12/12/2011 03:50 pm ET

Conversations With Wall Street: The Inside Story Of The Financial Armageddon [EXCERPT]

The following excerpt is from the newly released book: "Conversations with Wall Street: The Inside Story of the Financial Armageddon and How to Prevent the Next One," by Monika Mitchell and Peter Ressler


"We all knew in our heads that when the bubble burst, it would be a bit painful; but there's pain, then there is outright Armageddon. This is Armageddon."

-- Senior Bond Trader, Top Investment Bank

Wall Street and Main Street operate on two different value systems. As a general rule, Wall Street continues to follow the 1980s adage, immortalized by celluloid images, of "greed is good." The bailouts of 2008-2010 reaffirmed that code in the minds of those at the top of the industry. Ironically, Main Street supported that view for much of the 1990s and 2000s. Times were good; no one on the receiving end of either side wished to rock the boat. It came to a dramatic halt when Lehman Brothers collapsed, and Main Street paid the price for Wall Street excess. Suddenly ordinary Americans recognized how they had been exploited and expressed anger at those who controlled the purse strings.

How could they have gotten away with this? Where was government oversight while all this was happening?

The contrasting values on Wall Street and Main Street and how business is done in both sectors reveal the platform for the perfect financial storm. It is true the Wall Street mortgage machine took advantage of Main Street's ignorance and vulnerability. There was also something else in play that completed the picture - complacency and acceptance on the part of the general public for Wall Street shenanigans, which the Street understood better than Main Street did itself.

The subprime mortgage industry crisis revealed to Main Street (and the world) that the common Wall Street profit model does not support honesty and fairness. This was shocking to ordinary America. It was even shocking to many of us in the industry who could not imagine how market makers would want to bite the hand that fed them. Yet the Wall Street model is more often than not built on instant gratification. The focus on daily stock reports and quarterly returns have turned the industry into an ATM-like cash machine. Conversely, Main Street's common business model is geared toward long-term growth. Main Street values integrity and operates on a system of trust. People are respected for earning a "decent" living through effort and hard work.

In finance, those who are most valued are often the ones who figure out how to manipulate the system; they know how to push the law to the outer edge by exploiting loopholes and weakness in the regulations. On Wall Street you are considered a fool if you don't take the money and run. The good guys rarely make as much money as their less ethical counterparts—and money is how you are measured. The model for the subprime mortgage industry evolved into a fast moving "get rich quick" scheme in the five years from 2002-2007 that allowed Wall Street to mortgage the futures of Main Street America. The financial industry profited by convincing Main Street to abandon its long-term value structure and trade it in for immediate returns. Only unlike Main Street, Wall Street was not using its own money and credit to bankroll the housing markets. Lenders used FDIC guaranteed deposits and stockholder money to profit. Ordinary homeowners however were unaware they were risking it all, signing away life-savings and decades of past and future earnings. The perfect financial storm erupted when Main Street reverence for hard work collided with Wall Street reverence for easy money.


"Dave" was a senior bond salesman at one of the top investment banks on the Street. A 40-year-old father of three children, he was a handsome, gregarious guy who grew up in suburban Connecticut. Friendly, outgoing and smart, his clients loved him. He sold bonds to large institutions like pension funds and insurance companies. Every day there were headlines in the Wall Street Journal and New York Times about Dave’s firm and the massive losses stemming from the subprime mortgage and CDO markets. I asked him what he thought about the chaos taking place in the industry. He replied: "I have no idea -- no clue what's going on. This is like writing a crazy novel. Things are so crazy that you think you can write the next line, the headline comes out crazier than what you could have written. It's insanity. I'm so numb from watching people get fired all day that I'm almost in another zone. It's just surreal. But, you have to just push through and find the next mode of making money. You just have to push on."

Dave's words embodied Wall Street's philosophy. What is my next move? Where can I make money now? The survival-of-the-fittest philosophy adopted in business means just that: there is no time to think, only time to "push on." As Dave watched his firm blow up and his long-term colleagues get fired, his take-away was not about lessons learned or reflections on how to avoid this disaster in the future; rather, it was simply on how to survive. Wall Street daily life often resembles war on the battlefield more than an ordinary job. In war, a soldier needs a highly developed level of emotional detachment to deal with the destruction and exhilaration occurring every day. Managing trauma for a soldier becomes a way of life, which in some ways compares to life on Wall Street. When things are going well, the Street feels a euphoria that a victorious army feels. When the walls are crashing in, the financial industry takes cover.

Dave was a well-respected player in the world of bond sales, earning a few million dollars a year. As his once solid firm crashed and burned, his income was sliced to a fraction of his former number. Only Dave was not involved in the subprime mortgage markets. He was a "junk" bond salesman selling corporate debt for distressed companies. He had nothing to do with the mortgage-backed securities debacles, yet like everyone in the industry, there was a price to be paid for his colleagues' excess. He had been aware of the wild exuberance in the mortgage markets over the past couple of years. Guys on the desk would discuss other areas of the firm that were growing exponentially. You always knew what the "next big thing" was - especially something like subprime, which was making record profits for every firm on the Street. Yet industry vets understand a basic law of physics: what goes up must come down. When I asked him about his firm's collapse, he said: "It is a sad, sad situation. We all knew in our heads that when the bubble burst it would be a bit painful; but there's pain, then there is outright Armageddon. This is Armageddon." The word 'Armageddon' evokes images of nuclear war, natural disaster and the end of the world as we know it. Dave expressed the panic everyone at his firm was feeling. He also said a mouthful -- more than he knew. "When the bubble burst, we knew it was going to be painful." Pain in the marketplace is a given, an expected and accepted spoil of war. You just hope you are on the other side when everything comes crashing down.

I had another conversation with a senior trader at one of the top commercial banks in which he explained the common business model: "If you get screwed by someone, eventually you will do business with them again. People forget about it if there is an opportunity to make money." Trust is not a commodity on Wall Street; rather, it is a rarity. The trader was neither bragging about it, nor did he seem frustrated with it. He was simply stating a fact that this is how the industry worked. And he was one of the "good" guys who had steered away from subprime despite its high profit margins. After all my years in the industry, that is the way it works. There are networks of people, many of whom I know, that operate on integrity and stand by each other through deals and ventures. Yet there are other networks that dominate the largest firms that operate on a "rip your face off" code. Honest guys have to adapt to others who control market movements. It becomes something to which you get accustomed. You learn to tolerate and maneuver around it. Unlike Main Street, on Wall Street, if you eliminate people you do not trust, the playing field shrinks significantly. I dropped accounts I didn’t trust, knowing others that did so too. But we were rare and perhaps even worse -- foolish. If you wanted to base your business on trust, you lost market share -- plain and simple. You gained some opportunities and lost others; it did not necessarily balance out equitably either.

Contrary to Main Street, the Wall Street business model is based on blowing itself up. The boom and bust cycle that is so painful for ordinary folks is built into the financial system. On the Street, Armageddon is an everyday phenomenon for those on the losing side of the trade. This view is antithetical to the average American who plans twenty-five to thirty years of honest work until retirement to enjoy the fruits of his labor. Ordinary professionals do not deliberately blow their colleagues or customers up. It would ruin their business. On Main Street you are more often than not rewarded with market share for your integrity and fair play. Small business people generally operate on a system of trust in order to develop repeat business. Only in the financial industry are all bets off. This conflicting revenue model is the primary source of our economic pain today. Main Street views it as morally wrong to deliberately deceive customers and harm innocent people. Wall Street believes this is simply the cost of doing business; like in war, you do what it takes to win. But even in war, most modern soldiers operate on an honor code. You would never harm another soldier; you would never deliberately hurt an innocent victim; you would only kill your enemy in self defense. In a sense, modern warfare is more honorable than finance.


There is no legal or respected business model where destroying your customer and the society that supports you is not only acceptable but encouraged -- except on Wall Street. On the Street, the code of "Eat What You Kill" is standard operating procedure. If you analyze it, the practice resembles more primitive animal behavior than sophisticated human civilization. Where else is it acceptable to kill other people (in this case financially) to feed ourselves? If we did that in any other area of our lives, we would be considered unfit for society and jailed for sociopathic behavior. Yet on Wall Street, we have accepted this practice, which violates every other moral standard we value as people, and call it normal. Everyone -- strong, weak, young, old, innocent, or guilty -- is prey for the financial industry. In the subprime markets, there were no lines that were not crossed. The weaker and more vulnerable you were, the better the possibility of conning you. The financially desperate and disenfranchised were preyed upon because they were easy targets. For many unscrupulous mortgage brokers and lenders, these were literally "sitting ducks" easy to shoot down for a quick fee. A financially strapped 90-year-old Ohio woman, Addie Polk, was tricked by a mortgage broker into a 30-year-adjustable mortgage from Countrywide. When the eviction sheriffs arrived, she shot herself in the chest rather than leave her home alive. Not only would she not have survived the thirty years of the new mortgage, but the $45,000 loan was 50 percent more than her $30,000 home was worth -- clearly a time bomb set to explode. Sadly enough, these predatory practices were perfectly legal. There were no laws protecting victims like Addie Polk.

Yet there was a complex legal structure protecting lenders like Countrywide, its executives and unethical mortgage brokers. Government regulators not only failed to prevent unscrupulous acts, but they also encouraged these by neglecting to legislate against them. This crash and burn model remains a basic operating strategy for many in the industry. If government agencies sanction it, why shouldn’t others follow? That was the view during the height of the subprime crisis and continues to be used today. As the mortgage and housing markets began to collapse, top management yelled, "Timber" to their sales and trading desks. Unloading toxic debt onto unsuspecting buyers was the next move for panicked market makers. Many people had qualms about this since it was clear these products were ready to explode. But the "best" market strategy is not based on how honest you are, but rather on who is left standing. All is fair in love and finance, or so the theory goes.

Case in Point: "Doug" was considered one of the top salesmen at his commercial bank. His product specialty had been the high return subprime securities market. His clients were primarily pension funds, insurance companies, foreign banks, money managers for government institutions -- basically any large organization looking to increase its investment income. Doug sold some of the most lethal subprime products, not because he knew they were flawed, but because these were the hottest sellers in the industry. Like traders, salespeople never analyzed the products. Quality control was left internally to analysts, deal underwriters and structured finance teams. Doug's clients could not get enough of these bonds, and the bank's traders pushed him to sell more. Mirroring the housing market itself, the securities market was a seller's market and a buying frenzy. In late 2007, as the subprime markets were beginning to implode, management recognized that billions of dollars worth of securities they were holding on their books were defaulting. Doug claimed, "The bank had no idea they had so much risk until then; they just didn't know." Despite the amazing absurdity of this scenario, it was believable. Until this point in the subprime market game, most of the mortgage industry was on automatic pilot. Few took the time to stop and analyze the risks. Thousands of lenders, underwriters, traders, and salespeople jumped on the bandwagon and followed the herd.

As his bank suffered huge losses, upper management approached Doug, explaining the bank owned $50 billion of bad debt and needed to "move" it off the balance sheet as soon as possible. Doug's mission was to sell as many defaulting bonds to trusted pension, insurance and money management accounts as possible. The goal was to let these bonds detonate in someone else's hands. Management offered Doug a deal: sell the debt, and we will guarantee you a multi-million dollar payout. It was a clear moral dilemma for Doug. Did he try to coerce his long-term clients into buying securities he knew were worthless, or did he risk losing his own job and income instead? He wondered aloud, "How can I possibly do this to people who trust me and who I have known for most of my career?" Colleagues were being fired every day at his firm. There was so much uncertainty in the markets that everyone was concerned whether they would have a job from one day to the next. Management told him if he didn't do it they would have to lay off people on the desk. "I thought about it for a long time. In retrospect, I should have left, but I felt I had an obligation to my people. Besides, they just kept paying me. It’s hard to turn down guaranteed money."

Management paid him $3 million to sell bad debt to trusted clients without disclosing the risks involved. Many of the account managers who bought Doug's securities were fired afterward. So how did Doug feel being responsible for the misfortune of others that counted on him? He confessed he felt "guilty" that some of his best relationships were out of work because they bought his bonds. He was calling me to see if I could help them find other jobs -- many of whom are still out of work two years later. The remarkable irony of the event - and what separates Main Street from Wall Street - is Doug received multiple job offers from other firms. He had lost billions, but had saved billions for his firm. In the end, the crucial issue for Wall Street was that it survived - which it did but at a huge cost to so many others. Doug moved to another bank where he is currently earning millions more.

That is how the model works. It is not whether you act with integrity; rather, it is whether you can out-fox your colleagues, which is what makes you "better." I spoke to a money manager and client of Doug's, Terrence, at a large hedge fund, and asked what he thought of him. "He's a great salesman, but I don't trust him." I asked how that worked, "You don't trust him, but you think he is great?" Terrence replied, "He can sell." That sums up the relationship between clients and salesmen in the financial industry. The "best" salespeople are able to trick the investor into bad investments. And the "best" money managers are able to discern whether they are being tricked or not. That Terrence called Doug "great" reveals the need to redefine greatness. What makes dishonesty and deceit a good thing? This is where the Street's view is distorted. Greatness in the minds of ordinary people is dependent on honor and ability. However, in finance it boils down to who can out maneuver whom with better lies. Terrence assured me he would do business again with Doug: "He has some good ideas. You just have to make sure you don't get burned."

Read More: "Conversations with Wall Street"

Monika Mitchell is a regular contributor to the Huffington Post.