The Last Story About a Failed Financial Institution You'll Ever Have to Read

Why did federal regulators look the other way while The Firm made thousands of risky investments that eventually brought the company to its knees?
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Only 12 months ago, the future seemed bright indeed for [failed financial institution - hereafter known as "The Firm"]. In December 2007, when The Firm's President and CEO Scott MacKenzie addressed a banquet room packed with some of the nation's top investors and financial analysts, there was little hint of the looming disaster that would soon strip everyone in the room of his wealth and dignity.

"We have entered a new era," MacKenzie told the hushed crowd. "As I stand before you today, I can confidently declare that this company has now reached a state of permanent profitability, thanks to our almost complete reliance on sub prime mortgages and complex financial derivatives meant to securitize assets of unknown value. Drink up, everyone."

Just nine months after MacKenzie's glowing report, The Firm would find itself teetering on the brink of bankruptcy. MacKenzie would be out of a job, fired by his handpicked board of directors, who in turn would be dismissed by federal regulators shortly after the government stepped in with a multi-billion dollar bailout of The Firm. (MacKenzie, 58, declined to comment for this story, citing pending litigation.)

How did one of the country's oldest and most respected financial institutions fall so far so fast? Why did federal regulators look the other way while The Firm made thousands of risky investments that eventually brought the company to its knees? Who was minding the store while The Firm's top executives awarded themselves handsome bonuses just weeks before the company's dire financial position became public knowledge? These are just some of the questions being posed by journalists who are writing articles that are being published far too late to do any good.

The collapse of The Firm represents a dizzying fall from grace for a company that was once one of Wall Street's most high regarded financial institutions. When MacKenzie took over as CEO of The Firm in 2005, he publicly promised "to adhere to the high ethical standards that this company has always stood for, while ruthlessly maximizing shareholder value."

But some long-time employees of The Firm soon began to wonder whether MacKenzie was serious about following through on his lofty promises, especially the part about ethical standards. Under MacKenzie, the company quickly began to shift into areas that would have been considered far too risky in previous years, moving aggressively into the sub prime mortgage market and dramatically lowering its lending standards.

"Before MacKenzie took over, anyone who wanted a mortgage from us always had to make a 20 percent down payment," says one of The Firm's former loan officers, who requested anonymity on the condition that he not be made to look too foolish. "Then it became 10 percent. Not long after that, it was no money down at all. The week I left the company, all you had to do to get a mortgage was sign your name. Later, I heard that all you had to do was nod your head."

The Firm quickly became one of the largest and most profitable sub prime mortgage lenders on Wall Street, and its revenues more than doubled during MacKenzie's first 18 months on the job. The Firm's profits were plowed back into mortgage derivatives and special purpose vehicles, which in turn were split into tranches and categorized into varying degrees of subordination until finally, no one understood what was going on. But few seemed worried because the company was riding high on record profits.

"I walked into MacKenzie's office one afternoon and he was lighting a huge cigar with a hundred-dollar bill and cackling like a maniac," says one former mid-level executive, who asked to remain nameless in exchange for a job lead, any job lead at all. "I couldn't put my finger on it at the time, but it seemed like something was very wrong with the way the company was being run."

But by the spring of 2008, it was clear to The Firm's top executives that the company was in serious financial trouble. With loan defaults skyrocketing, The Firm announced an ambitious plan to raise badly needed capital by pooling resources with industry giants Lehman Brothers, Indy Mac, and Washington Mutual. But the deal fell through, in part apart because the companies feared joint action to improve their balance sheet might jeopardize their chances of receiving a federal bailout.

With The Firm buckling under $180 billion in mortgage-related loans, regulators stepped and seized control of the company. Billions that investors had plowed into The Firm were wiped out overnight, as were prospects for the company's 50,000 employees. MacKenzie and other top executives managed to walk away from the collapse with their bonuses and severance packages intact, rankling laid-off workers and shareholders.

"Scott Mackenzie pocketed $100 million by pursuing a dangerous strategy that ended up ruining the company," said one federal regulator who asked to remain nameless as well as simply faceless. "What I'd like to know is: How does he justify taking all that money?"

An e-mail message posing that very question to Mr. MacKenzie has, at press time, not been answered.

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