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  What also isn’t helping Lehman’s cause is that apart from Fuld’s immediate family and court retinue, you’re going to be hard-pressed to find anyone who has a good word for the guy. People who know him swear that if the waves start breaking over the bow, he’ll toss his closest and longest-serving colleagues overboard before himself. This does not encourage the kind of loyalty one needs from the crew when the ship begins to founder. I’m also told that Washington hates the guy, from the Treasury Secretary on down. Not the man you want to be worrying about when you show up with your tin cup.

  It’s all a bit much to get one’s head around. So as I’ve often done in the past when I’ve felt the need for a refreshing perspective, I strolled across the lobby to San Calisto. As I expected, the place was pretty much deserted; at this time of year, old bones start to need warm weather, so most San Calistans are off to the Caribbean or Palm Springs or Scottsdale, and there were only two at the table, the Ancient Mariner and the Warrior. Each had a cocktail in front of him, and each wore an expression that pretty eloquently said he was sick of the other’s company and conversation—so both of them were happy to see me.

  The talk naturally turned to Bear.

  “Never a first-rate firm,” said the Ancient Mariner. “I was always surprised that anyone would lend them money even in flush times. We treated them better than they deserved. Herman Strauss for some inexplicable reason liked Cy Lewis.”

  “Who was Cy Lewis?” I asked.

  “Back in the sixties, he was Bear Stearns,” the Warrior explained. “If you needed some sharp dealing to be done, Cy was the man to front it for you. Sort of fellow, you saw him in the locker room, you took your wallet into the shower with you. I’ll say this for him though. He could spot talent. He found Ace Greenberg and Ace was very, very sharp. Poor Ace, to see the firm he built disintegrate this way.”

  “That’s the trouble with this business,” the Ancient Mariner interjected. “You build a great firm, employ thousands of people good at their jobs—and a single son of a bitch can spin out of control playing with the firm’s credit and destroy a century’s good work! Look at what happened at Barings.”

  “You might say the same about the Federal Reserve,” the Warrior responded. “It’s all Greenspan’s fault. Met the fellow a few times. Never liked him. Pompous ass, bloated with self-regard and a bunch of lunatic Ayn Rand theories about the way the world ought to work. And so very anxious to please. Here’s a bit of interesting history for you, Chauncey. At the very end of the 1960s, we were making these crazy conglomerate loans, financing takeover bids, none of it adding a penny to the economy, but at least we weren’t risking the firm and taking these loans onto our own balance sheet. Still, it got the Fed’s dander up, and Bill Martin, who was then the Fed chairman, or maybe it was Art Burns, his successor, came down to Wall Street and told us to cut it out.”

  “And did you?” I asked.

  “Of course. We had no choice. Back in those days, the Federal Reserve jawbone, properly wielded, was a fearsome disciplinary tool. Of course, Martin probably kicked off a bear market, but I’m not certain, looking back, that it wasn’t a good thing. The Street was out of control, financing terrible takeover deals with bank loans and dubious bonds. Abuse of credit is the rogue gene in capitalism’s DNA. It’s always the same. We got through that, and then in the eighties along came Milken and his junk bonds, and the savings-and-loans—and now this mess. Mankind’s curse is easy money badly lent and badly borrowed.”

  They were very eloquent in their disgust, and I was quite impressed, yet when I finally left I found myself wondering whether, to such people, the present is ever qualitatively equal to the past. Practically everywhere I’ve ever been, past hates present, and present has little but contempt for past. Few can manage the transition from then to now. Most Street veterans remind me of certain older faculty at Groton who doubled as coaches of club hockey; they used to pine for the days before the school got artificial ice.

  I’ve pointed out that I’m a bit of a worshipper of olden times and noble traditions. Remember General MacArthur’s speech at West Point? “The corps, and the corps, and the corps.” I didn’t go to West Point; I never served in the military; but I never hear or read that speech without tearing up. This is a key aspect of the allure that San Calisto holds for me. While I’m over there, I can pretend that there was once a world governed more or less by the principles I was raised and educated to hold dear and essential. Principles not found in the “eat what you kill” gangsta rap that Wall Street now dances to.

  I’m probably fooling myself, I know. In their day, I’m sure these old guys prided themselves on the scalps on their belts. Cut every corner they could and double- and triple-dealt and engaged in every chicanery and manipulation they could—just like their successors do today. It’s human nature.

  MAY 10, 2008

  I’m surprised at how totally the media have bought into OG’s act. I mean, I’m no pundit or political expert, but I can’t believe that no one in the so-called “mainstream” media has called attention to qualities that were evident to me the first time I took a hard look at him. Most of the stuff is positively fawning. Not that I put much practical store by op-ed blathering. I have a friend who argues that pundits should be licensed like drivers. They should be made to take a test to get a pontification license, and then be subject to a point-penalty system for the punditical equivalent of traffic offenses: getting facts wrong, making grossly inaccurate predictions, laying down the law about subjects of which they have no practical grasp, relying on Iraq-quality unnamed sources, displaying pomposity and moral self-love, and so on. Pile up X number of points and your pundit’s license is suspended or revoked—meaning no Sunday morning talk shows, rejection slips from the op-ed editors at the Times and The Washington Post, no Charlie Rose or Jon Stewart, no Vanity Fair profile, no $25K lecture fees and fat advances for mailed-in books with nothing new to say.

  If only!

  MAY 13, 2008

  Late last night Mankoff telephoned to tell me to expect an envelope to be delivered by messenger early this morning. He sounded hyper-secretive.

  “What am I, your private intelligence agency?” I thought as I gracefully assented. The fact is, I have a lot on my own plate just now. When Mankoff first mentioned that he might have other jobs for me, like the meeting in Battery Park, I assumed these would be brief, few, and far between. Now I wonder. Where will it stop? Should I ask for a commission?

  “Bring it with you to the meeting this afternoon,” he told me. “In the meantime, read it. I want you to have an accurate sense of what’s really going on.”

  At 8:03 a.m. my doorbell rang. It was Pedro, the guy who’s at the desk in the lobby on weekends, with a plain brown envelope.

  Inside was a printout of a letter on Lehman letterhead written by a Lehman senior VP to the firm’s top people. I’ll just quote a couple of the juicier passages.

  To begin with, here’s how the writer sets the stage:

  I have become aware of certain conduct and practices, however, that I feel compelled to bring to your attention, as required by the Firm’s Code of Ethics, as amended February 17, 2004 (the “Code”), and which requires me, as a Firm employee, to bring to the attention of management conduct and actions on the part of the Firm that I consider to possibly constitute unethical or unlawful conduct. I therefore bring the following to your attention, as required by the Code, “to help maintain a culture of honesty and accountability.”

  Then he gets down to cases. Hard cases:

  The Firm has tens of billions of dollars of inventory that it probably cannot buy or sell in any recognized market, at the currently recorded current market values, particularly when dealing in assets of this nature in the volume and size of the positions the Firm holds. I do not believe the manner in which the Firm values that inventory is fully realistic or reasonable, and it ignores the concentration in these assets and their volume size given the current state of the market’s overall
liquidity.

  Handwritten addenda on the back of the memo state that Lehman is currently running more than 100,000 derivatives positions, 10,000 of which they can’t account for. That’s a 10 percent slippage in a system where 3 percent is considered catastrophic! Moreover, it seems that many of these positions are in trading portfolios whose computer systems don’t communicate. That is a shitload of shit! And if you take a large percentage of those trades and link them to other people’s balance sheets—including STST’s—and then link those balance sheets to still others, you can see how terrifying what one San Calistan calls the Mrs. O’Leary Effect really is: a cow kicks over a lantern and before the ensuing conflagration peters out, most of Chicago is in ashes.

  When I gave Mankoff the envelope, he read through it quickly. Then he stared at the ceiling, obviously weighing how to act on this new intelligence, probably trying to decide whether to pile on and short Lehman, as I know Rosenweis is urging him to do, or to let Fuld find his own way to his doom. Evidently having made up his mind, he turned his back to me, punched a number into his phone console, and murmured a few instructions that I couldn’t quite catch. Then he hit me with a nice bit of news: “Merlin Gerrett’s going to endorse the candidate. He’ll make the announcement next week.” This could be helpful. Really helpful when it comes to raising big money on the Street. Which is good, because I’m down to $2 million and pennies, and Orteig keeps hinting he could use more. Politicians are as bad as my friends’ ex-wives: there’s never enough.

  After the meeting, on the way out, I stuck my head in Lucia’s office just to say hello and how goes it.

  “Can’t talk now,” she told me. “We’ve just gone into full panic mode. The auditors have been called in and everyone has been told they’ll be working nights and weekends to make certain that our financial controls and valuations are as tight as they reasonably can be and that our books are up to the minute. Where we hold illiquid positions, they’re to be marked down another seventy-five basis points. Oh yes: Lehman’s just been declared a no-fly zone. We’re not trading Lehman for our own account, long or short, nor are we accepting orders in Lehman stock and options that aggregate more than 10,000 shares, and then only for Class A clients and counterparties and only on the long side. Now: off with you!”

  It isn’t even Memorial Day, but already this is starting to feel like it will be a very testing summer. What fresh hell awaits?

  JUNE 8, 2008

  Terrible hangover today: the only presences at last night’s celebration were me and my TV—and the latter doesn’t drink, so I polished off most of a fifth of Lagavulin all by my lonesome.

  Celebration of what, you ask?

  Because Hillary has conceded! OG will be the nominee! Which means that yours truly has played a decisive role in placing a winning bet on the longest-priced dark horse in the whole history of presidential elections, at least since Truman in 1948. Does that make me the bigtimiest fixer in American history? I sure as hell think I’m in the running.

  And that means, the way things are now on the economic and financial front, that he will surely be elected president. Which in turn means that barring an act of extreme bad faith on Orteig’s part, come next January Winters and Holloway will be whispering in the new chief executive’s ear to lay off Wall Street. Do you know the famous Titian painting of Pope Paul III and two of his so-called “nephews,” a pair of prize schemers by the look of them? It’s a fantastic painting; I saw it in Naples a few years ago, and it has stayed with me ever since. If I thought Mankoff would appreciate the joke, I’d get a postcard of it and paste OG’s face on the pope, and Winters’s and Holloway’s on the nephews—and give it to him the next time we see each other.

  The horizon looks bright. When Orteig called with news of Hillary’s concession, he told me they’ve passed $500 million.

  The news from the Street also favors OG. The smart money’s saying that Bernanke et al. are committed to fighting the wrong opponent—inflation—while in fact a deflationary collapse in everything from house prices to junk bonds is underway, spelling an outbreak of defaults and foreclosures. If things continue to deteriorate at their current rate, the electorate should be in a proper anti-GOP frenzy come Election Day.

  On to Washington!

  JUNE 21, 2008

  Lunch with Lucia today at Le Veau d’Or on my nickel.

  First item on the agenda: OG’s announcement two days ago that he’s opting out of the public financing system, and that his campaign will rely on private contributions. Let me add, quickly, that Lucia brought it up, several times employing the word “hypocrite.” She reports that people are saying it’s a flat-out renege on an earlier promise for which, according to her, OG is famous. She made it clear that she doesn’t trust him as far as she can throw him. Too slick, too ready with answers. I had no comment. I simply smiled and called for another kir.

  When she finished ranting, we moved on to other gossip, some of it cheering, some not. As we parted, she put her arm on mine and asked, “Chauncey, do you by any chance own any GIG?”

  That’s Global Insurance Group, probably the biggest, widest-reaching, and most powerful financial company in the world.

  “You know, I think I do. My old man got them when they bought a Dutch insurance company he’d put money into and he left them to me. It’s been a great stock—until recently. Now it’s probably too late to sell. Better to hang on and see what happens. Why?”

  “You should sell.”

  “Really? Why?”

  “Because something is better than nothing. Those shares could be worth zero.”

  “Why do you say that?”

  “Some fairly reliable people on the inside are telling me that the Treasury Department and the Federal Reserve are drawing up lists of which firms are to be saved and which left to die if things get much worse. GIG’s near the top of the list of those to be taken off life support.”

  “Ahead of Lehman?”

  “People down there won’t speak the word ‘Lehman.’ Just take my word for it on GIG.”

  I said I’d look into it.

  Which I may. Frankly, until after the election, I don’t plan to trade anything, long or short. I don’t want to stumble into someone else’s disaster and get tagged as an insider.

  JULY 31, 2008

  Was für eine Katastrophe! as they say in Zurich. Back in February the big Swiss bank UBS estimated that write-offs connected to U.S. mortgage-backed securities and securitizations might reach $260 billion. Six weeks later, the IMF bumped that figure to $950 billion. A month ago, James Polton went public with his estimate, probably self-serving in view of the huge short position he’s got, some of it in league with STST, via Protractor, that the right figure’s probably around $1.3 trillion, but of course he’s probably talking his book. Still, one of my clients, a very plugged-in and steady-minded bond manager, says that she hears the correct number might approach $2 trillion.

  How the hell is the Street going to fill a $2 trillion hole? There’s only one answer.

  Uncle Sam. Aka We the Taxpayers.

  It’s evident that 90 percent of the electorate is completely in the dark about the size of the bill they’re going to be handed to cover Wall Street’s mischief. Oddly, OG hasn’t brought it up in his campaign speeches. I put this down to Orteig’s political shrewdness. The worse OG makes Wall Street look, the greater will be the pressure on him to roll out the guillotines, and the harder it will be to put over my Winters-Holloway ticket on campaign insiders who aren’t party to the scam. Besides, OG has plenty of ammunition as it is.

  The big picture indicates that anyone who thinks “the people’s money” belongs to the people is about to find out otherwise. So far, talk about “subprime” and “counterparties” and “moral hazard” and the like is just so much Sanskrit to the man on Main Street.

  But this can change.

  We’re going from bad to worse, from portentous to downright ominous. Early this month, the FDIC moved in and seized a finan
cial conglomerate called Indy Mac, which started life as a spinoff from Countrywide. Last night, I had drinks at the Regency with a professor at MIT who’s head of the acquisitions committee at a regional museum that I’m trying to help out. He told me that, based on his statistical workup, Indy Mac alone may end up costing taxpayers and investors more than the entire savings-and-loan mess back in the ’80s.

  On top of that, Lucia reports that the Street consensus seems to be that the next big shoes to drop have to be Fannie Mae and Freddie Mac, the housing market’s Fasolt and Fafner. The latter are the twin giants who built Wotan’s Valhalla, another splendid Masters-of-the-Universe edifice that gets burned up in the end thanks to the arrogance of its inhabitants.

  Fannie and Freddie were created to supply liquidity to housing finance by buying mortgages originated in the private sector. They’re half-beast, half-man. Their debt is backed by Uncle Sam but their shares are owned privately. They’re supposed to apply certain credit-quality standards to the mortgage paper they take off the Street’s hands (and balance sheets), but the rating agencies have allowed that threshold to become meaningless with their cheap AAAs. A reliable source tell me that these “AAAs,” which bear about as much relationship to genuine credit-worthiness as an Orchard Street “Rolex” does to the real thing. They’re based on the assumption that bad paper issued or endorsed by great and famous institutions will be made whole by Uncle Sam in the event of trouble. It’s like getting a rich cosigner on one’s gambling debts.