Fixers (8 page)

“Someone mentioned her name in a way that sounded like I should recognize it. I didn’t. And you know how I hate to appear less than au courant in the who’s who department.”

“I do indeed. Ah, sweet Lizzie. She’ll cut your throat for tuppence ha’penny. She’s the tiny iron fist in the velvet glove of C & B.”

C & B: a name I did recognize. Stands for Coppercoat & Barley, one of the capital’s hardest-charging law firms. Four hundred lawyers and growing. As well known for its lobbying prowess as its jurisprudential skills, and no wonder. Its pride of lawyers already includes four former members of Congress, two ex-Cabinet secretaries, the niece of a recent vice president and God knows how many former Congressional staffers and clerks to Supreme Court justices. It’s a place where the so-called revolving door spins at Mach 5.

The more Lucia told me about Brewer, the more clearly I could see why Mankoff included her in his triumvirate. Winters and Holloway can be counted on to divert or hold up policy initiatives unfavorable or threatening to Wall Street, but if matters get out of hand, and an investigation or prosecution needs to be shut down or an indictment blocked, Brewer’s the girl for the job. She’ll know which doors to bang shut, what to cram down whose throat to shut them up, how to stifle regulatory actions that would affect a banking house’s public image and possibly even its access to credit, or—worst case—land its higher-ups in the pokey.

We moved on to the transactions that Lucia calls “our firm’s peculiar arrangements with James Polton,” and how these can be made to appear to jibe with “the client comes first.” STST is presently in the process of buttoning up what is supposed to be the final Polton deal, a structured ziggurat of mortgage debt and derivatives called 2007 Protractor.

Lucia doesn’t like the Polton deals. She thinks STST is pushing the ethical envelope with these transactions, and that they may in the end come back to bite. She would never say so out loud within the firm, because Polton’s hedge funds are huge revenue generators. He’s one of the top hedge-fund operators in the country, whether your benchmark is Assets Under Management (AUM)—$170 billion—or Internal Rates of Return (IRR)—average of 27 percent over the last five years.

In the summer of 2006, he came to the conclusion that the securitized credit markets, those great discrete pools of mortgages and consumer debt and the derivatives that can be attached to them, had moved into bubble mode, and sooner or later were going to burst. At that point, he began to short everything in that sector that he could. By the last quarter of 2006, however, others had seen the same opportunity as Polton, and there was little available in the market to sell short on the scale he likes—it was like a trout stream being depleted through overfishing—so he came to STST and Deutsche Bank and a couple of other big players in the mortgage-backed securities market and proposed that they look into creating credit pools specifically for him to bet against. He and his attorneys had figured out how to do this within the letter of the law if not its spirit.

Polton was willing to pay handsomely. The sugarplum visions he set dancing in the minds of structured-finance people at STST and elsewhere got them all in a tizzy of greed, and so, apparently without bothering about ethical niceties such as “should we sell our clients stuff we’ve designed to go bust?,” the firm’s math nerds went to work on the algorithmic equivalent of IEDs.

This is how I understand it to work: Polton gives STST a list of sure-to-default mortgage-related debt securities. STST packages them into a multi-tier investment pool. These work on the theory that although if you stack garbage high enough, by the time the
lower layers are consumed, the topmost layers will hang in there and somehow get paid off. This qualifies these layers, however, for a top rating from S&P and the other rating agencies, which means they can be bought by and sold to certain limited-risk clients—German regional banks, for instance—willing to rely on the ratings rather than their own credit judgment in return for a smidgen of additional yield. They’re taking long positions on stuff that Polton, STST, and coconspirators are simultaneously selling short in the parallel derivatives market. This is why such clients are called “mullets,” a word for the fish whose sole purpose of existence is to make a meal for larger predators.

This isn’t one of those instances where STST has taken a short position in order to help a valued client complete a trade or round out a position. Pure proprietary profit is the goal here; it’s the trading equivalent of swearing an oath with your fingers crossed behind your back. To dress this murky business up, a third-party front with a reassuring name like Derivatives Analysis Inc. is hired to put its stamp of approval on the garbage selected by Polton et al., and to take the fall when the top layers go kaput according to plan. That’s also when the client figures out what’s been done to him and calls his lawyer.

Lucia claims the Polton deals are models of probity compared to some of the other shit going down elsewhere, and for all I know, that’s right. There’s gossip that another big firm has pasted together a deal called Amethyst that they just keep refilling and refilling with garbage pulled from other, busted deals that they then can short over and over again. They’ve done $500 million so far—and still they find buyers. Even better is a huge scam at Citi, where the traders’ sleight of hand is shoving unsold, unsalable pieces of older deals—stuff too fragrant for even the most obtuse German provincial bank to swallow—onto their own bank’s balance sheet. They book those transfers as regular-way sales and immediately
“pass Go” and collect their individual bonuses, notwithstanding that when these trades blow up, it’s their own bank and its shareholders that will take the hit.

The arrangement with Polton isn’t the first time that Struthers Strauss has engaged in financial origami and created elaborate and deceptive paper structures that are eventually so complex that scarcely anyone is able to figure out how it all fits together. “Complication is the first refuge of the scoundrel,” says my elderly chum Scaramouche, about whom I’ll tell you more shortly.

STST showed its mastery of fraudulent complication back in the 1920s, another time when the markets were in the grip of what the economist John Kenneth Galbraith has called “a gargantuan insanity.” The firm pyramided interlocked “investment companies” with down-on-the-farm names like Appalachian and Clinch Mountain and, at the very summit, the Struthers Strauss Trading Company. These were sold to clients at nice prices with very nice built-in commissions and management fees. I suppose it was these deals that Struthers had in mind in 1927 when he issued the dictum about serving two masters.

In 1932, Herman Strauss, who was technically in charge of the firm’s underwritings, was hauled before the Senate Banking Committee. The questions thrown at Strauss were pretty softball—Washington was trying to cover up for Wall Street—but nevertheless he had to admit that in 1928 and 1929, the firm that he and Lembert Struthers had built with such pride and scruple had unloaded barge loads of garbage on the investing public for $50 a share, financial waste matter that three years later was selling for pennies. As it turned out, Strauss got off lightly. A year later, with FDR having replaced Hoover in the White House, the committee was reconvened with Ferdinand Pecora as chief counsel and the banks were eviscerated.

By now, Gentle Reader, you’re asking how a firm like STST can
look itself in the eye. The answer is it doesn’t. If the lawyers will sign off on it, go for it! “Legal” and “illegal” are as close as the Street comes to “right” or “wrong.” No matter what you and I may think, these Protractor-type deals are perfectly legal, approved by $1,000/hour lawyers.

There are people who argue that Wall Street is the natural habitat of the psychopathic personality. There’s a ten-point list called “the Hare checklist,” after the psychologist who formulated it, and I have to say I’ve seen striking examples of these attributes and tendencies in many if not most Street types I’ve encountered.

One more thing. What STST expects of its own people, it expects from those with whom it does business, and that includes outside consultants like me. Absolute discretion. Omertà that makes the Corleones look garrulous. Talk to anyone, especially the media, about your dealings with STST, and should someone there hear about it, you’re toast. If they knew about this diary, they’d be putting out a contract on me.

It’s the despair of my chum Lucia and her staff that Mankoff won’t do media—no talk shows, no
Fox Business News
, no sit-downs with most-favored journalists like Charlie Gasparino,
Maria Bartiromo, or Michael Lewis. Although Lucia would like to put him on
60 Minutes
or
Charlie Rose
, she has to admit that Mankoff’s “mystery man of Wall Street” shtick probably works in the firm’s favor.

Of course, the firm’s top analysts take public and publicized stances on stocks and sectors on which they develop opinions and make buy-hold-sell recommendations, and now and then, if it suits a particular transaction or strategy, Lucia will orchestrate a leak.

There’s definitely a Big Brother aspect to life at STST. Lucia says the phones are swept every day for bugs, and hard drives are subjected to random checks. And as I said, e-mails especially are carefully monitored. I don’t know what it is, but there seems to be something about e-mail that brings out the indiscreet in people. Traders in particular are blowhards by nature; with them, digital boasting can be reflexive, even though employees are regularly reminded of a favorite saying of Arnold Braum, the Wagnerian gnome who is the managing partner of Corbett & Charles, STST’s principal outside law firm: “the ‘e’ in ‘e-mail’ stands for ‘evidence.’ ”

STST recruits the best and the brightest and most ambitious products of the famous universities; year in, year out, the firm ranks first in recruitment at Stanford, MIT Sloan, Amos Tuck, and other top-rated business schools. The pace of the place is brutal: eighty-hour weeks are standard even in summer, and the firm’s on the brain 24/7. I think of it as a kind of hyperbaric chamber spun from gold. As you rise closer to the organizational summit, you have less and less time or energy left for the wife and kids, who are expected to compensate for the parental/spousal gap by buying stuff with your seven-figure take-home pay and black AmEx card or sleeping with the personal trainer.

You give yourself body and soul to STST. There’s no time for romance or the upward rounding of the mind and feelings or for moral or social or cultural reflection and improvement, and no
space in the spirit for any emotion other than ambition and greed. One mistake and you’re gone. If you can survive there for twenty years, till you’re forty-five, you’ll be rich enough to quit and learn to play Chopin or do good works in the barrios of South America or stalk the snow leopard or smell the roses.

No firm is defter at dealing with accusations of conflict of interest. That’s probably why the Polton trades have gone down so easily. So far. Here’s how they’re treated in
The Firm: The History of a Great Institution
, the first authorized history of Struthers Strauss, which will be published early next year. Lucia slipped me a copy of the manuscript, and I have to say it’s really very good: stylishly written, admirably researched. Here’s the book’s take on the Polton trades: “… 
the firm and its own investors enjoyed the substantial profits … produced by taking an astute and almost unique short position in the subprime mortgage market. While some would question whether the firm did not have an overarching fiduciary responsibility to all clients and customers to share its expertise … senior management was and is clear: Each business unit is responsible and accountable for doing its best to complete the mission of that particular business
—
period. No business is its brother’s keeper. Each tub on its own bottom
.”

“Each tub on its own bottom.” You can’t get more sweetly evasive than that.

I suppose all firms at some point have to deal with situations where some clients are more equal than others. Triaging clients is part of the business; why shouldn’t a firm go the extra mile, ethically as well as financially speaking, for the client who writes $100 million a year of business as opposed to one who throws in an order now and then? Polton is surely more profitable to STST day in, day out, than the German banks who’ve been the lead mullets in the Protractor-type offerings. But God knows how STST responds if faced with Lucia’s blackest nightmare: an insider whistleblower
with the facts and documents who can walk the SEC or Uncle Sam through the scheme, layer by layer.

So that’s STST, creed and culture. Further comment from me would be superfluous, other than perhaps this: every now and then, away from my business, I run into STSTers past and present. Only the ones who no longer work there seem remotely happy—at least as I define the word.

One final bit of background. I feel I should tell you a bit about San Calisto, nicknamed by me for the Roman palazzo where the Vatican stashes its superannuated cardinals. On days when I’m still in the office in the late afternoon, or when I have nothing on my plate for lunch, I’ll wander across the elevator lobby for a drink or a sandwich.

San Calisto currently houses four engaging relics (down from a half dozen when I moved in next door) from the era when STST was an old-fashioned partnership. They still pine for those bygone days, although they understand why the firm went public in 2000. Trading activity had grown in volume, risk, and technical complexity to a point that the then-partners’ personal wealth might have been imperiled. Incorporation and a listed quotation protected against that dire contingency.