Countdown to the Global Financial Crisis: A Story of Power and Greed PDF
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Countdown to the Global Financial Crisis Countdown to the Global Financial Crisis : A Story of Power and Greed By Paul Mazzola Countdown to the Global Financial Crisis: A Story of Power and Greed By Paul Mazzola Edited by Dr Celeste Rossetto This book first published 2022 Cambridge Scholars Publishing Lady Stephenson Library, Newcastle upon Tyne, NE6 2PA, UK British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Copyright © 2022 by Paul Mazzola All rights for this book reserved. No part of this book may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the copyright owner. ISBN (10): 1-5275-8281-7 ISBN (13): 978-1-5275-8281-1 This book is dedicated to my father, Rosario, from whom I drew much encouragement and inspiration and who always provided well-timed and sage advice. There are never wanting some persons of violent and undertaking natures, who, for they may have power and business, will take it at any cost. (Francis Bacon) CONTENTS Table of Figures .......................................................................................... xi Foreword ................................................................................................. xvii By Chris Whitehead Acknowledgements ................................................................................... xx Chapter 1 .................................................................................................... 1 Introduction PART ONE: HISTORY OF US INVESTMENT BANKING Chapter 2 .................................................................................................. 14 War to War (1776-1815) American War of Independence (1775-1783) .................................... 16 The War of 1812 ................................................................................. 20 Chapter 3 .................................................................................................. 37 Banking on Rail American Railroad Expansion (1830-1850) ......................................... 37 The Role of Bonds in Funding Railroads .............................................. 41 Needy Americans ................................................................................ 45 Chapter 4 .................................................................................................. 48 Bankers and the Civil War American Civil War (1861-1865) ......................................................... 56 Formal and Real Power ....................................................................... 70 Chapter 5 .................................................................................................. 73 The Pendulum Swings “Our Crowd” and the “Yankee Houses” .............................................. 73 The Panic of 1907 ................................................................................ 75 The Pujo Committee of 1913 .............................................................. 81 viii Contents Post-Depression prudential legislation ............................................... 84 Post-World War II Transformation ..................................................... 88 Transformation from Partnership to Corporation .............................. 91 The Capital Problem for Risk Taking ................................................... 95 Regulation – Post WWII .................................................................... 100 Chapter 6 ................................................................................................ 104 The GFC Background to the GFC ..................................................................... 104 Insufficient Capital Regulation .......................................................... 111 Capital Regulation ............................................................................. 113 Neo-Liberal Approach to Financial Market Legislation ..................... 119 PART TWO: THE LEHMAN STORY Chapter 7 ................................................................................................ 126 The Pre-Fuld Era (1850-1994) The Founders .................................................................................... 126 Normative Influence of the Jewish Connection (Our Crowd) ........... 132 Dispositional Power from Board Directorships ................................. 134 Profiting from the American Civil War .............................................. 134 Transformation to the Business of Investment Banking – an Exercise of Power ................................................................... 136 Retention of Power through Family Control ..................................... 137 Bobbie Lehman: Head of Lehman Brothers Partnership 1925-1969 .. 139 Peter Petersen: Chief Executive Officer 1973-1983 .......................... 141 Lewis Glucksman Chief Executive Officer 1983-1984 ....................... 144 The American Express Takeover ....................................................... 147 The Sticky Web of Power and Culture .............................................. 150 Chapter 8 ................................................................................................ 153 The Post-Fuld Era (1994-2008) Richard Fuld ...................................................................................... 153 Fuld’s New Team ............................................................................... 156 Countdown to the Global Financial Crisis: A Story of Power and Greed ix Chapter 9 ................................................................................................ 170 Hubris: The Terminal Disease The CDO Rating Route....................................................................... 171 Warehousing and the Process of Securitisation ............................... 172 Resisting Warnings ............................................................................ 181 Selling and Shorting Lehman Brothers shares as Mimetic Isomorphism................................................................................ 183 Talking Heads .................................................................................... 184 Fuld’s Response to Market Disquiet ................................................. 187 Bear Stearns – Failure of the Hedge Funds and then the Firm ......... 195 Fannie Mae and Freddie Mac’s Rescue............................................. 197 Lehman Brothers’ Last Weekend ...................................................... 198 The Shifting Nature of Power and Institutional Influence ................ 203 Economic Climate ............................................................................. 206 Political Atmosphere ......................................................................... 210 The Wash-up ..................................................................................... 213 Chapter 10 .............................................................................................. 215 Models and Numbers Lehman Brothers’ Business Model ................................................... 216 Similarities in the Peer Group’s Business Model .............................. 221 Lehman Brothers’ Financial Structure .............................................. 228 Risky Business ................................................................................... 237 Follow the Leader: Financial Structure ............................................. 241 PART THREE: CONNECTIONS & INFLUENCE Chapter 11 .............................................................................................. 248 Bedfellows The US Financial Network ................................................................. 250 Political Contributions ....................................................................... 254 Lobbying ............................................................................................ 267 Political Contributions and Lobbying as Coercive Pressure .............. 282 Revolving Door .................................................................................. 284 Empirical Evidence that Connections Count ..................................... 292 Knowledge Asymmetry ..................................................................... 294 Credit Rating Agencies ...................................................................... 296 Institutional Influence over FASB ...................................................... 304
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