To change the subject: what should be done with JM and crew? JC weighs in on Quicken.com today:
Memo to Rubin and Greenspan:
Make a Lesson of Long Term
Capital. Now.
James J. Cramer
7:00:AM ET October 05, 1998
Memo to Federal Reserve Chairman Greenspan and Treasury Secretary Rubin:
Sometimes the gods of irony obscure things to the point where only Joyce or Shakespeare
would see them. Other times, things are as obvious as the letter Poe placed in front of his
detectives. And sometimes they are plain as the nose on your face.
This time, with the Long Term Capital/Long Term Credit debacles, it is the latter. The
gods even gave these ill-leveraged institutions the same name so you would not miss the point.
But you have. And because you have, we must all pay the price of a nastier global recession
than we would have had three months ago.
Fortunately, unless ego and pride coalesce to keep you from admitting mistakes, we still have a
chance to correct what has occurred in a fashion that would set the examples that need to be set,
and get rid of the worst moral hazard I have come across since I have been in this business. No
one would blame you for a quick bridging operation that allowed an orderly liquidation of the
ne'er-do-wells at Long Term Capital. The world will blame you if you let the rescue stand as it
does now.
Where does my moral indignation stem from? Is it from my pocket? Sure, everybody in the
hedge-fund business would have done better had these guys not been in business, but that's not
why I write. Is it because I had money in Long Term Capital or knew people who had been
wronged or crossed by them? Neither. I have all my money in my own nonleveraged fund and if
I met these guys, it would only have been during the dark days when I interviewed at Salomon
Brothers before coming to my senses to work for Goldman Sachs.
No, my indignation stems from what I see to be a colossal blunder by the Federal Reserve of
New York not to see what everyone on every fixed-income desk -- repos, govies and
mortgages -- in this country and in London, Frankfurt, Tokyo and Hong Kong sees: that you
cannot let John Meriwether and his gang of miscreants get away with working at Long Term
Capital for one more moment. They must be stripped of their power, their glory and their
money, right now, if there is to be any signal sent overseas about the way we deal with
leverage that far exceeds common sense and margin calls that far exceed the law.
Let's be Dickensian for a second. It is the worst of times over in Tokyo. Until August it was the
best of times in New York. Yet, what do you, Mr. Rubin, do in every public interview you give?
You chide the Japanese for not letting capitalism do its dirty work. You seem almost
exasperated at the slowness, the foot-dragging, the kid gloves that the monetary authorities are
using in the face of obvious crackpot lending and profligacy.
What is your plan, if I may sketch it out in a nutshell? We want a David Paul/Centrust
example set, where the Japanese Feds come in, seize Long Term Credit Bank on Saturday, and
reopen it with the name Sumitomo on the door Monday morning. We want all of the Long Term
Credit people thrown out of work, "consolidated," I guess we would say diplomatically, and we
want the guys who wrecked this bank punished. We want "capacity taken out," and bad loans
crunched so the economy can restart, as we restarted our economy in 1990 after the S&L
debacle. You want pain for them, they who have suffered pain for a decade. But for us, let the
rich have their wine cellars and their Irish golf courses. Let them eat soda bread and drink
Cabernet!
You, Mr. Secretary, have been on a high horse about this, being quite blunt and frank about
what needs to be done there. But how about here? How did we handle a similar leveraged debacle
that threatens our financial system? Did we close Meriwether & Co. and have it reopen as
Goldman Sachs & Co., run by Goldman's Dave Rogers, a man you and I know could unwind this
junk better than most? (What a change that would be, from the Dominion of Arrogance to the
Dominion of Diligence and Kindness, as anyone who has worked side-by-side with Rogers
knows to be the case, myself included.) Did we immediately stop all payments to the Long
Termers who brought our system to its knees? Heck no, we let them pay everybody. We even
debated helping out partners who had borrowed money to leverage returns. We let them keep
their fees and their hundreds of millions in capital.
Did we inflict pain on these jokers, stripping them of their now-ill-deserved Laureates? Did
we remember Meriwether's role in cornering the two-year, another case of capitalism gone
awry a few years back? Nah, my people tell me Meriwether's as arrogant and as cool as ever,
calling the shots even still. He's getting ready for a giant marketing drive for ^$^&$*&$&
sake! At least Milken had the sense to do the time and Boesky to vanish from the heavens and
Earth. Soon Meriwether will probably be searching the globe looking for fresh money. Good
luck, but then again O.J. got enough jurors who are still convinced someone else did it, so
anything is possible. This man may be a three-time winner!
What should happen? Strip them now. The representatives that you strong-armed in the
bailout have their arms around the portfolio now. We don't need anybody else up there save the
clerks who know where to send the proceeds. And move swiftly to find out the following: Did
these ne'er-do-wells, sensing disaster after Russia, make themselves too big to fail by making
wild bets on everything from Amoco (AN:NYSE) to Globalstar (GSTRF:Nasdaq)? Did they so
leverage every repo desk in the country so everybody was on the hook?
Did Merrill Lynch, which seems to have the most direct exposure in this country, or
anybody else know about how big the problems were in August and didn't inform the Fed? Did
ex-Fed Vice Chairman Mullins, who worked at Long Term Capital, know what was happening?
Last I looked it is the Fed's job to enforce margin rules. At least that's what we were taught at
Goldman. Why was the Fed not informed till mid-September, when the margin rules are stark
and clear? How about the auditors? Where were the auditors? Or the lawyers? The
government threw the book at the lawyers and accountants in the S&L scandals of the '80s. Now
they come out smiling, or at least in anonymity? What gives?
It is not too late to send a signal to the Japanese about how to deal with Long Term Credit. You
made mistakes that were reasonable considering the size of the toxic waste pool just 90
minutes from Wall Street. But it has been cordoned off. This Chernobyl has been cemented and
cleansed. Now let's do some rectifying.
As every fixed-income desk in this country pays the phenomenal price for this bailout, in the
form of dramatically less business and obviously no bonuses, whether they did a good job or
not, and every hedge fund gets tarred with the same incredible brush that was used to paint the
books at Long Term, at least we will have the satisfaction of knowing that our country does not
look kindly upon those who flout the rules and break the margin laws. (It is not enough to meet
margin calls. You are not supposed to have them to begin with and certainly not more than
three times. At least us hedge fund mortals play by those rules.) And we will have a leg to stand
on when we meet with Japan to show them how to clear up their mess, the mess that now
threatens to bring the world into a deflationary spiral that looks and feels just like the one that
brought us Adolf Hitler in its wake in the 1930s.
Start over. Do it right. Now. Before your legacy is tarnished by this miserable mistake made in
the height of panic and confusion. You will only be blamed if you don't. After years of the most
successful management of the U.S. economy since Hamilton, this would be a terrible way to
end your careers.
James J. Cramer is manager of a hedge fund and co-chairman of TheStreet.com. Under no
circumstances does the information in this column represent a recommendation to buy or sell
stocks. Cramer's writings provide insights into the dynamics of money management and are not
a solicitation for transactions. While he cannot provide investment advice or
recommendations, he invites you to comment on his column by sending a letter to
TheStreet.com at letters@thestreet.com. |
