Bear Stearns was founded in 1923, but although Paula Daly’s Mouse to Minx sells vintage fashion of that era, quite probably when the 85-year-old bank went under on 6th March 2008, Paula Daly didn’t notice – between running her own small business and being a successful self-employed communications and marketing consultant, she says “Life was exhausting, and not without its stresses, but good.”
But in the US the collapse of Bear Stearns is seen as the beginning of the financial crisis of 2008, while in the UK, we date it from the collapse of Northern Rock, three weeks earlier. Both Northern Rock and Bear Stearns had become heavily involved in the sub-prime mortgages: Northern Rock’s business plan was to borrow heavily, extend mortgages based on the loans, and then re-sell these mortgages on international capital markets. This is known as “securitisation”.
Who got the idea for this risky business? In the UK, John Ritblat, former British Land chairman (described as “a charming old rogue, a bit of an old-fashioned spiv” by someone who likes him)
takes much of the credit for the revolution in property financing that has occurred over the past two decades. The industry used to be financed with fixed-rate borrowings secured on the property portfolio, but he pioneered techniques like securitisation of assets which, he believes, has transformed the industry into one financed by long-term, unsecured, borrowings. (The Observer, Sunday 16 July 2006)
Ritblat retired just over a year before August 2007, when Northern Rock first began to feel the chill. A self-confessed workaholic, he evidently knew the right time to retire from the “securitisation” business he pioneered – with an estimated net worth of £100m.
Once the fifth-largest investment bank in the United States, Bear Stearns collapsed in March 2008 under the weight of toxic hedge fund accounts backed heavily by subprime mortgages. The company was quickly sold to J.P. MorganChase (another financial giant and OpenSecrets.org Heavy Hitter) but the bank’s spectacular fall — and the federal government’s failure to stop it — is now seen as the first wave of the epic financial meltdown that created the global recession of 2008 and 2009. (Open Secrets)
In the US, within a week of Bear Stearns falling, the sub-prime mortgage crisis was in full collapse in the US, and the federal government was handing over trillions of dollars to the banks (Greg Palast, h/t The Sideshow), hoping to stave off disaster. There’s a timeline here, but as we all know: the financial crisis kept rolling from bank to bank, country to country.
In September 2008, it hit Paula Daly. She opened a letter from her bank,
and the word ‘foreclosure’ jumped out at her. She owed £25,000 in an overdraft and a loan, and ‘bang, no warning, they wanted it all back’.
Upset and confused, Daly phoned her accountant. ‘He said liquidation was my only option,’ she says. ‘That’s the first time I heard that word; it was such a shock. My business was struggling, yes, but what small business doesn’t struggle? It was good, it was viable, and I’d worked so hard for it, but suddenly it was over.’ (Telegraph, 22 Jan 2012)
On 8th October 2008, Gordon Brown announced a rescue plan for the banks – £400bn of helicopter money which was intended to ensure that banks watching the finance industry collapse like the Arctic ice in global warming, would loosen up, stop chasing small loans like the one to Daly, and protect Britain from the recession. The Telegraph politely doesn’t identify the bank that foreclosed on Paula Daly – it need not have been RBS, but it could have been any of the staggering banks unwilling to admit how close they were coming to collapse and with executives willing to see any of us suffer except them.
For the scale of criminality in the US banking world towards their small-scale debtors, read Matt Taibbi’s Invasion of the Home Snatchers, from November 2010. While I do not think anything on this scale happened in the UK, the foundering small businesses we’ve all seen go under are a classic sign of banks more interested in saving their executives than the economy. Even if Gordon Brown had begun the bailout a month earlier, the billions he invested in the banks might not have led to saving Daly’s home and business.
Helicopter money is precisely what the government has for three years been dropping into bank vaults, to the tune of some £850bn in cash, loans and guarantees. Ministers pleaded with bankers to lend it on to firms in the high street, but the banks preferred to keep it for themselves, to cover their gambling debts and bonuses. Dropping the stuff from helicopters is more effective since it does what it says on the tin: it instantly unleashes demand. It is an emergency blood transfusion straight into the veins of the economy, through high-street tills, job recruitment, restocking, warehouses and order books. It does not pass through the constricted arteries of bank managers. (Guardian, 26 Jan 2012)
The Telegraph described how for nine months Paula Daly struggled to keep her house – applying for jobs but being rejected for being overqualified or because, in her 40s, she was deemed “overqualified”. Finally she went on Jobseekers Allowance: “I’d been staving it off. I didn’t believe it was something I should be doing. I’d been a high earner with a good career. I didn’t think I needed to. I could not see myself in that dole-queue scenario.” But too late to get help with her mortgage:
in October 2009 she attended a repossession hearing for her home and business premises, which she was forced to leave just before Christmas.
Next came bankruptcy. ‘I had no option. I was being harassed several times a day by debt collectors. I was beaten into the ground by threatening letters, bailiffs and nasty phone calls. I’m single and it’s not nice dealing with all that on your own. When the house was repossessed it was valued at £240,000. It sat empty for six months, then they sold it for £190,000 and sent me a bill for £77,000, saying it was for the shortfall, though most of it was “administration fees”.’
That is, the bank which had driven Paula Daly to homelessness by foreclosure, was charging her for what it cost them to take her house.
Paula Daly is a sympathetic story to the Telegraph because, until about 4 years ago, she was “one of us” – a decent high-earning member of the upper middle class, £60,000 a year and running her own business, now made homeless by the recession: and indeed she sounds great.
Dr Éoin Clarke describes at the Green Benches the stories of three people working poor on benefits whom millionaires David Cameron, Iain Duncan Smith, and Chris Grayling don’t acknowledge exist: Jo, who became unemployed when the first round of millionaire George Osborne’s cut funding to the charity she worked for. She started a cleaning business which brings her in £100 a week (that is, something like 1/25th of David Cameron’s weekly salary, and 1/5th of the allowance that Osborne can claim each month for his meals) but as a single mother claims an array of benefits.
In addition to raising a child and working Jo also volunteers, and in September 2011 started a kids group. Jo felt so strongly about single parents being stigmatised that she started the campaign Single Parents Are Brilliant. Although Jo is in receipt of benefits and not a full time earner she does not feel like a scrounger. She also does not view herself as feckless. Responding to those types of slurs she replied
‘I am better off working, financially, self-esteem, mental health and for society too. My last job really made a difference securing the funding I did and even now as ‘just’ a cleaner, I am REALLY good at my job and my clients appreciate my reliability and hard work. It is certainly not what I dreamed of doing whilst I was at Uni, but it is work, I get paid.’
Paula Daly said to the Telegraph that she struggles with feelings of anger about her change of circumstance, but is determined to stay upbeat:
“I once had a bit of a shout in the job centre, which I feel is not fit for purpose, and the person I was ranting at whispered to me, ‘We are not set up for people like you.’ I said “Well, I’m here!” It does make one angry. I haven’t asked for help for 48 years, and that’s what you get.’
On her own website, she describes the book she’s written about her experience:
“as if Alice and Dorothy met up with Gulliver and set off into uncharted waters,” Paula explains the reason for taking this approach as being because of her “overwhelming sense of disbelief and confusion,” at her circumstances and not wanting to go down in history as having written something called a “misery memoir.”
Who succeeded John Ritblat, that pleasant spiv, at British Land? None other than Stephen Hester. Hester joined Credit Suisse in 1982: he left in 2002, but he was the co-head of European investment banking at Credit Suisse First Boston, which was a major financial backer of subprime lenders and heavily involved in the 2008 crisis: but Hester left in 2002 to become CEO of Abbey National for 21 months before Abbey was sold to Santander, and Hester became chairman of British Land. Hester is doing well – he was appointed chair of Northern Rock when the UK government had to nationalise it, and now chief executive of the Royal Bank of Scotland. Like Paula Daly in 2008, his business has been struggling recently – he’s missed lending targets, laid off 3,500 staff and seen RBS share price plunge 40 per cent. All that while getting by on a basic salary of only £1.2M. He’s also lost his home, but unlike her, through divorce rather than bankruptcy: he’s renting a £3.8million apartment near his family in London, and
he can fall back on his vast country pile in Oxfordshire, a 350-acre estate complete with eight gardeners. And there is always the ski chalet in Verbier. (Daily Mail, 28th January 2012)
What about the chair of Northern Rock, self-confessed libertarian Matt Ridley? He’s also the only son and heir of the 4th Viscount Ridley, the grandson of Roger Lumley, 11th Earl of Scarbrough, and brother-in-law of Owen Paterson, Secretary of State for Northern Ireland: a perfectly ordinary English aristocrat, doing just fine. George Monbiot did a champion take-down of how
whenever a conflict arose between his scientific training and the interests of business, he would discard the science. Ignoring hundreds of scientific papers that came to the opposite conclusion, and drawing instead on material presented by a business lobby group called the Institute of Economic Affairs, he argued that global temperatures have scarcely increased, so we should stop worrying about climate change. He suggested that elephants should be hunted for their ivory, planning laws should be scrapped, recycling should be stopped, bosses should be free to choose whether or not their workers get repetitive strain injury and companies, rather than governments, should be allowed to decide whether or not the food they sell is safe. He raged against taxes, subsidies, bailouts and government regulation. Bureaucracy, he argued, is “a self-seeking flea on the backs of the more productive people of this world … governments do not run countries, they parasitise them”. (Guardian, 23 October 2007)
And what of Bear Stearns, the company from 1923 that died in 2008, and eventually made Paula Daly homeless? A couple of weeks ago Jeffrey Verschleiser, who was head of the sub-prime mortgage operations at Bear Stearns, had a special family event: his daughter’s 13th birthday.
Although a lesser man might have something to worry about (he is named in a lawsuit filed by the Federal Housing Finance Agency for allegedly speeding bad loans onto “securitisation” before they defaulted) Verschleiser is quite relaxed: the major federal agency on the Wall Street beat is the Securities and Exchange Commission (SEC) and the federal Department of Justice (DOJ), represented by the U.S. Attorney’s Office for the Southern District of New York. The relationship between the SEC and the DOJ is described as “close, even symbiotic”.
Since financial crime-fighting requires a high degree of financial expertise — and since the typical drug-and-terrorism-obsessed FBI agent can’t balance his own checkbook, let alone tell a synthetic CDO from a credit default swap — the Justice Department ends up leaning heavily on the SEC’s army of 1,100 number-crunching investigators to make their cases. In theory, it’s a well-oiled, tag-team affair:
and in practice it really is, as smooth as a revolving door. When a big financial law enforcement conference was held at the Hilton in New York on 12th November 2010 (not long before Paula Daly was to lose her home in Bristol) the list of attendees included 1,500 or so of the country’s leading lawyers who represent Wall Street, as well as some of the government’s top cops from both the SEC and the Justice Department.
Criminal justice, as it pertains to the Goldmans and Morgan Stanleys of the world, is not adversarial combat, with cops and crooks duking it out in interrogation rooms and courthouses. Instead, it’s a cocktail party between friends and colleagues who from month to month and year to year are constantly switching sides and trading hats. At the Hilton conference, regulators and banker-lawyers rubbed elbows during a series of speeches and panel discussions, away from the rabble. “They were chummier in that environment,” says [Gary Aguirre, an SEC investigator who was fired in 2004 after he questioned the agency's failure to pursue an insider-trading case], who plunked down $2,200 to attend the conference.
Aguirre saw a lot of familiar faces at the conference, for a simple reason: Many of the SEC regulators he had worked with during his failed attempt to investigate John Mack had made a million-dollar pass through the Revolving Door, going to work for the very same firms they used to police. (Rolling Stone, 16th February 2011)
So Jeffrey Verschleiser can relax. He’s booked a 94-room luxury hotel just for his family, fully-staffed, inclusive of all their facilities: no one not in the Verschleiser family, their guest, or working for them set foot in the hotel from 12th January to 15th January.
“The good news is that they could have done this elsewhere,” [the hotel manager] said. “From our end, it’s a shame that locals can’t have use of the hotel from Thursday to Monday at noon, but we’re happy that the family decided to bring their business to all of Aspen, not just the Jerome.”
Jeffrey Verschleiser used to head Bear’s mortgage-backed securities operations.
Toward the end of his tenure, his particular specialty began with what at the time was the usual industry-wide practice, putting together gigantic packages of crappy subprime mortgages and dumping them on unsuspecting clients.
But Verschleiser reportedly went beyond that. According to a lawsuit later filed by a bond insurer called Ambac, Verschleiser also masterminded a kind of double-dipping scheme. What he would do is sell a bunch of toxic mortgages into a trust, which like all mortgage trusts had provisions written into their pooling and servicing agreements (PSAs) that required the original lenders to buy the loans back if they went into default.
So Verschleiser would sell bad mortgages back to the banks at a discount, but instead of passing the money back to the trust, he and other Bear execs allegedly pocketed the funds. (Rolling Stone, 13th January 2012)
And where is he now? Heading up the mortgage division at the finance company, Goldman Sachs:
Simon Johnson, the former International Monetary Fund economist, in his book 13 Bankers, argued that Goldman Sachs and the other large banks had become so close to government in the run-up to the financial crisis that the US was effectively an oligarchy. At least European politicians aren’t “bought and paid for” by corporations, as in the US, he says. “Instead what you have in Europe is a shared world-view among the policy elite and the bankers, a shared set of goals and mutual reinforcement of illusions.”
This is The Goldman Sachs Project. Put simply, it is to hug governments close. Every business wants to advance its interests with the regulators that can stymie them and the politicians who can give them a tax break, but this is no mere lobbying effort. Goldman is there to provide advice for governments and to provide financing, to send its people into public service and to dangle lucrative jobs in front of people coming out of government. The Project is to create such a deep exchange of people and ideas and money that it is impossible to tell the difference between the public interest and the Goldman Sachs interest. (Independent, 11th November 2011)
With respect to Stephen Hester’s newsworthy million-pound bonus, which he has turned down in the face of a huge public outcry and a threatened vote in the House of Commons, Laura Kuenssberg at ITV asks:
As taxpayers, it makes sense for us to want the bank to do well. We should therefore, want the best people to run it. How can the bank be run on commercial lines if they are not able to run their remuneration in a commercial manner?
Jeffrey Verschleiser admitted in an e-mail in 2007 that he knew the sub-prime mortgages and the consequent bad securitisation were an issue, and this admission has been public since January last year:
In 2007, when Ambac started to realize something was very wrong with its high-rated bonds, it demanded Bear provide loan-level detail and reviewed 695 non-performing loans in its portfolio. Ambac’s audit concluded that 80 percent of the loans showed an early payment default. This meant they should have never have been packed in the bonds Bear sold and were required to be repurchased. Bear refused, and of course had already been pocketing buyback money for itself from the originators. Bear also never told investors that its auditor Price Waterhouse and Coopers submitted an internal review in August 2006 that this repurchase process was not in-line with its due diligence standards and not typical for the industry. By January 2007, a Bear internal audit also reported the firm had collected $1.7 billion in repurchase claims — a 227% increase over the previous year. Yet Marano’s group of traders continued their double-dip payment scheme and kept selling the toxic loans with full awareness of the poor quality of the due diligence. (The Atlantic, 25th January 2011)
Is it really the answer, to hand the banks back to the same people who have caused the problem, who have arranged matters so that they entirely fail to suffer from the problems they caused?
Why should Stephen Hester get a bonus of any description? He is already being paid per year what it would have taken Paula Daly twenty years to earn (before tax) at the top of her salary capacity: Stephen Hester, so closely intertwined with Jo’s losing her job at a charity, with Paula losing her home, gets paid 230 times what Jo manages to earn by cleaning homes: in fact it’s estimated his total reward by next year will be around £40m for five years at RBS – more money than most of us will see in a lifetime.
Is paying millions to the very rich really how we get the best people to run banks? Or is that just how we get the same people to run banks who were running them before – who knew exactly what crisis this spivs’ securitisation of loans was going to run us into, and did nothing but save their own finances from disaster?
Over the past two years national and local campaigns in the US have been encouraging people to move their cash away from big financial institutions and into small banks and local credit unions. Tomorrow the campaign to Move Your Money launches. Let’s do it.
Never doubt that a small group of thoughtful, committed citizens can change the world. Indeed, it is the only thing that ever has.