Sunday, August 23, 2009

The Smartest Goodfellas In The Room ( Part 2)

( Continued From Part 1)

Capo Di Tutti Capi Blankfein took a sip from a glass of water and continued:

" After the others left, it was getting late and I suggested that Don Enrico, Ben,
Geithner and I needed to have a private sit-down to decide the issue. It was
truly up to us; if we didn't do something, it could be 1929 all over again.
It was almost dinner time - nothing like a good meal to get everyone
settled down and everyone's brains working again. The meeting had been
quite contentious - everybody blaming everyone else for the problems and
Geithner, Don Enrico and I having to shout everyone down and keep order.
And now the Press was out - someone had tipped them off about the big meeting
and they were waiting for us. We had to get out of Manhattan quickly together
without being seen.

" So I got on the phone and I had the pool send over Don Giovanni's
stretched armored Cadillac Limo with our best driver and two
soldiers for security. I told them to come in the armored car entrance of the Fed
and go immediately to the bottom level to pick us up. In the meantime,
Don Enrico and I suggested to Ben and Tim Geithner - he's a smart, coolheaded
kid who'll go places, by the way, that they join us for dinner. Geithner actually
suggested that going to any of our usual places without attracting
attention might be difficult and that we should probably dine right there at his
private dining room. I thanked him, but said I thought it best that we get away
from the Press- I motioned him to the window and pointed at the TV
trucks parked right outside. And then I said: "Tim, I got a car coming,
with security. And I know just the place. A Great Italian Restaurant just outside
Jersey City. The chef there used to cook for Silvio Berlusconi. Very upscale,
quiet, great food, everybody minds his own business - and the security?
Real Made Guys. It's perfect for us. "

" Just then, the doors parted and Don Giovanni himself strode into
the room. For those of you who don't already know him, he's our head of
Security and Special Operations - runs our KGB, if you know what I mean.
He came right up to me, kissed my hand and whispered in Italian:

" Padrino, come presto he sentito le notizie, mie sono venuto.
Per favore, Padrino, con permiso che io introdurre e mei soci"

I was astounded. Only rarely am I privileged to be called "Godfather".
I was touched by this extraordinary courtesy under the circumstances.
And so Don Giovanni, as you are here today, allow me to say in your
native tongue:

"Mio caro amico, molte grazie per suo servizio al suo Padrino quella notte"

" And he took charge right away. Escorted by two of the fiercest-looking
goombahs I've seen this side of the Sopranos, he hustled us all down the
service elevator and into his personal stretched Cadillac limo. He got
behind the wheel himself. When I asked if he knew where we were going,
he said, again in Italian, "Godfather, I know already. Jersey City."
He swung us out, right past the Press , and handled the five-ton car like a
Ferrari through Midtown and into the Holland Tunnel.

" One of the soldiers passed out shot glasses and some chilled grappa,
and I gotta tell you, poor Timmy Geithner thought it was vodka and
damn near choked! Anyway, everybody started to relax and loosen their ties,
and we began to seriously discuss the situation.

" In about twenty minutes, we got to the restaurant - beautiful, real quiet,
even though the place was packed. The proprietor, Salvatore - they call him
"Sally Bananas" in the New Jersey Comizione - whisked us all into his private
dining room and in the blink of an eye, drinks were in our hands.
We were hungry - and when Don Salvatore told us the veal had been flown over
from Italy just that morning, it sounded great.

" Over a great antipasto accompanied by a magnificent Orvieto, we finally
got down to business. Don Giovanni and his fellas got up without a word,
closed the sliding door and posted themselves outside. We were alone,
just the four of us, and we could finally speak frankly.

" I looked Ben Bernake straight in the eye and said "How could you let
this happen? If what I'm reading is right, Lehman isn't gonna last long enough
to get this piece of shit statement published. And when they fold, Greenberg's
shop is next - every counterparty Lehman's got is going to be lined up on the
sidewalk outside AIG waiting to get paid, all before the TV cameras.
And by the time Mr. and Mrs. Middle America see this on CNN or
CNBC, there'll be a run on the banks like you won't believe - FDIC
doesn't have one-tenth of what is needed if that happens.
In just the few days since you briefed me before I went to London,
Lehman's negative net worth has DOUBLED.

" Ben calmly nodded and said: "That's mark-to-market accounting for you.
On a historical basis, they're shaky, but not as bad as it looks. Remember, we
injected fourteen big against their Treasuries just two weeks ago, so we can still
keep them on life support"

" I said HOW? They're gonna blow through that like shit through a goose.
Even the Fed can't lend against this mortgage CDO shit guaranteed by
an insurance company that will itself be bankrupt as a result. And when you talk
about the market for CDO's AND their derivative securities, we're it!
Our exposure right now is thirteen BIG - and if we don't get to the front of
the line at AIG when this shit hits the fan, it's not just us that's screwed - it's everybody!

" Now Ben, let me gently remind you how this all got started. Last March,
when the Bear was getting sick, you and I both agreed that the cause of the
problem was theirexcessive exposure to these mortgage CDO's .
We also agreed that they were, in your words, "too big to fail".
You asked me to intervene, and I did two things. First, I agreed to
make market, to take over, as long as I was covered. AIG wasn't a problem then.
At that time, their reserves were twice the market's collective exposure.
I had been reducing Goldman's exposure since last December, so I thought OK.
We'll get some fee income, and we can wind this whole thing down safely so
nobody gets hurt too bad. The fundamentals of residential real estate have been
out of whack for the last eight years - and if we can just gradually
deflate this thing, we'll get over it. If you remember the eighties and
the RTC, we took some hits - but everyone who matters survived.

Now, Lehman Bros. is half Bear Stearn's size. You can't tell me that
they're small enough to fail. If we could get the Bear packed away safely,
we can surely get this done. If we can clean this up somehow, I've got
a buyer for Lehman - all I have to do is clean up this balance sheet some
FORTY BIG worth, and Barclay's will do the deal - I've got the word of
the Prime Minister of Great Britain on this.

" Here's what we gotta do. Everybody on this side of the pond has got to
step up for twenty big. I'll get that done. I'll get these assholes in line.
The Fed has got to guarantee the remainder. Ben - all you gotta do is
make the phone call to Mervyn ,your old colleague - and it's done.
Game over. Economy saved. You're a hero.

" Ben replied; "Lloyd, it's not that simple. To clean up Bear, we had
to lay off all that CDO garbage anywhere we could. You know that.
We spread the manure far and wide. And you know who bought?
Dickie Fuld. He bought out the positions of almost everyone we placed
that shit with. What was a problem then is a worse problem now
because it's all concentrated. We laid off Bear's trash at 30 cents
on the dollar - he BOUGHT at fifty, thinking he'd get made whole
either because of AIG or RE market fundamentals. And it's a leveraged
bet - he used borrowed money off-balance-sheet to do it. I didn't know
until today - I swear. I didn't say anything earlier because Jamie Dimon
and the Hindoo would have run right to their trading desks and let
the cats out of the bag.

" I told Ben, "I understand now. It explains everything, including
why Dickie never showed, never returned my calls. Ben, are you
telling me that including the off-balance-sheet borrowing,
it's even worse? "

"Ben said: " Yup. Offhand, I'd say it's in the neighborhood of
eighty to ninety big, maybe more. In my opinion, Lehman's
toast - the best we can do is have them file Chapter 11 right
now, give us some time - Lipton's their law firm, I can call them
in the morning - and in the meantime, we'll have to have some
help from Treasury. Henry, what can you guys do? "

" Don Enrico spoke next. He said, "Being in Washington, I
have to let you know political realities. Bush, as you know,
is an unpopular lame duck. McCain is up in the polls, but Obama
is closing fast. This whole thing is going to tank the economy.
What I would do is get a Troubled Assets Liquidation Facility going-
set up a Treasury-sponsored SPV to buy up all this crap. Hopefully,
the taxpayer will recoup. RTC did the same thing sixteen years ago.

" But if we do this, and the banks get spooked, it's all over. Right
now, the thing that's driving down CDO's is foreclosures - the flippers
who took out all those NINJA loans. But if we start getting to major layoffs
and mass unemployment because the banks won't roll over trade credit,
all bets are off. Even the prime CDO tranches will be affected. This will drive
down home values like nothing we've ever seen. And some folks will wind up
under water and figure it's better to walk away than keep paying - even if
they still have a paycheck."

" In short, Don Enrico continued, "you'll have a huge negative feedback loop
going - things will be circling the drain at an ever-increasing rate. The best
we can do is to put Lehman into BK right now, try to prop up AIG -
because that's the immediate problem - and hope for the best.
But that's not all. If we bail out all the CDO holders - everyone else is going
to come up to Capitol Hill wanting a bailout - the car makers,
the commercial banks - everyone. And the politicians will do it - because
if they don't, they won't get re-elected. All this could tip the election to Obama -
because McCain doesn't know shit about economics and has said as much."

"The bigger problem we have, though, is that we've done a pretty good job
keeping the American worker out of the prosperity loop for the last ten years.
Through immigration, outsourcing, and job exportation, all of which we in
the Investment Banking industry have encouraged, people just have not
been able to earn enough to keep up even a modest standard of living.
They've had to make up the difference by borrowing - mostly
against their homes. And if we knock out home values - and they
lose their jobs - we're screwed. Consumer demand is going to fall through
the floor - another negative feedback loop - and who knows where it will stop?
Now, Goldman has donated pretty heavily to the Democrats this cycle - including
Obama - but just to cover our bets. If that sbirri actually gets into office,
who knows what will happen? But, I can get W. to go along with some aid -
he's a Harvard MBA after all - enough at least to liquidate Lehman in an
orderly manner and keep AIG alive long enough to cover the counterparties."

" After some more discussion along these lines, we got the plan together.
Lehman was toast. They'd be shut down in a few days. Chapter 7. Timmy
Geithner would deliver the bad news to Dickie personally. Don Enrico
would provide as much as was needed to keep AIG alive until all the
CDS counterparties could get out. He'd take the responsibility for
bringing Dubya on board. And, he'd also do something about the
GSE's - Fannie and Freddie - which he blamed more than any of
us on the Street for causing this mess. Ben agreed to provide whatever
liquidity the market required to make this happen, at concessionary
rates. No discount penalties, and all agreed that in the event of any
disputes while this was going on, I would be the final arbiter.

" And as we all know, that's exactly what happened. Now, we know
things are gonna be tough for a while. But the biggest thing we gotta
deal with is uncertainty. In a few months, there's gonna be a new
Administration in Washington. Neither guy is going to give us the
free rein we've had for the last eight years. We actually might be
better off with Obama than McCain because he's a newbie and
we'll be better able to place the right people around him. Both
guys are complete amateurs when it comes to finance and economics;
which, if you'll reflect a minute, works hugely in our favor. In my opinion.
no matter what, we're good.

" So, that's all I've got right now. Let's finish this year strong, tighten
things up, and we'll be OK. We'll have another meeting in a few months,
and by then, I guarantee, you're all gonna be very happy campers here at
Camp Goldman. "

And with that, to cheers and applause, the Capo Di Tutti Capi left the room.

( Continued in Part 3)

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