It perhaps comes as no surprise to learn that Lehman Brothers’ CEO Dick Fuld was, and quite possibly is, a man who only heard what he wanted to hear.
On Wednesday September 10 2008 Fuld had to face up to one large reality, though – that the bank he headed had released third-quarter results for the year that involved a loss of $3.9 billion.
The rest, as they say, is history; the collapse of Lehman, the departure of Fuld, and a prolonged banking crisis.
The focus of Bethany McLean’s and Joe Nocera’s book All the Devils Are Here is how the seeds were sown for this crisis decades earlier, as the US financial system allowed huge bets to be wagered on the sub-prime mortgage market.
The writers introduce a cast of characters whom their cover’s subscript terms ‘the men who bankrupted the world’.
Worthy of note among these is former Countrywide Financial CEO Angelo Mozilo, a man whom a long-term colleague termed someone who was ‘very anxious to be successful’.
Mozilo is in some ways a living embodiment of the American dream. Born in the Bronx and ‘an extremely dark-skinned Italian-American’ he had experienced elements of racism in his youth, being refused service on one occasion by a Virginia Beach waiter because his establishment ‘did not serve coloureds’.
Perhaps understandably Mozilo did not think highly of America’s established financial order and was determined to make an impact and build up huge personal wealth.
He managed it, too, though while his work ethic was there for all to see, he was also a bully, and foul-mouthed with it – a street-fighter who could use force of personality to silence any dissenting voices.
Mozilo was one of those in the US financial sector who could not believe that the empire he had created was capable of crashing down around his ears.
Others who failed to grasp an increasingly obvious and unpalatable truth in 2007 were Ralph Cioffi and Matt Tannin, hedge fund managers at Bear Stearns, who in March of that year were discussing their fears of meltdown, while wondering if they could also be facing a great buying opportunity. It wasn’t the latter. As the book’s authors point out, within six months the mens’ two hedge funds were bankrupt.
If the fund managers’ nightmare was the ‘prologue to the financial crisis’, then what was ultimately to happen to Bear Stearns would prove to be ‘a rousing act one’.
Given what the crash meant for many, the authors’ use of ‘rousing’ is laced with irony. The company, as McLean and Nocera remind us, ‘was awash with mortgage-based securities of all sorts’ and the metaphorical ship was listing heavily in the face of a typhoon.
In retrospect, it is no surprise how rapidly the coup de grâce came for Bear. On Monday 10 March 2008 its stock was valued at around $70 per share, it had bank financing of around $120 billion and $18 billion in cash. Confidence in the firm was ebbing away fast, however.
By 12 March CEO Alan Schwarz was denying the bank’s liquidity problems on CNBC. All that did was panic lenders and investors all the more. By 17 March it had been sold to JP Morgan for $2 a share, later raised to $10.
‘The banks’ dirty little secret was now in the open’, add the authors. Some 30 years in the making the subsequent chaos sunk Lehman, came close to bringing down even the likes of Goldman Sachs and Morgan Stanley and its aftershocks are still being felt today.
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