naked capitalism

There is a not bad piece at the New York Times on the fates of various ex-Lehman employees a year after the collapse.

The story vividly if unwittingly illustrates the old saying that fish rot from the head. The people profiled were all involved in mortgage securitization, either directly or indirectly. Most seem unable to acknowledge that they played a role in precipitating the crisis, as in firms like Lehman packaged and peddled toxic debt. And the way they operated was grossly irresponsible. I’m now reading Gillian Tett’s Fool’s Gold, and it discusses at some length how JP Morgan was catching a lot of heat in the 2005-2006 era for its crappy earnings and low market share in a lot of investment banking businesses, particularly securitization and collateralized debt obligations. Yet the bank’s staff could see subprime defaults were rising in an economic expansion, an unheard of event. They also could not figure out how to make the deals work from an economic perspective. Now the book underplays that JP Morgan was badly singed in 2005 when GM and Ford were downgraded, and that was no doubt a big wakeup call as far as risk modeling and management were concerned. JP Morgan’s stance was hardly altruistic;  it wound up with residual risk on deals, and couldn’t figure out how to make the business model work in the later days given the pricing in the markets. But notice that the bank took that view because enough employees at the firm were concerned about firm risks, not individual bonuses, to keep the House of Morgan from getting drunk at the risk party (that is not to say the bank was a paragon, merely that it dodged one of the biggest bullets).

It is human nature for people to deny their involvement in questionable practices, particularly when the result produces lots of cash and prizes. And the most senior people interviewed, the ones who also came out of their time with the firm in the best financial shape, offer the most cringe-making rationalizations of their roles.

From the New York Times:

Ken Linton gives little thought to the approaching anniversary of Lehman’s collapse — or his role in it.

A senior trader on Lehman’s mortgage desk, Mr. Linton evaluated mortgages that were later sliced and diced into securitized investments…

When Lehman closed its origination business, Mr. Linton lost his job. Rich and single, he has pursued a life of leisure since then — sailing in his 37-foot boat, playing jazz trombone and, at the moment, taking a week to learn how to fly Russian fighter jets and gliders in New Mexico. He briefly considered attending culinary school.

Although Lehman laid him off in early 2008, his departure turned out to be a boon for Mr. Linton. Being forced out convinced him to bet against the firm’s stock as a counterweight against the Lehman shares he still owned, which protected him when the stock’s value plummeted. Combined with a well-timed sale of his Manhattan apartment and a stream of income from real estate investments, the moves gave him financial padding that frees him from job worries.

“I have been fortunate to have some nice toys,” he says. “And they are all paid up. It’s a nice situation to be in.”

He recalls vividly the days in early 2007 at Lehman when his financial models began to throw up more warnings showing delinquencies and defaults, and he remembers colleagues on his desk raising questions about loan quality.

Yves here. As the JP Morgan contrast demonstrates, Lehman was awfully late to realize there was trouble afoot. There subprime market was in an obvious downdraft; in fact some banks were eyeing and buying mortgage originators then, convinced the problem was temporary. Back to the story:

He says he has no qualms about his work at Lehman or its economic aftereffects. “Anyone at our level who had a different view from senior management would find themselves going somewhere else quick,” he says. “You are not paid to rock the boat.”

Yves here. The worst is that this sort of logic is seldom challenged. “Someone would have done my job anyhow, so what harm was there in my doing it?” Use that same reasoning for, say, the people who operated the gas chambers in World War II and you’ll recognize how spurious it is. Parents don’t accept the “everyone was doing it” defense from their kids. Why do we tolerate it from adults? Back to the story:

Jeff Schaefer, who helped oversee mortgage originations as a Lehman managing director, is now running a Mobil gas station and a car wash…Just two years ago, Mr. Schaefer supervised sales at Aurora Loan Services, Lehman’s mortgage-origination arm in Colorado. In the boom years, he led a 400-person team that stockpiled often-risky mortgages to disperse to the firm’s financial engineers and salesmen. He used to talk with Mr. Linton three to four times a day to get his marching orders on mortgage pricing and credit standards. It was those conversations, he says, that helped him decide whether to require borrowers to document their income or whether to give them so-called no-doc loans…

Too many people, he says, blame firms like Lehman, but he says all that Lehman did was create a product that investors were demanding to buy from the firm.

“How do you blame us? A lot of what we did from an origination standpoint was based on investors’ appetite,” he says. “Do you think we would just go out and say, ‘I think we’re going to do $100 million in no-doc loans?’ ”

Yves here. If we take this at face value, Lehman and its ilk were mere passive order takers. They had nothing to do with creating demand, nothing to do with the frenzy that pushed the margins of product design further and further out, so that high-yield, meaning risky, product was necessary to make the complex deals work. And no one looked too hard in the securitization sausage factory, that took pieces of deals and ground them up and made more appetizing end product called collateralized debt obligations, that it was the financial equivalent of sawdust and rat tails that were increasingly part of the product. Nah, if customers were happy to buy the stuff, why should a merchant care?