Fixers (18 page)

I’m surprised at how totally the media have bought into OG’s act. I mean, I’m no pundit or political expert, but I can’t believe that no one in the so-called “mainstream” media has called attention to qualities that were evident to me the first time I took a hard look at him. Most of the stuff is positively fawning. Not that I put much practical store by op-ed blathering. I have a friend who argues that pundits should be licensed like drivers. They should be made to take a test to get a pontification license, and then be subject to a point-penalty system for the punditical equivalent of traffic offenses: getting facts wrong, making grossly inaccurate predictions, laying down the law about subjects of which they have no practical grasp, relying on Iraq-quality unnamed sources, displaying pomposity and moral self-love, and so on. Pile up X number of points and your pundit’s license is suspended or revoked—meaning no Sunday morning talk shows, rejection slips from the op-ed editors at the
Times
and
The Washington Post
, no Charlie Rose or Jon Stewart, no
Vanity Fair
profile, no $25K lecture fees and fat advances for mailed-in books with nothing new to say.

If only!

Late last night Mankoff telephoned to tell me to expect an envelope to be delivered by messenger early this morning. He sounded hyper-secretive.

“What am I, your private intelligence agency?” I thought as I gracefully assented. The fact is, I have a lot on my own plate just now. When Mankoff first mentioned that he might have other jobs for me, like the meeting in Battery Park, I assumed these would be brief, few, and far between. Now I wonder. Where will it stop? Should I ask for a commission?

“Bring it with you to the meeting this afternoon,” he told me. “In the meantime, read it. I want you to have an accurate sense of what’s
really
going on.”

At 8:03 a.m. my doorbell rang. It was Pedro, the guy who’s at the desk in the lobby on weekends, with a plain brown envelope.

Inside was a printout of a letter on Lehman letterhead written by a Lehman senior VP to the firm’s top people. I’ll just quote a couple of the juicier passages.

To begin with, here’s how the writer sets the stage:

Then he gets down to cases. Hard cases:

Handwritten addenda on the back of the memo state that Lehman is currently running more than 100,000 derivatives positions, 10,000 of which they can’t account for. That’s a 10 percent slippage in a system where 3 percent is considered catastrophic! Moreover, it seems that many of these positions are in trading portfolios whose computer systems don’t communicate. That is a shitload of shit! And if you take a large percentage of those trades and link them to other people’s balance sheets—including STST’s—and then link those balance sheets to still others, you can see how terrifying what one San Calistan calls the Mrs. O’Leary Effect really is: a cow kicks over a lantern and before the ensuing conflagration peters out, most of Chicago is in ashes.

When I gave Mankoff the envelope, he read through it quickly. Then he stared at the ceiling, obviously weighing how to act on this new intelligence, probably trying to decide whether to pile on and short Lehman, as I know Rosenweis is urging him to do, or to let Fuld find his own way to his doom. Evidently having made up his mind, he turned his back to me, punched a number into his phone console, and murmured a few instructions that I couldn’t quite catch. Then he hit me with a nice bit of news: “Merlin Gerrett’s going to endorse the candidate. He’ll make the
announcement next week.” This could be helpful. Really helpful when it comes to raising big money on the Street. Which is good, because I’m down to $2 million and pennies, and Orteig keeps hinting he could use more. Politicians are as bad as my friends’ ex-wives: there’s never enough.

After the meeting, on the way out, I stuck my head in Lucia’s office just to say hello and how goes it.

“Can’t talk now,” she told me. “We’ve just gone into full panic mode. The auditors have been called in and everyone has been told they’ll be working nights and weekends to make certain that our financial controls and valuations are as tight as they reasonably can be and that our books are up to the minute. Where we hold illiquid positions, they’re to be marked down another seventy-five basis points. Oh yes: Lehman’s just been declared a no-fly zone. We’re not trading Lehman for our own account, long or short, nor are we accepting orders in Lehman stock and options that aggregate more than 10,000 shares, and then only for Class A clients and counterparties and only on the long side. Now: off with you!”

It isn’t even Memorial Day, but already this is starting to feel like it will be a very testing summer. What fresh hell awaits?

Terrible hangover today: the only presences at last night’s celebration were me and my TV—and the latter doesn’t drink, so I polished off most of a fifth of Lagavulin all by my lonesome.

Celebration of what, you ask?

Because Hillary has conceded! OG will be the nominee! Which means that yours truly has played a decisive role in placing a winning bet on the longest-priced dark horse in the whole history of presidential elections, at least since Truman in 1948. Does that make me the bigtimiest fixer in American history? I sure as hell think I’m in the running.

And that means, the way things are now on the economic and financial front, that he will surely be elected president. Which in turn means that barring an act of extreme bad faith on Orteig’s part, come next January Winters and Holloway will be whispering in the new chief executive’s ear to lay off Wall Street. Do you know the famous Titian painting of Pope Paul III and two of his so-called “nephews,” a pair of prize schemers by the look of them? It’s a fantastic painting; I saw it in Naples a few years ago, and it has stayed with me ever since. If I thought Mankoff would appreciate the joke, I’d get a postcard of it and paste OG’s face on the pope, and Winters’s and Holloway’s on the nephews—and give it to him the next time we see each other.

The horizon looks bright. When Orteig called with news of Hillary’s concession, he told me they’ve passed $500 million.

The news from the Street also favors OG. The smart money’s saying that Bernanke et al. are committed to fighting the wrong opponent—inflation—while in fact a deflationary collapse in everything
from house prices to junk bonds is underway, spelling an outbreak of defaults and foreclosures. If things continue to deteriorate at their current rate, the electorate should be in a proper anti-GOP frenzy come Election Day.

On to Washington!

Lunch with Lucia today at Le Veau d’Or on my nickel.

First item on the agenda: OG’s announcement two days ago that he’s opting out of the public financing system, and that his campaign will rely on private contributions. Let me add, quickly, that Lucia brought it up, several times employing the word “hypocrite.” She reports that people are saying it’s a flat-out renege on an earlier promise for which, according to her, OG is famous. She made it clear that she doesn’t trust him as far as she can throw him. Too slick, too ready with answers. I had no comment. I simply smiled and called for another
kir
.

When she finished ranting, we moved on to other gossip, some of it cheering, some not. As we parted, she put her arm on mine and asked, “Chauncey, do you by any chance own any GIG?”

That’s Global Insurance Group, probably the biggest, widest-reaching, and most powerful financial company in the world.

“You know, I think I do. My old man got them when they bought a Dutch insurance company he’d put money into and he left them to me. It’s been a great stock—until recently. Now it’s probably too late to sell. Better to hang on and see what happens. Why?”

“You should sell.”

“Really? Why?”

“Because something is better than nothing. Those shares could be worth zero.”

“Why do you say that?”

“Some fairly reliable people on the inside are telling me that the Treasury Department and the Federal Reserve are drawing up lists of which firms are to be saved and which left to die if things
get much worse. GIG’s near the top of the list of those to be taken off life support.”

“Ahead of Lehman?”

“People down there won’t speak the word ‘Lehman.’ Just take my word for it on GIG.”

I said I’d look into it.

Which I may. Frankly, until after the election, I don’t plan to trade anything, long or short. I don’t want to stumble into someone else’s disaster and get tagged as an insider.

Was für eine Katastrophe!
as they say in Zurich. Back in February the big Swiss bank UBS estimated that write-offs connected to U.S. mortgage-backed securities and securitizations might reach $260 billion. Six weeks later, the IMF bumped that figure to $950 billion. A month ago, James Polton went public with his estimate, probably self-serving in view of the huge short position he’s got, some of it in league with STST, via Protractor, that the right figure’s probably around $1.3
trillion
, but of course he’s probably talking his book. Still, one of my clients, a very plugged-in and steady-minded bond manager, says that she hears the correct number might approach $2 trillion.

How the hell is the Street going to fill a $2 trillion hole? There’s only one answer.

Uncle Sam. Aka We the Taxpayers.

It’s evident that 90 percent of the electorate is completely in the dark about the size of the bill they’re going to be handed to cover Wall Street’s mischief. Oddly, OG hasn’t brought it up in his campaign speeches. I put this down to Orteig’s political shrewdness. The worse OG makes Wall Street look, the greater will be the pressure on him to roll out the guillotines, and the harder it will be to put over my Winters-Holloway ticket on campaign insiders who aren’t party to the scam. Besides, OG has plenty of ammunition as it is.

The big picture indicates that anyone who thinks “the people’s money” belongs to the people is about to find out otherwise. So far, talk about “subprime” and “counterparties” and “moral hazard” and the like is just so much Sanskrit to the man on Main Street.

But this can change.

We’re going from bad to worse, from portentous to downright
ominous. Early this month, the FDIC moved in and seized a financial conglomerate called Indy Mac, which started life as a spinoff from Countrywide. Last night, I had drinks at the Regency with a professor at MIT who’s head of the acquisitions committee at a regional museum that I’m trying to help out. He told me that, based on his statistical workup, Indy Mac alone may end up costing taxpayers and investors more than the entire savings-and-loan mess back in the ’80s.

On top of that, Lucia reports that the Street consensus seems to be that the next big shoes to drop have to be Fannie Mae and Freddie Mac, the housing market’s Fasolt and Fafner. The latter are the twin giants who built Wotan’s Valhalla, another splendid Masters-of-the-Universe edifice that gets burned up in the end thanks to the arrogance of its inhabitants.

Fannie and Freddie were created to supply liquidity to housing finance by buying mortgages originated in the private sector. They’re half-beast, half-man. Their debt is backed by Uncle Sam but their shares are owned privately. They’re supposed to apply certain credit-quality standards to the mortgage paper they take off the Street’s hands (and balance sheets), but the rating agencies have allowed that threshold to become meaningless with their cheap AAAs. A reliable source tell me that these “AAAs,” which bear about as much relationship to genuine credit-worthiness as an Orchard Street “Rolex” does to the real thing. They’re based on the assumption that bad paper issued or endorsed by great and famous institutions will be made whole by Uncle Sam in the event of trouble. It’s like getting a rich cosigner on one’s gambling debts.

Not everyone’s fooled. Fannie’s shares alone have lost two-thirds of their value in the past month, while the technocrats try to figure out if there’s some way to resolve the mess short of outright nationalization, which is the Street’s worst nightmare. You can see
why: if Fannie and Freddie can be taken over, why not GIG, why not Citi?

Apparently Polton has accumulated a massive short position in Fannie and Freddie stock using STST as his prime broker. According to Lucia, Mankoff took a look at the account and called Rosenweis in just the other day, cut him a new one and ordered him to tell Polton to move his short position to another firm. I gather Rosenweis was really unhappy, but at STST it’s Mankoff’s unhappiness that calls the tune.

Two weeks ago,
The Washington Post
ran a story reporting that OG’s campaign had solicited ex-Fannie CEO Franklin Raines for “his advice on mortgage and housing policy matters.” Mankoff saw it and commented that a lot of people think that Raines is a jerk-off with slimy ethics, and isn’t someone OG should be seen in public with and definitely not someone for the press to perceive as a member of OG’s inner circle. I passed this on to Orteig, and he promised to take care of it.