The great writer James Baldwin once wrote,”No man is a villain in his own eyes.” He meant, of course, that even the most despicable acts can seem justified at the time, and that before we judge someone—even someone who has caused great harm and suffering—we need to do our best to understand his motivations. This is the responsibility of an enlightened and truly moral person.
Never has Baldwin’s statement seemed more true than in the financial collapse of late 2008. In that dizzying two-month period, many of the most respected, powerful, and wealthy men on Wall Street were revealed to be greedy, self-serving, and rather shallow thieves. The transformation occurred almost literally overnight. On September 10, 2008, the hoary investment house Lehman Brothers announced a catastrophic loss—almost four billion dollars—the shock from which precipitated a general bear market. Over the next two weeks, the fallout from Lehman’s and other houses’ losses created a stock meltdown that almost destroyed the financial system of the United States.
Stan O’Neal
We all know the story. We’ve all seen numerous documentaries about it, and read many a liberal screed on the blogs of our choice. But Greg Farrell’s excellent book, Crash of the Titans: Greed, Hubris, the Fall of Merrill Lynch and the Near Collapse of Bank of America, is the first account that actually gave me a sense of how smart, generally decent men could behave so heinously. Farrell’s subject is the story of Merrill Lynch, the august brokerage firm that was one of the more notable casualties of the sub-prime mortgage debacle. Like so many other investment firms of the time, Merrill had wagered heavily on the now-infamous “Collateralized Debt Obligations”, or CDOs, which, as far as I can tell, were just huge digital baskets of mortgages lent to people all over the country. These so-called “financial instruments” turned out the be the greatest technical innovation since the Hindenburg.
Farrell managed to make the story compelling by focusing on the four principal actors: Stan O’Neal, the CEO of Merrill (and the most obvious “villain” of the piece); Greg Fleming, co-president of Merrill and its resident Cassandra; John Thain, the Über-CEO who took over Merrill after O’Neal was fired; and Ken Lewis, the flinty CEO of Bank of America, who was suckered into buying Merrill right before its stock imploded. As the title suggests, Clash of the Titans, Farrell’s book is a tragedy of almost epic proportions. In his telling, all of the men are smart, tough, and even courageous. But three of them (Fleming being the exception) were laid low by a singular, unexpected character flaw. Not hubris, actually, nor even greed. Rather, as Farrell reveals, it was something more surprising…
John Thain
Thain is perhaps the most compelling and central of the players. It was he who inherited O’Neal’s massive pile of debt, and it was his, Thain’s, Herculean efforts that almost saved the firm. If the book aspires to Greek tragedy, then Thain is its Oedipus—strong, shrewd, and at times heroic. (When he was an executive at Goldman Sachs, it was his sang freud during the September 11 terror attacks that kept many panicked employees from fleeing into the streets and perhaps being caught in the collapse of the Twin Towers.) In general, Thain looked and acted every bit the model of the Great American Exec. As Farrell writes:
There was something else [about Thain], too, not quantifiable on a résumé…. He looked like he was right man for the job. Just over six feet tall, square-jawed and with his erect, athletic bearing, this was someone who could lead men and women into battle. This was general among soldiers.
Thain wore glasses, which seemed to magnify the bright hazel hue of his eyes. The also added to the Clark Kent-Superman aura that had attached to Thain during his successful turnaround of the New York Stock Exchange. A competitive wrestler at MIT, Thain earned a degree in electrical engineering from the school and was one of the few applicants accepted directly into Harvard Business School. With this gold-plated academic background, he was hired by Goldman Sachs.
Indeed, for the first part of 1998, Thain used his organization skills and brilliant talent for fund-raising to help the struggling Merrill find its bearings. The darker side of Thain, of course, was the man who lavishly renovated his office to the tune of two million dollars even as Merrill’s stock was still teetering on the verge of collapse (the final plunge came ten months later).
When it became clear that even Thain’s steady hand and salesmanship could not save the company, he and Fleming arranged to sell it to its long-time suitor, the Charlotte-based behemoth Bank of America. Herein comes the fourth—and arguably most tragic—of the players, Ken Lewis, BofA’s CEO and diametric opposite to Thain. Where Thain was Northern, well-bred, sophisticated, and confident, Lewis was Southern, working-class, humble, and insecure. Even so, Lewis commands a major presence in the tale, determined to purchase the ailing Merrill in order to out-do his legendary BofA predecessors, and also to alloy a bit of New York City shine to his giant Southern bank.
Though Thain and his circle dismissed BofA as “the Walmart of Banks,” he quickly overcame his distaste when the firm down the street, Lehman Brothers, went sudddenly pear-shaped, raising the strong possibility that Merrill Lynch might also cease to exist within the week. Somehow, Lewis and his team were unable to spot the massive number of toxic assets still on Merrill’s books at the time, and he bought the firm. It was a mistake that would lead to his own fall from power less than a year later.
The most revealing (and exasperating) moments in the tale come immediately after the BofA deal was completed. Almost immediately, BofA management began to realize that they had made a collossal blunder as the bad paper on Merrill books came to the surface. Even so, John Thain continued to pester BofA’s HR Director, Steele Alphin, to secure his (Thain’s) bonus. He originally sought pay-day in the 40 million dollar range, and this apparent disconnect with reality startled and shocked Alphin:
Alphin couldn’t understand it. He had met with and spoken to Thain dozens of times since the deal [to buy Merrill] was struck in September. In so many ways, Thain was a brilliant man. His understanding of the business was unparalleled. But he had some blind spots. Alphin knew Thain well enough to understand that the incessant conversations they had about money, about compensation, had nothing to do with greed. John Thain was not a greedy person. He was a dedicated family man who put his wife and kids before everything else. Alphin came to view Thain’s focus on money as symptomatic of Wall Street’s out-of-control bonus culture.
Taken in narrow terms, Thain was right to ask for a certain level of compensation. But nobody in New York seemed to understand the bigger picture. Alphin didn’t go to an Ivy League school, and he wasn’t even the top student at the school he did attend, but he understood a few things about Wall Street. The whole reason everything came crashing down in 2008 was twenty-five years of nonstop focus on bonus checks, on compensation. Why did Lehman Brothers go out of business? Because their people kept doing real estate deals long after the market had turned. It produced bigger bonuses for them. Why did AIG keep selling those foolhardy insurance policies on CDOs? Because it was easy money and let to bigger bonuses. Why did Merrill Lynch need to be saved in the first place? Because O’Neal let his guys run wild in the CDO market so the could all get bigger bonuses…. And even Thain, with all his degrees from Harvard and MIT, couldn’t see it. That’s what twenty-five years on Wall Street would do to a man.
And herein lies the great revelation of Farrell’s book, which Farrell himself seems to only touch upon tangentially. It wasn’t greed, or even arrogance (hubris) that caused the financial meltdown of 1998. It was vanity. Within a culture that measures a man’s character but the size of his last bonus check, even the most obscene behavior becomes acceptable, provided it keeps your numbers “looking good.” Remember that all of these figures involved—O’Neal, Thain, Dick Fuld of Lehmen Brothers, and so on—were already fabulously wealthy men when the CDO craze began. It’s not about the money. It’s about ego.
Ken Lewis
I was reminded of a blog post called Enough Already by the English writer George Monbiot. In this post, Monbiot relates how Prince Alwaleed of Saudi Arabia agonized over the discovery that Forbes magazine was going to lower his ranking in the list of the world’s richest men. As Monbiot writes:
In March Forbes magazine published an article about Prince Alwaleed, who, like other Saudi princes, doubtless owes his fortune to nothing but hard work and enterprise. According to one of the prince’s former employees, the Forbes global rich list “is how he wants the world to judge his success or his stature.”(4) The result is “a quarter-century of intermittent lobbying, cajoling and threatening when it comes to his net worth listing.” In 2006, the researcher responsible for calculating his wealth writes, “when Forbes estimated that the prince was actually worth $7 billion less than he said he was, he called me at home the day after the list was released, sounding nearly in tears. ‘What do you want?’ he pleaded, offering up his private banker in Switzerland. ‘Tell me what you need.’”
Never mind that he has his own 747, in which he sits on a throne during flights. Never mind that his “main palace” has 420 rooms. Never mind that he possesses his own private amusement park and zoo and, he claims, $700 million worth of jewels. Never mind that he’s the richest man in the Arab world, valued by Forbes at $20bn, and has watched his wealth increase by $2bn in the past year. None of this is enough. There is no place of arrival, no happy landing, even in a private jumbo jet. The politics of envy are never keener than among the very rich.
John Thain is no Saudi Prince, but he still has a lot answer for. For a smart man, he behaved terribly. His actions in saving Merrill Lynch from ruin were brilliant, but they ultimately revealed a stunning level of narcissism. More than anything, he dreaded losing face. He dreaded it even more than losing money.
It was exactly this secret animus lurking in the psyche of the American entrepreneur that deregulatory economists like Alan Greenspan unwitting unleashed. As Greenspan himself famously admitted, his theories behind deregulation had “a flaw.”
The “flaw” was human nature. The price was paid by us.
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