Banking’s Wild Geese: Part 2, the recovering
[Continued from yesterday's Part 1.]
By: David A. Smith
Yesterday’s post followed banking’s Wild Geese – the former Lehman traders, bankers, and salesmen, profiled in a recent New York Times article, whose lives exploded when their firm did.
Three of Lehman’s Wild Geese: unemployed Gelber, gentlemen of leisure Linton, plugger Ollquist
Like the dispersed Irish mercenaries, they are defined by who they were before, roles they understandably and with some justice defend:
Yet few Lehman veterans, or their counterparts at other banks, blame themselves for the havoc their activities wrought. Instead, they point to the failures of regulators.
“From a policy perspective, the regulators have to step in,” says Richard McKinney, who oversaw mortgage trading at Lehman and in the firm’s last year, the bundling of mortgages and other loans.
Mr. McKinney flew the coop early; he landed at hedge fund D. E. Shaw.
“It would be an awful lot to ask the Street to not look for revenue opportunities where their competitors are finding revenue.”
He’s right about that, of course – and that’s the point. You can’t ask players to set the rules.
When asked whether he raised any red flags about problems in Lehman’s mortgage business, he declined to discuss that, or any other aspects of his work at the firm.
Undoubtedly he signed a non-disclosure and non-disparagement agreement on the way out the door.
You want the severance, keep your mouth shut
After they flew, many of Ireland’s Wild Geese settled in new habitats because they were good at their jobs – even making common cause with their former enemies:
It was some time before the British armed forces began to tap into Irish Catholic manpower.
The great Irish Brigade on the winning side at the Battle of Fontenoy, 1745
Cuimhnidh ar Luimneach agus ar feall na Sasanach! Remember Limerick and Saxon perfidy
In the late eighteenth century, the Penal Laws were gradually relaxed and in the 1790s the laws prohibiting Catholics bearing arms were abolished.
Talent and self-interest will out. If you can beat ‘em, recruit ‘em.
The man in the rest stop
Across the country, in Lithia,
It has been a year and a half since Lehman dismissed Mr. Schaefer, but still, when the 51-year-old father of two thinks of the money he lost in Lehman stock, “that’s when the anger comes,” he says.
Mr. Schaefer’s situation is different; he was dismissed before Lehman’s meltdown.
The fall of Lehman, he also says, has affected his wife as much as him. She crisscrossed the country with him and their children to advance his career, bouncing from
[I couldn't quite nail it down; possibly Fishhawk Car Wash in Lithia – Ed.]
On strangers’ lands we’ve made our homes and foreign soil our graves
O the Wild geese are flying, O the Wild Geese are flying
Unlike Ms. Gelber, who still searches for an accommodating landing pad, Mr. Schaefer took his destiny into his on hands, and bet on himself.
O the glamour
Too many people, he says, blame firms like Lehman, but he says all that Lehman did was create a product that investors were demanding to buy from the firm.
“How do you blame us? A lot of what we did from an origination standpoint was based on investors’ appetite,” he says. “Do you think we would just go out and say, ‘I think we’re going to do $100 million in no-doc loans?’ ”
Exactly. As I pointed out in starving for yield?, you can’t sell what no one wants to buy.
“I spent a long time being very angry,” says Mr. Schaefer, the former Lehman executive turned gas station owner. “Angry for working so hard and doing so much. More importantly, for my family and all the time I was away traveling — the time I put in away from them.”
While Mr. Schaefer’s anger is understandable, was he that angry when he was doing it? Or does his anger arise only now that his army was decimated?
“Now all that money I earned, the money paid in stock, is gone. I can’t go back and remake it.”
Mr. Schaefer took his bonuses in Lehman stock; he bet on his firm, on his outfit. He didn’t diversify.
“I don’t know,” he says. “You know what I miss? I miss the pressure. That’s what I love. I love the pressure. I just don’t have that here.”
Pressure that-a-way
In a few years, he will find his way back; as will another wild goose.
The man who thought ahead
Flying high in the New Mexican sky, Ken Linton gives little thought to the approaching anniversary of Lehman’s collapse — or his role in it.
“Ken Linton, center, was ousted before the firm collapsed, and he began shorting its stock.”
A senior trader on Lehman’s mortgage desk, Mr. Linton evaluated mortgages that were later sliced and diced into securitized investments. In his 13 years working at the firm, Mr. Linton, 43, impressed many with his intelligence. A native of
Quants often do better; economic reality will not be fooled forever.
“On the chess-board lies and hypocrisy do not survive long.”
Emanuel Lasker
Seeing the patterns leads to making the right moves
He recalls vividly the days in early 2007 at Lehman when his financial models began to throw up more warnings showing delinquencies and defaults, and he remembers colleagues on his desk raising questions about loan quality.
Mr. Linton evidently did his job; he observed the data, he read the data; and he reported his findings.
Anyone who was quantitative could see the rising risks coming. Indeed, back in December, 2005,
I called the market top, highlighting subprime lending as the trigger:
I thought we were going to be heading down
Why is subprime lending a leading indicator? Because by definition, subprime borrowers are at the edge of the bankable frontier (as my AHI colleague David Porteous has discussed on his blog), and as such, they are the most sensitive to changing economic circumstances:
Most high-rate mortgages, known as subprime loans, have adjustable interest rates, Fitch said. That means borrowers are more sensitive to fluctuations in rates, because rising rates mean their mortgages payments rise as well.
About 19% of home loans nationwide are subprime, up from about 5% a decade ago, as homeowners take on heavy debt burdens.
This is another longer-wave clue: the much higher percentage of loans being subprime means more folks closer to the economic edge have elected to buy homes. Observant herds can turn into stampedes and in so doing can drive prices up above ‘normal’ (whatever that is).
– and about 1% of loans had passed the overdue category and were actually in foreclosure, according to the Mortgage Bankers Association. But the rate for subprime loans was much higher — about 10.3% of such loans were in default, and about 3.5% were in foreclosure.
Note the obvious: subprime delinquency rates lead normal market rates. You might think that subprime borrowers, having managed to leap onto the rising economic ladder of homeownership, could rapidly pull themselves up. Economic reality is more cruel; while many do, quite a few don’t:
Up to now, I’ve read innumerable frothy insubstantial Chicken-Little-market top articles, and found all of them utterly unpersuasive. But this modest story — the newspaper equivalent of a green salad! — is different; this feels like a leading indicator.
I think you’re getting sick
So here it is, folks. I’m calling the market top.
Mr. Linton sounded similar warnings, with much better data. Those warnings were ignored or overridden:
He said the firm’s ranking as the top loan originator on Wall Street, not to mention the pressures put on the desk by Lehman’s growth-obsessed leadership, made it difficult for even the most senior executives to raise questions, even a senior vice president like Mr. Linton.
“Anyone at our level who had a different view from senior management would find themselves going somewhere else quick,” he says. “You are not paid to rock the boat.”
You might want to rethink your boat-rocking
That may well be so – I’m certain it was. Still, does the corporate culture absolve you of your personal moral responsibility?
Although Lehman laid him off in early 2008, his departure turned out to be a boon for Mr. Linton. Being forced out convinced him to bet against the firm’s stock –
Like Groucho Marx, who would short the stock of any company foolish enough to hire him, Mr. Linton could quite reasonably conclude that any firm firing him or ignoring his advice would be booked for decline – but Mr. Linton’s reason was even more portfolio-rational:
– as a counterweight against the Lehman shares he still owned, which protected him when the stock’s value plummeted.
In other words, Mr. Linton hedged his own life.
If you don’t, who will?
Then he hedged it further:
Combined with a well-timed sale of his
In other words, Mr. Linton has been shrewd, and has taken his own counsel.
– and a stream of income from real estate investments, the moves gave him financial padding that frees him from job worries.
Does anyone begrudge him his leisure?
“I have been fortunate to have some nice toys,” he says. “And they are all paid up. It’s a nice situation to be in.”
As Thomas Crowne said, “no complaints”
Many of the wild geese built new lives and went on to success in new armies:
George Brown of the Austrian Army, was made a Field Marshal by Emperor Charles IV.
Maurice Lacy was a Field Marshall in the Austrian and Russian Armies, and many reached high commands in
In South America Bernardo O’Higgins became the Liberator of Chile.
Members of the Irish Brigade of France served as Marines with John Paul Jones on the Bonhomme Richard and others were at
We have not yet begun to fight
The Hibernia regiment of
Liberating many countries other than their own
Some of banking’s wild geese could will be permanent casualties of the financial conflict:
The year has been by far the hardest of her life, [Ms. Gelber] says. The battle now, she says, is a lonely one. “It’s mental,” she confides.
“I can’t sit home like this,” she continues, her voice rising. “I want to work. Lehman was who I was. I really loved it there. I was proud to be there.”
In the words of an 18th century poet:
The Wild Geese shall return
and we’ll welcome them home
So active, so armed, so flighty a flock
was never known to this land to come
Since the days of Prince Fionn the Mighty.
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