mortgage-backed securities (bonds), and CMBS means commercial mortgage-backed securities. These were two of Lehman Brothers’ most profitable businesses, and the firm, the fourth largest investment bank in the world, had declared bankruptcy only hours earlier. Those who had worked in these divisions were the superstars of the industry. Most of their competitors coveted their commercial talent, meaning the ability to make money. They were considered untouchable prior to September 15th, 2008; now, they were unemployed and available. “Shocked, devastated, outraged, terrified, confused, and numb” were the adjectives they used as they sat in my office after that fateful day.
In my wildest imagination after thirty years in the business, I never expected to be in the center of the largest and most devastating financial crisis since the Great Depression. For the first time in my career, no one knew what would happen next. The smartest guys in the business, the ones who understood risk, the guys who could figure out how the markets would behave and how to capitalize on these predictions, were completely baffled. The lives they had built for themselves and their families were now threatened. In some ways, it was like facing death. We go through life taking things for granted until we lose them without warning. Fear has a way of forcing the truth to the surface. It creates a desire to honestly evaluate our actions for the first time in our lives.
After Lehman Brothers filed for Chapter 11 and the markets ceased to function, one of the first people I met was a mortgage trader who had just lost everything. “Jeff” had worked at Lehman his whole career; most of his money was tied up in Lehman stock. Both of us witnessed the gradual erosion of the subprime mortgage market beginning in July 2007, which culminated in the economic devastation of millions of lives on and off Wall Street. We were both in shock. “Can you believe this?” I asked him. He shook his head: “I really can’t. I can’t believe this happened.” It was clear the collapse of this 158-year-old institution, which had sustained his family in an opulent lifestyle for nearly twenty years, had taken him by complete surprise. We sat in silence for a few moments, not sure of what to say. I thought about how this man had lost his job, career, money and life he had built and cultivated for decades in a matter of days. His distress was palpable.
The crash was blamed on subprime mortgage securities, loans made to borrowers with less than stellar credit histories. Today, the word “subprime” is synonymous with evil. I wanted to learn how these securities could wreak such havoc on this large scale. I had spent my whole career recruiting talent for the mortgage business. I knew the original founders of the securitization market. I could not figure out how the safeguards on the market—underwriting standards, loan-to-value ratios, solid modeling formulas, and large down payments—had been removed. As a trader on Lehman’s residential mortgage securities desk, Jeff was there through it all. He must have a view on how this debacle occurred.
“How do you give a loan to someone who has no shot at paying it back and not expect the bonds to default?” I asked. “It does not make any sense,” I said. Jeff replied, “One of the reasons subprime bonds were created was to give potential homeowners with troubled credit history a second chance at owning a home.” He explained the product was geared to borrowers who had experienced temporary hardships like health issues, job loss or other circumstances out of their control, yet had the ability to overcome these obstacles. Rather than completely shut them out of the home buyer’s market, these loans were structured so those with secure incomes could still buy a home: “The analytics and models that the Street developed could accurately determine the probability of default and therefore manage the risk in a prudent and measurable way. There was, in the early days of subprime, specific criteria for who could qualify. These bonds were riskier than securities backed by prime mortgage loans, so the returns were higher. That made them attractive for investors who thought they understood the risks involved. Over time demand for these investments grew substantially. In the beginning they were extremely profitable for Wall Street. Contrary to what we read in the newspapers, the early vintages of subprime bonds did have a lot of value.”
His description of the subprime market reminded me of a conversation I had with “Dean,” a structured products banker from Goldman Sachs. He said that before the meltdown, he felt “proud to be in a field that allowed capital to flow from where it was abundant to where it was scarce.” He worked long hours and loved his job. He understood his job provided a valuable service to clients and those impacted by his clients’ success. Yet the events of the two years leading up to the market crash had deeply disturbed him: “The industry forgot its purpose.” Dean was remarkably philosophical about an industry full of people whose sole purpose was to make money. Many people in finance have a sense of pride in what they do and know their jobs are important to well-functioning markets; however, Dean’s sense of nobility in finance was unique and inspiring. It was a belief that I shared. However, I did not always feel that way. The belief that there was a deeper purpose to my work was a gradual process that evolved over time and through life-changing events. I thought back to my early years in the business. The truth was I had never given a thought to “the purpose of the industry” in those days. My purpose was to make a good living for myself and my family. It began and ended there. How can I make money today? How can I make more money today? Those were the most probing questions I had asked in my first years in the industry. For me, Wall Street offered a happy escape from a challenging youth in my native Flatbush.
Fear and Loathing in Flatbush
Growing up on the streets of Brooklyn was living in fear every day. Fear of getting beat up, fear of being robbed, fear of being harassed in whatever way you can imagine. People liked hurting you just for the hell of it. It was like a sport in my neighborhood. How many kids could you terrorize in one day? Some kids lived for it. Up until kindergarten, you were safe; however, at age five, your childhood was officially over. Your mother would push you out the door to go to school and life changed overnight. I would walk by myself the two blocks to elementary school, praying I would not be jumped or pushed on the ground. But most days I would find myself at the mercy of the same older boys who waited for the five-year-olds’ arrival to steal their milk money. You got used to it—that is just the way it was. You had to learn to fend for yourself, take your punches, and figure out how to hit back. In retrospect, it was good preparation for a career on Wall Street.
As I grew up, I realized I was different than the other children. My house and Joey Zito’s were the only ones on the block with a Christmas tree. Italian Catholic was something my Jewish neighborhood could understand. But we were something else—practically freaks. I remember the first time a group of boys asked me, “Why do you have a Christmas tree?” I replied, “I’m a Christian Scientist.” From then on, I became the brunt of every joke. Brooklyn is a place where kids look for some form of weakness until they find it. I was 100% Jewish by ancestry. My family names from one generation ago were Eisenberg and Blumenthal. No one understood a Jew who did not want to be a Jew—least of all me.
Christian Science was a strange religion for a kid on King’s Highway. It made me feel like an outcast. As a young boy I remember the elders praying over me when I was ill. Oddly enough, their prayers comforted me and I felt better. The religion taught me you could use your mind to change things. I met my friend Richie at church. He was one of my earliest teachers and introduced me to cigarettes and marijuana. We would stand behind the church while the congregation prayed, smoking up a storm. My mother never noticed; my father never cared. At age twelve the elders required you to make a choice to commit yourself to the religion. Christian Science forbids smoking, drinking, drugging and sex—all the things I looked forward to the most. I quit without a moment’s hesitation and immediately went to the dark side. It would take me the next fourteen years to find my way out.
By fifteen I learned to fight. I began lifting weights to add some heft to my skinny frame. Silky, the neighborhood bully, had spent years kicking the shit out of me. He was several years older; despite the abuse, I played basketball and stickball with him. One day, I had on my best shirt, an orange button down with light blue stripes. Silky was in the mood for violence and grabbed my shirt ripping the pocket. Suddenly, I saw red and hit him hard. The sight of blood spurting from his nose and the look of shock on his face fueled my rage. I had finally stopped the beatings. The knowledge that I could control my destiny by creating fear in my adversaries was a turning point