All The Devils Are Here: Unmasking the Men Who Bankrupted the World (81 page)

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Rackson sued because he claimed that he alone was never paid by Sosin.

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It should be noted that although both Spitzer and the SEC would soon bring charges against Greenberg, he has never gone to trial for any alleged wrongdoing. Although five people were convicted in the Gen Re case, including an AIG executive, Greenberg was not a part of that case, even though he was an unindicted coconspirator. And although Greenberg eventually settled with the SEC, neither admitting nor denying guilt, as of this writing he has yet to settle with the New York attorney general’s office. Throughout, Greenberg has consistently denied any wrongdoing.

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Through his attorney, Frost denies being upset, and says that he was “part of the process.”

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A Gissinger defender says that this is inaccurate, and that Gissinger and McMurray had a professional working relationship.

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In that same memo, Mozilo noted that while purchase loans—loans used to actually purchase a house-had increased from 19 percent of Countrywide’s subprime business in 2001 to 33 percent in 2006, the other two-thirds of its subprime loans were refinancings. In other words, even at Countrywide, this wasn’t really about putting people in homes.

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Ironically, First Franklin had been founded by Bill Dallas, who later started Ownit, the mortgage lender in which Merrill owned a 20 percent stake.

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According to a former government official, one of the biggest cheerleaders for the CSE program was SEC commissioner Annette Nazareth. In fact, the CSE program was based on something called Basel II, an update of the original Basel rules, which was being widely implemented in Europe and which allowed banks to lower their capital requirements significantly, resulting in a much higher leverage ratio. But Basel II never went into effect in this country, despite the urging of the big banks and the Federal Reserve, largely because of resistance from the FDIC. According to this same former official, the “chief proselytizer for Basel II” at the Fed was Federal Reserve vice chairman Roger Ferguson. As it happens, Ferguson and Nazareth are married.

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In response to Levin’s charge that S&P refused to reevaluate existing residential mortgage-backed securities, S&P said that previously issued securities were “already subject to surveillance based on an analysis that incorporates more applicable information regarding the actual performance of the collateral” than the new methodology would offer. In response to the Koch and Gutierrez e-mail, S&P said that it was publishing studies showing that even a more severe housing downturn would still result in triple-A securities maintaining their ratings, and that neither Koch nor Gutierrez had been involved in the rating process. When asked to comment about the meeting with Terry McGraw, S&P said that it “made changes to its surveillance practices multiple times in late 2006 and 2007.”

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A chart later prepared by the Senate Permanent Subcommittee on Investigations showed that 91 percent of the triple-A-rated subprime residential mortgage-backed securities issued in 2007, and 93 percent of those issued in 2006, were subsequently downgraded to junk status.

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Although Kim hired a staff, his hedge fund never got off the ground because he was unable to raise any money. According to a lawsuit filed by Michael Pasternak, who claims to have turned down a $2 million yearly salary at Morgan Stanley to work for him, Kim told prospective hires that he had investors lined up to sink more than $2 billion into the fund. Indeed, Kim walked out of Merrill believing he had a $4 billion commitment from his old firm and several billion from other prospective investors. But as the market worsened, all of Kim’s investors decided against investing. In August 2008, just a month before Lehman weekend, Kim shut down the fund, which he had been funding out of his own pocket.

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Three months later, Merrill wrote down an additional $11 billion in subprime securities. In all, of the approximately $45 billion or so that Semerci and Lattanzio had added to Merrill’s books in the year after Kronthal left, a staggering $42 billion would wind up being written off.

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Around this same time, according to Institutional Investor magazine, Goldman’s insurance analyst, Tom Cholnoky, issued an unusually tough-minded report entitled “Don’t Buy AIG.” Cholnoky’s rationale, the magazine reported, was the likelihood of “further rating agency downgrades and capital-raising activities that would dilute shareholders.”

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Cassano’s lawyers deny that he did anything wrong in his handling of the collateral calls. “Mr. Cassano followed appropriate procedures in a timely manner to report to his boss and outside auditors on the first collateral call by Goldman Sachs in early August 2007,” they wrote in an e-mail. “Indeed, the information provided by Mr. Cassano was circulated through appropriate channels to AIG’s CFO by mid-August.” In addition, they deny that Mr. Cassano “had not prepared his company for the collateral calls-indeed, during Mr. Cassano’s tenure, he had the tools to resist and reduce the collateral calls based on fundamental analysis and contractual defenses. This is why, during Mr. Cassano’s tenure, the company had more than sufficient liquidity to meet collateral demands.” They point out that after a lengthy investigation the Justice Department decided not to bring charges against Mr. Cassano.

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This view would gain great currency during the various investigations that took place in the wake of the financial crisis. Phil Angelides, the chairman of the Financial Crisis Inquiry Commission, would later question whether Goldman was acting like a “cheetah chasing down a weak member of the herd.”

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Paulson fought the increase because he didn’t see why the GSEs were needed to support the high-end housing market, and he told a group of Senate Republicans that he would hold firm. But it was a losing battle; raising the limits was popular with members of Congress on both sides of the aisle. In a meeting with Pelosi and Boehner, Pelosi told Paulson they were going to raise the limits. She said it in a way that suggested he would be unable to stop her. The she laughingly showed him a note that Boehner had slipped her. “Let’s roll Hank,” it said.

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Lehman Brothers also used a quirk in the accounting rules to book repo transactions at the end of the quarter as real sales of assets, instead of as temporary financing. This strategy, called Repo 105-because the accounting rules required that the firm deliver assets worth $105 in order to get $100 of cash-enabled Lehman to reduce the leverage it reported. Then, once the new quarter started, Lehman would repurchase the assets. As the crisis deepened, Lehman upped its use of Repo 105, from $38.6 billion at the end of the fourth quarter of 2007 to $50.4 billion by the end of the second quarter of 2008. “Another drug we r on,” as McDade later called it in an e-mail.