My Front Row Seat to the Mortgage Boom and Bust, Part III
Taken to the woodshed
This is part III of my story about the best seat in the house to watch the subprime crisis unfold from 2004 - 2007. But man was it a hot seat.
Check out Part I HERE and Part II HERE.
The more that my boss Jim disconnected, didn't show up, the more senior management looked to me as the defacto head of the group.
It was an ego trip, but I didn't know how to handle my relationship with Jim. Because he saw it too.
He was flaky, but he wasn't dumb.
Meanwhile, my buddy from CA and I were still drowning in day-to-day operations, struggling to get our funding wires out on time every afternoon.
And there was no real risk management.
We had no idea how to do it, Jim wasn't around to teach us, and because I didn't want to show weakness to the brass, I didn't raise my hand.
We'd review reports with Jim, bucket the stale loans into color-coded boxes. And he'd agree to call our clients to clean up the line.
But he never did.
In his defense they were hard conversations, balancing our desire for the clients to use the line with them needing to buy back stale loans - almost certainly with money they didn't have.
But that was the job.
And as the reports got worse, I felt the eye of Sauron swinging past Jim and landing on me.
I had unwittingly walked myself into a situation where I had the responsibility for delivering results without the authority to make the decisions necessary to deliver them.
And I was torn: Sell Jim out, the guy who hired me, and go tell our brash CEO and dapper President that Jim wasn't doing his job?
Or put my head down and keep grinding, trusting that Jim would somehow get us out of the mess.
Neither were comfortable options, so I picked a third, more weaselly option.
But first, our firm's president is a character worth describing. We'll call him Tim.
Mid 60s, tall with perfectly coiffed silver hair, Tim was the kind of elder statesmen that even the 20-something female analysts swooned over.
Shoot, my future wife fawned over him.
To be honest, we all did.
Tim grew up on Wall Street alongside Michael Milken at Drexel Burnam in the '80s (yes, that Milken), presiding over young and reckless traders even as he was young and reckless himself.
He was a throwback from another Wall Street, perfectly tailored suits in an era when hoodies were showing up in boardrooms 3,000 miles to the west.
Even the big boss paid him respect, and the two rarely quarreled.
As things got truly rocky for me, I remember meetings where Tim was kind and grandfatherly, guiding me through a difficult situation while with a single look making it perfectly clear that screwing up was my job.
So in my youthful ignorance, I penned an email in September 2005 to Tim and the big boss that I would come to regret.
My idea was that if I sent them a comprehensive business update, it would act as a passive aggressive application for what had already become my job running the group.
And that the email would be so good, so insightful that they'd have no choice but to part ways with Jim and formally put me at the helm.
I didn't know what else to do.
And was too stupid or too afraid to just go have an honest conversation with either Tim or the big boss.
I toiled over the email, wrestled with every word, finally delivering it under the innocuous subject line "Business Update."
And didn't hear a peep of a response until that fateful email from the big boss two months later, where he accused me of either being too naive to understand the risks our sloppy business was taking, or hoping to throw them off the scent until we cleaned it up.
The damage was done - my reputation was tarnished and it would never recover.
But we got bailed out.
The Germans approved our credit line increase, Jim finally got our two biggest problem clients to clean up their aged loans, we expanded lines for a host of originators who were bursting with loans and we were off to the races again.
And I thought that for the time being we were out of the woods, that the big boss would perhaps give me a pass and reconsider me for the role of Jim's replacement.
We weren’t, and he didn't.
When home prices stalled in 2006, Wall Street doubled down on exotic lending, with Bear Stearns leading the way.
2006 was truly something to behold, an orgy of reckless lending, reckless borrowing, and a refusal by anyone to admit there was anything wrong with any of it.
It was like every loan that came across our desk was a Stated Stated 80/20 (80% first lien, 20% second lien, stated income, stated assets).
Got a pulse? Here's a loan. It wasn't much more complicated than that in 2006.
We knew the shark had been jumped when Bear Stearns began to pump the Option ARM, a choose your own adventure version of irresponsible structured finance.
Borrowers could choose their own teaser rate, with payment options as low as 1%.
Other banks introduced their own flavor of Option ARMs, and it was a mad dash to see who could outflex the other with schemes to lower payments and keep home prices propped up.
But they were already starting to falter, as 2006 would mark the peak of home prices in that cycle.
Nevertheless, the Germans had come through, Jim had cleaned up our problem loans and we were cooking again.
We passed $300MM on the line, then $400MM. Half a billion was in range.
And then a strange thing happened: One in day in our weekly sales and trading meeting, word came down that the market for second liens was falling apart.
Home prices had stopped going up in mid-2006 and apparently investors were no longer interested in holding paper without any equity behind them.
Then a couple months later, rumors swirled on the desk that a big servicer had screwed up and under-reported default rates
People were freaking out.
First payment defaults were through the roof, had been for months, but no one knew it. (A first payment default is was it sounds like, when a borrower misses their first payment. Which is amazing that it's even a thing.)
The goose was cooked.
So was our line, and so were we.
Aged loans were stacking up and originators were running out of options to buy them back.
A client out of Lancaster, Pennsylvania, about 80 miles west of Philadelphia, which our parent company had taken an equity position, was in a particularly perilous position.
We were financing their loans, buying their loans, selling their loans and taking a piece at every step.
They had millions in stale garbage on the line with no buyers, and for good reason.
So the big boss just swept the loans off our warehouse line and onto one he had for the mother ship.
That was the game: musical chairs with infamous borrower names traded around between unsuspecting warehouse lenders.
And then the real bomb dropped.
Remember that email sent by the big boss? Where he suggested that my credibility with him had been called into question?
He hadn’t forgotten.
Our entire group, which was now full on warehouse hippie since I had hired another buddy from California, was hauled into the office on a Saturday morning.
And there we found not just the big boss and Tim, but a team of what looked like banking regulators from the '90s, middle aged, frumpy and perhaps the most non-Wall Street bankers to ever call themselves by the name.
Introductions were made, President Tim gave me a look like "you brought this upon yourself" and we were informed that the warehouse group would be relocating to Somerset County, New Jersey, under the watchful eye of Walt, a salt and pepper, doddering version of Tim.
Walt and his team of yawning community bankers had been hired as a package to replace the Warehouse Hippies, and we were expected to spend the next several months passing off responsibilities.
And that was that. There was no further discussion, no arguments, and by lunchtime my wild ride on Wall Street was basically over.
I did my duty, spent some miserable weeks in Somerset, perhaps too much time at the TGI Fridays bar, and that was that.
Jim was unceremoniously let go, Keith foisted onto another group and the Warehouse Hippies were distributed amongst other teams within the firm.
Why we weren't just let go, I have no idea.
Perhaps Tim took pity on us, perhaps the big boss just wanted to torture us with an every day reminder of the opportunity we had squandered.
My future business partner landed in the distressed trading group, which for obvious reasons was in the path of growth.
I joined a team that was kicking around the idea of launching or buying a chartered bank, which would have been an interesting perch from which to watch the next several years unfold, but I was over it.
I waited out bonus season, which was expectedly disappointing, and tendered my resignation.
I was sweating bullets that day, as one usually does when one tenders a resignation.
And when I delivered it to my new manager, who had had a front row seat for the warehouse group's unraveling and had come to either like or pity me, he could not have been less surprised.
His smile basically said, "good for you, now get the fuck out of here before this place rots you any more than it already has."
While he had watched me fumble what at the time could have been a promising career opportunity, I watched as he threw his marriage into the toilet.
Night after night of wishing his young daughter sweet dreams on the phone, literally going bald before our eyes from the stress, with a culture of debaucherous adultery swirling around him.
Even if he was innocent, at home he was guilty by association.
I saw this up and down the desk - hard charging, line snorting parents who had abandoned their families for the firm.
A firm that didn't for a moment consider what happened at home. There was a cult-like devotion to the firm and to the big boss.
You either threw your entire self into the effort to fund more loans, to sell more bonds, or you were relegated to working with Keith, or in compliance.
I walked out that door wounded, but motivated.
My future business partner and I had spent our final months together on the desk hatching the idea to go back to California and pick up the pieces when the whole thing unravelled.
But that, is another story.