Colossal Failure Of Common Sense Part 1

Colossal Failure of common Sense.

The inside story of the collapse of Lehman Brot. McDonald & Patrick Robinson.

Prologue.

I STILL LIVE STILL LIVE just a few city blocks away from the old Lehman Brothers headquarters at 745 Seventh Avenue-six blocks, and about ten thousand years. I still walk past it two or three times a week, and each time I try to look forward, south toward Wall Street. And I always resolve to keep walking, glancing neither left nor right, locking out the memories. But I always stop. just a few city blocks away from the old Lehman Brothers headquarters at 745 Seventh Avenue-six blocks, and about ten thousand years. I still walk past it two or three times a week, and each time I try to look forward, south toward Wall Street. And I always resolve to keep walking, glancing neither left nor right, locking out the memories. But I always stop.

And I see again the light blue livery of Barclays Capital, which represents-for me, at least-the flag of an impostor, a pale subst.i.tute for the swashbuckling banner that for 158 years was slashed above the entrance to the greatest merchant bank Wall Street ever knew: Lehman Brothers.

It was only the fourth largest. But its traditions were those of a banking warrior-the brilliant finance house that had backed, encouraged, and made possible the retail giants Gimbel Brothers, F. W Woolworth, and Macy's, and the airlines American, National, TWA, and Pan American. They raised the capital for Campbell Soup Company, the Jewel Tea Company, B. F. Goodrich. And they 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.

I suppose, in a sense, I had seen only its demise, the four-year death rattle of twenty-first-century finance, which ended on September 15, 2008. Yet in my mind, I remember the great days. And as I come to a halt outside the building, I know too that in the next few moments I will be engulfed by sadness. But I always stop.

And I always stare up at the third floor, where once I worked as a trader on one of the toughest trading floors on earth. And then I find myself counting all the way up to thirty-one, the floor where it all went so catastrophically wrong, the floor that housed the royal court of King Richard. That's Richard S. Fuld, chairman and CEO.

Swamped by nostalgia, edged as we all are by a lingering anger, and still plagued by unanswerable questions, I stand and stare upward, sorrowful beyond reason, and trapped by the twin words of those possessed of flawless hindsight: if only if only.

Sometimes I lie awake at night trying to place all the if-onlys in some kind of order. Sometimes the order changes, and sometimes there is a new leader, one single aspect of the Lehman collapse that stands out above all others. But it's never clear. Except when I stand right here and look up at the great gla.s.s fortress which once housed Lehman, and focus on that thirty-first floor. Then it's clear. Boy is it ever clear. And the phrase if only if only slams into my brain. slams into my brain.

If only they had listened-d.i.c.k Fuld and his president, Joe Gregory. Three times they were hit with the irredeemable logic of three of the cleverest financial brains on Wall Street-those of Mike Gelband, our global head of fixed income, Alex Kirk, global head of distressed trading research and sales, and Larry McCarthy, head of distressed-bond trading.

Each and every one of them laid it out, from way back in 2005, that the real estate market was living on borrowed time and that Lehman Brothers was headed directly for the biggest subprime iceberg ever seen, and with the wrong men on the bridge. d.i.c.k and Joe turned their backs all three times. It was probably the worst triple since St. Peter denied Christ.

Beyond that, there were six more if-onlys, each one as cringe-makingly awful as the last.

If only Chairman Fuld had kept his ear close to the ground on the inner workings of his firm-both its triumphs and its mistakes. If he had listened to his generals, met people who formed the heart and soul of Lehman Brothers, the catastrophe might have been avoided. But instead of this, he secluded himself in his palatial offices up there on the thirty-first floor, remote from the action, dreaming only of accelerating growth, nursing ambitions far removed from reality.

If only the secret coup against Fuld and Gregory had taken place months before that clandestine meeting in June 2008. If the eleven managing directors who sat in ostensibly treasonous but ultimately loyal comradeship that night had acted sooner and removed the Lehman leaders, they might have steadied the ship, changing its course.

If only the reign of terror that drove out the most brilliant of Lehman's traders and risk takers had been halted earlier, perhaps in the name of common sense. The top managers might have marshaled their forces immediately when they saw giants such as Mike Gelband being ignored.

If only d.i.c.k Fuld had kept his anger, resentment, and rudeness under control. Especially at that private dinner in the spring of 2008 with Hank Paulson, secretary of the United States Treasury. That was when Fuld's years of smoldering envy of Goldman Sachs came cascading to the surface and caused Paulson to leave furious that the Lehman boss had disrespected the office he held. Perhaps that was the moment Hank decided he could not bring himself to bail out the bank controlled by Richard S. Fuld.

If only President George W. Bush had taken the final, desperate call from Fuld's office, a call made by his own cousin, George Walker IV, in the night hours before the bank filed for Chapter 11 bankruptcy. It might have made a difference.

If only ... if only. Those two words haunt my dreams. I go back to the fall of Lehman, and what might have made things different. For most people, victims or not of this worldwide collapse of the financial markets, it will be, in time, just water over the dam. But it will never be that for me, and my long background as a trader and researcher has prompted me many times to burrow down further to the bedrock, the cause of the crash of 2008. I refer to the repeal of the Gla.s.s-Steagall Act in 1999.

If only President Clinton had never signed the bill repealing Gla.s.s-Steagall. Personally, I never thought he much wanted to sign it, but to understand the ramifications it is necessary to delve deeper, and before I begin my story, I will present you with some critical background information, without which your grasp might be incomplete. It's a ten-minute meadow of wisdom and hindsight, the sort of thing I tend to specialize in.

The story begins in the heady, formative years of the Clinton presidency on a rose-colored quest to change the world, to help the poor, and ended in the poisonous heartland of world financial disaster.

Roberta Achtenberg, the daughter of a Russian-born owner of a Los Angeles neighborhood grocery store, was plucked by President Clinton from relative obscurity in 1993 and elevated to the position of a.s.sistant secretary of the Department of Housing and Urban Development. Roberta and Bill were united in their desire to increase home ownership in poor and minority communities.

And despite a barrage of objections led by Senator Jesse Helms, who referred to Achtenberg as that "d.a.m.n lesbian," the lady took up her appointment in the new administration, citing innate racism as one of the main reasons why banks were reluctant to lend to those without funds.

In the ensuing couple of years, Roberta Achtenberg harnessed all of the formidable energy on the ma.s.sed ranks of United States bankers, sometimes threatening, sometimes berating, sometimes bullying-anything to persuade the banks to provide mortgages to people who might not have been up to the challenge of coping with up-front down payments and regular monthly payments.

Between 1993 and 1999, more than two million such clients became new homeowners. In her two-year tenure as a.s.sistant secretary, she set up a national grid of offices staffed by attorneys and investigators. Their princ.i.p.al aim was to enforce the laws against the banks, the laws that dealt with discrimination. Some of the fines leveled at banks ran into the millions, to drive home Achtenberg's avowed intent to utilize the law to change the ethos of providing mortgage money in the United States of America.

Banks were compelled to jump into line, and soon they were making thousands of loans without any cash-down deposits whatsoever, an unprecedented situation. Mortgage officers inside the banks were forced to bend or break their own rules in order to achieve a good Community Reinvestment Act rating, which would please the administration by demonstrating generosity to underprivileged borrowers even if they might default. Easy mortgages were the invention of Bill Clinton's Democrats.

However, there was, in the mid- to late 1990s, one enormous advantage: amid general prosperity, the housing market was strong and prices were rising steadily. At that point in time, mortgage defaults were relatively few in number and the securitization of mortgages, which had such disastrous consequences during the financial crisis that began in 2007, barely existed.

Nonetheless, there were many beady-eyed financiers who looked askance at this new morality and privately yearned for the days when bank policies were strictly conservative, when credit was flatly denied to anyone without the proven ability to repay.

And at the center of this seething disquiet, somewhere between the persuasive silken-tongued members of the banking lobby and the missionary zeal of Roberta Achtenberg, stood William J. Clinton, whose heart, not for the first time, may have been ruling his head.

He understood full well the goodwill he had engendered in the new home-owning black and Hispanic communities. But he could not fail to heed the very senior voices of warning that whispered, There may be trouble ahead There may be trouble ahead.

President Clinton wanted to stay focused with the concerns of the bankers, many of whom were seriously upset by Achtenberg's pressure to provide shaky mortgages. And right before the president's eyes there was a related situation, one that had the deepest possible roots in the American financial community.

This was the fabled Gla.s.s-Steagall Act of 1933, the postWall Street crash legislation that prevented commercial banks from merging with investment banks, thus eliminating the opportunity for the high-rolling investment guys to get their hands on limitless supplies of depositors' money. Gla.s.s-Steagall was nothing short of a barrier, and it stayed in place for more than sixty years, but the major U.S. banks wanted it abolished. They'd tried but failed in 1988. It would take another four years for this Depression-era legislation to come once more under attack.

President Clinton understood the ramifications, and he was wary of the reform, wary of seeming to be allied with the power brokers of the biggest banks in the country. He understood the complexities of the Gla.s.s-Steagall Act, its origins, and its purposes-princ.i.p.ally to prevent some diabolical investment house from plunging in big on a corporation like Enron and going down with a zillion dollars of small depositors' cash. No part of that did President Bill need.

On one hand was the belief of the main U.S. clearing banks that such mergers would strengthen the whole financial industry by increasing opportunities for hefty profits. But there were many people running small banks who were fearful that a repeal of Gla.s.s-Steagall would ultimately lead to large conglomerates crushing the life out of the minnows.

President Clinton always kept a weather eye on history, and he was aware the commercial banks, with their overenthusiastic investments in the stock market, had essentially taken the rap for the crash of 1929. They were accused of crossing a forbidden line, of buying stock in corporations for resale to the public. It had been too risky, and the pursuit of huge profits had clouded their judgment.

The man who had stood firmly in the path of the gathering storm of the 1930s was Virginia senator Carter Gla.s.s, a former treasury secretary and the founder of the U.S. Federal Reserve System. The somewhat stern Democratic newspaper proprietor was determined that the commercial banks and the investment banks should be kept forever apart.

He was supported by the chairman of the House Banking and Currency Committee, Alabama congressman Henry Bascom Steagall, and it was their rigid legal barricade that did much to solve Wall Street's greatest-ever crisis. The biggest banks were thenceforth prevented from speculating heavily in the stock markets. But even then, a lot of people thought it was a harsh and restrictive law.

With President Clinton in office for only three years, the major banks once more marshaled their forces to try for a third time to repeal Gla.s.s-Steagall, and once more it all came to nothing, with the nation's small banks fighting tooth and nail to hold back a system they thought might engulf them. But in 1996 they failed once more.

In the early spring of 1998, however, a Wall Street detonator exploded, sending a sharp signal that the market was willing to go it alone despite the politicians. On April 6 Citicorp announced a merger with Travelers Insurance, a large corporation that owned and controlled the investment bank Smith Barney. The merger would create a vast conglomerate involved with banking, insurance, and securities, plainly in defiance of Gla.s.s-Steagall.

The House scrambled to put a reform bill together, but the issue died in the Senate after it became clear that President Clinton had many concerns and was almost certain to veto it. The $70 billion merger between Citicorp and Travelers went right ahead regardless. The result was a banking giant, the largest financial conglomerate in the world, and it was empowered to sell securities, take deposits, make loans, underwrite stocks, sell insurance, and operate an enormous variety of financial activities, all under one name: Citigroup.

The deal was obviously illegal, but Citigroup had five years to get the law changed, and they had very deep pockets. Senators harrumphed, and the president, concerned for the nation's smaller banks, worried.

However, the most powerful banking lobbies in the country wanted Gla.s.s-Steagall repealed, and they bombarded politicians with millions of dollars' worth of contributions. They cajoled and pressured Congress to end this old-fashioned Depression-era law. Inevitably they won. In November 1999, the necessary bills were pa.s.sed 5444 in the Senate and 34386 in the House of Representatives. In the ensuing days the final bipartisan bill sailed through the Senate, 908 with one abstention, and the House, 36257 with fifteen abstentions. Those margins made it vetoproof. I remember the day well. All my life my dad had been telling me that history inevitably repeats itself. And here I was listening to a group of guys telling me it was all different now, that everything was so much more sophisticated, "doorstep of the twenty-first century" and all that, so much more advanced than 1933.

Oh, yeah? Well, I never bought it. It's never different. I knew that Gla.s.s-Steagall had been put in place very deliberately to protect customer bank deposits and prevent any crises from becoming interconnected and forming a house of cards or a row of dominoes. Carter Gla.s.s's bill had successfully kept the dominoes apart for more than half a century after his death.

And now that was all about to end. They were moving the pieces, pressing one against the other. I remember my concern as I watched the television news on November 12, 1999. The action on the screen was flying in the face of everything my dad had told me. I was watching President Clinton step up, possibly against his better judgment, and sign into law the brand-new Financial Services Modernization Act (also known as Gramm-Leach-Bliley), repealing Gla.s.s-Steagall. In less than a decade, this act would be directly responsible for bringing the entire world to the brink of financial ruin. Especially mine.

1.

A Rocky Road to Wall Street.

Right here, in a haze of tobacco smoke and cheap hamburger fumes, I was on the skid row of finance ... places like this specialize in the walking dead of failing corporations.

AT THE AGE of ten, I resided in some kind of a marital no-man's-land, a beautiful but loveless gabled house in the leafy little township of Bolton, Ma.s.sachusetts, some twenty miles west of downtown Boston. My father, Lawrence G. McDonald, had accepted the end of his marriage and had left my stunning fashion-model mother to bring up their five children all on her own. I was the oldest. of ten, I resided in some kind of a marital no-man's-land, a beautiful but loveless gabled house in the leafy little township of Bolton, Ma.s.sachusetts, some twenty miles west of downtown Boston. My father, Lawrence G. McDonald, had accepted the end of his marriage and had left my stunning fashion-model mother to bring up their five children all on her own. I was the oldest.

The general drift of the breakup was rooted in my dad's hard-driving business career. Owner and chief executive of a chemical engineering company, he might have stepped straight out of a suburban c.o.c.ktail party staged on the set of The Graduate: The Graduate: "Plastics, son. That's the future." "Plastics, son. That's the future."

And I guess in a way it was the future. At least it was his future, because plastics made him a stack of money, enough to start his own brokerage firm, and it only took him about twenty-nine hours a day, seven days a week, to do it. He was obsessed with business.

So far as my mom was concerned, that was the upside. The downside was his devotion to the game of golf, which took care of his entire quota of spare time. For all of my formative years he played to scratch or better. As the club champion of Woods Hole Golf Club, down on the sh.o.r.es of Nantucket Sound, he had a swing that was pure poetry, relaxed, precise, and elegant, the clubhead describing a perfect arc through the soft sea air as it approached the ball. Also, he could hit the son of a b.i.t.c.h a country mile.

Mom never really saw him, since she never landed a job as a greenskeeper. And he saw her princ.i.p.ally in magazines and on giant billboards around Boston, where dozens of images showed her modeling various high-fashion accessories.

When I referred to the marital home being loveless, I was not quite accurate. There was a burgeoning love in that house, but it did not involve Dad. He'd moved out, and many months later, a new suitor for my mother appeared on the horizon. Years later they were married, but even at my young age I realized he must have been some kind of latter-day saint, taking on this very beautiful lady with the staggering enc.u.mbrance of five kids and a kind of rogue husband prowling around the outskirts of her life, keeping an iron grasp on every nickel of her finances.

The name of the new man, who would one day become my stepfather, was Ed O'Brien. He was an extremely eminent lawyer and a grandson of a former governor of New Hampshire. Ed was a very cla.s.sy guy, and he adored Mom and helped her in every way. He was not so big and tough as Dad, who had a touch of John Wayne about him, a kind of western swagger and a suggestion of unmistakable att.i.tude, which often goes with entirely self-made men.

Anyway, right now I want to get to the point. Remember, Dad did not live with us anymore, and Ed occasionally stayed the night. Well, on this particular morning I was standing in the living room staring out of the window at Ed's brand-new Mercedes-Benz convertible, a $100,000 car even way back then in the late seventies. Suddenly I saw a car pull up outside the front gates.

Into the expansive front yard strode Lawrence G. McDonald, wielding what looked to me like a seven-iron. He came striding up to Ed's automobile and took an easy backswing, left arm straight, and completely obliterated the windshield in a shower of splintered gla.s.s. The clubhead struck right above the wipers, a little low. I thought Dad might have raised his head just a tad on impact.

Never breaking stride, he walked resolutely to the front of the car, took aim, and smashed the right-side headlight. Moving left, he ripped the club back fast. I thought I detected a slightly tighter swing, hands a little farther down the club. Anyhow, he did precisely the same to the headlight on the left.

By this time there was gla.s.s all over the place, and still I just stood there, gaping, wide-eyed. I watched Dad stride around to the back of the car, and for a moment I thought he was planning to survey his handiwork. You know, like standing back after you've dropped a ten-footer.

I was wrong. Once more he took his stance, swung the club back, and fired it straight into the taillight on the left side, shooting red gla.s.s all over the lot. Then he moved two paces right and with precisely the same shot, slightly wristy with a lot of backspin, punched out the other one. If either taillight had been a golf ball, it would have flown high and dug in on landing, probably pin high. There was a lot of precision about Dad's play that morning.

I mention this because the incident is branded into my memory. It took me ten years to ask him about it, and he replied as only he, or perhaps John Wayne, could-real slow. "It wasn't a seven-iron, son. Didn't need any more than a pitching wedge."

It would be another thirty years before I would witness at very close quarters another such act of wanton, willful destruction. And that took place on the trading floor of a Wall Street investment bank.

I begin my story with that brief insight into the character of my father because he had, even after the divorce, a profound influence on me. By nature he was a bear. That's not a straightforward grizzly, seeing world disaster in every downward swing of the Dow. Dad was a perma-bear, seeing potential catastrophe every hour from the opening bell to the close of business. begin my story with that brief insight into the character of my father because he had, even after the divorce, a profound influence on me. By nature he was a bear. That's not a straightforward grizzly, seeing world disaster in every downward swing of the Dow. Dad was a perma-bear, seeing potential catastrophe every hour from the opening bell to the close of business.

For some investors the floor of the New York Stock Exchange is the last refuge of the Prince of Darkness, a place where demons of ill fortune lurked behind every flickering screen. Dad was not that bad, because he was an instinctively shrewd investor, often a wizard at stock selection, spotting the corporation that was about to tank. But his att.i.tude almost caused him to miss the two greatest bull market rallies in history, because to Dad, cash was king, and he might need to prepare for the end of the world. He was the ultimate value investor. In outlook he was a cautious, somewhat skeptical pessimist. In personality he made Howard Hughes look like an extrovert.

In his own business Dad was extremely successful. He earned his bachelor of science degree in chemical engineering at Notre Dame, where he was number one on the golf team. Then he went to work as a salesman at General Electric's plastics division, the Google and Microsoft of its day. He ended up a multimillionaire, owning his own plastics manufacturing plant in Ma.s.sachusetts.

When he told me to beware, that history, without fail, repeats itself, he was not thinking of the sunlit uplands of triumph and achievement. He had in mind events like the eruption of Krakatoa, World War II, the fall of the Roman Empire, the collapse of the Soviet Union, and above all the crash of 1929. Always the crash.

With a worldview like his, it was scarcely surprising that the peace and quiet of the golf course was his princ.i.p.al escape. And he was one h.e.l.l of a player. He held the course record of 65 at Woods Hole for more than twenty years, and on one near-legendary occasion he nailed the three par-fives in birdie, eagle, and double eagle. He played the great golf courses in serious compet.i.tion, once losing on the last green at Winged Foot Country Club to one of the best Ma.s.sachusetts amateurs of all time, Joe Keller-and even Joe had to sink a forty-footer to beat him.

Dad had already set me on the road to becoming a scratch golfer when my world caved in. He and Mom split, leaving Mom with us kids in the big house without the means to support either it or us. Ed had a law practice in Worcester, and to that tough Ma.s.sachusetts city we upped and transplanted ourselves, mostly because Mom needed a friend, just someone to be there, in the absence of Dad and his weighty bank balance.

Bolton, where we had always lived, was a little gem of a town, an upper-middle-cla.s.s haven set in green rolling country with the families of well-to-do business guys in residence. From there, my mom, now in desperate financial straits, my three brothers and one sister, and I ended up in a housing project in the worst part of a distinctly suspect city-the absurdly named Lincoln Village Apartments, gateway to nowhere. I was too young to go into culture shock, but h.e.l.l, even I realized that somehow the roof had fallen in on my life.

With five children to care for, my mom, the hugely admired Debbie Towle, could not possibly go back to work. She was still, by all accounts, spectacularly beautiful, and would once again have been in demand as a fashion model, but that was impossible. We were not so much hard-up as bereft.

The apartment was in a nightmarish neighborhood, run-down and dirty, with a slightly sinister atmosphere, as if at any moment some shocking crime might be committed. Mom was always in tears. I could tell she hated the place, hated living at the wrong end of this urban version of Death Valley.

As you can imagine, the people were an absolute treat, many of them shifty-eyed, leering, unkempt, and full of resentment: some really shaky kids, white trash, drug dealers. There were also gangs of trainee criminals staging shoplifting raids and nighttime burglaries all over the city. They kept trying to recruit me, but I knew enough to stay well out of it. I refused to join them, and one night their leader came to the door of our apartment, dragged me out onto the front steps, and punched me right in the face.

Mom nearly had a heart attack, and Ed O'Brien came to the rescue, trying to help with money. Dad? He pretty much disappeared. In my first eighteen months in Worcester I went to three different schools, each one a bigger disaster than the last. This was life as I had never imagined it. Academically I was slipping behind; mostly I was afraid to go outside the door because of the sheer danger of the place. It's hard to explain every vestige of the change in our lives. But the difference was total. There were no more trips to the Cape, no more golf, no more elegant dinners at our home. We were prisoners of the cells of Lincoln Village.

My dad did pull one masterstroke on my behalf. He arranged for me to report to tranquil, green Worcester Golf Club, where I spent time caddying. I was too young to understand I was hauling a huge bag around for one of the immortals-Bob Cousy the six-foot-one point guard for the great Celtics teams of the fifties and sixties, and an excellent golfer. The sweet-swinging point guard called me "kid;" I called him "Mr. Bob."

But those trips around the course were only a tiny respite from my real world. I earned $100 caddying, all of which I gave to my mom. As a family, we were sinking into depression. I remember it all so well-no laughter, no joy, and the unmistakable feeling that we never should have been anywhere near Lincoln Village. Finally, the entire family got together, both Mom's people and Dad's, and decided, "We have to get those kids the h.e.l.l out of there."

So one bright morning in the spring of 1979 we all moved to Cape Cod, where Dad had always had a home. We went back into the sunlight, back to life as we had once known it in Bolton, away from the glum recesses of Worcester.

When I began at my high school in Falmouth, I was at a huge disadvantage, way behind in my work in all subjects. I fought an academic war to become a C student, struggling to catch up. During my junior and senior years, when it was time to make a decision about college, I most definitely was not regarded as a candidate for a top university. So you can imagine my surprise one day when Dad showed up and told me he was taking me out to his alma mater in South Bend, Indiana: Notre Dame, the hallowed campus of the Fighting Irish, which also houses one of the greatest libraries in North America under the watchful eye of the Touchdown Jesus, set in ma.s.sive mosaic glory on the eastern wall of Memorial Library.

He took me to all the sacred places: the Grotto, the library, the Rockne Memorial, the Sacred Heart Church, the palatial South Dining Hall, and of course the stadium. I thought then, as I think now, it must be one of the most fabulous university campuses on earth.

Plaintively, I asked my dad, "But why now? Why bring me here so late? I obviously could never make it, not after the years in Worcester. If you wanted me to come here, I should have stayed at my school in Bolton."

He was a man of few words at the best of times, and he greeted my comments with even fewer words than usual. There was no explanation of his intentions. And we traveled home to the Cape with hardly any further discussion about my lack of academic future. I think Dad knew I was doing everything I could to regain lost ground at school, but there was no possibility whatsoever that I could ever aspire to a place like Notre Dame.

When we reached the house, Dad took me by the shoulders, turned me around to face him, and said in that rich baritone voice of his, "Son, remember this-it's not where you start, it's where you finish." Spoken, I have often thought, like a true hard-driving son of a mailman-and for that matter, a bit like John Wayne. A student's gotta do what a student's gotta do.

What I had to do was scramble my way into a university of some description. Any description. In the end I made it to the University of Ma.s.sachusetts at Dartmouth, a small seaside town that sits in the southernmost corner of the state, where the Atlantic washes through the trailing headland of Cuttyhunk, the last of the Elizabeth Islands.

Before I reported to UMa.s.s for my economics courses, I spent a summer working in Falmouth pumping gas. I swiftly developed a deadly rivalry with the gas station next door, which was manned by one of my local buddies, Larry McCarthy.

He was a whip-smart kid, built like a jockey, 120 pounds wet through, and about five foot five. He got a pretty hard time at school partly because he was so small and partly because he was frequently seen reading the Wall Street Journal Wall Street Journal when he was in seventh grade. But he was a feisty little devil, and he fought like a tiger, ever ready to swing a roundhouse right at any perceived slight. Just how feisty he was would be demonstrated to me in Technicolor when we both had our backs to the wall at Lehman Brothers twenty years later. when he was in seventh grade. But he was a feisty little devil, and he fought like a tiger, ever ready to swing a roundhouse right at any perceived slight. Just how feisty he was would be demonstrated to me in Technicolor when we both had our backs to the wall at Lehman Brothers twenty years later.

His dad was a bank president, and he sent his son to the expensive Sacred Heart School. Right from the get-go Larry was being groomed for a Wall Street career. He sailed into Providence College to study economics and business administration.

Even as a teenager, I should have known he'd go far, because he was h.e.l.l as a business rival. One week things were a little quiet, so I cut a cent off the gas price at my station, guessing the notoriously parsimonious New Englanders would go for that with enthusiasm. I was right, and for a couple of days I was doing real well. Then it all went south and I was back in the doldrums.

It did not take me long to find out why. Across the street Larry had slashed his price by more than two cents and mopped up almost all of the town's regular business at the pumps. The summer drew to a close leaving us still best friends, but with the business pecking order established.

As a freshman, I lived in Falmouth with my dad and made the hour journey to school each day. That had the advantage of being free except for gas, and the disadvantage of my being watched beadily by a very advanced financier as I toiled my way through the demanding curriculum. Dad was making a big effort, seeming to want to make amends for things in the past, and we got closer. I guess I started to like him more, as I have done ever since.

By the time I moved into junior year, I had become a top student, straight As, while majoring in economics, with probably the best grades in my cla.s.s. Dad regarded all this with a watchful gunslinger's gaze. Never said anything. Probably figured there wasn't any need. But I bet he secretly knew I could have made Notre Dame if I'd had a shot.

When we talked, it was usually about business. Sometimes about our other shared interest, golf, but mostly Dad let his short irons do the talking. Although I do remember he once told me he'd dropped a sixty-footer on the fifth green of the exclusive International Club out in Bolton. This was reputed to be the largest green in the game, a 120-yard-wide upside-down apple pie generally regarded as impossible from all angles. Dad, who was the best player in the entire membership, recounted that putt with a paucity of words. But he told it like it was, straight and true, the upholding of good over evil, like a scene from the back lot of High Noon High Noon.

Those were the terms in which he saw the world, and he looked at the financial markets with a mixture of suspicion and cynicism, watching, waiting for the c.h.i.n.k in the armor of the mighty that would allow him to cash in. Like all bears, he was intuitively drawn to the art form of shorting stocks-acquiring shares in a corporation in antic.i.p.ation of a downward spiral. In the broadest possible terms, if one thousand shares are acquired at $100 each and the price then falls to $50 per share, the bear tucks away a succulent $50,000 profit. It's a bit complicated, because the original $100 shares are not actually purchased by the bear. They're borrowed through a broker and immediately sold. All the old bruin needs to do is buy them back at the cheaper price and pocket the difference. And so, while all around him the stockholders are licking their wounds, losing their cars, selling their houses, and watching their portfolios blow up, men like my father bask in the sheer scale of the disaster, counting their cash and staring balefully around for the next potential casualty.