 2007 would be more stable, according to people who were there.
In January, Mr. Clarke, the chief executive, reorganized Travelport into three brands -- Orbitz, Galileo and Gullivers Travel Associates, a wholesaler of hotel rooms and group tours. The company continued to cut jobs.
Galileo's Mr. Wilson says he has warned employees of "further changes" as the company completes the Worldspan acquisition. The deal could produce about $100 million in cost savings through the consolidation of sales staffs, data centers, and other operations, Mr. Clarke says.
In this year's first quarter, Travelport's profits were up 36% over the year-earlier period, to $157 million. Half of the profit improvement was because of revenue growth, the company says, 25% was because of vendor-related cost reductions and 25% was from productivity improvements, including reductions in the work force.
Mr. Wilson says Travelport's debt load has made it more urgent to generate cash. "If we can accelerate the reduction of our debt and therefore lessen our interest payments," he says, "no one would expect management to do otherwise."
With the Worldspan merger looming, employees at both companies say they are worried about their jobs. "We are all on pins and needles," says one employee. "Everybody here feels it's only a matter of time."
For many laid-off employees, finding new jobs hasn't been easy. Danny Carrasco, a software developer in his 50s, searched for five months before finding a job at a telecommunications company. Technical analyst Robert Renwick, 30, sent out more than 100 résumés over four months before landing a job at the local school district. He and his wife, a first-grade teacher, put off having children, he says. "I can't believe they would ruin all these lives to make a couple extra pennies," he says.
John Kliegel is earning 33% less as a program manager at a satellite company. His twin, Russell, is juggling job hunting with free-lancing. Mr. Kleppinger, the software engineer, once expected to retire at Travelport. He's now earning 20% less at a new job.
After months of searching, writing résumés and reading books on how to interview, Ms. Fugazzi landed a job with the Colorado Department of Human Services. She earns about $33,000 less than she did at Travelport, counting her old bonus. But the government job, she says, "feels more secure."
Write to Ianthe Jeanne Dugan at ianthe.dugan@wsj.com
Hedge funds and private-equity funds are pools of private investor money. They typically boast of very high returns and therefore, attract large amounts of cash from very wealthy investors. There is a high degree of risk involved with these funds, but over recent years, the returns have been large enough to outweigh any perceived risk – and billions of dollars have flowed into them. Because of the promised high returns, they charge very high fees which are typically 2% of assets under management every year and 20% of any profits. So, they must be both aggressive and creative in order to make money for themselves and to keep their investors happy…..and from withdrawing their money. They have made billions of dollars in recent years for themselves and their investors. We’re going to take a brief look at how they have done this.
Have you ever been called by a hedge fund or private equity fund looking for new investment dollars? The answer for the vast majority of us is – no. The reason is that these funds cater to the rich. They are looking for multi-million dollar initial investments, not the few dollars you and I would put into a mutual fund every month. So, they are investment vehicles for the rich and are certainly influenced by very rich people. What does the Bible say about the rich and the pursuit of riches? We have already discussed this, so I will summarize here. The Bible tells us that we should seek the Lord and His Righteousness first – other things we need will be given to us. Do not love money, love the Lord. He will take care of us and give us all we need. What do you think the Lord sees when he looks at Wall Street and these funds? He sees wealthy people pursuing ever more wealth. Do these funds make money at the expense of the poor or less fortunate? Yes – they do. The pursuit of money has blinded us to how this money is made. This is what we’re going to focus on. Do you think the Lord approves of this type of behavior? We’ve already covered this topic in previous posts and the Bible is clear – the love of money is the root of all evil. It can’t get any clearer than this. So, if these funds and Wall Street in general are pursuing riches at all costs, how long do you think the Lord will allow it to continue? Will He allow the rich to continue to exploit the poor forever? I believe we’re about to find out that the answer is no. We are beginning to see this today – July 27, 2007. Let’s take a quick look at events that have transpired over the past few months that are beginning to have a very direct impact on Wall Street.
We discussed the current subprime mortgage problem in a previous post. Let’s do a quick review of what has happened and what may happen in the future as a result of these events. Subprime mortgages are mortgages that are given to homebuyers with poor credit. These mortgages typically have much higher overall interest rates than mortgages given to consumers with good credit. It appears that many of them are not fixed rate loans, but have adjustable interest rates so that the mortgage broker or bank can offer very low initial interest rates that will reset at a much higher rate at a later date. It’s what many would call a ‘teaser’ rate that looks good to the borrower and sells more mortgages. As the Federal Reserve has increased the Federal Funds Rate, many of these mortgages have reset at much higher interest rates which have then increased the monthly payments that many of these subprime borrowers must pay every month. As a result, many of the subprime borrowers have been unable to make these increased payments leading to a very dramatic increase in home foreclosures.
You may be wondering how this has affected Wall Street and hedge funds. Good question. Until recently, a housing downturn could have affected Wall Street due to the overall impact to the U.S. economy, but now there is a much more direct correlation. In recent years these loans have been sold by the banks who initiated the loans to the big Wall Street investment banks. The Wall Street banks have then re-packaged these loans into investment securities called collateralized debt obligations or CDO’s. These CDO’s have then been bought by many different hedge funds. In recent years, these have been attractive to investors because they promised high returns and with the housing boom and low interest rates, the risk involved seemed muted. With the downturn in the housing market and increased interest rates, it has become apparent that many subprime borrowers were issued loans they could not afford. They can’t refinance because the value of their home has not appreciated (in some cases has depreciated) and interest rates are now higher than their initial rate….so they’re trapped. With no options, they lose their homes in foreclosure. We can talk about why this has happened, but the bottom line is that many have taken advantage of the poorest of us in the pursuit of wealth. I’m sure that the borrowers, brokers, banks and Wall Street have all played a part in this, but the bottom line is that many wealthy people were profiting from these loans. From what we read, there is very little concern about the people who have lost their homes as a result of this. The vast majority of articles we read are about how this could affect hedge funds, the housing market and the stock market. Ever wonder what the Bible says about loaning money to the poor at high interest rates? The answer is there and remember, the Lord’s Word applies to us today, just as it applied to everyone alive when it was written.
“He who increases his wealth by exorbitant interest amasses it for another, who will be kind to the poor.” (Proverbs 28:8)
The Lord is clear: if you continue to exploit the poor, your wealth will be taken from you.
“You trample on the poor
and force him to give you grain.
Therefore, though you have built stone mansions,
you will not live in them;
though you have planted lush vineyards,
you will not drink their wine.
For I know how many are your offenses
and how great your sins.
You oppress the righteous and take bribes
and you deprive the poor of justice in the courts.
Therefore the prudent man keeps quiet in such times,
for the times are evil.
Seek good, not evil,
that you may live.
Then the LORD God Almighty will be with you,
just as you say he is. “ (Amos 5:11-14)
“He oppresses the poor and needy.
He commits robbery.
He does not return what he took in pledge.
He looks to the idols.
He does detestable things.
He lends at usury and takes excessive interest. Will such a man live? He will not! Because he has done all these detestable things, he will surely be put to death and his blood will be on his own head.” (Ezekiel 18:12-13)
“The LORD takes his place in court;
he rises to judge the people.
The LORD enters into judgment
against the elders and leaders of his people:
"It is you who have ruined my vineyard;
the plunder from the poor is in your houses.
What do you mean by crushing my people
and grinding the faces of the poor?"
declares the Lord, the LORD Almighty.” (Isaiah 3:13-15)
There are many other verses, but we’ll stop there. Where is this subprime problem leading? Hedge funds that invested heavily in these subprime securities are closing. Debt markets are tightening due to investor’s adversity to the perceived increase in risk. This, in turn, is making it much harder for private equity companies to fund their buyout deals. This issue, coupled with the housing downturn, is causing the stock market to fall (the NYSE dropped over 300 points yesterday). It shouldn’t surprise anyone who is spiritually mature that the exploitation of the poor by the wealthy is turning around to bite the wealthy. Will the current situation end softly or are we facing something much more dramatic? I believe we are seeing the beginning of the end of the financial dominance of the U.S. What we are seeing is only the beginning as the Lord begins to redistribute wealth from those focused on themselves and the pursuit of money to those who are following Him and His kingdom.
The following article appeared in the Wall Street Journal today. Take note of who is benefiting from the efforts of private equity and who is suffering.
IN THE TRENCHES
How a Blackstone Deal
Shook Up a Work Force
Layoffs at Travelport,
Dividend for Investors;
'On Pins and Needles'
By IANTHE JEANNE DUGAN
July 27, 2007; Page A1
CENTENNIAL, Colo. -- Not long after the Blackstone Group bought Travelport Ltd. last August, workers at the company's office campus here began feeling the squeeze.
Two months after the deal closed, scores of employees were lugging boxes of personal belongings to their cars, having lost their jobs. Under Blackstone's ownership, the travel-reservations conglomerate has laid off 841 people, about 10% of its work force. Blackstone, a private-equity firm, has already recouped all of the money it invested in Travelport.
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RAPID PACE
• The Situation: After Blackstone Group bought Travelport, changes came swiftly for some workers.
• The Background: To capitalize on their investments more quickly, private-equity firms have been overhauling companies faster.
• The Bottom Line: Travelport has laid off 841 workers, and Blackstone has already recouped its investment.
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Similar scenes have been unfolding at companies around the nation, a human toll of the corporate-buyout boom. Private-equity firms, which say they bring sorely needed financial discipline to poorly run companies, have been slashing costs and extracting profits at warp speed. As the cycle of buying and selling companies has intensified, life in the trenches can be unstable and traumatic.
By the end of 2007, Travelport expects to slash costs by $150 million. Last week, it brought public its online reservations unit, Orbitz Worldwide Inc., using the proceeds to pay off debt. Its Galileo unit, which feeds airline information to travel agents, is the focus of much of the overhaul. Many of the job cuts have occurred at the company's data-operations center here outside Denver, where some jobs have been outmoded by shifts in technology and in the way people buy airline tickets and rent cars, executives say.
John Kliegel, 41 years old, a computer-systems analyst, and his twin, Russell, a technical writer, were both laid off. They're selling the house they share because they can no longer afford it. Don Kleppinger, a 46-year-old software engineer with five sons, lost his job, leaving him without health insurance for several months. Grace Covyeau, 63, who lost her job as a telecommunications engineer, took a part-time job last month making sandwiches and coffee at King Soopers grocery store.
"It came as a shock," says Michael Berson, 49, who lost his job as a data engineer in October, three years after receiving a "Super Star" award for saving the company $1.2 million on telecommunications costs. Mr. Berson has moved to Tulsa, where he is looking for a new job.
In addition to the 841 layoffs, 1,500 Travelport workers have left voluntarily since the buyout. The company says it has hired 1,582 new workers during that period, and has invested heavily in new technology.
Travelport Chief Executive Jeff Clarke describes the Centennial operation as the "factory" through which thousands of transactions pass every second. "We need to shift into new technologies," he says. "Some require productivity improvements and often will lead to layoffs."
To complete their $4.3 billion Travelport purchase, Blackstone and Technology Crossover Ventures, a Palo Alto, Calif., venture-capital firm that now owns 11%, invested $1 billion and borrowed the rest. That debt landed on Travelport's balance sheet. In March, Travelport borrowed an additional $1.1 billion and paid it out as a dividend to the two firms, returning all their money in just seven months.
"This is likely one of the quickest returns of invested capital for a private-equity deal of its size," Travelport's new chief financial officer, Michael Rescoe, said in a May conference call with analysts.
The buyout boom has been lucrative for Blackstone partners and investors, which include large institutions such as pension funds. Last year, Blackstone managed assets valued at about $88 billion and earned $2.27 billion, according to a prospectus for its own initial public offering in June. Its chief executive, Stephen Schwarzman, who resides in a 35-room Manhattan apartment, made more than $650 million on the offering and retained a 24% stake now worth more than $5 billion.
Such riches raise hackles among laid-off workers. "These investments are helping the fat cats by hurting the little guys," says Ms. Covyeau. "It'll make you sick."
Over the past five years, private-equity firms have bought more than 10,000 companies. This year, through June, 1,399 deals worth $582 billion have been announced, according to data provider Dealogic.
In order to recoup their investments quickly, buyout firms are speeding up everything -- closing deals more swiftly, cutting jobs and restructuring companies faster, and taking them public sooner. They've also been taking big cash payments out of the companies they buy, as Blackstone did with Travelport. These payments, known as "dividend recapitalizations," reached a record $25 billion in 2006, and are on pace to exceed that amount this year, according to Standard & Poor's Corp. In 2001, they amounted to just $1 billion. The payments increase pressure to cut costs.
"Layoffs are far more likely at firms that pay these dividends," says Steven Bavaria, who oversees bank-loan ratings at Standard & Poor's. "Employees left behind are doing more work, looking over their shoulders, feeling stressed."
At a congressional hearing in May, the Private Equity Council, a lobbying group, testified that buyouts often result in long-term job growth. It cited the Carlyle Group's 2005 purchase of auto-parts company AxleTech International Holdings Inc., which grew to 568 from 425 workers after it began supplying parts to military-vehicle makers.
In other cases, job cuts follow buyouts. After buying Hertz Global Holdings Inc. for $15 billion from Ford Motor Co. in late 2005, Clayton, Dubilier & Rice Inc. and a unit of Merrill Lynch & Co. collected a $1 billion dividend, then took the company public. This year, Hertz cut more than 2,000 jobs, or about 8% of its work force.
Last summer, Blackstone teamed up with Carlyle, Kohlberg Kravis Roberts & Co. and other buyout firms to buy VNU, the parent of Nielsen Media Research and ACNielsen, for about $10 billion. In December, the firm announced 4,100 job cuts, about 10% of its work force.
"None of us wants a single job to be cut," says Paul "Chip" Schorr IV, the Blackstone senior managing director who orchestrated the purchase of Travelport and now serves as its chairman. Mr. Schorr, 40, joined Blackstone in 2005 from the venture-capital arm of Citigroup Inc.
The layoffs at Travelport were one of many steps taken to revamp the company. All told, Travelport has reduced operating costs by 6%, the company says.
Before Blackstone bought it, Travelport was operating as the Travel Distribution Systems unit of Cendant Corp., a travel and real-estate conglomerate based in Parsippany, N.J. Cendant's founder and chief executive, Henry Silverman, a former Blackstone partner, had cobbled together Cendant's travel unit through a series of acquisitions.
Galileo, which Cendant bought in 2001, gets paid by airlines to feed information about airline schedules, pricing and inventory to travel agents. In addition, it runs the reservations system for United Airlines. Galileo is the largest contributor of Travelport revenue, which totaled $2.6 billion last year.
That business has been suffering. The Sept. 11 attacks curtailed airline travel, as did the outbreak of severe acute respiratory syndrome, or SARS. In 2003, struggling airlines reduced the fees they paid to middlemen such as Galileo.
Cendant also had gotten into the online travel-agency business by buying Orbitz, which competes with Travelocity, Expedia and others. Each time consumers use the site to book reservations for flights, rental cars and hotels, Orbitz collects a fee. As more consumers turned to the Internet for travel planning, the business grew.
But as airlines and hotels began handling reservations through their own Web sites, the middlemen lost business. In 2001, systems such as Galileo had handled 70% of airline reservations, according to Forrester Research, a market-research firm. These days, such systems handle just 50%. Cendant began laying off employees, and in 2005, it decided to split itself into four parts.
Mr. Schorr believed that Cendant hadn't fully integrated the systems behind the travel businesses it had acquired. "It was like having a house with eight kitchens," he says. If it eliminated overlapping systems, he believed, the business could become more efficient. He also saw growing opportunities in foreign markets such as the Middle East and Asia.
On Aug. 23, the day Blackstone took over, Mr. Clarke wrote to employees on an internal blog: "For most of us, our jobs won't change." Mr. Clarke, who had become chief executive a few months earlier, previously held senior positions at Computer Associates and at Compaq Computer Corp.
Some employees believed Blackstone's arrival would ease the belt-tightening and stress that had begun under Cendant. "A lot of us thought these layoffs would stop," says Gina Fugazzi, 51, who oversaw the company's voice systems in the U.S. "There was no more to cut."
Others had heard enough about how private-equity firms operate to be concerned about their jobs. Ms. Covyeau, the telecommunications manager, says many employees were "aware that the pattern at private-equity firms was streamlining work forces." Anxiety, she says, began rising.
In the blog, Mr. Clarke noted to employees that Travelport intended to re-engineer operations to reduce overlap and to eliminate "activities that are not contributing to our success."
The company decided to overhaul the telecommunications center housed in Centennial. "We are automating work that was done manually," explains Mr. Clarke.
Within weeks of the buyout, at a meeting with employees in Centennial, some managers warned that more cuts were coming. Ms. Covyeau says she began packing her boxes and told a manager: "Please, just give me a severance package and let me out of here."
One morning in October, managers in Centennial sent emails instructing employees to report to various conference rooms and cafeterias. Ms. Fugazzi says her heart sank when she walked into her designated room and found only about 20 people. "I suddenly realized I was in a group getting laid off," she says. A colleague, she recalls, spotted a tray of bagels and coffee and chortled: "Looks like this is our last supper."
A manager told them their jobs were being cut for economic reasons, according to several people who were there. Some employees burst into tears; others stared stoically. "I was devastated," recalls Ms. Fugazzi, who says she had planned to retire in four years. "I had the mentality that if you worked hard, you could keep your job forever."
When they got back to their desks, their email had been disabled. Guards lingered while employees filled boxes with belongings. The company declined to provide written references. In the confusion, some employees say, they were inadvertently given a wrong number to call about benefits -- it was a sex line. A company spokesman says only eight employees received the incorrect number, and the company corrected the mistake right away.
All told, Travelport laid off about 500 people that month, including veterans in their 50s and 60s who say they had good performance reviews and relatively high salaries of about $100,000.
Most of the layoffs occurred at Galileo. Gordon Wilson, Galileo's London-based chief executive, said in a written statement that many of the jobs had been outmoded by technology. For example, travel agents used to connect to Galileo's system by phone. Now, many of them access it via the Internet.
The company offered laid-off employees two weeks severance for every year they worked, according to several employees. Mr. Wilson declined to provide details about the severance packages, which he called "generous."
In December, Travelport announced the acquisition of Worldspan, one of Galileo's chief competitors, for $1.4 billion. At a Christmas party at the Denver Museum of Nature and Science, a Travelport executive assured remaining employees that 2007 would be more stable, according to people who were there.
In January, Mr. Clarke, the chief executive, reorganized Travelport into three brands -- Orbitz, Galileo and Gullivers Travel Associates, a wholesaler of hotel rooms and group tours. The company continued to cut jobs.
Galileo's Mr. Wilson says he has warned employees of "further changes" as the company completes the Worldspan acquisition. The deal could produce about $100 million in cost savings through the consolidation of sales staffs, data centers, and other operations, Mr. Clarke says.
In this year's first quarter, Travelport's profits were up 36% over the year-earlier period, to $157 million. Half of the profit improvement was because of revenue growth, the company says, 25% was because of vendor-related cost reductions and 25% was from productivity improvements, including reductions in the work force.
Mr. Wilson says Travelport's debt load has made it more urgent to generate cash. "If we can accelerate the reduction of our debt and therefore lessen our interest payments," he says, "no one would expect management to do otherwise."
With the Worldspan merger looming, employees at both companies say they are worried about their jobs. "We are all on pins and needles," says one employee. "Everybody here feels it's only a matter of time."
For many laid-off employees, finding new jobs hasn't been easy. Danny Carrasco, a software developer in his 50s, searched for five months before finding a job at a telecommunications company. Technical analyst Robert Renwick, 30, sent out more than 100 résumés over four months before landing a job at the local school district. He and his wife, a first-grade teacher, put off having children, he says. "I can't believe they would ruin all these lives to make a couple extra pennies," he says.
John Kliegel is earning 33% less as a program manager at a satellite company. His twin, Russell, is juggling job hunting with free-lancing. Mr. Kleppinger, the software engineer, once expected to retire at Travelport. He's now earning 20% less at a new job.
After months of searching, writing résumés and reading books on how to interview, Ms. Fugazzi landed a job with the Colorado Department of Human Services. She earns about $33,000 less than she did at Travelport, counting her old bonus. But the government job, she says, "feels more secure."
Write to Ianthe Jeanne Dugan at ianthe.dugan@wsj.com
The End (of Wall Street)
I wrote the articles on ‘wealth and the Bible’ sometime in early to mid 2007. At the time, it appeared that the sub-prime housing market was heading for some serious trouble. It also seemed like there was a lot of lying, cheating and stealing going on – from the information I could find. I also posed a question at one point – how long will God allow this to continue? How long will He allow a small group of wealthy men – to continue to take advantage of us? The answer – it turns out – was less than a year.
Today is November 13, 2008. Over the past 2 months, we’ve watched the world’s economy seize up – prices for everything (stocks, bonds, commodities, etc) are plummeting. As bad as things are – they’re going to get worse. As I have mentioned multiple times before – when our wealth is gone – which path will we take? We’ve watched where the world’s path takes us – destruction. Will we choose a different path this time?
The article below sums up what really goes on in Wall St. firms and describes how greed drove the housing market to ruin. It’s always best to learn the truth of what happened from someone who has been in the game. If you have purchased stocks, bonds, CDO’s – whatever – from Wall St. – this will explain exactly what you purchased – a lie.
jg
____________________________
The End
by Michael Lewis Nov 11 2008
The era that defined Wall Street is finally, officially over. Michael Lewis, who chronicled its excess in Liar’s Poker, returns to his old haunt to figure out what went wrong.
Photoillustration by: Ji Lee
To this day, the willingness of a Wall Street investment bank to pay me hundreds of thousands of dollars to dispense investment advice to grownups remains a mystery to me. I was 24 years old, with no experience of, or particular interest in, guessing which stocks and bonds would rise and which would fall. The essential function of Wall Street is to allocate capital—to decide who should get it and who should not. Believe me when I tell you that I hadn’t the first clue.
I’d never taken an accounting course, never run a business, never even had savings of my own to manage. I stumbled into a job at Salomon Brothers in 1985 and stumbled out much richer three years later, and even though I wrote a book about the experience, the whole thing still strikes me as preposterous—which is one of the reasons the money was so easy to walk away from. I figured the situation was unsustainable. Sooner rather than later, someone was going to identify me, along with a lot of people more or less like me, as a fraud. Sooner rather than later, there would come a Great Reckoning when Wall Street would wake up and hundreds if not thousands of young people like me, who had no business making huge bets with other people’s money, would be expelled from finance.
When I sat down to write my account of the experience in 1989—Liar’s Poker, it was called—it was in the spirit of a young man who thought he was getting out while the getting was good. I was merely scribbling down a message on my way out and stuffing it into a bottle for those who would pass through these parts in the far distant future.
Unless some insider got all of this down on paper, I figured, no future human would believe that it happened.
I thought I was writing a period piece about the 1980s in America. Not for a moment did I suspect that the financial 1980s would last two full decades longer or that the difference in degree between Wall Street and ordinary life would swell into a difference in kind. I expected readers of the future to be outraged that back in 1986, the C.E.O. of Salomon Brothers, John Gutfreund, was paid $3.1 million; I expected them to gape in horror when I reported that one of our traders, Howie Rubin, had moved to Merrill Lynch, where he lost $250 million; I assumed they’d be shocked to learn that a Wall Street C.E.O. had only the vaguest idea of the risks his traders were running. What I didn’t expect was that any future reader would look on my experience and say, “How quaint.”
I had no great agenda, apart from telling what I took to be a remarkable tale, but if you got a few drinks in me and then asked what effect I thought my book would have on the world, I might have said something like, “I hope that college students trying to figure out what to do with their lives will read it and decide that it’s silly to phony it up and abandon their passions to become financiers.” I hoped that some bright kid at, say, Ohio State University who really wanted to be an oceanographer would read my book, spurn the offer from Morgan Stanley, and set out to sea.
Somehow that message failed to come across. Six months after Liar’s Poker was published, I was knee-deep in letters from students at Ohio State who wanted to know if I had any other secrets to share about Wall Street. They’d read my book as a how-to manual.
In the two decades since then, I had been waiting for the end of Wall Street. The outrageous bonuses, the slender returns to shareholders, the never-ending scandals, the bursting of the internet bubble, the crisis following the collapse of Long-Term Capital Management: Over and over again, the big Wall Street investment banks would be, in some narrow way, discredited. Yet they just kept on growing, along with the sums of money that they doled out to 26-year-olds to perform tasks of no obvious social utility. The rebellion by American youth against the money culture never happened. Why bother to overturn your parents’ world when you can buy it, slice it up into tranches, and sell off the pieces?
At some point, I gave up waiting for the end. There was no scandal or reversal, I assumed, that could sink the system.
Then came Meredith Whitney with news. Whitney was an obscure analyst of financial firms for Oppenheimer Securities who, on October 31, 2007, ceased to be obscure. On that day, she predicted that Citigroup had so mismanaged its affairs that it would need to slash its dividend or go bust. It’s never entirely clear on any given day what causes what in the stock market, but it was pretty obvious that on October 31, Meredith Whitney caused the market in financial stocks to crash. By the end of the trading day, a woman whom basically no one had ever heard of had shaved $369 billion off the value of financial firms in the market. Four days later, Citigroup’s C.E.O., Chuck Prince, resigned. In January, Citigroup slashed its dividend.
From that moment, Whitney became E.F. Hutton: When she spoke, people listened. Her message was clear. If you want to know what these Wall Street firms are really worth, take a hard look at the crappy assets they bought with huge sums of borrowed money, and imagine what they’d fetch in a fire sale. The vast assemblages of highly paid people inside the firms were essentially worth nothing. For better than a year now, Whitney has responded to the claims by bankers and brokers that they had put their problems behind them with this write-down or that capital raise with a claim of her own: You’re wrong. You’re still not facing up to how badly you have mismanaged your business.
Rivals accused Whitney of being overrated; bloggers accused her of being lucky. What she was, mainly, was right. But it’s true that she was, in part, guessing. There was no way she could have known what was going to happen to these Wall Street firms. The C.E.O.’s themselves didn’t know.
Now, obviously, Meredith Whitney didn’t sink Wall Street. She just expressed most clearly and loudly a view that was, in retrospect, far more seditious to the financial order than, say, Eliot Spitzer’s campaign against Wall Street corruption. If mere scandal could have destroyed the big Wall Street investment banks, they’d have vanished long ago. This woman wasn’t saying that Wall Street bankers were corrupt. She was saying they were stupid. These people whose job it was to allocate capital apparently didn’t even know how to manage their own.
At some point, I could no longer contain myself: I called Whitney. This was back in March, when Wall Street’s fate still hung in the balance. I thought, If she’s right, then this really could be the end of Wall Street as we’ve known it. I was curious to see if she made sense but also to know where this young woman who was crashing the stock market with her every utterance had come from.
It turned out that she made a great deal of sense and that she’d arrived on Wall Street in 1993, from the Brown University history department. “I got to New York, and I didn’t even know research existed,” she says. She’d wound up at Oppenheimer and had the most incredible piece of luck: to be trained by a man who helped her establish not merely a career but a worldview. His name, she says, was Steve Eisman.
Eisman had moved on, but they kept in touch. “After I made the Citi call,” she says, “one of the best things that happened was when Steve called and told me how proud he was of me.”
Having never heard of Eisman, I didn’t think anything of this. But a few months later, I called Whitney again and asked her, as I was asking others, whom she knew who had anticipated the cataclysm and set themselves up to make a fortune from it. There’s a long list of people who now say they saw it coming all along but a far shorter one of people who actually did. Of those, even fewer had the nerve to bet on their vision. It’s not easy to stand apart from mass hysteria—to believe that most of what’s in the financial news is wrong or distorted, to believe that most important financial people are either lying or deluded—without actually being insane. A handful of people had been inside the black box, understood how it worked, and bet on it blowing up. Whitney rattled off a list with a half-dozen names on it. At the top was Steve Eisman.
Steve Eisman entered finance about the time I exited it. He’d grown up in New York City and gone to a Jewish day school, the University of Pennsylvania, and Harvard Law School. In 1991, he was a 30-year-old corporate lawyer. “I hated it,” he says. “I hated being a lawyer. My parents worked as brokers at Oppenheimer. They managed to finagle me a job. It’s not pretty, but that’s what happened.”
He was hired as a junior equity analyst, a helpmate who didn’t actually offer his opinions. That changed in December 1991, less than a year into his new job, when a subprime mortgage lender called Ames Financial went public and no one at Oppenheimer particularly cared to express an opinion about it. One of Oppenheimer’s investment bankers stomped around the research department looking for anyone who knew anything about the mortgage business. Recalls Eisman: “I’m a junior analyst and just trying to figure out which end is up, but I told him that as a lawyer I’d worked on a deal for the Money Store.” He was promptly appointed the lead analyst for Ames Financial. “What I didn’t tell him was that my job had been to proofread the documents and that I hadn’t understood a word of the [obscenity deleted] things.”
Ames Financial belonged to a category of firms known as nonbank financial institutions. The category didn’t include J.P. Morgan, but it did encompass many little-known companies that one way or another were involved in the early-1990s boom in subprime mortgage lending—the lower class of American finance.
The second company for which Eisman was given sole responsibility was Lomas Financial, which had just emerged from bankruptcy. “I put a sell rating on the thing because it was a piece of [obscenity deleted],” Eisman says. “I didn’t know that you weren’t supposed to put a sell rating on companies. I thought there were three boxes—buy, hold, sell—and you could pick the one you thought you should.” He was pressured generally to be a bit more upbeat, but upbeat wasn’t Steve Eisman’s style. Upbeat and Eisman didn’t occupy the same planet. A hedge fund manager who counts Eisman as a friend set out to explain him to me but quit a minute into it. After describing how Eisman exposed various important people as either liars or idiots, the hedge fund manager started to laugh. “He’s sort of a [obscenity deleted] in a way, but he’s smart and honest and fearless.”
“A lot of people don’t get Steve,” Whitney says. “But the people who get him love him.” Eisman stuck to his sell rating on Lomas Financial, even after the company announced that investors needn’t worry about its financial condition, as it had hedged its market risk. “The single greatest line I ever wrote as an analyst,” says Eisman, “was after Lomas said they were hedged.” He recited the line from memory: “ ‘The Lomas Financial Corp. is a perfectly hedged financial institution: It loses money in every conceivable interest-rate environment.’ I enjoyed writing that sentence more than any sentence I ever wrote.” A few months after he’d delivered that line in his report, Lomas Financial returned to bankruptcy.
Eisman wasn’t, in short, an analyst with a sunny disposition who expected the best of his fellow financial man and the companies he created. “You have to understand,” Eisman says in his defense, “I did subprime first. I lived with the worst first. These guys lied to infinity. What I learned from that experience was that Wall Street didn’t give a [obscenity deleted] what it sold.”
Harboring suspicions about people’s morals and telling investors that companies don’t deserve their capital wasn’t, in the 1990s or at any other time, the fast track to success on Wall Street. Eisman quit Oppenheimer in 2001 to work as an analyst at a hedge fund, but what he really wanted to do was run money. FrontPoint Partners, another hedge fund, hired him in 2004 to invest in financial stocks. Eisman’s brief was to evaluate Wall Street banks, homebuilders, mortgage originators, and any company (General Electric or General Motors, for instance) with a big financial-services division—anyone who touched American finance. An insurance company backed him with $50 million, a paltry sum. “Basically, we tried to raise money and didn't really do it,” Eisman says.
Instead of money, he attracted people whose worldviews were as shaded as his own—Vincent Daniel, for instance, who became a partner and an analyst in charge of the mortgage sector. Now 36, Daniel grew up a lower-middle-class kid in Queens. One of his first jobs, as a junior accountant at Arthur Andersen, was to audit Salomon Brothers’ books. “It was shocking,” he says. “No one could explain to me what they were doing.” He left accounting in the middle of the internet boom to become a research analyst, looking at companies that made subprime loans. “I was the only guy I knew covering companies that were all going to go bust,” he says. “I saw how the sausage was made in the economy, and it was really freaky.” Danny Moses, who became Eisman’s head trader, was another who shared his perspective. Raised in Georgia, Moses, the son of a finance professor, was a bit less fatalistic than Daniel or Eisman, but he nevertheless shared a general sense that bad things can and do happen.
When a Wall Street firm helped him get into a trade that seemed perfect in every way, he said to the salesman, “I appreciate this, but I just want to know one thing: How are you going to screw me?”Heh heh heh, c’mon. We’d never do that, the trader started to say, but Moses was politely insistent: We both know that unadulterated good things like this trade don’t just happen between little hedge funds and big Wall Street firms. I’ll do it, but only after you explain to me how you are going to screw me. And the salesman explained how he was going to screw him. And Moses did the trade.
Both Daniel and Moses enjoyed, immensely, working with Steve Eisman. He put a fine point on the absurdity they saw everywhere around them. “Steve’s fun to take to any Wall Street meeting,” Daniel says. “Because he’ll say ‘Explain that to me’ 30 different times. Or ‘Could you explain that more, in English?’ Because once you do that, there’s a few things you learn. For a start, you figure out if they even know what they’re talking about. And a lot of times, they don’t!”
At the end of 2004, Eisman, Moses, and Daniel shared a sense that unhealthy things were going on in the U.S. housing market: Lots of firms were lending money to people who shouldn’t have been borrowing it. They thought Alan Greenspan’s decision after the internet bust to lower interest rates to 1 percent was a travesty that would lead to some terrible day of reckoning. Neither of these insights was entirely original. Ivy Zelman, at the time the housing-market analyst at Credit Suisse, had seen the bubble forming very early on. There’s a simple measure of sanity in housing prices: the ratio of median home price to income. Historically, it runs around 3 to 1; by late 2004, it had risen nationally to 4 to 1. “All these people were saying it was nearly as high in some other countries,” Zelman says. “But the problem wasn’t just that it was 4 to 1. In Los Angeles, it was 10 to 1, and in Miami, 8.5 to 1. And then you coupled that with the buyers. They weren’t real buyers. They were speculators.”
Zelman alienated clients with her pessimism, but she couldn’t pretend everything was good. “It wasn’t that hard in hindsight to see it,” she says. “It was very hard to know when it would stop.” Zelman spoke occasionally with Eisman and always left these conversations feeling better about her views and worse about the world. “You needed the occasional assurance that you weren’t nuts,” she says. She wasn’t nuts. The world was.By the spring of 2005, FrontPoint was fairly convinced that something was very screwed up not merely in a handful of companies but in the financial underpinnings of the entire U.S. mortgage market. In 2000, there had been $130 billion in subprime mortgage lending, with $55 billion of that repackaged as mortgage bonds. But in 2005, there was $625 billion in subprime mortgage loans, $507 billion of which found its way into mortgage bonds. Eisman couldn’t understand who was making all these loans or why. He had a from-the-ground-up understanding of both the U.S. housing market and Wall Street. But he’d spent his life in the stock market, and it was clear that the stock market was, in this story, largely irrelevant. “What most people don’t realize is that the fixed-income world dwarfs the equity world,” he says. “The equity world is like a [obscenity deleted] zit compared with the bond market.” He shorted companies that originated subprime loans, like New Century and Indy Mac, and companies that built the houses bought with the loans, such as Toll Brothers. Smart as these trades proved to be, they weren’t entirely satisfying. These companies paid high dividends, and their shares were often expensive to borrow; selling them short was a costly proposition.
Enter Greg Lippman, a mortgage-bond trader at Deutsche Bank. He arrived at FrontPoint bearing a 66-page presentation that described a better way for the fund to put its view of both Wall Street and the U.S. housing market into action. The smart trade, Lippman argued, was to sell short not New Century’s stock but its bonds that were backed by the subprime loans it had made. Eisman hadn’t known this was even possible—because until recently, it hadn’t been. But Lippman, along with traders at other Wall Street investment banks, had created a way to short the subprime bond market with precision.
Here’s where financial technology became suddenly, urgently relevant. The typical mortgage bond was still structured in much the same way it had been when I worked at Salomon Brothers. The loans went into a trust that was designed to pay off its investors not all at once but according to their rankings. The investors in the top tranche, rated AAA, received the first payment from the trust and, because their investment was the least risky, received the lowest interest rate on their money. The investors who held the trusts’ BBB tranche got the last payments—and bore the brunt of the first defaults. Because they were taking the most risk, they received the highest return. Eisman wanted to bet that some subprime borrowers would default, causing the trust to suffer losses. The way to express this view was to short the BBB tranche. The trouble was that the BBB tranche was only a tiny slice of the deal.
But the scarcity of truly crappy subprime-mortgage bonds no longer mattered. The big Wall Street firms had just made it possible to short even the tiniest and most obscure subprime-mortgage-backed bond by creating, in effect, a market of side bets. Instead of shorting the actual BBB bond, you could now enter into an agreement for a credit-default swap with Deutsche Bank or Goldman Sachs. It cost money to make this side bet, but nothing like what it cost to short the stocks, and the upside was far greater. The arrangement bore the same relation to actual finance as fantasy football bears to the N.F.L. Eisman was perplexed in particular about why Wall Street firms would be coming to him and asking him to sell short. “What Lippman did, to his credit, was he came around several times to me and said, ‘Short this market,’ ” Eisman says. “In my entire life, I never saw a sell-side guy come in and say, ‘Short my market.’ ” And short Eisman did—then he tried to get his mind around what he’d just done so he could do it better.
He’d call over to a big firm and ask for a list of mortgage bonds from all over the country. The juiciest shorts—the bonds ultimately backed by the mortgages most likely to default—had several characteristics. They’d be in what Wall Street people were now calling the sand states: Arizona, California, Florida, Nevada. The loans would have been made by one of the more dubious mortgage lenders; Long Beach Financial, wholly owned by Washington Mutual, was a great example. Long Beach Financial was moving money out the door as fast as it could, few questions asked, in loans built to self-destruct. It specialized in asking homeowners with bad credit and no proof of income to put no money down and defer interest payments for as long as possible. In Bakersfield, California, a Mexican strawberry picker with an income of $14,000 and no English was lent every penny he needed to buy a house for $720,000.
More generally, the subprime market tapped a tranche of the American public that did not typically have anything to do with Wall Street. Lenders were making loans to people who, based on their credit ratings, were less creditworthy than 71 percent of the population. Eisman knew some of these people. One day, his housekeeper, a South American woman, told him that she was planning to buy a townhouse in Queens. “The price was absurd, and they were giving her a low-down-payment option-ARM,” says Eisman, who talked her into taking out a conventional fixed-rate mortgage. Next, the baby nurse he’d hired back in 1997 to take care of his newborn twin daughters phoned him. “She was this lovely woman from Jamaica,” he says. “One day she calls me and says she and her sister own five townhouses in Queens. I said, ‘How did that happen?’ ” It happened because after they bought the first one and its value rose, the lenders came and suggested they refinance and take out $250,000, which they used to buy another one. Then the price of that one rose too, and they repeated the experiment. “By the time they were done,” Eisman says, “they owned five of them, the market was falling, and they couldn’t make any of the payments.”
In retrospect, pretty much all of the riskiest subprime-backed bonds were worth betting against; they would all one day be worth zero. But at the time Eisman began to do it, in the fall of 2006, that wasn’t clear. He and his team set out to find the smelliest pile of loans they could so that they could make side bets against them with Goldman Sachs or Deutsche Bank. What they were doing, oddly enough, was the analysis of subprime lending that should have been done before the loans were made: Which poor Americans were likely to jump which way with their finances? How much did home prices need to fall for these loans to blow up? (It turned out they didn’t have to fall; they merely needed to stay flat.) The default rate in Georgia was five times higher than that in Florida even though the two states had the same unemployment rate. Why? Indiana had a 25 percent default rate; California’s was only 5 percent. Why?
Moses actually flew down to Miami and wandered around neighborhoods built with subprime loans to see how bad things were. “He’d call me and say, ‘Oh my God, this is a calamity here,’ ” recalls Eisman. All that was required for the BBB bonds to go to zero was for the default rate on the underlying loans to reach 14 percent. Eisman thought that, in certain sections of the country, it would go far, far higher.The funny thing, looking back on it, is how long it took for even someone who predicted the disaster to grasp its root causes. They were learning about this on the fly, shorting the bonds and then trying to figure out what they had done.
Eisman knew subprime lenders could be scumbags. What he underestimated was the total unabashed complicity of the upper class of American capitalism. For instance, he knew that the big Wall Street investment banks took huge piles of loans that in and of themselves might be rated BBB, threw them into a trust, carved the trust into tranches, and wound up with 60 percent of the new total being rated AAA. But he couldn’t figure out exactly how the rating agencies justified turning BBB loans into AAA-rated bonds. “I didn’t understand how they were turning all this garbage into gold,” he says. He brought some of the bond people from Goldman Sachs, Lehman Brothers, and UBS over for a visit. “We always asked the same question,” says Eisman. “Where are the rating agencies in all of this? And I’d always get the same reaction. It was a smirk.” He called Standard & Poor’s and asked what would happen to default rates if real estate prices fell. The man at S&P couldn’t say; its model for home prices had no ability to accept a negative number. “They were just assuming home prices would keep going up,” Eisman says.
As an investor, Eisman was allowed on the quarterly conference calls held by Moody’s but not allowed to ask questions. The people at Moody’s were polite about their brush-off, however. The C.E.O. even invited Eisman and his team to his office for a visit in June 2007. By then, Eisman was so certain that the world had been turned upside down that he just assumed this guy must know it too. “But we’re sitting there,” Daniel recalls, “and he says to us, like he actually means it, ‘I truly believe that our rating will prove accurate.’ And Steve shoots up in his chair and asks, ‘What did you just say?’ as if the guy had just uttered the most preposterous statement in the history of finance. He repeated it. And Eisman just laughed at him.”“With all due respect, sir,” Daniel told the C.E.O. deferentially as they left the meeting, “you’re delusional.” This wasn’t Fitch or even S&P. This was Moody’s, the aristocrats of the rating business, 20 percent owned by Warren Buffett. And the company’s C.E.O. was being told he was either a fool or a crook by one Vincent Daniel, from Queens.
A full nine months earlier, Daniel and Moses had flown to Orlando for an industry conference. It had a grand title—the American Securitization Forum—but it was essentially a trade show for the subprime-mortgage business: the people who originated subprime mortgages, the Wall Street firms that packaged and sold subprime mortgages, the fund managers who invested in nothing but subprime-mortgage-backed bonds, the agencies that rated subprime-mortgage bonds, the lawyers who did whatever the lawyers did. Daniel and Moses thought they were paying a courtesy call on a cottage industry, but the cottage had become a castle. “There were like 6,000 people there,” Daniel says. “There were so many people being fed by this industry. The entire fixed-income department of each brokerage firm is built on this. Everyone there was the long side of the trade. The wrong side of the trade. And then there was us. That’s when the picture really started to become clearer, and we started to get more cynical, if that was possible. We went back home and said to Steve, ‘You gotta see this.’
”Eisman, Daniel, and Moses then flew out to Las Vegas for an even bigger subprime conference. By now, Eisman knew everything he needed to know about the quality of the loans being made. He still didn’t fully understand how the apparatus worked, but he knew that Wall Street had built a doomsday machine. He was at once opportunistic and outraged. Their first stop was a speech given by the C.E.O. of Option One, the mortgage originator owned by H&R Block. When the guy got to the part of his speech about Option One’s subprime-loan portfolio, he claimed to be expecting a modest default rate of 5 percent. Eisman raised his hand. Moses and Daniel sank into their chairs. “It wasn’t a Q&A,” says Moses. “The guy was giving a speech. He sees Steve’s hand and says, ‘Yes?’” “Would you say that 5 percent is a probability or a possibility?” Eisman asked. A probability, said the C.E.O., and he continued his speech.
Eisman had his hand up in the air again, waving it around. Oh, no, Moses thought. “The one thing Steve always says,” Daniel explains, “is you must assume they are lying to you. They will always lie to you.” Moses and Daniel both knew what Eisman thought of these subprime lenders but didn’t see the need for him to express it here in this manner. For Eisman wasn’t raising his hand to ask a question. He had his thumb and index finger in a big circle. He was using his fingers to speak on his behalf. Zero! they said. “Yes?” the C.E.O. said, obviously irritated. “Is that another question?”“No,” said Eisman. “It’s a zero. There is zero probability that your default rate will be 5 percent.” The losses on subprime loans would be much, much greater. Before the guy could reply, Eisman’s cell phone rang. Instead of shutting it off, Eisman reached into his pocket and answered it. “Excuse me,” he said, standing up. “But I need to take this call.” And with that, he walked out.
Eisman’s willingness to be abrasive in order to get to the heart of the matter was obvious to all; what was harder to see was his credulity: He actually wanted to believe in the system. As quick as he was to cry [obscenity deleted] when he saw it, he was still shocked by bad behavior. That night in Vegas, he was seated at dinner beside a really nice guy who invested in mortgage C.D.O.’s—collateralized debt obligations. By then, Eisman thought he knew what he needed to know about C.D.O.’s. He didn’t, it turned out. Later, when I sit down with Eisman, the very first thing he wants to explain is the importance of the mezzanine C.D.O. What you notice first about Eisman is his lips. He holds them pursed, waiting to speak. The second thing you notice is his short, light hair, cropped in a manner that suggests he cut it himself while thinking about something else. “
You have to understand this,” he says. “This was the engine of doom.” Then he draws a picture of several towers of debt. The first tower is made of the original subprime loans that had been piled together. At the top of this tower is the AAA tranche, just below it the AA tranche, and so on down to the riskiest, the BBB tranche—the bonds Eisman had shorted. But Wall Street had used these BBB tranches—the worst of the worst—to build yet another tower of bonds: a “particularly egregious” C.D.O. The reason they did this was that the rating agencies, presented with the pile of bonds backed by dubious loans, would pronounce most of them AAA. These bonds could then be sold to investors—pension funds, insurance companies—who were allowed to invest only in highly rated securities.
“I cannot [obscenity deleted] believe this is allowed—I must have said that a thousand times in the past two years,” Eisman says. His dinner companion in Las Vegas ran a fund of about $15 billion and managed C.D.O.’s backed by the BBB tranche of a mortgage bond, or as Eisman puts it, “the equivalent of three levels of dog [obscenity deleted] lower than the original bonds.” FrontPoint had spent a lot of time digging around in the dog [obscenity deleted] and knew that the default rates were already sufficient to wipe out this guy’s entire portfolio. “God, you must be having a hard time,” Eisman told his dinner companion. “No,” the guy said, “I’ve sold everything out.” After taking a fee, he passed them on to other investors. His job was to be the C.D.O. “expert,” but he actually didn’t spend any time at all thinking about what was in the C.D.O.’s. “He managed the C.D.O.’s,” says Eisman, “but managed what? I was just appalled. People would pay up to have someone manage their C.D.O.’s—as if this moron was helping you. I thought, You [obscenity deleted], you don’t give a [obscenity deleted] about the investors in this thing.”
Whatever rising anger Eisman felt was offset by the man’s genial disposition. Not only did he not mind that Eisman took a dim view of his C.D.O.’s; he saw it as a basis for friendship. “Then he said something that blew my mind,” Eisman tells me. “He says, ‘I love guys like you who short my market. Without you, I don’t have anything to buy.’ ”
That’s when Eisman finally got it. Here he’d been making these side bets with Goldman Sachs and Deutsche Bank on the fate of the BBB tranche without fully understanding why those firms were so eager to make the bets. Now he saw. There weren’t enough Americans with [obscenity deleted] credit taking out loans to satisfy investors’ appetite for the end product. The firms used Eisman’s bet to synthesize more of them. Here, then, was the difference between fantasy finance and fantasy football: When a fantasy player drafts Peyton Manning, he doesn’t create a second Peyton Manning to inflate the league’s stats. But when Eisman bought a credit-default swap, he enabled Deutsche Bank to create another bond identical in every respect but one to the original.
The only difference was that there was no actual homebuyer or borrower. The only assets backing the bonds were the side bets Eisman and others made with firms like Goldman Sachs. Eisman, in effect, was paying to Goldman the interest on a subprime mortgage. In fact, there was no mortgage at all. “They weren’t satisfied getting lots of unqualified borrowers to borrow money to buy a house they couldn’t afford,” Eisman says. “They were creating them out of whole cloth. One hundred times over! That’s why the losses are so much greater than the loans. But that’s when I realized they needed us to keep the machine running. I was like, This is allowed?”
This particular dinner was hosted by Deutsche Bank, whose head trader, Greg Lippman, was the fellow who had introduced Eisman to the subprime bond market. Eisman went and found Lippman, pointed back to his own dinner companion, and said, “I want to short him.” Lippman thought he was joking; he wasn’t. “Greg, I want to short his paper,” Eisman repeated. “Sight unseen.” Eisman started out running a $60 million equity fund but was now short around $600 million of various subprime-related securities. In the spring of 2007, the market strengthened. But, says Eisman, “credit quality always gets better in March and April. And the reason it always gets better in March and April is that people get their tax refunds. You would think people in the securitization world would know this. We just thought that was moronic.”
He was already short the stocks of mortgage originators and the homebuilders. Now he took short positions in the rating agencies—“they were making 10 times more rating C.D.O.’s than they were rating G.M. bonds, and it was all going to end”—and, finally, the biggest Wall Street firms because of their exposure to C.D.O.’s. He wasn’t allowed to short Morgan Stanley because it owned a stake in his fund. But he shorted UBS, Lehman Brothers, and a few others. Not long after that, FrontPoint had a visit from Sanford C. Bernstein’s Brad Hintz, a prominent analyst who covered Wall Street firms. Hintz wanted to know what Eisman was up to. “We just shorted Merrill Lynch,” Eisman told him.“Why?” asked Hintz.“We have a simple thesis,” Eisman explained. “There is going to be a calamity, and whenever there is a calamity, Merrill is there.” When it came time to bankrupt Orange County with bad advice, Merrill was there. When the internet went bust, Merrill was there. Way back in the 1980s, when the first bond trader was let off his leash and lost hundreds of millions of dollars, Merrill was there to take the hit. That was Eisman’s logic—the logic of Wall Street’s pecking order. Goldman Sachs was the big kid who ran the games in this neighborhood. Merrill Lynch was the little fat kid assigned the least pleasant roles, just happy to be a part of things. The game, as Eisman saw it, was Crack the Whip. He assumed Merrill Lynch had taken its assigned place at the end of the chain.
There was only one thing that bothered Eisman, and it continued to trouble him as late as May 2007. “The thing we couldn’t figure out is: It’s so obvious. Why hasn’t everyone else figured out that the machine is done?” Eisman had long subscribed to Grant’s Interest Rate Observer, a newsletter famous in Wall Street circles and obscure outside them. Jim Grant, its editor, had been prophesying doom ever since the great debt cycle began, in the mid-1980s. In late 2006, he decided to investigate these things called C.D.O.’s. Or rather, he had asked his young assistant, Dan Gertner, a chemical engineer with an M.B.A., to see if he could understand them. Gertner went off with the documents that purported to explain C.D.O.’s to potential investors and for several days sweated and groaned and heaved and suffered. “Then he came back,” says Grant, “and said, ‘I can’t figure this thing out.’ And I said, ‘I think we have our story.’ ”
Eisman read Grant’s piece as independent confirmation of what he knew in his bones about the C.D.O.’s he had shorted. “When I read it, I thought, Oh my God. This is like owning a gold mine. When I read that, I was the only guy in the equity world who almost had an [obscenity deleted].”
On July 19, 2007, the same day that Federal Reserve Chairman Ben Bernanke told the U.S. Senate that he anticipated as much as $100 billion in losses in the subprime-mortgage market, FrontPoint did something unusual: It hosted its own conference call. It had had calls with its tiny population of investors, but this time FrontPoint opened it up. Steve Eisman had become a poorly kept secret. Five hundred people called in to hear what he had to say, and another 500 logged on afterward to listen to a recording of it. He explained the strange alchemy of the C.D.O. and said that he expected losses of up to $300 billion from this sliver of the market alone. To evaluate the situation, he urged his audience to “just throw your model in the garbage can. The models are all backward-looking. The models don’t have any idea of what this world has become….
For the first time in their lives, people in the asset-backed-securitization world are actually having to think.” He explained that the rating agencies were morally bankrupt and living in fear of becoming actually bankrupt. “The rating agencies are scared to death,” he said. “They’re scared to death about doing nothing because they’ll look like fools if they do nothing.”
On September 18, 2008, Danny Moses came to work as usual at 6:30 a.m. Earlier that week, Lehman Brothers had filed for bankruptcy. The day before, the Dow had fallen 449 points to its lowest level in four years. Overnight, European governments announced a ban on short-selling, but that served as faint warning for what happened next. At the market opening in the U.S., everything—every financial asset—went into free fall. “All hell was breaking loose in a way I had never seen in my career,” Moses says.
FrontPoint was net short the market, so this total collapse should have given Moses pleasure. He might have been forgiven if he stood up and cheered. After all, he’d been betting for two years that this sort of thing could happen, and now it was, more dramatically than he had ever imagined. Instead, he felt this terrifying shudder run through him. He had maybe 100 trades on, and he worked hard to keep a handle on them all. “I spent my morning trying to control all this energy and all this information,” he says, “and I lost control. I looked at the screens. I was staring into the abyss. The end. I felt this shooting pain in my head. I don’t get headaches. At first, I thought I was having an aneurysm.”Moses stood up, wobbled, then turned to Daniel and said, “I gotta leave. Get out of here. Now.” Daniel thought about calling an ambulance but instead took Moses out for a walk.
Outside it was gorgeous, the blue sky reaching down through the tall buildings and warming the soul. Eisman was at a Goldman Sachs conference for hedge fund managers, raising capital. Moses and Daniel got him on the phone, and he left the conference and met them on the steps of St. Patrick’s Cathedral. “We just sat there,” Moses says. “Watching the people pass.” This was what they had been waiting for: total collapse. “The investment-banking industry is [obscenity deleted],” Eisman had told me a few weeks earlier. “These guys are only beginning to understand how [obscenity deleted] they are. It’s like being a Scholastic, prior to Newton. Newton comes along, and one morning you wake up: ‘Holy [obscenity deleted], I’m wrong!’ ”
Now Lehman Brothers had vanished, Merrill had surrendered, and Goldman Sachs and Morgan Stanley were just a week away from ceasing to be investment banks. The investment banks were not just [obscenity deleted]; they were extinct. Not so for hedge fund managers who had seen it coming. “As we sat there, we were weirdly calm,” Moses says. “We felt insulated from the whole market reality. It was an out-of-body experience. We just sat and watched the people pass and talked about what might happen next. How many of these people were going to lose their jobs. Who was going to rent these buildings after all the Wall Street firms collapsed.”
Eisman was appalled. “Look,” he said. “I’m short. I don’t want the country to go into a depression. I just want it to [obscenity deleted] deleverage.” He had tried a thousand times in a thousand ways to explain how screwed up the business was, and no one wanted to hear it. “That Wall Street has gone down because of this is justice,” he says. “They [obscenity deleted] people. They built a castle to rip people off. Not once in all these years have I come across a person inside a big Wall Street firm who was having a crisis of conscience.”
Truth to tell, there wasn’t a whole lot of hand-wringing inside FrontPoint either. The only one among them who wrestled a bit with his conscience was Daniel. “Vinny, being from Queens, needs to see the dark side of everything,” Eisman says. To which Daniel replies, “The way we thought about it was, ‘By shorting this market we’re creating the liquidity to keep the market going.’ ”“It was like feeding the monster,” Eisman says of the market for subprime bonds. “We fed the monster until it blew up.”
About the time they were sitting on the steps of the midtown cathedral, I sat in a booth in a restaurant on the East Side, waiting for John Gutfreund to arrive for lunch, and wondered, among other things, why any restaurant would seat side by side two men without the slightest interest in touching each other.There was an umbilical cord running from the belly of the exploded beast back to the financial 1980s. A friend of mine created the first mortgage derivative in 1986, a year after we left the Salomon Brothers trading program. (“The problem isn’t the tools,” he likes to say. “It’s who is using the tools. Derivatives are like guns.”)
When I published my book, the 1980s were supposed to be ending. I received a lot of undeserved credit for my timing. The social disruption caused by the collapse of the savings-and-loan industry and the rise of hostile takeovers and leveraged buyouts had given way to a brief period of recriminations. Just as most students at Ohio State read Liar’s Poker as a manual, most TV and radio interviewers regarded me as a whistleblower. (The big exception was Geraldo Rivera. He put me on a show called “People Who Succeed Too Early in Life” along with some child actors who’d gone on to become drug addicts.) Anti-Wall Street feeling ran high—high enough for Rudy Giuliani to float a political career on it—but the result felt more like a witch hunt than an honest reappraisal of the financial order.
The public lynchings of Gutfreund and junk-bond king Michael Milken were excuses not to deal with the disturbing forces underpinning their rise. Ditto the cleaning up of Wall Street’s trading culture. The surface rippled, but down below, in the depths, the bonus pool remained undisturbed. Wall Street firms would soon be frowning upon profanity, firing traders for so much as glancing at a stripper, and forcing male employees to treat women almost as equals. Lehman Brothers circa 2008 more closely resembled a normal corporation with solid American values than did any Wall Street firm circa 1985.
The changes were camouflage. They helped distract outsiders from the truly profane event: the growing misalignment of interests between the people who trafficked in financial risk and the wider culture.
I’d not seen Gutfreund since I quit Wall Street. I’d met him, nervously, a couple of times on the trading floor. A few months before I left, my bosses asked me to explain to Gutfreund what at the time seemed like exotic trades in derivatives I’d done with a European hedge fund. I tried. He claimed not to be smart enough to understand any of it, and I assumed that was how a Wall Street C.E.O. showed he was the boss, by rising above the details. There was no reason for him to remember any of these encounters, and he didn’t: When my book came out and became a public-relations nuisance to him, he told reporters we’d never met. Over the years, I’d heard bits and pieces about Gutfreund. I knew that after he’d been forced to resign from Salomon Brothers he’d fallen on harder times. I heard later that a few years ago he’d sat on a panel about Wall Street at Columbia Business School. When his turn came to speak, he advised students to find something more meaningful to do with their lives. As he began to describe his career, he broke down and wept.When I emailed him to invite him to lunch, he could not have been more polite or more gracious. That attitude persisted as he was escorted to the table, made chitchat with the owner, and ordered his food.
He’d lost a half-step and was more deliberate in his movements, but otherwise he was completely recognizable. The same veneer of denatured courtliness masked the same animal need to see the world as it was, rather than as it should be. We spent 20 minutes or so determining that our presence at the same lunch table was not going to cause the earth to explode. We discovered we had a mutual acquaintance in New Orleans. We agreed that the Wall Street C.E.O. had no real ability to keep track of the frantic innovation occurring inside his firm. (“I didn’t understand all the product lines, and they don’t either,” he said.) We agreed, further, that the chief of the Wall Street investment bank had little control over his subordinates. (“They’re buttering you up and then doing whatever the [obscenity deleted] they want to do.”)
He thought the cause of the financial crisis was “simple. Greed on both sides—greed of investors and the greed of the bankers.” I thought it was more complicated. Greed on Wall Street was a given—almost an obligation. The problem was the system of incentives that channeled the greed. But I didn’t argue with him. For just as you revert to being about nine years old when you visit your parents, you revert to total subordination when you are in the presence of your former C.E.O. John Gutfreund was still the King of Wall Street, and I was still a geek. He spoke in declarative statements; I spoke in questions. But as he spoke, my eyes kept drifting to his hands. His alarmingly thick and meaty hands. They weren’t the hands of a soft Wall Street banker but of a boxer. I looked up. The boxer was smiling—though it was less a smile than a placeholder expression.
And he was saying, very deliberately, “Your…[obscenity deleted]…book.” I smiled back, though it wasn’t quite a smile.“Your [obscenity deleted] book destroyed my career, and it made yours,” he said.I didn’t think of it that way and said so, sort of.
“Why did you ask me to lunch?” he asked, though pleasantly. He was genuinely curious.You can’t really tell someone that you asked him to lunch to let him know that you don’t think of him as evil. Nor can you tell him that you asked him to lunch because you thought that you could trace the biggest financial crisis in the history of the world back to a decision he had made. John Gutfreund did violence to the Wall Street social order—and got himself dubbed the King of Wall Street—when he turned Salomon Brothers from a private partnership into Wall Street’s first public corporation. He ignored the outrage of Salomon’s retired partners. (“I was disgusted by his materialism,” William Salomon, the son of the firm’s founder, who had made Gutfreund C.E.O. only after he’d promised never to sell the firm, had told me.)
He lifted a giant middle finger at the moral disapproval of his fellow Wall Street C.E.O.’s. And he seized the day. He and the other partners not only made a quick killing; they transferred the ultimate financial risk from themselves to their shareholders. It didn’t, in the end, make a great deal of sense for the shareholders. (A share of Salomon Brothers purchased when I arrived on the trading floor, in 1986, at a then market price of $42, would be worth 2.26 shares of Citigroup today—market value: $27.) But it made fantastic sense for the investment bankers. From that moment, though, the Wall Street firm became a black box.
The shareholders who financed the risks had no real understanding of what the risk takers were doing, and as the risk-taking grew ever more complex, their understanding diminished. The moment Salomon Brothers demonstrated the potential gains to be had by the investment bank as public corporation, the psychological foundations of Wall Street shifted from trust to blind faith. No investment bank owned by its employees would have levered itself 35 to 1 or bought and held $50 billion in mezzanine C.D.O.’s. I doubt any partnership would have sought to game the rating agencies or leap into bed with loan sharks or even allow mezzanine C.D.O.’s to be sold to its customers. The hoped-for short-term gain would not have justified the long-term hit.
No partnership, for that matter, would have hired me or anyone remotely like me. Was there ever any correlation between the ability to get in and out of Princeton and a talent for taking financial risk? Now I asked Gutfreund about his biggest decision. “Yes,” he said. “They—the heads of the other Wall Street firms—all said what an awful thing it was to go public and how could you do such a thing. But when the temptation arose, they all gave in to it.” He agreed that the main effect of turning a partnership into a corporation was to transfer the financial risk to the shareholders. “When things go wrong, it’s their problem,” he said—and obviously not theirs alone. When a Wall Street investment bank screwed up badly enough, its risks became the problem of the U.S. government.
“It’s laissez-faire until you get in deep [obscenity deleted],” he said, with a half chuckle. He was out of the game. It was now all someone else’s fault.He watched me curiously as I scribbled down his words. “What’s this for?” he asked. I told him I thought it might be worth revisiting the world I’d described in Liar’s Poker, now that it was finally dying. Maybe bring out a 20th-anniversary edition. “That’s nauseating,” he said.Hard as it was for him to enjoy my company, it was harder for me not to enjoy his. He was still tough, as straight and blunt as a butcher. He’d helped create a monster, but he still had in him a lot of the old Wall Street, where people said things like “A man’s word is his bond.” On that Wall Street, people didn’t walk out of their firms and cause trouble for their former bosses by writing books about them. “No,” he said, “I think we can agree about this: Your [obscenity deleted] book destroyed my career, and it made yours.” With that, the former king of a former Wall Street lifted the plate that held his appetizer and asked sweetly, “Would you like a deviled egg?”
Until that moment, I hadn’t paid much attention to what he’d been eating. Now I saw he’d ordered the best thing in the house, this gorgeous frothy confection of an earlier age. Who ever dreamed up the deviled egg? Who knew that a simple egg could be made so complicated and yet so appealing? I reached over and took one. Something for nothing. It never loses its charm.
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