Read Online The Devil's Casino by Vicky Ward - Free Book Online Page B
Authors: Vicky Ward
Tags: Non-Fiction, Business
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each quarter the leverage got taken down, to placate both the board and the rating agencies. (In fairness to Lehman, it was not the only bank that made money by raising leverage between quarters—all banks did it.)
Cohen suspected that LCPI had a secret cushion, but according to several senior LCPI executives, he was never told the precise size of what was known on the LCPI floor as “Dick’s reserve.”
The Lehman traders did their best to make sure Cohen and Robinson couldn’t tell what gambles they were making, and what enormous stakes were on the table. “Dick’s reserve” might as well been called “the daily fiction”—which, in fact, it was. A former managing director says it worked like this:
We called that kitty [kept on a piece of paper] “Dick’s reserve.”
A nice story, but neither Peter Cohen nor the rating agencies were fooled for long. Toward the end of each quarter, it was standard practice for rating agencies like Moody’s Investors Service and Standard & Poor’s to ask banks to write down their risk. Cohen told Fuld to get it done. Fuld went to Pettit, who managed the deleveraging. But on one memorable occasion the chain was broken and chaos ensued.
In 1987 Cohen told Fuld to take his leverage down. Dick passed on the news to Jim Vinci, Pettit’s staff officer.
Fuld said, “I made another deal with Peter Cohen, but I haven’t told anybody yet. We have to get the balance sheet (as in risk) lower than expected.” Fuld hadn’t told Pettit yet about the new agreement with Cohen, and yet Vinci went over to Jeff Vanderbeek, a friend at the trading desk, and said to the man who ran the repo book, a book of short-term loans, “Jeff, look—Dick’s just told me that you’re going to have to be a lot lower.”
Vanderbeek (now the owner of the New Jersey Devils), according to Vinci, was tired of getting picked on in the quarterly deleveraging issue. (“The repo book was always the place with the most elasticity,” says Vinci.) His bonuses were taking a hit because they no longer reflected his true performance.
Vanderbeek was furious. Fuld was negotiating with Cohen, seemingly to the detriment of his business and LCPI’s loans. He bolted from his desk and went to Pettit’s office. Vinci recalls, “I’ m watching from across the trading room. And there’s a lot of arms being waved, and a lot of screaming and yelling. Next thing I know, Pettit gets out of his chair, leaves his office, slams the door, and goes into Dick ‘s office. And now Pettit and Fuld are yelling and screaming at each other.
“Pettit leaves Fuld’s office, slams
that
door, walks back to his office, and goes back to work. I see Fuld coming for me across the trading floor, making a beeline. I have never been so belittled and berated in my entire life. He backs me into a corner and starts screaming expletives—’You little bleep! This is my fucking trading floor! I don’t know what the fuck you were thinking when you betrayed me!’ ”
Fuld felt that Vinci had broken the chain of command and had usurped Pettit’s role by telling Vanderbeek, albeit with the best of intentions.
“I was just doing the right thing, but Dick didn’t like getting yelled at by Pettit, who was just trying to protect the business. That’s why we were all loyal to Pettit. That’s why Vanderbeek didn’t go in to talk to Fuld. He went to talk to Pettit, because he knew Pettit always wanted to do the right thing for the business. Fuld just wanted to do what was politically correct for Peter Cohen and Shearson.
“Now the stupid thing about it then was that when we delevered, it was all window dressing. We just took off the least risky assets, which were the easiest to sell. We would make the books look like they were delevered.”
Once the quarter was over, the loans would go back onto the repo book. It was just like the cards coming on and off the wall at 9 Mill Lane a few years earlier.
----
LCPI must have really grated on the
Cohen suspected that LCPI had a secret cushion, but according to several senior LCPI executives, he was never told the precise size of what was known on the LCPI floor as “Dick’s reserve.”
The Lehman traders did their best to make sure Cohen and Robinson couldn’t tell what gambles they were making, and what enormous stakes were on the table. “Dick’s reserve” might as well been called “the daily fiction”—which, in fact, it was. A former managing director says it worked like this:
We called that kitty [kept on a piece of paper] “Dick’s reserve.”
A nice story, but neither Peter Cohen nor the rating agencies were fooled for long. Toward the end of each quarter, it was standard practice for rating agencies like Moody’s Investors Service and Standard & Poor’s to ask banks to write down their risk. Cohen told Fuld to get it done. Fuld went to Pettit, who managed the deleveraging. But on one memorable occasion the chain was broken and chaos ensued.
In 1987 Cohen told Fuld to take his leverage down. Dick passed on the news to Jim Vinci, Pettit’s staff officer.
Fuld said, “I made another deal with Peter Cohen, but I haven’t told anybody yet. We have to get the balance sheet (as in risk) lower than expected.” Fuld hadn’t told Pettit yet about the new agreement with Cohen, and yet Vinci went over to Jeff Vanderbeek, a friend at the trading desk, and said to the man who ran the repo book, a book of short-term loans, “Jeff, look—Dick’s just told me that you’re going to have to be a lot lower.”
Vanderbeek (now the owner of the New Jersey Devils), according to Vinci, was tired of getting picked on in the quarterly deleveraging issue. (“The repo book was always the place with the most elasticity,” says Vinci.) His bonuses were taking a hit because they no longer reflected his true performance.
Vanderbeek was furious. Fuld was negotiating with Cohen, seemingly to the detriment of his business and LCPI’s loans. He bolted from his desk and went to Pettit’s office. Vinci recalls, “I’ m watching from across the trading room. And there’s a lot of arms being waved, and a lot of screaming and yelling. Next thing I know, Pettit gets out of his chair, leaves his office, slams the door, and goes into Dick ‘s office. And now Pettit and Fuld are yelling and screaming at each other.
“Pettit leaves Fuld’s office, slams
that
door, walks back to his office, and goes back to work. I see Fuld coming for me across the trading floor, making a beeline. I have never been so belittled and berated in my entire life. He backs me into a corner and starts screaming expletives—’You little bleep! This is my fucking trading floor! I don’t know what the fuck you were thinking when you betrayed me!’ ”
Fuld felt that Vinci had broken the chain of command and had usurped Pettit’s role by telling Vanderbeek, albeit with the best of intentions.
“I was just doing the right thing, but Dick didn’t like getting yelled at by Pettit, who was just trying to protect the business. That’s why we were all loyal to Pettit. That’s why Vanderbeek didn’t go in to talk to Fuld. He went to talk to Pettit, because he knew Pettit always wanted to do the right thing for the business. Fuld just wanted to do what was politically correct for Peter Cohen and Shearson.
“Now the stupid thing about it then was that when we delevered, it was all window dressing. We just took off the least risky assets, which were the easiest to sell. We would make the books look like they were delevered.”
Once the quarter was over, the loans would go back onto the repo book. It was just like the cards coming on and off the wall at 9 Mill Lane a few years earlier.
----
LCPI must have really grated on the
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