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The Unnecessary Meltdown
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A year ago today, Wall Street imploded. But as William Cohan reports, a little-known meeting two years earlier started the runaway snowball—and also could have prevented the catastrophe.
As we parse through the rubble of the one-year anniversary of the demise of what used to be known as Wall Street, is it possible to isolate the canary in the coalmine—the proverbial moment above all others when the magnitude of the growing carnage in the mortgage-securities market began to reveal itself, and could have been mitigated?
That moment was not the bankruptcy of Lehman Brothers, a year ago Monday, or the $85 billion government bailout of AIG or even the shotgun marriage between a near-bankrupt Bear Stearns and JPMorganChase. Rather, a relatively innocuous meeting held fifteen months earlier—in December 2006, in a conference room on the 30th floor of Goldman Sachs—would forever change Wall Street.
As the meeting was winding up, Viniar concluded by saying, "It feels like it’s going to get worse before it gets better."
The meeting, conducted by David Viniar, Goldman’s CFO, included the five people who were running the firm’s so-called FICC—fixed-income, currencies and commodities—group and the various controllers, auditors and risk managers that work with them in those divisions. In sum, about 20 people had collected around Viniar to review what to him was a disturbing short-term trend: Goldman’s mortgage-desk had lost money ten days in a row. Not a lot of money by Goldman’s standards—somewhere in the $5 million to $30 million range—but a pattern troubling to Viniar, and he wanted to know why. “So one day we lost money—you know, our business is to make money with money,” Viniar told me in a recent interview. “Two days, three days, four days, five days and you start saying to the controllers, ‘Guys, what’s going on? What do they have? What’s their positions?’ Seven days, eight days, by the 10th day I say, ‘Let’s just talk about this.’”
• Nomi Prins: The Next Meltdown The mortgage traders came to the meeting with a two-inch thick report detailing all the firm’s mortgage-related trading and credit positions. Viniar said the firm did not make big bets one way or the other, but rather had a series of bets that tilted toward prices going up or down. At that moment, Goldman’s bias was toward being “long” mortgages—betting the value of the trades and the underlying mortgages would increase. But even so, there were disputes about the value of the mortgage securities with some of Goldman’s trading partners. In some cases, Goldman had asked for more cash (as collateral) to buy these securities; they seemingly valued them less than the rest of the market (and of course would be proved right).
The meeting dragged on for close to three hours. Each position was reviewed and then reviewed again. The firm had lost money ten days in a row because, Viniar said, it was betting mortgage-based securities would rise, when “the market was going down.” As the meeting was winding up, Viniar concluded by saying, “It feels like it’s going to get worse before it gets better." Nobody there knew how bad it was going to get. We didn’t have a clue that things were going to go crashing down.” There was complete consensus in the room about Viniar’s conclusion.
So Viniar and his colleagues quickly decided to reduce Goldman’s risk in this area to as close to zero as possible. “The words we used were, ‘Let’s get closer to home,’” Viniar said. He figured the mortgage market would continue to fall—again he did not realize how far and how fast—but that by reducing the firm’s exposure in December 2006, Goldman would be in position to buy when others were forced to sell and would benefit in the long-run.
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William D. Cohan, a former senior-level M&A banker on Wall Street, is the author of The Last Tycoons: The Secret History of Lazard Freres & Co, and his new best seller House of Cards: A Tale of Hubris and Wretched Excess on Wall Street.
Most businesses are facing challenges,
including "The Beast."
Noticed the "Yurman" Ad in the feature section of the Beast,
page 3 mon sept 14.
Is that Beast's first advertisement ?
Whatever it takes to keep the Beast going.
actually that was the best thing on the site - who is that woman - incredibly beautiful
This article is mis-titled. It should read "How Goldman could have averted the inevitable, for themselves" or some such. At this point in the world of finances there was no way to stop the financial collapse - the mortgages were in place the net of security ownership, guarantee and insurance was in place. The real decision making should have begun in 2000 before the "toxic mortgage" was embraced. Then we could have averted the meltdown.
estcruzer--Goldman did avert a lot of the damage for itself by stepping out of the game before it got sucked into an ever-expanding bubble. A real estate downturn was inevitable, but we've had those before with limited impact. The crash was avoidable and would not have happened if all the major financial players had eased back at the end of 2006. The seeds may have been sown early on, but the bubble happened in the last months.
That must be why The Beast is running all these gossipy Hollywood sex and celebrity stories lately. We Politicos don't pay much attention to those, except to make some wise ass remarks, so they must be trying to attract a broader group of readers, people not as hard boiled as the regulars.
No one talks about Lou Ranieri, father of Mortgage Backed Securities. He blew up Solly, and Hyperion and other "banks" with them. Now we know where all the "toxic" waste went, don't we ladies and gentlemen? George Patton
Cohan is a sycophantic buffoon. An imbecile of epic proportions...
If GS was so much "smarter" than the rest of the market why did it need Warren Buffett's $5Bn at 10%? or the government's TARP money? Why did they need access to the Fed window in an emergency application? Why did the Fed grant the application? Did GS traders short AIG when they realized that the CDS they supposedly bought were bigger than the market for the undelying securities AIG was insuring? If they were short AIG why did they keep buying CDSs from them? why didn't they dump their CDSs? Cohan's analysis is in sum, idiotic.
I've no doubt that Viniar et al. set in motion the events that led to Bear's collapse by re-marking their postiiions (BTW did they change the marks after buying the CDS? and did they disclose to AIG that they were going to change their marks if they did?) but to infer from that that they were "smarter" than the market is belied by what actually happened to GS thereafter. What GS is undoubtedly "smarter" at is co-mingling the public purse (whether controlled by republicans or democrats) with its very private (and largely personal) fortunes. And in the good ole USA, that has most unfortunately become what counts...
As a historian, I know that capitalism has a major recession or depression every 30-40 years, and seems to be operating on some type of generational cycle, as American politics does.
Even in the 19th Century, many people were aware of this cycle of boom and bust in capitalism, in which a free market, competitive phase would be followed by a crash and consolidation. It is happening again now, and will happen again.
I don't see that the Obama administration is doing all that much to help the unemployed or ordinary people that are losing their homes, although like Bush Junior, they have bent over backwards to help big banks and corporations. That is understandable, since big capitalist interests pay for both political parties.
It takes about one generation for the mass mind to forget - mostly because the previous generation is derelict in their duty to teach their history to the next generation. But Greed never goes away, so there is a constant pressure to take risks and a periodic event to correct the runaway results of that constant pressure. Even if we institute rules to "control" the Greed, the next generation - smart little sobs that they are - will find a way around it, if they can't just de-institute the rules their parents put in place for their protection.
I"m sure you would agree the root of the problem is the lack of education we give our children when they can best absorb it on how the world really works - myself included. Maybe it's time to put some emphasis on teaching not testing but teaching our children again. So Goldman won't find itself discussing the next financial collapse in another generation.
"The sharp loss spooked investors, who wanted out of the Bear hedge funds in droves."
You say? C'mon! Strictly speaking, we don't have investors here. Investors are interested in the books, extremely careful about risk, and the nuts and bolts. These guys are ALL two bit gambling bastards. The only winners being GS and the other finance behemoths that we keep afloat and now they have the nerve to brag on about how they knew this and that xx years ago? Go to your credit union, open an account there, and then fire your elected officials if they aren't going to rein in this greedy, worthless crew.
Basically you had a very small community of buyers and sellers that acted in concert. They all bought at the same time because they somehow convinced themselves that they had eliminated risk in financial instruments, and they all panicked at the same time. This is the basic structural flaw in the international financial system of big money - a small community of players, working off the same information, doing the exact same thing at the same time - sounds like a bubble maker to me.
Insightful never..
So being a follower lemming is probably the easiest job in the world, second only to banking... thank God we have competent people in other, real professions actually working while these guys get to play 'finance risk' with our money. World domination: ..see if we can cause a huge crack in all the financial markets in the world at once whilst getting rewarded for doing it. Great fun!
I wrote about the meltdown in 2001.
By 2004 it was so obvious it had to happen.
Going back over blogs this is as far back in my writings I have traced. Even in early 2008 Bernanke andWall Street was telling everyone all was ok. (what were and are these people smoking)
They are quite simply liars of convenience.
http://www.smirkingchimp.com/thread/12844
This article, while probably being mostly correct, gives the impression these people in Goldman Sachs were not guilty of any wrong doing and that they were doing their utmost to conduct their dealings in an ethical and principled manner.
Given that the warnings were abundantly clear long before this meeting, namely in the manufactured housing bubble, then the author of the above article appears to be a stooge. Willing or otherwise is irrelevant. Ignorance is no defense at law.
The above article can be interpreted as saying ignorance is a defense at law. It is not.
Goldman Sachs need to be downsized. If they are not we are five to seven years out from the next bust. The next one will be bigger. (worse)
As an independent professional trader for over 30 years one lesson I learned long ago was not adding to losing positions. The strategy is an enticing one, and is commonly known as averaging. The market drops against you just keep buying thereby lowering both your average price and break even point. Averaging works most of the time, but when that anticipated bounce to get you out doesn't occur the results can be disastrous. Averaging on a massive scale was the source of the meltdown.
each & every time,
when you peel enough away -
there sits goldman,
at the bottom of it all.
Another indication Wall Street is no longer aware there's an economy beyond its border. The crisis started with the combination of stagnant middle-income wage growth over the past 30 years, coupled with triple-digit percentage increases in consumer credit during the same time period. It's the Main Street economy, not some meeting at Goldman Sachs. How did its mortgage book get into trouble in the first place? By December 2006, it was far too late for any meaningful reaction.
http://aleksandreia.wordpress.com/2009/09/02/its-the-lower-80-stupid/
- E.L. Beck
The real problem here is that Investment Bank "Traders" are playing the market with other peoples' money. For several decades from the 1930s to 1990s, a prudent distinction was made between Commercial Banks and Investment Banks. Commercial Banks were regulated and had protections for depositors' money. Investment Banks who took high risks were Partnerships so the Partners kept their bretherin in check from taking undue risks as their personal fortunes were at stake. It also meets the fundamental economic principle of high risk high reward. This simple but effective mechanism was changed in the interest of greed and to protect the guilty. Bring it back and see how much appetite remains for the unrestrained risk taking when your own wealth is on the line, instead of faceless nameless shareholders' funds.
I'm a pro business conservative and I think Wall Street should be put out of business. We already have Las Vegas, and they practice truth in advertising.
Thank you.
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