Capital Offense by Hirsh Michael

Author:Hirsh, Michael
Language: eng
Format: epub
Publisher: Wiley
Published: 2010-08-05T16:00:00+00:00

Even so, down in the canyons of Wall Street there were many who knew that Corrigan had reason to be afraid of derivatives—very afraid. One of them was a derivatives trader named Frank Partnoy. At around the same time that Corrigan was blowing up at JP Morgan and other banks and delivering his “warning,” Partnoy was hard at work at his trading desk at Morgan Stanley in New York. A Kansas-born math whiz who had gone to Yale Law School, Partnoy was living out Jerry Corrigan’s and Brooksley Born’s worst fears—and Joe Stiglitz’s theories. After Yale, Partnoy had clerked for Judge Michael Mukasey, later to be George W. Bush’s attorney general. Partnoy was fascinated by the Street, so close yet so far from New Haven, Connecticut, and Mukasey reluctantly told him to go ahead and give it a try. After a time at First Boston, a second-tier firm—during which Partnoy’s most enduring accomplishment was to invent a supercool poker program—he made it to the promised land: Morgan Stanley, the most prestigious house on Wall Street.

Morgan Stanley had once been the ultimate “white-shoe” firm, the blue-blooded offspring of JP Morgan after Glass-Steagall legally separated commercial and investment banking. For four decades, from behind their antique mahogany desks, the bankers of Morgan Stanley underwrote the securities for and dispensed investment counsel to America’s corporate finest. The firm did not even have a salesman or trader on its staff until the mid-1970s. But more aggressive firms like Salomon Brothers and Goldman Sachs began to earn more money as the leveraged-buyout 1980s began, and Morgan found itself dropping in the “league tables,” which is how the investment banks ranked themselves. The “pivotal point,” as Partnoy described it, came when Ron Perelman was readying a junk-bond-funded takeover attempt at Revlon, which had long been a Morgan client. The temptation was too great: The firm jumped in, earned $25 million in fees, and soon included among its clients some of the biggest takeover pirates of the era, including T. Boone Pickens.

Not that this trend was all bad. Through the 1980s and into the early 1990s, the changing nature of Wall Street still benefited the larger real economy. Capital was becoming more available to wider sectors of the economy. Back in the nineteenth-century world of J. P. Morgan, capital had been scarce and Wall Street had been controlled by a stodgy few. Morgan himself held major stakes in the railroads, which together comprised some 60 percent of the New York Stock Exchange, and stock issuance was a closely held right granted to only the most blue-blooded of corporations. But now the IBMs and the General Motors didn’t need Wall Street as much as before; their corporate ratings were often better than those of the investment banks and they sometimes had their own financing units. They could easily tap the commercial-paper market on their own. So whereas in the old days prestige came to those firms that worked their way up the credit scale to the blue chips, now firms like Morgan Stanley had to look for less creditworthy new clients.

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