back before falling off the cliff.
In the mid-1980s, I began working in the mortgage securities markets for Lehman Brothers and Bear Stearns. Mortgage securities were new and exotic investment products. When Mike Mortara, one of the innovators of the market, moved from Solomon Brothers to Goldman Sachs, I followed him. In the late 1990s, I broke away from AJ Consulting to start my own search firm with Monika and another partner. We built the company into the exclusive talent broker for Goldman Sachs’ fixed income division. Mike Mortara was one of the most innovative and brilliant money makers in the industry. He was already a legend by the time I met him, having achieved superstar status by inventing mortgage securities with another financial genius, Lou Ranieri, also a man of deep character and integrity. Mike was of the old school - the way things used to be done at the top firms and still are in some circles: creating value for profit. His word was his bond. I grew up in the industry understanding culture is as important as profit.
In mid-2007, some of my investment banking and hedge fund clients began to cancel searches in the mortgage markets. The only business that seemed poised to grow was commercial real estate and asset-backed securities. Something was amiss in the housing market. Between late 2007 and early 2008, the industry was in flux. Bankers and finance pros were jumping around from one firm to the next. Many were setting up their own shops, others were pushed out of their firm after large losses. It was an industry in transition. No one knew what was coming right around the corner. The first tremor in the market was the collapse of the venerable Bear Stearns hedge fund. Veteran market makers headed the fund, which blew up in a million pieces. The markets held their breath. It was reminiscent of the collapse of Long Term Capital Management ten years before. At that time, two mathematical wizards, both Nobel Laureates in Economics, had miscalculated global market movements, nearly crushing the industry. The firm had borrowed $90 for every $1 in assets and was systemically connected to financial institutions across the globe.
The massive losses after the Bear fund collapse were far-reaching and vast. Just how far-reaching no one knew for sure. Rumors circulated that the investment bank itself was in trouble. The idea of a firm that old, respected and well-capitalized going down was unfathomable. The Street did not yet know that the majority of their investments were in mortgage products and some of the most lethal kinds. Nor did they know that Bear had tripled its leverage (borrowing) over the past three years. They were no longer the solid belt-tightening firm they used to be in the Ace Greenberg years. Former CEO Ace was so cautious and frugal that he was famous for demanding his employees save paper clips. When the firm collapsed in March 2008, the industry was shocked. Highly respected professionals had operated this firm. The mood on the Street was one of tremendous sadness. We mourned the loss of one of our own. At a Lehman Brothers benefit for the Fiver Children’s Foundation, a non-profit dedicated to inner city youth run by the former head of global fixed income sales and one of my former business partners, Tom Tucker, the conversation was sorrowful. Bear employees sat together drinking heavily, while Lehman employees offered sympathy. The crowd toasted them; everyone present felt their pain. They had lost 80% of their share price, their jobs, and their status. More than that, the Lehman crowd felt fear. Little did they know that six months later they would be wiped out by bankruptcy. In retrospect, it was the calm before the storm.
In mid-2008, every firm wanted to hire the Bear talent partly out of a sense of industry loyalty, but also because these were some of the most talented people in finance. From an outside view, who would want to hire people whose excessive risk crushed the firm? From an inside view, no one in the industry blamed them for Bear’s demise. They were simply caught in the downturn of the markets. Many great ones before them had gone down. The key was to pick yourself back up and get back in the game as soon as possible. I began to interview the Bear mortgage desk for clients. These industry giants were devastated. Out of necessity, we began deep discussions, trying to understand what happened to the firm and the industry. These were heartfelt conversations with people I had known for years and others well-known by reputation. Their vulnerability opened up the discussion to a level of personal honesty none of us were used to. There was much more at stake now than business as usual. I wanted to understand how people I admired and respected for their brains and expertise for nearly three decades had cannibalized their own industry, the industry that supported my family and friends. Slowly a picture of the human side of Wall Street emerged revealing how the mighty had fallen and how “the best of the best” felt about life at the bottom.
“Frank” was a high-yield bond (distressed corporate debt) salesman who had nothing to do with the mortgage markets. He sold corporate bonds and bank loans that belonged to companies experiencing financial difficulty. After receiving his MBA from NYU, he began his career in 1990 with a consulting firm where he helped analyze companies. He moved to Bear Stearns in 1994 as a salesman and quickly became one of the biggest producers on the desk. He sold high-yield bonds (a.k.a. “junk” bonds) to hedge funds, pension funds, insurance companies and money managers. Frank had slicked back hair, darting eyes, and an easy and affable manner. Sporting a classic white shirt, red power tie and dark suit, he evoked a bygone era of Wall Street. His gross production in 2006 for the firm had been just over $20 million, with his compensation ranging between $1.5m - $2 million per year. Fifty percent of that was paid to him in Bear Stearns stock. Married with three children, ages three, five and six, he commuted into the city every day from his five-bedroom home in Connecticut. In 2007, after Bear Stearns’ hedge fund failed, his production was cut in half. As Bear collapsed in March of 2008, the value of his company stock tumbled from $60 per share to $2 per share. When he came into my office a few weeks later, he was devastated. Not only had he lost fourteen years of savings, he was now unemployed and finding it difficult to secure another position. “I can’t believe what those guys in mortgages did to this firm,” he said. “I have to find another job. I have to take care of my family. I have lost everything. I don’t know what to do.” Frank was clearly distressed. “I have friends in the business, but everybody is looking for work, and there aren’t many people hiring in this environment.” His voice alternated between anger and alarm. “This is a shock to me. I never thought in my entire career I would be in a position like this. I can’t believe this happened.” I promised Frank I would do whatever I could to introduce him to my contacts on the Street. I wanted to leave him with some hope, so I said: “Life sometimes throws us curve balls that we just don’t expect. I always try to remember when things get tough that when one door closes, another one opens.” He looked at me thoughtfully and said, “Thanks, I never thought of that.”
For years I have been a confidant to people in the business. Guys know when they walk into my office, their anonymity is protected. They also know I will not judge them and will listen to their struggles—both personal and professional. I am the guy rooting for them. It is something I developed within the walls of AA. We not only talk about money and careers, but also about passion and purpose. I want to know what kind of character a person has when I refer him to clients. If they have integrity and honor, I will do everything I can for them. Frank was one of the casualties of this mortgage debacle. Like so many others, he had not anticipated the carelessness of workmates or his superiors—individuals holding great responsibility for tens of thousands of people’s lives who refused to be accountable for their involvement in the industry’s collapse. A few days later I got an email from Frank thanking me for our talk. He wrote: “My faith is growing a little stronger each day. Your comment about ‘one door’ really hit home with me, and is helping me start to see this as an opportunity. Will I say in five years that this was the best thing that ever happened to me? Did it force me to do something that I would not have done perhaps ever? I am trying to take the positive energy out of this situation.” Eventually Frank took a commission-based job with a small firm. Lacking the support and resources of a big organization behind him, he found it difficult to get the job done. He has to work twice as hard to earn far less money. He ultimately figured out how to survive, but it remains challenging.
Money Troubles
The industry was in flux after the market collapse and nearly unrecognizable to most of us. The only thing really clear was that the old rules of “pick yourself up by your own bootstraps” no longer applied—at least not for the bailed-out few. The most challenging aspect of all was not the bad debt sitting on the books of the big firms, but rather the government