Wednesday, April 15, 2015
Book Review 346: Serpent on the Rock
For a time, and despite a weird, poisonous managerial culture, Bache was the largest American stock brokerage, but that did not earn it prestige, not even by the loose standards by which Wall Street awards esteem. It did not earn it money, either.
So when some financial leaders — I am looking at you, Jamie Dimon — assert that regulation restricts size, and size is good for America’s financial health, it is worth asking, Oh,yeah? What about Bache?
Although Bache was big, slow and stupid, it was not especially dishonest. A low bar but something.
Not until Reagan and deregulation created opportunities. Just as he said lowering taxes would do.
The opportunities for robbery were especially alluring in the selling of limited partnerships. Although Bache eventually failed, no one ever faced criminal charges, so New York Times reporter Kurt Eichenwald did not have the easy ride of mining indictments and trial transcripts. But he did become a repository for document dumps by distressed employees (some of whom were honest) and victims. We have to take him, in large part, on trust, but he seems reliable.
The Rock in “Serpent on the Rock” is Prudential, the giant —but not big enough to compete effectively in an unregulated environment — insurance combine. It thought it needed a brokerage, and Bache was desperate to be acquired.
Prudential had a solid reputation, lots of capital and a huge pool of potential victims, er, clients.
Bache as a whole never performed, but Prudential’s incompetent management had no clue what to do about that. And the one place it never bothered to look for trouble was the Direct Investment Group, which was marketing billions of dollars in limited partnerships as safe. They were not.
Pru never looked because Direct Investment was reporting strong profits, feeding bonuses upstream; and on Wall Street you can get away with anything as long as you feed bonuses to your superiors.
Even the most minimally competent manager could have spotted DIG as a problem, because one manager of partnerships it was working with in a big way was VMS, and anybody who read The Wall Street Journal in the late ‘80s was alerted to the dangerous state of VMS.
When the crash came, years later, investors who relied on the stellar reputation of the Prudential lost most of their money. The ones who had bought VMS limited partnerships usually lost all of it.
It takes a while for Eichenwald to set the stage, but when he finally does, “Serpent on the Rock” turns from an interesting to a compelling story. It turns out Prudential’s reputation was phony, and the big company screwed its customers as enthusiastically as Bache ever had.
And got away with it.