New York attorney general Cuomo also came out swinging, despite the fact that during the heyday of housing he was running HUD under President Clinton. In that capacity, Cuomo had supported broad home ownership, even though so many people did not have the means to buy homes. Now he was examining whether executives behaved properly, or whether their actions defrauded the public. I asked Cuomo, “Do you worry that politicians and the media have been fanning the flames of class warfare? The bonuses outrage and ‘business is bad’ theory seem to be obscuring other, perhaps more important, issues, like fixing the financial system and getting credit moving again.”
“That is a fair point,” he said thoughtfully. “People are rightfully upset about Wall Street abuses and excess. And we need to address those issues. But we also need to be very careful and not let that anger become counterproductive and a distraction. I also think Wall Street should be taking a long, hard look at the philosophy of incentive compensation. I don’t think bonuses are always bad. The question for Wall Street is, can it design incentives that promote the long-term health of the firms as opposed to just hitting short-term numbers?”
There were so many shock waves in the economy that nobody was wasting energy worrying about the fate of Lehman’s doomed executives. Still, it was an extraordinary tale of wealth destruction in a very short period of time. It was a devastating transition for many.
As one executive told me frankly, “In the last twelve months at Lehman, I made $14 million. But $12 million was in stock, and that was completely wiped out. Uncle Sam took a million.” He was left with $1 million to pay for a $14 million lifestyle. He had big bank account problems, including a very expensive house to unload. But he smiled and shrugged at his plight.
“Some people are pretty bitter, and they’ve filed claims and the like,” he told me. “My view is that’s how it’s supposed to work. If the shareholders get wiped out, everyone in the senior managing team should get wiped out. Now, you say, ‘Oh, well, this was different.’ Screw it. The management team and their interests should be aligned, and, in this case, they were, and they both got wiped out. That’s how it worked, and that’s how I think it should work.”
EIGHT
The Aftershocks
“I don’t think we really believed at the time, or understood at the time, just how bad it really was.”
—JOHN MACK, CEO OF MORGAN STANLEY, IN AN INTERVIEW WITH MARIA BARTIROMO, FEBRUARY 13, 2009
In his career, Bob Steel had worked the entire financial circuit—from investment banking (Goldman Sachs) to Treasury to the banking industry (Wachovia), with a couple years’ teaching school in between, but in the fall of 2008, he was feeling out of the loop. Steel, fifty-seven years old and North Carolina–raised, had worked for Hank Paulson as under secretary for domestic finance until the summer and now headed up Wachovia Bank. He’d gone in knowing that the bank had issues, but he was confident he could solve them. Now, less than one hundred days later, he was in talks to sell the bank. What a disaster! He would have liked to have discussions with his old colleagues at the Treasury, but it was against the law for him to contact them. He was on his own.
Steel found it hard to resist the metaphor of the raging seas. He told me that prior to the September collapse of Lehman, “It was getting increasingly uncomfortable. And I think that the weaker swimmers, the less strong institutions like Wachovia, found it more and more difficult as the water became choppier and the tide became stronger. It became more and more apparent to us, and to other institutions, that the world was going to be different. We were getting prepared for a period of tumult.”
As the fateful weekend in mid-September approached, Steel and his colleagues were already discussing the need to find a strategic investor.
The origins of Wachovia’s problems, deeply rooted in the subprime calamity, could be traced to the actions of a husband-and-wife team named Herb and Marion Sandler. At the height of the housing boom, the Sandlers ran a California-based mortgage company called Golden West Financial. Their specialty was option ARMs, loans that featured low teaser interest rates that later ballooned beyond the borrowers’ ability to pay. A special invention of the Sandlers’ was the “Pick-a-Pay” program. This allowed borrowers to pay low monthly amounts, delaying what they owed by adding to the loan principal. People ended up owing far more than their properties were initially worth.
In their glory days, the Sandlers were praised for their acumen: “Husband, Wife are Golden Duo,” raved Fortune in 2002. “Golden West Strikes It Gold with Principles,” headlined the Seattle Post Intelligencer in 2006. That year, Golden West Financial was acquired by Wachovia for $24 billion, and the Sandlers personally made $2 billion on the purchase.
Everyone thought it was a good deal. But at the time it was unknown that Golden West was neck deep in the subprime mess, and the whole thing was about to go under. The golden couple came to be known as “the toxic-mortgage king and queen.”
The Sandlers’ questionable tactics were outed in the media, including in a scathing feature on 60 Minutes, but they
