Back in 2006, the theme of our 16th Annual Broker Report Card Survey was: “We Love Management.” Our survey of about 920 advisors revealed mostly positive attitudes (of course, as usual, reps complained then, as they do now, about company support). What was not to love in 2006? Revenue and earnings of securities firms were the highest they had been since 2000, and, well, when it's a bull market and everyone is making money, it's easy to love management.
As you might imagine, advisors we surveyed this year (about 1,551 responded) were not as satisfied with management as they were two years ago. (Please see page 27 for more.) But then the torching of about $500 billion in capital will do that (that is the amount of capital written off by the companies on our annual survey). That figure will surely rise, as Citigroup is sitting on another $300 billion in troubled assets that the government has agreed to guarantee. The trend reminds me of an overused line from The Sun Also Rises, but in this case it seems appropriate: Question: “How did you go broke?” Answer: “Two ways. Gradually and then suddenly.” And it feels a little like that: Rumors abound, stock prices slip, then begin to plummet; and then, over a weekend, a hasty government rescue is banged out.
The amount of potential capital destruction is truly awesome to contemplate ($1.3 trillion by some estimates). That the management of these companies would “bet the farm,” even unwittingly, is truly amazing. What were they thinking? Shouldn't they have known the kind of leverage they had taken could turn into a catastrophe if the value of underlying assets dropped even a little? The answer is yes. But, as our book excerpt from Chain Of Blame notes, there was too much money being made in the securitization of mortgages. In fact mortgage origination got so sloppy, the book's co-author Paul Muolo says, “Mortgage due diligence firms working for Wall Street companies like Bear Stearns, Lehman Bros. and Merrill Lynch hired more laptop-grunt underwriters to review loan files, renting out hotel ballrooms to house these freelance eagle eyes.” In some cases, “Supervisors would stand up on tables, shouting through bull horns, to exhort employees to stay on pace to approve a loan an hour.” Muolo and co-author Mathew Padilla put the blame for this out-of-control recklessness squarely on the backs of Wall Street firms, who literally backed up the truck to buy these loans in order to securitize them. Of course, there is plenty of blame to go around, from greedy home buyers to greedy lending institutions to social engineers in Congress who refused to see the ugly portents of the bloated balance sheets of government sponsored enterprises (GSEs). Please turn to page 47 for the story of Stan O'Neal's drive to push Merrill Lynch headlong into sub-prime securitization.
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