A colossal failure of common sense: the inside story of the collapse of Lehman Brothers by Lawrence G. McDonald; Patrick Robinson

Author:Lawrence G. McDonald; Patrick Robinson
Language: eng
Format: mobi, epub
Tags: Investments & Securities - General, Corporate & Business History, Lehman Brothers (1993- ), 2008-2009, Financial services industry - United States, Financial crises, Finance, Business, Global Financial Crisis, Economic Conditions, Bank failures - United States, Investment banking - United States, Economics, United States, Corporate & Business History - General, Lehman Brothers, History Of Specific Companies, Business & Economics, Economic History, Investments & Securities, Securities industry - United States, General, Financial crises - United States
ISBN: 9780307588333
Publisher: Random House, Inc.
Published: 2009-07-21T17:21:39+00:00

8

The Mortgage Bonanza

Blows Out

These were people who, in the five

thousand years of recorded human

house construction, never would have

been granted a mortgage to purchase

even a dwelling of mud, reeds, or palm

leaves. And they were very, very

frightened.

WE DID NOT linger very long

outside the New Century parking

lot. We drove maybe half a mile

back toward the freeway and

parked on a side street. We then

walked back to New Century and

took a long look around the outside

of the building.

There was plainly no point in

even contemplating entering, since

we had no appointment and in any

event had no right to be snooping

around asking questions. It would

have taken someone mere moments

to call the mortgage department

back in New York and demand to

know who the hell we were and

what we wanted, at which time the

game would be up and Dave Sherr

would want some embarrassing

answers.

“We’d never get in there,” said

Dave Gross. “Not under any guise.”

“I wouldn’t be absolutely sure

about that,” I replied. “Gimme a

couple of big pizza boxes, I’ll be

through that door and in the

president’s office in about three

minutes—‘Brad Morrice insisted,

real hot with extra cheese.’”

Grossy looked at me, plainly

considering whether I’d completely

lost it. I decided not to elaborate on

my misspent youth, and instead

outlined our strategy. We needed a

restaurant close to the building,

where we could locate a few

bodybuilders on their break.

We found a place that was almost

perfect—snazzy, pricey lunch, nice

bar, expensive décor, glamorous

waitresses—just a few hundred

yards from the New Century

building, and made it our HQ for a

couple of hours. Sitting at a corner

table, we assessed the events of the

last few days.

First

off,

Merrill

Lynch,

according to a fast phone call from

Ashish, now had $50 billion worth

of CDOs filled with mortgages on

their books—a whole mass of

subprime, scads of them from

California, some of them probably

sold from this very restaurant.

Grossy reminded me of Pete

Hammack’s very last words before

we left: “If, in just one month, New

Century

cannot

move

those

subprime mortgages out into the

market, they’re dead. Their balance

sheet could not stand it.” Pete meant

not just New Century but all of us.

No one can afford to hold on to the

scalding hot potato of subprime

mortgages that cannot be sold.

“Larry,” he’d told me, “this market

right now is like a line of traffic,

with everyone moving up to the

head of the line and waiting for the

green light—get the CDOs sold and

keep going forward.” In Pete’s

opinion,

if

that

traffic

light

malfunctioned, and the first two

vehicles were somehow stuck,

everyone else would back up. There

would be a whole line with nothing

moving, all jammed up, and the

carnage would be indescribable.

New Century was selling $5

billion worth of mortgages every

month, and David Einhorn, the

founder and president of the

multibillion-dollar

hedge

fund

Greenlight Capital, had just joined

its board of directors. He’s

probably the smartest short-seller

on Wall Street, maybe the world.

So what was he doing on the board

of this New Century outfit, with its

billion-dollar

headquarters

and

lugheads riding around in brand-

new Jaguars? His presence on the

board gave me pause. Could we all

be wrong? Did they really have a

golden

business,

upright

and

aboveboard? Could Alex, Mike,

and Larry all be completely wrong

in their assessments? This was,

after

all,

the

second-largest

subprime lender in the nation.

The thoughts were racing through

my mind. And I guess my

expression betrayed my concerns,

but Dave, one of our best bond

salesmen, did not share them.

“Listen,” he said, “New Century

had a real shake-up couple of

months ago, new CEO, this guy

Brad Morrice.

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