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The Payoff by Jeff Connaughton
algorithmic trading, bank run, banking crisis, Bernie Madoff, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, cuban missile crisis, desegregation, Flash crash, locking in a profit, London Interbank Offered Rate, London Whale, Long Term Capital Management, naked short selling, Neil Kinnock, Plutocrats, plutocrats, Ponzi scheme, risk tolerance, Robert Bork, short selling, Silicon Valley, too big to fail, two-sided market, young professional
Next, we asked for a briefing by the SEC’s Enforcement Division. We wanted to learn about the status of its investigation into naked short selling of the stock of Bear Stearns and Lehman. At the briefing, SEC lawyers told us we’d have to be patient and that the investigation would take at least another year. They added that they couldn’t give us any details of the investigation but warned us that it’s almost impossible to prove intent under the current rule (that is, the reasonable-belief standard). Under this rule, anyone accused of naked short selling can simply say: “I reasonably believed I could find the stock in time.” In essence, the SEC lawyers confirmed our view that the rule against naked short selling was unenforceable and that they knew it. Most stock trades in the United States are cleared by a Wall Street backroom firm called the Depository Trust Clearing Corporation (DTCC).
We’d chatted for about fifteen minutes when Larry startled me by saying, “We want to be part of the solution, and we think we have a proposal that will work.” It turns out that months previously the DTCC had gone to the SEC with a proposed solution to naked short selling: The DTCC would create a computer system in which the actual shares of a stock must first be declimated (more simply: flagged or identified) before a broker could sell shares short. A centralized database would prevent the same shares from being used for multiple short sales. The DTCC believed that such a system would effectively stop naked short selling for the shares it cleared, which represented a vast majority of all shares traded in the United States. Larry told us that the SEC had received the DTCC proposal months ago but hadn’t done any follow-up. Instead, the SEC had asked Larry whether he was sure that the DTCC board (which is made up of representatives of Wall Street brokerage firms) supported the proposal.
Ted, a religious man, faithfully attended the Wednesday morning Senate prayer breakfasts. It was here that he developed close friendships with a number of Republican senators, who responded to the sincerity of Ted’s faith. Senator Johnny Isakson (R-GA) was one of them. Isakson and Ted shared an interest in financial issues, and both had recently received complaints from constituents about the naked short selling of stocks by hedge funds and about the SEC’s rescission of the uptick rule. If you think a stock is undervalued, you can buy in the belief that its price will rise over time. If you think a stock is overvalued, you can sell it short in the belief that its price will drop over time. Selling short involves selling shares you don’t own. If the price does drop, you can make a profit when you buy the stock to cover your short sale (if it rises, you make a loss).
algorithmic trading, automated trading system, Bernie Madoff, Bernie Sanders, Bretton Woods, buttonwood tree, computerized trading, corporate raider, creative destruction, credit crunch, Credit Default Swap, financial innovation, fixed income, Flash crash, High speed trading, housing crisis, index arbitrage, locking in a profit, Long Term Capital Management, margin call, market bubble, market fragmentation, market fundamentalism, Myron Scholes, naked short selling, pattern recognition, Ponzi scheme, quantitative trading / quantitative ﬁnance, Renaissance Technologies, Ronald Reagan, Sergey Aleynikov, short selling, Small Order Execution System, statistical arbitrage, technology bubble, transaction costs, Vanguard fund, Y2K
The creators of inverse exchange-traded funds, which increased in value as the market dropped, added that the uptick rule had interfered with the returns on their new, popular products. As soon as the rule disappeared, traders began engaging in a practice known as “naked” short selling, where speculators sold short stocks they didn’t physically possess. Actual shares are supposed to be borrowed from other investors in a short-selling transaction and returned when the short seller closes out his position with a purchase, but some investors were bending the rules. With naked short selling, it was theoretically possible to short more shares than a particular company actually had outstanding. In effect, it was a license to print stock certificates. This also was a violation of the law. The SEC could have sued them. Instead, Cox urged the SEC to revisit the rule and change the uptick requirement to a nickel.
In perhaps what was his most frustrating experience as a senator, Kaufman failed to get Banking Committee Chairman Senator Chris Dodd, a fellow Democrat, to add language about HFT and naked short-selling to the financial reform legislation he was crafting with Representative Barney Frank of Massachusetts, chairman of the House Financial Services Committee. The bill would be the most far-reaching overhaul of Wall Street and banking in 20 years. Said Senator Kaufman, “We went to people and we said, ‘There’s this incredible problem.’ Their basic thinking was, number one, it has got to be something that demonstrably was part of the problem that brought the market down, and high-frequency trading and naked short selling were not part of that problem.” After the Flash Crash, Senator Kaufman convinced Senator Mark Warner of Virginia to coauthor a letter to Dodd asking that Dodd add a provision to the financial reform bill requiring the SEC to study HFT and report its findings to the Congress.
The SEC never tested the elimination of the Uptick Rule during the market sentiments that derived the origination of the Uptick Rule in the first place—the bear market.” Instead of reinstituting the rule, however, the SEC opted for a temporary ban in short selling of 799 financial stocks. Members of Congress wanted to prevent short sellers from driving down the stock prices of weak banks that were beneficiaries of federal bailout dollars. In October 2009, when the ban expired, program traders again engaged in naked short selling. In fact, the market plunged the day after the temporary ban was lifted. Connaughton came up with an idea for Kaufman to have a voice in reforming Wall Street even though he wasn’t a member of the Banking Committee: He convinced Kaufman to pretend that he was a member over the next two years. They both understood the political process. They both understood that if Kaufman spoke publicly and repeatedly on targeted financial topics, he would develop traction in the press and on the Hill, regardless of his actual committee assignments.
Endless Money: The Moral Hazards of Socialism by William Baker, Addison Wiggin
Andy Kessler, asset allocation, backtesting, bank run, banking crisis, Berlin Wall, Bernie Madoff, Black Swan, Branko Milanovic, break the buck, Bretton Woods, BRICs, business climate, capital asset pricing model, commoditize, corporate governance, correlation does not imply causation, credit crunch, Credit Default Swap, crony capitalism, cuban missile crisis, currency manipulation / currency intervention, debt deflation, Elliott wave, en.wikipedia.org, Fall of the Berlin Wall, feminist movement, fiat currency, fixed income, floating exchange rates, Fractional reserve banking, full employment, German hyperinflation, housing crisis, income inequality, index fund, inflation targeting, Joseph Schumpeter, laissez-faire capitalism, land reform, liquidity trap, Long Term Capital Management, McMansion, mega-rich, money market fund, moral hazard, mortgage tax deduction, naked short selling, negative equity, offshore financial centre, Ponzi scheme, price stability, pushing on a string, quantitative easing, RAND corporation, rent control, reserve currency, riskless arbitrage, Ronald Reagan, school vouchers, seigniorage, short selling, Silicon Valley, six sigma, statistical arbitrage, statistical model, Steve Jobs, The Great Moderation, the scientific method, time value of money, too big to fail, upwardly mobile, War on Poverty, Yogi Berra, young professional
One can argue whether the restrictions placed on these activities is adequate or excessive, or for that matter, if they effectively serve the public good. But what is far more relevant is the SEC’s tacit allowance of naked short selling through what became known as the “Madoff Rule,” which exempted market makers from the same requirements to deliver stock after stock sales. This essentially provided broker-dealers with the ability to legally counterfeit securities, and to rent this resource out to hedge fund clients. Patrick Byrne, CEO of Overstock.com, a company victimized by relentless naked short selling, worked with reporter Mark Mitchell to reveal the extent of the naked short-selling problem through his web site www.deepcapture.com. Clearly this activity has been pernicious to the equity of some companies. However, it did not cause the downfall of the global economy or of the stock market.
In June 2008, Congress saw fit to investigate the exercise of judgment by investors of capital—often large, high-profile pensions and endowments—to devote a considerable allocation of assets to the commodities markets. Hedge funds make up an increasing allocation of institutional funds. Certain of their brokers secured special regulations that unfairly advantaged large customers, many of which manipulated commodity prices. Their use of short selling was heavily directed against the financial sector itself, and by July 2008 Congress looked into the matter, triggering the SEC to ban “naked” short selling of the common stocks of 19 banks and brokers. By generating such a list, the government favored some companies over others, socialistically guiding where dollars may and may not flow, to the detriment of others not privileged enough to 140 ENDLESS MONEY make the list. In September, the list was expanded to cover 799 financial firms for which no short selling would be permitted, even when it would be done with borrowed shares.2 The Congressional hearings are reminiscent of the government’s scrutiny of capital pools in the early 1930s.
Some think ETFs could fail because the custodians of their gold may be leasing out their deposits to traders at bullion banks who are selling the metal short to earn an interest spread. This may explain the churning in the gold markets in 2008-2009 and the heavy technical resistance seen at about $1,000 per ounce. In response to this fear, many have begun to buy specie instead, which would reveal this subterfuge and also suspected naked short selling by bullion banks generally. An interesting alternative to specie is digital gold, essentially deposit accounts that enable electronic transactions for commerce that are 100 percent reserved. James Turk pioneered this product, goldmoney.com, which had about $700 million of holdings in mid-2009. To alleviate the credit crunch of 2008, politicians are considering unprecedented increases in government spending and borrowing.
The Divide: American Injustice in the Age of the Wealth Gap by Matt Taibbi
banking crisis, Bernie Madoff, butterfly effect, collapse of Lehman Brothers, collateralized debt obligation, Corrections Corporation of America, Credit Default Swap, credit default swaps / collateralized debt obligations, Edward Snowden, ending welfare as we know it, fixed income, forensic accounting, Gordon Gekko, greed is good, illegal immigration, information retrieval, London Interbank Offered Rate, London Whale, naked short selling, offshore financial centre, Ponzi scheme, profit motive, regulatory arbitrage, short selling, telemarketer, too big to fail, War on Poverty
* * * *1 The Fairfax story is often included in with other legendary bear-raid stories involving companies like Overstock.com, Dendreon, Afinsa (a Spanish collectibles company), and Biovail, another Canadian firm, all of which were targeted by some of the same hedge funds described in this story, many of which ended up out of business and/or mired in scandal. Many of those tales revolve around the issue of naked short selling, a type of financial counterfeiting that allows short investors to artificially depress the stock prices of target companies. Whether naked short selling is a serious social contagion or meaningless conspiracy theory is a passionately debated topic on Wall Street, and to even broach the subject inspires strong emotions: right or wrong (and I believe wrong), in some quarters, if you bring it up at all, eyes roll automatically. One of the reasons I originally shied away from the Fairfax story was that it has a naked short-selling angle that makes some serious observers dismiss it out of hand as nutty conspiracy. So even though naked short selling was actually a factor in the Fairfax case, I’ve left it out of this narrative, because it’s the other craziness that went on in this case that’s really interesting
(Morristown, New Jersey, alone would have lost thousands.) But for the most part, insider trading is a crime of fractional violence. You steal from uninformed investors all over the world, a few pennies or dollars at a time. The damage fans out evenly across a vast geography, and it’s hard to see. It’s because of this that lots of Wall Street people genuinely think of insider trading and naked short selling as victimless crimes. People get hurt, sure, but the victims are mostly sophisticated investors who should know better, and it’s not like you’re hitting them in the head with a brick or anything. It’s not a real crime. At least it doesn’t look like one. That may once have been true. But in the Fairfax case, the principals in this “victimless” scheme started to mimic the gangster aesthetic.
asset-backed security, bank run, banking crisis, big-box store, call centre, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, fixed income, housing crisis, Maui Hawaii, money market fund, mortgage debt, naked short selling, NetJets, shareholder value, short selling, Shoshana Zuboff, Skype, too big to fail, Y2K
Short selling is essentially betting that a company will do badly: investors sell shares of borrowed stock (from a broker, for example) and then buy new shares to replace the old ones. If the new shares were bought for less than the original borrowed stock, the investor makes money. Naked short selling means that original shares aren’t borrowed. Either way, both forms of trading were driving down WaMu’s stock, which was now hovering around $3. Killinger thought Paulson could use his influence at the Securities and Exchange Commission (SEC) to help WaMu get on a list of 19 financial institutions temporarily protected from naked short selling. The SEC had given JPMorgan, Bank of America, and Citigroup this privilege. “What’s interesting about that list,” noted the Seattle Post-Intelligencer at the time, “is one name conspicuous by its absence—Seattle-based Washington Mutual Inc., whose stock has been of more than passing interest to short-sellers.”
., 2, 113, 155, 264, 288, 298 California AIG complaint about WaMu to, 166 banking preferences in, 53 decline in home prices in, 157, 185, 187 impact of WaMu sale in, 331–32 Killinger brand rally in, 92–93 naming of WaMu in, 90n Option ARMs in, 197 real estate market in, 47 subprime lending in, 58, 64, 71 tracking of complex data and customers in, 165 CAMELS ratings, 176, 228, 248, 262, 300 Cantwell, Maria, 275, 293, 293n Capital Markets Group, WaMu, 158, 169 capital raise, WaMu Bair-JPM representatives discussion about, 232 Cathcart and, 201 deadline for, 262 disagreements among regulators and, 234 FDIC/Bair and, 262, 275, 294 Fishman-Frank letter to save WaMu and, 296 Fishman’s attempts at, 270, 294, 296 “Go It Alone” proposal and, 294 Killinger and, 188–90, 191, 199, 201, 202, 205, 234, 237 Moody’s-WaMu meeting and, 265–66 OTS enforcement order and, 258, 267, 270 OTS-FDIC relations and, 244 OTS-Fishman/WaMu meeting about, 273–74 OTS pressures on WaMu for, 228, 229, 234, 237, 244 potential sources for, 235 sale of WaMu and, 279, 301 shareholder relations and, 188–90, 191, 199, 202, 205, 245–46 TPG and, 189, 237, 238, 279 Casey, Tom attempts to sell WaMu and, 232–33, 269, 280, 287, 288, 301 board presentations of, 192, 193 Chapman (Fay) disagreements with, 179–80 concerns about decline in housing market of, 153 definition of subprime loan of, 179 FDIC seizure of WaMu and, 303 JPM negotiations and, 232–33 JPM severance of, 321 Killinger’s hiring of, 98 loan loss forecast of, 192 Moody’s downgrade news and, 261, 264, 265, 266 off-loading of subprime and Option ARMs and, 154 professional background of, 98–99, 107 Rotella’s relationship with, 107 shareholder lawsuits against, 178 “category killers,” 91, 92 Cathcart, Ron, 150–51, 151n, 153, 154, 163, 164, 176, 178, 200–201 Cavanagh, Michael, 232, 234, 266, 272, 316 CBS: IndyMac story on, 242 Centrust Savings and Loan, 28 Cerberus, 235 Chapman, Craig, 61–62, 66, 78, 96, 97, 101, 106, 123, 128 Chapman, Fay appraisal problems and, 178–79, 180–82, 181n financial crisis comment of, 333 hiring of, 19 housing market concerns of, 179–80 Killinger’s “higher-risk lending strategy” and, 123 Killinger’s relationship with, 30, 97, 107, 180, 181–82, 183, 205 Long Beach Mortgage concerns of, 56–58, 60–61, 62, 63, 72, 75–78 NYSE bell ringing and, 54 Pepper and, 19, 310 on Pepper’s leadership style, 20 personal and professional background of, 19, 61, 75 personality and character of, 57, 75 resignation/retirement of, 182–83, 309 Rotella’s relationship with, 180 settlement for, 182 WaMu acquisitions and, 49 WaMu Alumni Fund and, 310 WaMu responsibilities of, 49 at WaMu reunion, 307 Chase Bank. See JPMorgan Chase Chase Home Finance, 104 Chicago, Illinois Jenne’s delinquent homeowner tour and, 171–72 WaMu branches in, 86, 108, 109 chief operating officer (COO), WaMu Pepper’s advice to Killinger about, 103–4 Rotella hired as first, 104–5, 106 Chrysler Financial, 235 Citigroup Dimon at, 230 as largest U.S. bank, 104 naked short selling protection for, 247 near failure of, 314, 314n OTS defense of oversight and, 317, 318 as potential buyer of WaMu, 3, 271, 282, 283, 289, 290, 298 TARP and, 315 Clark, Susie, 224 Clinton, Bill, 64, 113, 155 CNBC, 212, 267 CNN, 267 Coburn, Tom, 135 Cohen, H. Rodgin, 232, 233 Collateralized Debt Obligations (CDOs), 158, 295, 295n commercial real estate loans, 26–27 community banks: closure of, 319–20 Community Fulfillment Centers, WaMu, 142–43, 144–45, 144n, 159, 166 Community Reinvestment Act, 59 compensation Countrywide-WaMu competition and, 160 five emissaries–Killinger discussion about, 204–5 for fixed-rate loans/mortgages, 128, 129, 197 for Goldman Sachs board members, 164 for loan consultants, 117, 128–29, 188, 196, 197 at Long Beach Mortgage, 69–70, 78, 166–67 for Option ARMs sales, 117, 197 Pepper’s advice to Killinger about, 103–4 for real estate agents, 143 for salespeople, 140, 166–67 shareholders concerns about WaMu, 187–88 for subprime loans, 197 for WaMu board members, 164 for WaMu senior executives, 131, 187–88 See also specific person Congress, U.S.
See secondary market; shareholders/investors, WaMu; type of investor irrational money lenders, Killinger’s comment about, 163, 170, 240 Jenne, Kevin, 112–18, 167–68, 170–72 Jiminez (Ramona and Gerardo) family: mortgage loan to, 154–57, 172–73, 331–32 Johnson, Earvin “Magic,” 141–42 JPMorgan Chase assets of, 229 Bair meetings with representatives from, 232–33, 266, 316 Bank One acquisition by, 104–5, 230 Bear Stearns acquisition by, 187, 232, 246, 325, 329 board of, 295 bundling of mortgage-backed securities by, 120 Dimon appointment as president and COO of, 105 FDIC-OTS relationship and, 251 FDIC relationship with, 232, 246, 316 Great Depression and, 212 high-risk mortgages at, 138 home equity loans at, 325 investor conference call at, 301, 304 as largest company in world, 329 lawsuits against, 326 losses at, 325 Morgan Stanley acquisition rumors and, 287, 293 OTS/Reich and, 233–35, 283 philanthropy of, 326–28 political connections of, 231 regulators’ meetings with, 232–34 Rotella hiring of employees from, 107 SEC protection from naked short selling of, 247 shareholders at, 325 subprime mortgages and, 325 TARP and, 315, 328 See also JPMorgan Chase, WaMu and; specific person JPMorgan Chase, WaMu and acquisition of WaMu by, 3, 4, 6, 7, 300, 321–22 bidding for WaMu by, 300, 316–17 Chapman’s (Fay) recommendation to sell WaMu to, 179 closure of WaMu and, 301, 316–17 conversion of WaMu by, 320–24 direct negotiations for JPM acquisition of WaMu and, 189, 195, 229–38, 238n FDIC sale of WaMu and, 274–75, 289–90, 292–93, 298, 300, 316–17 and Fishman attempts to sell WaMu to JPM, 271–72 and funding for WaMu acquisition, 301, 304, 304n hostile takeover of WaMu proposal by, 245–46 Moody’s downgrade of WaMu and, 290 Paulson’s views about WaMu offer from, 248 plans for acquisition of WaMu by, 266, 274–75, 275n, 283–84, 295 press conference of, 4 profits on WaMu purchase by, 328–29 renegotiation of WaMu borrowers with, 332 rumors about WaMu deal with, 267, 268 rumors about WaMu health and, 214 Santander-JPM bid-rigging allegations and, 282n and WaMu as government-assisted deal, 266 WaMu online data room and, 291, 322 and WaMu sale as “government assistance” transaction, 246, 246n WaMu stockholders and, 245–46 junk bonds, 28 Justice Department, U.S., 60, 332 Kashkari, Neel, 315 Kaufman, Ted, 126, 330 Kelly, Edward “Ned,” 289, 298 Keystone Holdings, 42 Kido, Ken, 209–10, 281 Killinger, Brad, 29, 33, 37, 45, 81 Killinger, Bryan, 29, 33, 35, 36, 37, 45, 81 Killinger, Debbie, 29, 30, 33, 34–36, 37, 43, 45, 46, 79, 80–84, 88, 311 Killinger, Karl, 33–34, 35, 37 Killinger, Kerry absence from Seattle office of, 93–94 as Alexander the Great, 88 appearance of, 88, 189 appointment as president and CEO of, 30, 309 Baker e-mail about housing to, 152 as “Banker of the Year,” 87 blame for WaMu problems and, 241, 330 board memberships of, 83 board regulators meeting and, 192–93 caricatures of, 49, 322 compensation for, 45, 94, 104, 174, 205 congressional testimonies of, 329–31 corporate jets and, 88–89, 97, 174, 205 demands for resignation of, 195, 205 dilemma of, 121–22 employee views about, 93–94, 177, 180, 201–2, 241–42 FDIC lawsuit against, 333–34 firing of, 3, 252–53, 254, 263 five emissaries meeting with, 203–6 hiring by, 98–99 Linda thanked by, 196 management style of, 52, 55, 57, 62–63, 87, 96, 123, 174–76, 177 marginalization and isolation of, 201–2 marital problems of, 80–83 McKinsey review and, 241–42 McMurray’s report and, 186–87, 201 media criticisms of, 102, 308 nickname for, 33 NYSE bell ringing and, 54 optimism of, 173–75 organization and structure of WaMu and, 67, 96, 101, 108 OTS pressures to replace, 255 Pepper’s advice to, 102–4, 133–35, 133n Pepper’s CD gift to, 30–31 Pepper’s hiring of, 18, 19 Pepper’s relationship with, 149, 309 as Pepper’s successor, 27–31, 205 Pepper’s views about, 29–30, 87, 102–4 Pepper’s visits to WaMu and, 148 personal life of, 33–38, 45–46, 52–53, 80–84, 94 personality and character of, 28–29, 36–37, 43, 44, 45–46, 47, 53, 87–88, 90–91, 102, 105, 132, 135, 173–75, 199–200 plans/vision for WaMu of, 67, 85, 86, 87, 88, 96, 108, 109, 122–23, 228–29, 240, 241 political connections of, 231 popularity of, 87, 93 potential successors to, 106, 107, 175, 202 professional background of, 18–19, 28, 29, 37, 38 reputation/image of, 43, 44, 88, 99 resignation thoughts of, 175 sale of WaMu and, 179, 330 Seattle office of, 32–33, 95 severance package for, 258 shareholder/investor relations and, 47, 55, 81–82, 102, 173, 188, 189–91, 193–200 shareholder lawsuits against, 102, 178 stress on, 190, 241 surprise birthday party for, 79–80 as WaMu board chairman, 30, 200, 239, 240–41, 309 WaMu board relationship with, 164–65, 170, 186–87, 239 WaMu as “category killer” and, 91 WaMu culture/values and, 94–95, 98, 107, 132–33 WaMu reunions and, 308–9, 311 wealth of, 37–38, 46, 82–83 work ethic of, 35 See also specific person, merger, acquisition, or topic Killinger, Linda Cottington, 83–84, 89–90, 94, 174, 196, 205, 231, 308, 309, 328, 333 Kohn, Donald, 250, 252, 275, 294, 295–96 Korea Development Bank (KDB), 261 Korszner, Randy, 275 Kovacevich, Richard, 297 Ladder Capital, 254 Lannoye, Lee Killinger–five emissaries meeting and, 203–6 Long Beach Mortgage acquisition and, 59–60, 62–63 retirement of, 62 at shareholders 2008 meeting, 197–99 Last Hurrah Party, WaMu, 322 Lehman Brothers as advisor to WaMu, 228 bankruptcy of, 270, 272, 273, 296 capital raise at, 187 concerns about survival of, 260, 261 decision not to bail out, 269 decline in stock price of, 260, 261 Financial Services Conference of, 87 Great Western acquisition and, 41, 44 impact on borrowing at Fed’s discount window of, 285 impact on WaMu of problems at, 268, 272, 273, 296 KDB deal and, 261 losses at, 261, 263 mortgage-backed securities sales at, 120 Lehman Investors Conference, 153, 173 Leonard, Andrew, 128 Leppert, Tom, 163 Lereah, David, 136, 152, 152n Levin, Carl: Senate Committee hearings and, 318, 329–31, 334 Lewis, Kenneth D., 125, 231 Lillis, Charles, 164 liquidity, WaMu Break the Bank model for, 215, 248, 278 Cantwell-Paulson conversation about, 293 closing of banks and ratio for, 215 closure of WaMu and, 299–300, 300n, 304–5 FDIC-OTS-WaMu discussion about, 244 Fishman capital raise plan and, 294 Fishman letter to customers about, 280 Moody’s-WaMu meeting about, 265 OTS press release about, 304–5 OTS report and, 300 regulators’ concerns about, 250 sale of WaMu and, 284, 290 WaMu reports to regulators about, 286, 299 See also bank runs, WaMu; credit lines The Little Prince (children’s book), 49 loan consultants/managers compensation for, 117, 128–29, 188, 196, 197 Countrywide-WaMu competition and, 126–28 fraud among, 145 Jenne’s Option ARMs focus groups and, 116–18 layoffs of, 188 at President’s Club meetings, 142–44 pressures on, 129 underwriting guidelines and, 125–26 See also Ramirez, Tom Long Beach Mortgage AIG report about, 166 Ameriquest loans compared with those of, 154n assets of, 58 audits of, 166, 167 California regulation of, 66 change from thrift to mortgage company of, 64–65 Chapman (Craig) as manager of, 66, 78, 101 Chapman (Craig)-Rotella relationship and, 128 Chapman’s (Fay) concerns about, 56–58, 60–61, 62, 63, 72, 75–78 compensation at, 69–70, 78, 129, 166–67 Countrywide-WaMu competition and, 127 culture at, 63–64 Davis (Craig) as head of, 75–76 defaults and delinquencies at, 137, 153 expansion of, 78, 136–37 founding of, 63 fraud and, 71–73, 76, 93, 154, 166 funding for mortgage brokers and, 129 Goldman Sachs relationship with, 121, 131, 157 “higher-risk lending strategy” and, 122 Home Loans Group and problems at, 167 Justice Department accusation against, 60 Killinger and, 57, 58, 62–63, 75, 76, 78, 137–38 Lannoye opposition to, 197–98 losses at, 66 mortgage-backed securities sales at, 67, 73–75 off-loading of risky loans and, 157 OTS concerns about, 223–24 oversight of, 65, 66, 137 paperwork problems at, 332 privatization of, 66 profits of, 64, 65, 71 proposal to shut down, 76, 78 public offering for, 65 repurchase of mortgage-backed securities by, 137 reputation of, 157, 176 Rotella and, 109–10, 128, 137–38 subprime mortgages at, 63, 69, 71, 75, 167–68 underwriting guidelines for, 56, 65–66, 67, 78, 125, 137–38, 167 WaMu acquisition of, 58, 59–60, 62, 63 WaMu reviews of, 57, 76–78 See also Jiminez (Ramona and Gerardo) family: mortgage loan to Longbrake, Bill end of savings and loan banks comment of, 318 hiring of, 18 housing market warnings of, 161–63 junk bond incident and, 28 Killinger as Pepper successor and, 28 NYSE bell ringing and, 54 Pepper appointment as temporary CEO and, 10–11 personal and professional background of, 28, 98 as potential Pepper successor, 27, 29, 205 WaMu departure of, 98 WaMu responsibilities of, 98 Los Angeles Times, 71, 242–43 Mad Money (TV show), 246–47 Magleby, Alan, 297 Maher, John, 40, 42, 43–44, 45, 60 Market Research Department, WaMu, 192 See also Jenne, Kevin Martinez, Melissa, 126 Matthews, Phillip, 164 McCain, John, 264, 301 McGee, Liam, 255 McKinsey Group, 241–42 McMurray, John, 186–87, 186n, 201–2, 260–61, 264, 266, 269, 270, 288, 301 media bailout reports by, 2 bank runs and, 2, 201, 207–8, 209, 211–12, 214, 215, 243, 279, 282 criticisms of Killinger by, 102, 308–9 Dimon’s Seattle address and, 326–27 end of modern Wall Street proclaimed by, 288 FDIC seizure of WaMu and, 300–301, 302, 303 Fishman appointment announced in, 258 IndyMac failure and, 207–8, 209, 242–43 JPM merger offer to WaMu and, 237–38 Kido interview with, 281 Killinger firing reported in, 254 Lehman problems and, 270 Paulson interview with, 284–85 Pepper and, 309–10 sale of WaMu rumors and, 279, 288, 289, 298–99, 300–301, 302 and WaMu failure as nonevent, 314 WaMu final hours and, 267–68, 272, 276, 279, 281, 282, 288, 289, 292, 298–99, 300–301, 302 WaMu information lockdown and, 281 WaMu layoffs and, 321 WaMu shareholder meetings and, 189 See also specific media organization Meola, Tony, 75, 76, 142, 144, 145 “Merge with Washington Mutual!”
The End of Growth: Adapting to Our New Economic Reality by Richard Heinberg
3D printing, agricultural Revolution, back-to-the-land, banking crisis, banks create money, Bretton Woods, carbon footprint, Carmen Reinhart, clean water, cloud computing, collateralized debt obligation, computerized trading, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, David Graeber, David Ricardo: comparative advantage, dematerialisation, demographic dividend, Deng Xiaoping, Elliott wave, en.wikipedia.org, energy transition, falling living standards, financial deregulation, financial innovation, Fractional reserve banking, full employment, Gini coefficient, global village, happiness index / gross national happiness, I think there is a world market for maybe five computers, income inequality, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Isaac Newton, Kenneth Rogoff, late fees, liberal capitalism, mega-rich, money market fund, money: store of value / unit of account / medium of exchange, mortgage debt, naked short selling, Naomi Klein, Negawatt, new economy, Nixon shock, offshore financial centre, oil shale / tar sands, oil shock, peak oil, Ponzi scheme, post-oil, price stability, private military company, quantitative easing, reserve currency, ride hailing / ride sharing, Ronald Reagan, short selling, special drawing rights, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, too big to fail, trade liberalization, tulip mania, working poor, zero-sum game
The answer: short selling (also known as shorting or going short), which involves borrowing the assets (usually securities borrowed from a broker, for a fee) and immediately selling them, waiting for the price of those assets to fall, buying them back at the depressed price, then returning them to the lender and pocketing the price difference. Of course, if the price of the assets rises, the short seller loses money. If this sounds dodgy, then consider naked short selling, in which the investor sells a financial instrument without bothering first to buy or borrow it, or even to ensure that it can be borrowed. Naked short selling is illegal in the US, but many knowledgeable commentators assert that the practice is widespread nonetheless. In the boom years leading up to the 2007–2008 crash, it was often the wealthiest individuals who engaged in the riskiest financial behavior. And the wealthy seemed to flock, like finches around a bird feeder, toward hedge funds: investment funds that are open to a limited range of investors and that undertake a wider range of activities than traditional “long-only” funds invested in stocks and bonds — activities including short selling and entering into derivative contracts.
Affordable Care Act / Obamacare, asset-backed security, bank run, banking crisis, banks create money, break the buck, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, conceptual framework, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, Detroit bankruptcy, diversification, double entry bookkeeping, eurozone crisis, facts on the ground, financial innovation, fixed income, friendly fire, full employment, hiring and firing, housing crisis, Hyman Minsky, illegal immigration, inflation targeting, interest rate swap, Isaac Newton, Kenneth Rogoff, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, market bubble, market clearing, market fundamentalism, McMansion, money market fund, moral hazard, naked short selling, new economy, Nick Leeson, Northern Rock, Occupy movement, offshore financial centre, price mechanism, quantitative easing, Ralph Waldo Emerson, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, short selling, South Sea Bubble, statistical model, the payments system, time value of money, too big to fail, working-age population, yield curve, Yogi Berra
The new Wall Street model looked shaky, and in the market’s view, Lehman was probably the next to go. On Bear Stearns Day, Lehman’s CEO Richard “Dick” Fuld knew that his company was in the crosshairs, and when the stock market opened on the next Monday, Lehman’s stock was, indeed, pummeled. As he later lamented to the FCIC, “Bear went down on rumors and a liquidity crisis of confidence. Immediately thereafter, the rumors and the naked short-selling came after us.” It certainly did. But Lehman managed to hold things together for another six months. Lehman’s primary regulator was the same as Bear’s: the somnolent SEC. After the Bear Stearns bailout, however, and especially after the Fed began lending to broker-dealers, the central bank started watching over Lehman Brothers and the other three Wall Street giants—with supervision, stress tests, requests for data, and the like.
“[as] fundamentally flawed”: FCIC Report, 323. “central to the financial crisis”: FCIC Report, 323. “‘save their ass’”: Paulson, On the Brink, 144. “you may not have to take it out”: Paulson, On the Brink, 151. “hardest thing I had ever done”: Paulson, On the Brink, 170. $200 billion worth of repos outstanding: FCIC Report, 326. “what we learned scared us”: Paulson, On the Brink, 121. “naked short-selling came after us”: FCIC Report, 326–27. better than they actually were: See Latman, “New York Accuses Ernst & Young of Fraud in Lehman Collapse,” New York Times. longer-term debt by June: FCIC Report, 326. rejected the idea as “gimmicky”: FCIC Report, 328. $55 billion loan from the Fed: FCIC Report, 328. Fannie and Freddie were taken over: Sorkin, Too Big to Fail, chapter 11. Paulson refused: Paulson, On the Brink, 190.
Albert Einstein, Bayesian statistics, Black-Scholes formula, Bretton Woods, Brownian motion, capital asset pricing model, collateralized debt obligation, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, discovery of penicillin, discrete time, Emanuel Derman, en.wikipedia.org, Eugene Fama: efficient market hypothesis, financial innovation, fixed income, floating exchange rates, full employment, Henri Poincaré, implied volatility, index fund, Isaac Newton, John Meriwether, John von Neumann, Joseph Schumpeter, Kenneth Arrow, Long Term Capital Management, Louis Bachelier, margin call, market clearing, martingale, means of production, moral hazard, Myron Scholes, naked short selling, Paul Samuelson, price stability, principal–agent problem, quantitative trading / quantitative ﬁnance, RAND corporation, random walk, risk tolerance, risk/return, Ronald Reagan, shareholder value, Sharpe ratio, short selling, stochastic process, The Chicago School, the scientific method, too big to fail, transaction costs, tulip mania, Works Progress Administration, yield curve
Monte Carlo simulations – an algorithm that repeats simulations of a postulated financial relationship with random elements. The Monte Carlo simulation often reveals patterns that cannot be gleaned by analytic methods. Mortgage-backed securities – a financial instrument that derives its asset value on a collection of underlying mortgages; in other words, a financial security that is backed by a collection of financial securities. Naked short – selling of securities for which one does not own the title or a right to sell. Normal distribution of returns – a distribution that follows a prescribed and symmetric pattern that occurs frequently in natural processes. Optimal control theory – an extension of the calculus of variations that is a powerful tool in the modeling of dynamic processes. Options – the contractual right to purchase a security at a future date under specified terms.
A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers by Lawrence G. Mcdonald, Patrick Robinson
asset-backed security, bank run, collateralized debt obligation, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, cuban missile crisis, diversification, fixed income, high net worth, hiring and firing, if you build it, they will come, London Interbank Offered Rate, Long Term Capital Management, margin call, money market fund, moral hazard, mortgage debt, naked short selling, negative equity, new economy, Ronald Reagan, short selling, sovereign wealth fund, value at risk
Just as crooked financial officers in now-bankrupt corporations had sought to bamboozle their accountants and investors, now the Wall Street elite, the lawyers and bankers, set out to bamboozle the SEC regulators. We suddenly had a commando squad of MIT- and Harvard-educated multimillionaires preparing to go into combat against $120,000-a-year civil service regulators. It never did seem like an even match to me. What Wall Street’s financial maestros came up with while the SEC guys were consumed with backdated options, insider trading, and naked short-selling was something brand-new—a fee-generating machine hereinafter referred to as the dreaded credit derivatives, also known as securitization. They invented a method of turning a thousand mortgages into a bond with an attractive coupon of 7 or 8 percent. This high-yield bond could be traded, and hence turned into a profit generator; it would enable the mortgage brokers, investment banks, and bondholders to reap a very nice annual reward—just so long as the homeowners kept right on paying on time every month, and the U.S. housing market held up the way it always had.