Then: CEO of Royal Bank of Canada | Now: Chair of BCE Inc. and director of BlackRock
>> If you were to ask me in hindsight whether 2008 was a good thing or a bad thing for RBC, I’d very reluctantly say it was good in the long term, but terribly painful in the short term. And it certainly wasn’t a good thing for the rest of the world. So I don’t say that with any great amount of pride.
By the second half of 2007, everybody was feeling uneasy. There was significant volatility in the marketplace, and liquidity had begun to dry up. At the same time, markets were still rising. But by the time Bear Stearns went under in March 2008, liquidity had dried up completely, and a number of businesses were stalling out. At that time, we were operating in crisis-management mode. Did I sleep at night? Not well. I was in hourly contact with Chuck Winograd, the CEO of RBC Capital Markets, which is where we held most of our exposure. We had daily meetings with the Bank of Canada and the other major Canadian banks to ensure Canada didn’t have the same challenges as the United States and Europe. When you’re getting hourly updates and being told you’ve got another $30-million loss, it’s pretty rotten.
Just prior to the infamous Lehman weekend, I received a call from Lazard, the investment bank representing Lehman, asking whether we would have any interest in buying all or part of the firm. My inclination right up front was, there’s not a snowball’s chance in hell. The thought of going from one of the strongest balance sheets in the industry to one of the weakest—I had neither the courage nor the desire to take that kind of risk. In addition, from the time I had taken over as CEO in 2000, I’d reiterated our strategy that no more than 25% of our business would be in investment banking. If we’d bought Lehman, overnight, it would have been over 50%.
I’d met Dick Fuld various times—Lehman was a big counterparty for us. I won’t criticize an ex-CEO, but obviously Lehman went bankrupt, so you can’t say they did a good job relative to Goldman, which managed through the crisis effectively. But Lehman was caught between politics, what the Fed could force the banks to do and what the banks wanted to do. (1)
We went into the Lehman weekend knowing there was a good chance they would declare bankruptcy on Monday. We had billions of dollars of exposure to Lehman, but virtually all of it was collateralized by equities and other liquid securities. Over that weekend, we went through drills figuring out what we were going to do at the opening on Monday. So when Monday morning came in London, we immediately started liquefying our collateral. I’m proud to say that by noon Toronto time, Chuck called to say our exposure to Lehman was in the hundreds of millions, down from multiple billions. I just remember breathing a sigh of relief—and then moving on to the next crisis.
I’d say that 80% of what saved Canada from calamity was the structure of our mortgage business. A big chunk of bank balance sheets in Canada are represented by residential mortgages, but the vast majority of those mortgages stay on bank balance sheets; therefore, we actually care whether we get paid back. That wasn’t the case in the U.S., and as a result, our underwriting standards were much better.
We were also incredibly fortunate to have Mark Carney (2) as head of the Bank of Canada. A lot of central bankers are brilliant economists, but they have little experience on Wall Street. Ben Bernanke fits that profile. (3) Mark was a Goldman guy who’d spent a large portion of his career in risk management. He was able to punch above his weight not only because of the strength of his intellect, but also because of his vast market experience.
In addition, all the Canadian banks did a number of things they didn’t have to do, but we did them because they were the right thing to do. Before the crash, we were criticized for being too conservative. You might argue that was good management, but it would be unlikely for people to give credit to the banks." /D.C.
(1) “Watch Too Big to Fail,” says Nixon. “It’s a very good depiction of what went down and the decisions Hank Paulson and the Fed had to make.” Lehman CEO Dick Fuld was portrayed by James Woods.
(2) Carney’s first day as governor was Jan. 1, 2008, less than three months before Bear Stearns went bankrupt.
(3) Bernanke was a tenured professor at Princeton before joining the Fed.
Then: President of Manulife Asset Management | Now: CEO of the adviser arm of Wealthsimple
>> The world was awash with cash. I remember going through the interview process at Manulife in mid-2007 (4) and talking about how incredible it was that there was so much liquidity in the market and that everything was priced for perfection. People were willing to put billions of dollars at risk for two basis points.
When the asset-backed commercial paper crisis hit, I started getting worried. At Manulife, I asked, “How much of this do we have in our portfolio?’ I called operations, and they said I’d have to call compliance. So I called compliance. They said, “How about I come back to you in 10 days?” And I said, “How about 10 minutes or 10 hours?” (5)
But it took until the turn of 2008 to see the disconnect—there were fires burning underground, and few people knew the extent of them. I was probably more bearish, but even I wasn’t aware of how bad it was. At Manulife, we eventually saw so clearly how deep the crisis was and how global. We have a private markets arm, and we were managing physical trees and cutting them down to supply the American and Chinese lumber markets. We had been filling football-field-size boats with trees, and we saw that business grind to a sudden halt.
At Manulife, there were all these variable-rate annuities (6) that had been aggressively sold in the run-up to the crisis, especially in the U.S. That meant gyrations in the stock market had huge effects not only on our company but also on us personally, as shareholders. Fortunately, nobody panicked, even though we had a lot at stake and the stock was going down.
It was challenging to feel the sense of invincibility Manulife had always carried in its culture start to erode. We put on a brave face during the crisis, but man, was I ever close to the fire.
It felt like the world was going to fall apart. I had spent a bunch of time with Thomas Homer-Dixon in the early 2000s, and he was writing about the intricacies of networks. Sept. 11 had given us a warning: If you break one node, it has multiple impacts. I remember being very attuned to the first TARP (7) vote and thinking, Oh my God, they don’t know what’s going on—because they didn’t understand the connectivity of the situation.
Looking back, I think America’s opportunism, unbridled capitalism and commercial liberalism played itself out, whereas Canadians are fundamentally more conservative. There’s a part of it that’s culture, a part that’s regulation and a part that comes from our economic model, which doesn’t force excess.
A few years ago, I had both my kids watch The Big Short (8), and then we discussed it. I wanted them to understand the importance of thinking for themselves. Groupthink comes with being lured by shiny objects. You can let your guard down and not ask very basic questions—just think of Bernie Madoff’s investors. /T.K.
(4) Then CEO Dominic D’Alessandro had grand visions of creating a global champion based in Toronto. Those dreams dissipated in 2008 because the CEO didn’t hedge his company’s risks.
(5) This was a recurring theme during the crisis—no one knew how to value these complex financial products, and the web of securities made it nearly impossible to know what liabilities each firm held.
(6) These annuities guaranteed customers a minimum income and offered some upside if markets went up—and they became incredibly problematic when markets tanked.
(7) The Troubled Asset Relief Program, designed to buy up to $700 billion (U.S.) in toxic assets, was initially rejected by the House of Representatives but was approved four days later after markets fell. George W. Bush signed it into law.
(8) The film was based on Michael Lewis’s bestselling book, and starred Brad Pitt, Steve Carell and Christian Bale as a few of the oddball investors who called the crisis—and made bucketloads of money.
Then: Deputy head of the financial markets department at the Bank of Canada | Now: Senior deputy governor of the Bank of Canada
>> I was around in the 1990s for the Mexican peso crisis (9), the Asian financial crisis (10) and a string of other events that led to a lot of economic literature about instability in emerging markets. So when markets that are very well developed and institutions that have been around for a long time were having fundamental credit and liquidity issues, you realized just how big this could be. When Bear Stearns went under, I had a feeling it wasn’t just them. Maybe they were higher up in the queue, but the combination of the strength of the housing market and the fact that it was funded in a way that was fundamentally unstable spread way further than just Bear.
By the time the firm went down, we’d been dealing for months with third-party asset-backed commercial paper here in Canada—both the transparency of the assets underpinning them and the liquidity. ABCP was a short-term security—usually 30 to 90 days max—but the underlying assets were long-term, like credit card receivables and mortgages. Because of that fundamental mismatch, and because of worries about what was actually in there, the market ultimately froze.
At the Bank of Canada, we were on high alert. It was one of those moments when you know you need to consider operations you never would’ve considered before. And we couldn’t do it alone in our ivory tower—we had to talk to people. I was in the trenches, running the SWAT team—it was called our collateral working group, but “SWAT team” sounds more fun—developing the facilities we ended up putting in place, and the ones we didn’t. We were on the phone every day with market participants to get the pulse of what was going on and what might be useful.
The weekend Lehman collapsed, the federal family—the Department of Finance (11), the Bank of Canada, OSFI, CDIC, FCAC—got together and said, “Okay, what’s our contingency? How can we support each other without tripping over each other?” And we found a way to intervene, repeatedly, to provide the extraordinary liquidity needed to stabilize the system. (12)
A big lesson here is that it’s so important, both domestically and internationally, to have multilateral channels of discussion open. I can only imagine how difficult it would’ve been to solve the crisis without that type of collaboration. /D.C.
(9) In 1994, the Mexican government (led by president Carlos Salinas) devalued the peso, sparking a crisis that cut the peso’s value in half, sparked rabid inflation and caused a brutal recession.
(10) In 1997, the Thai baht collapsed, dragging down other east Asian currencies.
(11) When then minister of finance Jim Flaherty died in April 2014, Carney hailed his “sound management of the Canadian economy” during the crisis.
(12) The amount of liquidity provided by the Bank peaked in December 2008 at $41 billion, most of it through repos—buying securities from the banks that would be sold back after a fixed term.
Then: Senior equities trader at Lehman Brothers in New York | Now: Vice-president of institutional sales at Haywood Securities in Vancouver
>> We didn’t see Dick Fuld around the trading floor as often as you’d think. My first time running into him wasn’t even in New York. It was at the golf club in Sun Valley, Idaho, in the summer of ’07. I thought, I’m only going to have a couple of chances in my life to have a one-on-one with Dick Fuld. The safest way to put it is, he was particularly rude. I learned a lot about him in that moment, and over the next year, I kept thinking, Dick’s gonna fuck this up. This is a guy who’s so self-absorbed that whatever happens, I had a pretty good hunch his ego would get in the way of us being rescued.
When Bear Stearns went under in March 2008, I was in the Dominican Republic for my 30th birthday, along with four of my best friends, one of whom worked at Bear Stearns. Bear started the week at 60 bucks and ended at 11. That Sunday, J.P. Morgan came in with the $2 bid (13). Lehman had a very similar profile to Bear, so you couldn’t bury your head in the sand and not think the same thing could happen there. By the time we headed to the airport, the mood had turned pretty sombre.
But May 21, 2008, was the day I really knew things were going bad. That’s the day David Einhorn (14) gave his famous Lehman speech at the Ira Sohn Investment Conference. I’d sent a desk analyst who helped me with ideas—it was a thousand bucks a ticket—and he called from Sixth Avenue, saying, “Einhorn just gave a pretty compelling speech on why we’re not going to have a job in a year.”
Meanwhile, our dear CFO, Erin Callan (15), was moving things around, which is one of the things Einhorn had spotted—that we were moving liabilities off the balance sheet at quarter-end.
In May and June, my bosses started asking me to pare down my book, which was pretty sizable for a mid-level trader. After the third time I was told to pull in some capital, I was like, okay, something’s amok. It was still typically rah-rah around Lehman, and Dick gave his stirring “screw the shorts” speech. Even I was wise enough to know you never blame the stock’s performance on the shorts.
It was very frowned upon to sell Lehman stock, even as the price fell. Restricted stock units were a significant portion of our compensation. I worked with senior salespeople who’d been there 20 or 25 years—guys with houses and kids and high-end lifestyles—who had high-eight-figure or low-nine-figure net worths in Lehman stock. When the firm went down, a lot of guys who’d been set for retirement ended up having to go back to sales jobs at mid-market firms. It was tough to see.
That Sunday night, Sept. 14, we got an email from our boss, Eric Johnston—he was head of the equity trading department. The subject line was: “Just got word that it is over for Lehman. We will be going into liquidation.” Everyone came in Monday morning and started working on their résumés. No one was trading. There were dozens of reporters outside, and Lehman kept sending us emails, saying, “Please don’t engage the Brazilian news network downstairs.” It was surreal.
Meanwhile, I’d put out feelers over the summer back home in Vancouver— I knew the jig was up—and my apartment was already three-quarters packed. I’d been keeping it quiet, because I figured if we were going to get fired, at least I’d get severance. But when Barclays came in as the bailout, I figured I’d played the game long enough. I moved home in late September. I was lucky I had a place to go with an intact economy.
Ultimately, the buck stops with Dick. (16) He was too enamoured with the stock price, as opposed to understanding the new lines of business that ended up bringing down the firm. Lehman wasn’t the only one to make those mistakes—it just came down to who got out of the way quicker.
I don’t wish Dick any harm, but if I ever bumped into him again, I wouldn’t be the intimidated junior trader I was the first time we met. I’d have some choice words for him. /D.C.
(13) The bid was eventually raised to $10.
(14) Einhorn, the founder of Greenlight Capital, evicerated Lehman’s accounting and announced the outlook for its stock was “dim.”
(15) Callan, a rookie CFO and the only woman on Lehman’s 13-person executive team, was pushed out in June 2008; six months after her firing, she attempted suicide.
(16) Fuld was Lehman’s CEO from 1994 to 2008. Today, he runs Matrix Private Capital Group in New York.
Genesis of a crisis
February 2007: Lehman’s stock peaks at $86.18, giving it a market cap of $60 billion (U.S.)
April 2: Subprime mortgage lender New Century Financial files for bankruptcy
July 31: Bear Stearns liquidates two hedge funds that invested in securities backed by subprime mortgages
Mid-August: Canada’s $30-billion third-party asset-backed commercial paper market freezes
Jan. 11, 2008: Bank of America, the biggest U.S. bank by market cap, agrees to buy floundering Countrywide Financial for about $4 billion (U.S.)
March 16: J.P. Morgan acquires Bear Stearns for $2 a share, with $30 billion (U.S.) in backing from the Fed. The next day, Lehman shares fall by almost 50%
June 9: Lehman announces a second-quarter loss of $2.8 billion (U.S.), its first since being spun off by American Express in 1994
Sept. 7: Mortgage giants Fannie Mae and Freddie Mac are taken over by the government
Sept. 10: Lehman pre- announces a third-quarter loss of $3.9 billion (U.S), along with a strategic restructuring. The stock falls by 42% the next day
Sept. 12: Lehman ends the week with just $1 billion (U.S.) in cash
Sept. 13–14: Lehman spends the weekend trying to broker a takeover deal with Barclays and Bank of America. On Sunday, major players hold an emergency two-hour trading session to scale back their exposure to Lehman
Sept. 15: Lehman Brothers files for bankruptcy protection, and the stock falls 93%. Bank of America agrees to buy Merrill Lynch for $50 billion (U.S.). The next day, AIG accepts an $85-billion (U.S.) bailout that gives the government a 79.9% stake in the company