A Nefarious Gambler Who Singlehandedly Broke a Bank

Nicholas William Leeson, a British 28-year-old trader of The Barings Bank, who led this venerable bank to its financial collapse in 1995. Credit: rankia.com

“It’s very easy for me to get along with people, but I don’t necessarily have to like you or any of the people who I work with to get along with them. So I come in and do my job, do it to the best of my ability, and then at the end of the day if you’re going to ask me out for a drink, I’m not going to go out for a drink with you because I don’t like you, but I’m not going to tell you that, there’s no reason for there to be any animosity during the day. I just didn’t like the people who I worked with and so I would go and do the work, be very friendly, everybody would probably say that they thought they were my best friend and if they have the knowledge, then I will attempt to get the knowledge through whichever way is best, and if a friendship is that method, then friendship is the method that I would use.” –Nick Leeson

Greed is a powerful evil.  This malignant sin will make rational and prudent people to do the most abominable actions you can think of.  Nothing is out of reach in the search of money.  Nothing.  Such was the case of Nicholas William Leeson. 

Nick Leeson’s life started as a classic rags-to-riches tale. Nick, as he was called, was born in on February 25, 1967 in the humble town of Watford.  His father was a hard-working plasterer who wanted his son to be somebody other than an ordinary manual worker.

Like many in the 1980’s, Nick Leeson wanted to be rich and successful, but Nick Leeson was also a very strange man with an extraordinary ability to manipulate and deceive those around him. His victims willingly entered into a dream he wove, lured by the prospect of vast sums of money and together they lost 830 million pounds.

In the early 1980s, he landed a job as a clerk with royal bank Coutts, followed by a string of jobs with other banks, ending up with Barings, where he quickly made an impression and was promoted to the trading floor.  In a relatively short period, he was appointed manager of a new operation in futures markets on the Singapore Monetary Exchange (SIMEX) and was soon making millions for Barings by betting on the future direction of the Nikkei Index.

Before I go on, I would like to highlight the historic value and prestige of the Barings Bank.  The iconic bank was founded in 1762. It was the oldest bank in England, and one of the oldest banks in the world, with more than two centuries of history.  It was the bank of choice for the Queen of England to handle her accounts, and had financed, among other things, the Napoleonic wars. It is claimed that the royal family had invested 40 million pounds in Barings.  Some pundits say that former Lady Diana had her account on this venerable bank.

Having said that, allow me to continue with the story.  Management at Barings Bank allowed Leeson to remain Chief Trader while also being responsible for settling his trades, jobs usually done by two different people.  This tragic breach of financial security permitted Leeson to hide his gargantuan losses from his superiors in London.

The tragic events started when Leeson opened a fake error 88888 account where he hid his losses. This account had been set up to cover up a mistake made by an inexperienced team member, which led to a loss of £20,000. Leeson now used this account to cover his own mounting losses.

The losses escalated to enormous amounts without the knowledge of Senior Management in London who were outdated and were unaware of how the derivatives’ markets worked.  The Barings bank was still living in the economy of the eighties when financial transactions were very traditional and with strict risk controls.  They had no idea of the casino gambling transactions being made by Leeson in the very heart of the cut-and thrust empire of SIMEX (Singapore International Money Exchange).  It was absolutely unbelievable that London had not done a basic reconciliation of the position held by the Baring Bank in Singapore.  Had they done this simple audit routine, the box of worms would have been discovered and the bank would have been saved.  But there’s no use crying over spilled milk.  Let me go on with the story.

“By December 1994 the red ink hidden in account 88888 totaled $512 million. Getting increasingly desperate Leeson bet that the Nikkei index would not drop below 19,000 points. At the time this seemed reasonable as the Japanese economy was rebounding after a 30-month recession. Then on the 17th January 1995, a devastating earthquake measuring 7.2 hit the Japanese city of Kobe. The previously stable Nikkei index plummeted by 7 percent in a week. As the losses grew, Leeson requested extra funds to continue trading, hoping to extricate himself from the mess by more deals. Leeson was counting that there would be a post quake rebound and the Nikki would stabilize at 19,000.

There was no hedges, no bets the other way to protect Barings’ huge exposures. There was no rebound. Over three months he bought more than 20,000 futures contracts worth about $180,000 each in a vain attempt to move the market. Some three quarters of the $1.3 billion he lost Barrings resulted from these trades. When Barings executives discovered what had happened, they informed the Bank of England that Barings was effectively bust.”

Leeson hurriedly resigned and flew to Malaysia, Thailand and finally Germany, where he was arrested and extradited back to Singapore on November 20, 1995, though his wife Lisa was allowed to return to England.  Trusted with the finances of royalty and aristocracy for over two hundred years, the Barings Bank had been brought down by the covert trading activities of just one man, leaving the entity with losses of around £850 million.

Sentenced to six and a half years in Changi Prison in Singapore, Leeson was released in 1999, having been diagnosed with colon cancer, which he survived despite grim forecasts at the time.  While in prison, in 1996, Leeson published an autobiography, Rogue Trader, narrating his acts.  In 1999, the book was made into a film of the same name starring Ewan McGregor and Anna Friel.

Nick Leeson presently lives in Ireland with his second wife Leona and three children.  He has his own Web page and spends most of his time delivering talks to companies on risk management, compliance and corporate responsibility, also undertaking after-dinner speaking engagements recounting his unique life experiences and struggles against adversity.

This astounding story took place in Singapore and England in 1995.  Little did we know that thirteen years later the same series of events would take place.  Only this time it brought the world on its proverbial knees. It was the global financial meltdown of September 2008.  Giant financial entities like Salomon Brothers, Long-Term Capital Management, Fannie Mae, Freddie Mac, Bear Stearns, Merrill Lynch, and Lehman Brothers bit the dust or were taken over by the Federal Government.  Even entire countries like Iceland, Ireland, Portugal, and Greece also went bust. The dust provoked by the financial catastrophe of 2008 has not cleared yet.

Once more, greed, excess, and high-stakes gambling turned the world upside down.  The effects are still reverberating across the globe.  When will it ever end?  When will we learn that money is only a reference of value, and not an end in itself?  When will we realize that investment banking is not a global casino where anything goes?  I’m afraid I don’t have the answer to these questions. It’s a tough cookie.

If you are interested in viewing the captivating story of Nick Leeson, I recommend the 1996 documentary film made by Adam Curtis, titled 25 Million Pounds. Good Day!

Source:  Nick Leeson – Official Website

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Hank Paulson’s Perspective on the Financial Meltdown of 2008

“If we don’t act boldly, we could be in a depression deeper than the Great Depression.  This is the financial equivalent of war and we’re going to need wartime powers.” — Hank Paulson, former U.S. Treasury Secretary

Henry Merritt "Hank" Paulson, Jr., an American banker who served as the 74th U.S. Secretary of the Treasury. (Credit: StockTradingToGo.com)

 If you unfold a newspaper to read the morning news, or turn on the TV set to listen to the evening news, or talk to one of your co-workers at the water cooler, or exchange courtesies with your neighbor while taking care of the lawn, it’s most likely the subject of all these activities will be the economy.  The negative side of it.  You’ll see violent protests across the United States and the major capitals of the world called Occupy Wall Street, student’s protests in London against high tuition fees, government bureaucrats dissenting in Greece because they have been fired or “Indignados” in Spain angry because their government has tightened up its belt and no public money is flowing as it used to be.  The new economy in a state of shambles as a result of the meltdown of Wall Street in 2008.  There is anger out there, and people are venting their anger everywhere.

Ever since the collapse of Lehman Brothers on September 15, 2008, I’ve dedicated lots of hours researching about this event which froze the global financial system.  Credit dried up as the banking system seemed to run out of money.  All banks need to lend to each other—short-term loans that get them through the night or the weekend and enable them to do their hour-by-hour business.  None would lend now, except at high rates.

The toxic mortgages were out in the world in the poisonously bundled CDOs (Credit Default Obligations).  Rather that dissipate the risk, the CDOs had sent it to investors all over the globe.  The magic formula had not predicted that so many flawed mortgages would default at once.  The black swan was alive; it was not a myth, and the banks were in a state of shock.

“Many short sellers made a bundle by betting that the market could crash.  The insurance firms would have to pay big.  Many buyers of credit default swaps were like vultures and hyenas on the lookout for rotting carcasses.”

This is the state of things Hank Paulson found when he became the 74th U.S. Secretary of Treasure in 2006.  Two weeks ago, I finished reading his book, “On the Brink:  Inside the Race to Stop the Collapse of the Global Financial System”.  This book is Paulson’s first-person account of the desperate economic events of 2008 which are still reverberating in different parts of the world, even as we speak.

Paulson narrates all the intense moments he found at the Treasury as he addressed urgent market conditions, evaluated critical decisions, and debated policy and financial considerations with key players in Washington, such as:  CEOs of top Wall Street firms, Ben Bernanke, Tim Geithner, Sheila Bair, Nancy Pelosi, Barney Frank, Barack Obama, John McCain and George W. Bush, just to name a few.  It’s a long list of players.

Hank Paulson is a controversial figure.  Many will say he’s a hero, whereas many other will say he’s a villain.  The is what Times Magazine published about Paulson in an article called, “25 People to Blame for the Financial Crisis.”

“When Paulson left the top job at Goldman Sachs to become Treasury Secretary in 2006, his big concern was whether he’d have an impact.  He ended up almost single-handedly running the country’s economic policy for the last year of the Bush Administration.  Impact?  You bet.  Positive?  Not yet.  The three main gripes against Paulson are that he was late to the party in battling the financial crisis, letting Lehman Brothers fail was a big mistake, and the big bailout bill he pushed through Congress has been a wasteful mess.”

Hank Paulson together with Alan Greenspan, was a hands-off regulator, content to believe that participants in the marketplace would act rationally and do the right thing.  Like most conservatives, he still honored the principle of “the invisible hand”—that widely held, neoclassical economic notion that official intervention was at best a last resort.  As an example of this ideology, the SEC (Securities and Exchange Commission) had only a handful of regulators—seven to keep with on Wall Street’s combined assets of $4 trillion.

Salaries were very modest at the SEC.  A SEC regulator would make about $120,000 a year against over $1 million earned by a Lehman Brothers specialist in Turkish or Scandinavian bonds.  Keeping tabs on Wall Street banks was nearly impossible.  Yet it was exactly what had to be done.  Even bankers admit that the financial collapse of 2008 was partly caused by lax regulations.  Chuck Prince, former CEO of Citigroup, is quoted as saying, “As long as the music is playing, you’ve got to get up and dance.”

“The regulatory structure, organized around traditional business lines, had not begun to keep up with the evolution of the markets.  As a result, the country had a patchwork system of state and federal supervisors dating back 75 years.  This might have been fine for the world of the Great Depression, but it had led to counterproductive competition among regulators, wasteful duplication in some areas, and gaping holes in others.  This situation called for the Blueprint for a Modernized Financial Regulatory System unveiled on March 31, 2008. “

John Mack, CEO of Morgan Stanley, one of the largest investment banks in the United States, had this to say about regulations.  “We cannot control ourselves.  You have to step in and control The Street.”  “Greed, leverage, and lax investor standards,” John Mack said.  “We took conditions for granted, and we as an industry lost discipline.” 

Below are Paul Hanks recollections of the financial scenario on September 2008:

“Back in my temporary office on the 13th floor, a jolt of fear suddenly overcame me as I thought for a moment of what lay head of us.  Lehman was as good as dead, and AIG’s problems were spiraling out of control.  With the U.S. sinking deeper into recession, the failure of a large institution would reverberate throughout the country—and far beyond our shores.  I could see credit tightening, strapped companies slashing jobs, foreclosures rising ever faster:  millions of Americans would lose their livelihoods and their homes. It would take years for us to dig ourselves out from under such a disaster.”  This is the economic equivalent of war”, I said.  “The market is ready to collapse.”

Between March and September 2008, eight major U.S. financial institutions failed—Bear Stearns, IndyMac, Fannie Mae, Freddie Mac, Lehman Brothers, AIG, Washington Mutual and Wachovia—six of them in September alone.

After Lehman Brother died, credit froze around the world.  With banks clinging to whatever cash they had, companies around the world could not borrow the money they needed to live on a daily basis.  Stock markets collapsed.  Whole countries threatened to follow:  Ireland, Iceland, Hungary, Ukraine, Greece, Portugal—the crisis even reached out to Central Asian republics.  Huge bailouts and economic “stimulus” programs had to be put in place to keep the system running.

Frances Christine Lagarde, the former Minister of Economic Affairs, Finances and Industry of France commented; “All banks suddenly realized that no one was safe and that any bank could fall.  At that point, they considered that their counterparts were vulnerable so they blocked all financing channels.  The credit system stopped working at that moment.”

This is another dramatic narration of the calamitous period of September 2008:

“Paulson stepped out of a meeting room and found a quiet corner to call his wife Wendy on his cellphone.  His voice immediately betrayed his own panic.  ‘What if the system collapses?,’ he confided in her.  ‘Everybody is looking to me, and I don’t have the answers.  I’m really scared.’”

Wendy read back to him over the phone, Timothy 1:7; “For God hath not given us the spirit of fear, but of power, and of love, and of a sound mind.”

At the end of the book, Hank Paulson highlights four lessons that he learned could help the United States avoid a similar calamity in the future.  This is what he wrote in his book:

1.  The structural economic imbalances among the major economies of the world that led to massive cross-border capital flows are an important source of the justly criticized excesses in our financial system.  These imbalances lay at the root of the crisis.  Simply put, in the U.S. we save much less that we consume.  This forces us to borrow large amounts of money from oil-exporting countries or from Asian nations, like China and Japan, with high savings rates and low shares of domestic consumption.  The crisis has abated, but these imbalances persist and must be addressed.

2.  Our regulatory system remains a hopelessly outmoded patchwork quilt built for another day and age.

3.  The financial system contained far too much leverage, as evidenced by inadequate cushions of both capital and liquidity.  Much of the leverage was embedded in largely opaque and highly complex financial products.

4-  The largest financial institutions ar so big and complex that the pose a dangerously large risk.  Today, the top ten financial institutions in the U.S. hold close to sixty percent of financial assets, up from ten percent in 1990.

I’ll close this post with a positive note.  Angela Merkel, the Chancellor of Germany, and Nicolas Sarkozy, the 23rd and current President of the French Republic, came up with a bold plan to mend Europe’s deplorable financial mess.  Greece’s chaotic situation will be taken care of, as well as the rest of the European countries on the brink of a financial default.  The markets responded positively and investors are more relieved.

The world’s biggest economy—the United States—grew at a 2.5 percent annual pace in the July-September period, the best in a year, led by consumers and businesses, the Commerce Department said Thursday.   Meanwhile, European leaders unveiled a plan to shield Greece from default, protect the region’s banks and keep the crisis from spreading to Italy and Spain. Despite a lack of key details, the accord eased concerns of an imminent new financial crisis that could derail the global economy.

“A month ago there were fears of a double-dip in the U.S. and a blowup in Europe. Those tail risks have diminished,” said Josh Feinman, global chief economist at DB Advisors.

Will the specter of Lehman Brothers still hover over the financial world in the future?  Who knows?  Time will tell.  In the meantime, let’s hope for the best.  Good Day.

Book:  On the Brink:  Inside the Race to Stop the Collapse of the Global Financial System, written by Henry Paulson.  Kindle Edition

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The Global Financial Meltdown of 2008

“When there’s a delusion, a mass delusion, you can say everybody is to blame.” — Warren Buffett, May 2010

In my lifetime I’ve seen remarkable historic events that have changed the world many times over.  I’m glad to have been alive to witness these dramatic events take place.  Still fresh in my mind is the breakdown of the Soviet Union, the fall of the Berlin wall and the reunification of Germany in 1989.   The assassination of President John F. Kennedy in 1963; the landing on the Moon in 1969; the terrorists attacks on the Twin Towers of New York in 2001, and the meltdown of Wall Street in 2008 are events deeply embedded in my memory.

On September 15, 2008, Lehman Brothers filed for bankruptcy, and soon after the world gasped for air.  The global financial system had frozen.  Not a single dollar was loaned.  The markets were in a catatonic stage.  I will never forget that event.

Even since, I’ve read every article on the meltdown of 2008 that I can place my paws on.  Every day I surf the web in an effort to find more information that will help me understand the circumstances surrounding the financial debacle.  Thus far I have read the following books on the subject:

1. “The Big Short:  Inside the Doomsday Machine” by Michael Lewis.
2. “The Devil’s Casino:  Friendship, Betrayal, and High Stakes Games Played Inside Lehman Brothers” by Vicky Ward.
3. “The Last of the Imperious Rich:  Lehman Brothers 1844-2008″ by Peter Chapman.
4. “The Murder of Lehman Brothers:  An Insider’s Look at the Global Meltdown” by Joseph Tibman.
5. “The Quants:  How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It” by Scott Patterson.
6. “Too Big to Fail:  The Inside Story of How Wall Street and Washington Fought to Save the Financial System—and Themselves” by Andrew Ross Sorkin.

The next book on my computer screen is “On the Brink:  Inside the Race to Stop the Collapse of the Global Financial System” by Hank Paulson.  I bought it yesterday through Amazon’s Kindle application.  That’s where I acquire my  e-books at a very reasonable price.

Of all the books mentioned above, the best one is unequivocally, “Too Big to Fail”, brilliantly written by Andrew Sorkin.  The information contained in this book is absolutely overwhelming. At its core, “Too Big to Fail” is a chronicle of failure—a failure that brought the world to its knees and raised questions about the very nature of capitalism.  It is an intimate portrait of the dedicated and often baffled individuals who struggled—often at great personal sacrifice but just as often for self-preservation—to spare the world and themselves on even more calamitous outcome.

You’ve probably heard the expression that hindsight is always 20/20 and it’s true because all the facts are known.  Galileo Galilei once said, “All truths are easy to understand once they are discovered, the point is to discover them.”  Professors Nouriel Roubini and Robert J. Shiller forewarned of the catastrophe being fabricated under the surface, as far back as 1994.  They were unheeded.

As soon as the financial crisis erupted, the finger-pointing began.  Should the blame fall on Wall Street, Main Street, or Pennsylvania Avenue?  On greedy traders, misguided regulators, sleazy subprime companies, cowardly legislators, or clueless home buyers?  As Warren Buffet said in his quote at the beginning of this blog post, it was all of the above.  All were drinking the Cool-Aid and enjoying the party while it lasted.  When the music stopped, all were staring down at the abyss.

Could the financial crisis have been avoided?  That is the $1.1 trillion question—the price tag of the taxpayers’ bailout thus far.  The seeds to disaster had been planted years earlier with such measures as:

• The deregulation of the banks in the late 1990s.
• The push to increase home ownership, which encouraged lax mortgage standards.  They were called Ninja loans—No Income, No Jobs, No Assets.
• Historically low-interest rates, which created a liquidity bubble.
• The system of Wall Street compensation that rewarded short-term risk taking.

All of these factors came together to create the perfect storm.

Meanwhile, Wall Street, bent but not broken, rumbles on in search of new profits.  Risk is being reintroduced into the system.  Vulture investing is back in vogue again, with everyone raising money in anticipation of the collapse of commercial real estate and the once-in-a-lifetime bargains that might be available as a result.

In 2009 Goldman Sachs announced a record profit that year of $13.4 billion, due in large part to trading for its own account.  The firm paid out $16.2 billion in bonuses, the equivalent of $498,000 per employee.  Lloyd Blankstein, CEO of Goldman Sachs said he was just a banker “doing God’s work.”

Despite lip service by many of the industry’s leaders to support reform, Wall Street swarmed Washington with 1,400 lobbyists, paying the top ten lobbying firms $30 million to push back on most of the significant reform efforts.

Wall Street is back to its previous practices—making more money in the short term.  They just can’t help it.  It’s the nature of the beast.  John Mack, CEO of Morgan Stanley once said, “We cannot control ourselves.  You have to step in and control The Street.”

So three years after the greatest financial crisis of modern times, are we any closer to solving the Too Big to Fail conundrum?  What do you think, as Europe and the United States financial markets teeter?  I guess the answer is floating in the wind.  Good Day.

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The House of Lehman

Picture of the iconic Charging Bull bronze statue that stands in Bowling Green Park near Wall Street in Manhattan, New York City.  It’s one of the most photographed sites in Manhattan.

“We have involved ourselves in a colossal muddle having blundered in the control of a delicate machine, the working of which we do not understand.  The result is that our possibilities of wealth may run to waste for a time–perhaps for a long time.”

John Maynard Keynes, The Great Slump of 1930

On September 15, 2008, Hank Paulson, U.S. Treasury Secretary, announced the fall of Lehman Brothers.  It was a day the world will never forget.  The U.S. economy contracted by four percent, financial institutions took over $1 trillion in losses, and the U.S. government and other countries bailed out their banking sector with rescue packages worth either hundreds of billions or trillion of dollars, depending on how you count them.  On September 15, 2008, $700 billions were wiped out of the stock market.  The stock marked plunged more than 500 points.  The fragile house of cards of Lehman Brothers finally came tumbling down on this tragic day after a brilliant history of more than 160 years.

In hindsight, we are now fully aware that Wall Street banks used their financial clout to bet in brand-new financial markets, bundling together complex derivatives with bogus mortgages in a toxic brew that ultimately poisoned the global economy.  The dust has not settled yet and additional card houses are crumbling down as a result of this global financial collapse.  The latest victim is Portugal which tragically followed Iceland, Greece, and Ireland.  Spain is expected to be the next casualty.

In the private sector, the following entities were brutally shaken by the turbulence at Wall Street when the financial bubble imploded, (e.g., Bear Stearns, Lehman Brothers, Indy Mac, Freddy Mac, Fannie Mae, Merrill Lynch,  AIG, Washington Mutual, Wachovia, and others.)  Eight financial institutions failed—six of them in September of 2008 alone.

And the damage was not limited to the U.S.  More than 20 European banks across ten countries were rescued from July 2007 through February 2009.  This, the most wrenching financial grand debacle since the Great Depression, caused a terrible recession in the United States and severe harm across the world.

Ten years earlier, in 1998, the global markets for custom derivatives had grown to over $70 trillion in face value (and over $2.5 trillion in market value) from almost nothing a decade before.  In a decade the derivatives market which operated in the shadows grew at the walloping rate of 826 percent.  Everybody was drinking the Kool-Aid by the gallon, (e.g., subprime borrowers themselves, securitizers, institutional investors, mortgage brokers and originators, mortgage lenders, Wall Street investment banks, members of both main political parties, Federal Regulators, and major U.S. rating agencies.)

After more than two years, the poltergeist of Lehman Brothers still hovers over the financial markets to remind us of what rapacious greed and predatory lending  can do.  It’s unfortunate that Lehman Brothers is associated with the financial calamity of Wall Street.  In fact, it was one of the most respected financial icons of the United States founded in the 19th century.  Lehman Brothers played an important part in the financial and commercial history of the United States for more than 160 years.

In 1844, 22-year old Henry Lehman, the son of a Jewish cattle merchant emigrated to the United States from Rimpar, Bavaria in Germany.  After arriving in New York, he moisten his index finger and lifted it up into the air to feel the flow of the wind.  The wind was blowing South and that is where he headed—to the Deep South.  The roads led him to a Jewish enclave in  Montgomery, Alabama where he opened a dry-goods store—“H. Lehman.”

In 1847, following the arrival of his brother Emanuel Lehman, the firm became “H. Lehman and Bro.” With the arrival of their youngest brother, Mayer Lehman in 1850, the firm changed the name again and “Lehman Brothers” was founded.

The Lehman brothers were hard-working people who believed in traditional moral values.  After being a peddler, selling groceries, dry goods, and utensils to the local cotton farmers, Henry Lehman and his two brothers  placed their bets on the commodities business.  Soon after its founding, Lehman Brothers evolved from a general merchandising business to a commodities broker that bought and sold cotton for the planters living in and around Montgomery, Alabama. “King Cotton” dominated the economy of the southern United States in the 1850s. As the business grew, a brief partnership was formed with cotton merchant John Wesley Durr to build a cotton storage warehouse, enabling Lehman Brothers to engage in larger sales and trades.

Their large warehouses of cotton served as reserves for depositors who considered them a safe bank.  Lehman’s influence on commerce, finance, and banking weaves throughout the fabric of U.S. business and political history.  At its sudden death in 2008, Lehman Brothers was the fourth largest bulge bracket investment bank in the world.  But its traditions were those of a banking warrior—the brilliant finance house that had backed, encouraged and made possible the retail giants of Gimbel Brothers, E.W. Woolworth and Macy’s and the airlines American, National, TWA and Pan Am.

They raised the capital for Campbell Soup Company, the Jewel Tea Company, and B.F. Goodrich.  They also backed the birth of television at RCA, plus the Hollywood studios RKO, Paramount, and 20th Century Fox.  They found the money for the Trans-Canada oil pipeline.  They were also the producers of “A Streetcar Named Desire”.

Some of the core activities of Lehman Brothers were:  bucket shops, investments trusts, short selling, credit default swaps and subprime mortgages.  All this vast financial empire was created by selling household goods and cotton; practical physical things people could see and touch.  How different the business changed in the latter years of the company when  ambitious executives like Richard Fuld, Joseph Gregory, Erin Callan and Lew Glucksman led the company to its demise.  Fuld became a symbol of failure, the face of arrogant, blundered, massively overleveraged Wall Street.

On its later years, Lehman Brothers had departed from long-term investment in America’s future and settled on aggressive short-term profit-making by off-loading toxic mortgages on anyone it could sell them to.  What a sad ending for this preeminent Wall Street house.

“People are 99 percent animal, one percent human; and it’s the human part that causes all the trouble.  You’d think it would be the other way around.” (The Last Days of Lehman Brothers—the movie).

Ben Bernanke, present Chairman of the Federal Reserve Board, the central bank of the United States; during his tenure as Chairman, Bernanke has overseen the response of the Federal Reserve to late-2000s financial crisis, and Tim Geithner, current United States Secretary of the Treasury are still at the helm of the economy of the United States.  They are the same ones who orchestrated the financial maneuvers of the financial catastrophe of 2008.  Do they have what it takes to do their job or are they puffing up the next global financial  bubble?  It’s the sixty thousand dollar question I ask myself.  Good Day.

Suggested reading:  The Murder of Lehman Brothers:  An Insider’s Look at the Global Meltdown written by Joseph Tibman

 

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The Disappearance of the Trees of El Bosque

I live in a neighborhood called, Residencial El Bosque, which in Spanish means Residences of the Woods. The name is a literary illusion, since there are only a few trees left in this once lush tropical forest during the late sixties.

Originally El Bosque was a large extension of land of an expensive real estate project called Circle Club which had several branches in Central America.  The project consisted of expensive mansions surrounded by tall tropical trees and a top-of-the-line golf course.  The target customers were upper middle class U.S. retirees who would find a tropical paradise in the Republic of Panama.  Something similar to what happened at Boquete forty years later.

Then an unexpected event killed the project.  A military Junta toppled the legitimate government of then President Arnulfo Arias Madrid on October 11, 1968.  Immediately boatloads of money was vacuumed from Panamanian banks which found refuge in Miami banks.  Billions of dollars flowed to the protected golden shores of Florida.

The Circle Club went belly up and the land was appropriated by the Banco Nacional which acts like a Central Bank.  The new government, under the leadership of strong man General Omar Torrijos Herrera, decided to divide the real estate into small pieces of land about 312 square meters and constructed middle-income houses.  The mortgages were sold by the Caja de Ahorros—another government institution.  The average cost of a house at  Residencial El Bosque (the new name of the residential area) was about $35,000 in 1980.  That is what I paid for my house on July 12, 1980.  The monthly mortgage payment was exactly $343.75.

Since I had a very good salary at that time, I paid my house in five years, saving several thousands of greenbacks in interest payments.  It was a wise idea that came from my wife.  She’s the best Comptroller I’ve ever known.  And they say women can’t handle money.  It’s not true at all.

While building Residencial El Bosque, most of the magnificent tropical trees were chopped down by the land developers and only a few remained.  This is a tendency in Panama, cut trees no matter what.  Now we are regretting the uncontrolled devastation of our natural forests which only remain in its natural state in the Provinces of Bocas del Toro and Darien.

At a small park within Residencial El Bosque, a lonely tropical palm tree still stands.  It displays the beauty of the tropical vegetation with its broad leaves which look like giant fans.  I took several shots of this palm tree roughly about 5:30 p.m. which is a magical hour to take pictures as a good photographer will certainly agree.

Morning light is at its best from just before sunrise to about an hour afterwards, while evening light is best from one hour before to just sunset.  It’s often called by photographers, “the golden light”.

Below at the pictures captured during this golden time of the day, in black and white.  Later on, during the shooting session, I switched to color to compare the difference in mood that coloration or lack of it, can create on an image.  I’m frequently impressed with the effect of black and white pictures.  Now let’s take a look at one of the few standing trees of Residencial El Bosque. Here we go.

Photograph of a large tropical palm tree located in a small park at Residencial El Bosque where I live. Photo ©Omar Upegui R.

Photograph of the middle section of the large palm tree of Residencial El Bosque. I wonder how many other similar trees were destroyed during the building project. Photo ©Omar Upegui R.

Photograph of the dry leaves of a large palm tree in Panama City, Panama. Notice how large and wide the leaves are. They looked like giant fans to me. Photo ©Omar Upegui R.

I was mesmerized by the tones of black, white and gray captured by the small camera. Photo ©Omar Upegui R.

Text can not fully describe the beauty of nature. Photo ©Omar Upegui R.

Photograph of the central section of a large palm tree at Residencial El Bosque in Panama City, Panama. Photo ©Omar Upegui R.

Even though we are all aware of the negative effects of the destruction of the planet caused by humans, we continue to destroy vast areas of tropical forests every year.  The Amazonia is threatened by greedy land developers while government officials remain passive and often taking bribes.  How long can we keep on this growing trend of destruction?  At this moment I have more questions than answers.  Good Day.

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Orbiting Around Money

During my heyday years, I was a  consummate movie fan.  I lived a few blocks from the Lux Theater at Avenida Perú, so this venue was my second home.  Then I got married, and slowly detached myself from the silver screen.

Yesterday, I decided to return to a motion movie venue  in an effort to find out how Oliver Stone created a sequel to the 1987 original movie Wall Street based on the controversial and powerful character of Gordon Gekko.  I can still  remember his famous speech about Greed is Good.

Wall Street:  Money Never Sleeps is not as good as the original, but it convinced me of its intention to entertain.  Michael Douglas showing his age, depicted a more mellow investment trader.  The agressivness of the first movie was subdued, but there were still flashbacks of his earlier years as a corporate raider.  Jake Moore (Shia LaBeouf), Bretton James (Josh Brolin), and  Winnie Gekko (Carey Mulligan) played their roles well, but not to the heights of the original picture.

I loved the terrific background music, the beautiful pictures of Manhattan’s skyline and the description of the real events which took place during the burst of the sub-prime mortgage bubble.  I could easily follow the financial mumbo-jumbo of the picture,  such as derivatives, collateralised debt obligations, leveraged corporations, hedge funds, credit default swaps, moral hazard, too big to fail, and of course, the lust for money.

If you saw the original movie and have been following the events that led to the worst financial crisis in modern times, this movie will give you glimpses of the sale of Bear Stearns to JPMorgan Chase, scenes of the financial meltdown itself on September of 2008, and the rumors and practices that brought down AIG, Bear Stearns, Merril Lynch, Washington Mutual, Wachovia, Lehman Brothers, Freddie Mac, and Fannie Mae.

Oliver Stone brings to light the gamble played by Wall Street bankers, who were responsible for creating and trading complex financial products that were based on derivatives and debt-laden loans, the value of these loans being very difficult to determine even by the stoutest of financial experts. I plan to write about the role played by the mysterious high priests of Wall Street who created complex lines of code to predict the performance of financial instruments.  They are known as Quants and their story is very intriguing, to say the least.

One of the best scenes in this movie is the lecture that he gives at Jacob’s alma mater about the foreseeable financial crises. It was reminiscent of the speech he gave in the first film about money and greed.

In a nutshell, the picture was not as brilliant as the first one, but accomplishes the goal of entertaining.  In that sense, it was “Mission Accomplished”—using George W. Bush’s unfortunate words.  This isn’t a bad movie, but I still recommend the first one over this any day. One thing is certain, Michael Douglas won’t win another Oscar for this version of Gekko.

I took my Birthday camera with me and took a couple of shots to capture my return to the movies after a long hiatus of roughly forty years.  I enjoyed the come back immensely.  Here we go.

Photograph of the entrance of Cinépolis Theater at the second floor of Metro Mall in Panama City, Panama. Photo by ©Omar Upegui R.

Photograph of a general view of the venue. There is a nice cafeteria inside its premises to pull more money out of your pockets. Photo by ©Omar Upegui R.

Photograph of movie-goers lining up to buy their tickets at the entrance of the venue. I shot this picture from the cafeteria. Photograph by ©Omar Upegui R.

Photograph of a well decorated wall with posters of movies currently being projected at Cinépolis. You can see the Wall Street poster on the second row from top to bottom towards your left. Photo by ©Omar Upegui R.

Photograph of a movie ticket. The date is Sunday, October 3, 2010. The price is $1.95 including VAT. It clearly indicates that the ticket is for retired persons (Tercera Edad Class). The hour of the projection was 01:55 p.m. Photo by ©Omar Upegui R.

Soon I’ll post an article about the Quants, also known as the Alchemists of Wall Street. Their story is bigger than life.  Their quantitative models will help us understand the financial transactions which took place within the walled gardens of Wall Street.  Good Day.

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Hollywood Takes a Look at Wall Street

One of the hottest topics on the Internet today is financial reform.  Web sites like C-Span and PBS Radio are diluted with insightful information about root causes, effects and possible solutions for the financial chaos which exploded in 2008.

A guy once said “greed is good” and the phrase stayed.  Nowadays it’s legal.  As you look around, everyone at Wall Street seems to be drinking the same Kool Aid.  There was a recent comment made by a Congress Representative that caught my attention; “If ‘ifs’ and ‘buts’ were candy and nuts, we would have a Merry Christmas.”

It’s so true.  Nobody seems to accept the blame for what happened.  All the main players of the financial fiasco agree that the economic collapse of Wall Street was a result of a combination of overwhelming underlying market forces which concurred in 2008 to create one of the worst economic disasters of modern times.  This is not exactly what happened.  The main problem was the cultural environment embedded in Wall Street based on the passionate love of money.

Nobody saw it coming.  Everybody was caught by surprise.  As of this day, not a single CEO of the largest Wall Street banks has taken full responsibility for mismanagement or fraud.  Furthermore, not a single arrest, indictment or conviction has been made to senior insiders of the mayor sub-prime lenders.  All was peace and love inside the walled—no pun intended—Garden of Eden, until the stuff hit the fan on Monday, September 15, 2008.  On this day, the world held its breath as the arteries of the globe’s financial system froze up.  Should I continue? Nah, you already know the rest of the story.

Two days ago I watched a movie—for the third time—which depicts very well the culture at Wall Street since the dawn of times.  This culture is based on the arrogant love of money and sheer greed.  The name of this picture is Wall Street directed by Oliver Stone in 1987.  The story takes place in New York City in 1985.  The similarities to the events which took place at Wall Street during September of 2008 are striking.

Below is an excerpt of a speech made by Gordon Gekko, the main character of the film brilliantly played by Michael Douglas.  Other seasoned actors who also performed remarkable roles in this film were Charlie Sheen, Martin Sheen and Daryl Hannah.

“America has become a second-rate power.  Its trade deficit and its fiscal deficit are of nightmare proportions.  Now, the days of the free market when our country was a top industrial power, there was accountability to the stockholder.  The Carnegies, the Mellons, the Vanderbilts who built this great industrial empire made sure of it because it was their money at stake. Today, management has no stake in the company.

Altogether, these men sitting up here, own less than 3 percent of the company, and where does Mr. Cromwell put his million dollars to hold?  Now, in Teldar stock, he owns less than one percent.  You own the company.  That’s right, you the stockholder.  You are all being screwed over by these bureaucrats with their state lunches, with their hunting and fishing trips, their corporate jets and golden parachutes.

The new law of evolution in corporate America seems to be survival of the unfittest.  Well, in my book, you either do it right or you get eliminated.  I’m not a destroyer of companies.  I’m a liberator of them.  The point is, ladies and gentlemen, is that greed, for lack of a better word, is good.  Greed is right.  Greed works.  Greed clarifies, cuts through and captures the essence of evolutionary spirit.  Greed in all of its forms; greed for life, for money, for love, knowledge, has marked upwards in surge of mankind.  And greed, you mark my words, will not only save Teldar Paper, but that other malfunctioned corporation called the USA.”

No matter what they say, the heart of the financial calamity was greed—love of money—starting from the borrower, all the way up the ladder to the CEO of the big banks.  The rest is dressing on the cake.  Good Day.

Wall Street – The Movie

Note: Click above link to view the entire picture.

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