Still In Denial

Writing "unemotionally" about the 2008 financial crisis, former Lehman Brothers executive Thomas Russo unintentionally provides a disturbing glimpse into the Wall Street mindset.

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Friday, January 07, 2011

One of the most important people in finance was overlooking Central Park from his Fifth Avenue apartment, enjoying the Bach that his twin teenage daughters were playing on violin and speaking to the young Fulbright scholars from Iraq and China he'd invited for a reception. "In everything I do, I always ask myself, 'Am I doing the best that I can?'" the host, Lehman Brothers vice chairman and chief legal officer Thomas Russo, told a New York Sun writer. "If you feel good about what you do, then you can be at peace with yourself."

It was early 2005. Russo spoke about morality, forthrightness, passion, hospitality, fitness and the Lehman culture of doing the right thing. "I cannot emphasize enough," the vice chairman repeated, "the importance of doing the right thing."

Five years later, Russo still speaks about those principles, but not about the culture of his old firm, which declared bankruptcy two years ago. In February, Bob Benmosche hired him as general counsel and executive vice president of AIG, the finance giant, overseeing regulatory and government affairs.

Since then, the principles have led him to do something odd.

On nights and weekends, even while vacationing with his wife on the Danube, Russo penned a book about this country's pressing financial calamities. "You do the things you feel are right," he said in a brief interview from an AIG office in New Jersey. "Where I'm coming from is a sincere concern. That's why I did it."

The 2008 Financial Crisis and Its Aftermath, with a David Foster Wallace-like 581 footnotes on its 140 pages, shows what the world looks like from inside the halls of Wall Street. The view is astounding. By the end of the book, now quietly available for free online (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1697896) or as a $1.99 download for the Kindle, and written with his AIG associate Aaron Katzel, it turns into a meditation on this country's debt. The finale even proposes a way to negotiate the tax raises and long-term spending cuts that the country will, he worries, rot without.

Its first half, though, is what makes it special. Russo, a longtime confidante of Lehman chief Richard S. Fuld, provides an intense and detailed history of the American financial system's near-collapse. And even though that account is incomparably more thoughtful than the one Hank Paulson gives in his woozy memoir On the Brink, what's even more interesting is what Russo leaves out. "One can understand why individuals who have suffered the painful consequences of the crisis would be tempted to seek a simple explanation for their difficulties. However," he writes in an early passage, "no one party was solely responsible."

He is angry about a lot of things, but the Wall Street bailouts are not one of them. "I'm looking at this from a much bigger picture," he said. "I'm looking at it from above."

So the role that giants like Russo's past and current firm played in the system's downfall isn't so much an afterthought as a consideration that comes up early and is put into a grander perspective. "If you try to single out any one thing at fault, the remedies will be singled out towards that one thing," he said. "You create a very defensive and to some extent counterproductive atmosphere, because people will say, 'It wasn't me; it was someone else.' It becomes emotional, and one thing this paper tries to do is stay away from emotion. It wants facts."

*

Russo, 67, had to give a speech at the Practicing Law Institute in the fall on the impact of the recession on corporate America. "So I started to prepare an outline for my talk," he said. "And I just got more and more and more involved, and it obviously became far more than an outline for a talk. And then it got out of control."

Even though Russo has written a two-volume book on commodity regulation, which the American Bar Association Journal called a "treatise" but "nuts-and-bolt-ish," he wasn't interested in getting an agent. "I'm much more interested in getting the information out," he said. The money from his Kindle copies will go to the Scholar Rescue Fund at the Institute for International Education, which oversees the Fulbright scholarship, and whose executive committee Russo chairs.

"I think he very much does have a sense of public service, or duty, to sort of share his knowledge and experience," said Katzel, "and, hopefully, through that knowledge and experience get people to focus on the very significant challenges that the company faces." He paused. "I'm sorry—the country! I meant to say country."

"To the extent that lay people will read it, I think that's good," Russo said. "The ideal readers would be the people in Washington who are going to make these decisions."

He considered publishing it under a pseudonym. "You want the work to speak for itself," he said. "I didn't like sticking my head up." The first copy of the book that a reporter saw said "Confidential—Not for Distribution," but also "For your eyes only" and "show to no one." Since Lehman's collapse, of course, regulators, former shareholders and the public have monitored Fuld and deputies like Joe Gregory. "If this draws negative attention, I'd be shocked," Russo said. "If trying to go and deal with the problems in this country draws negative attention to me, I wouldn't feel sorry for me, I'd feel sorry for people."

Most of the book is measured. Not only is there no first-person narration, but there are no scenes or story line. "I didn't want that. I wanted this to be much more of an intellectual piece," he said. "What this paper is meant to do is just inundate the reader with a lot of facts, so that the reader will stand back and say, 'We have a lot of problems.'"

The investment banks are barely mentioned. "Why do I want to talk about Goldman or Morgan Stanley?"Russo asks. "Then it'll be looked at like, 'It's only because you were in this seat or that seat'; you'll be attributed all sorts of motivations. My motivation for this was very pure."

The sense you get from the book is that Russo is a worried man. Between the pressing need for stimulus spending to save a withering economy and the medium-term need to deal with gargantuan federal and municipal debt, not to mention trillions of dollars of off-balance-sheet obligations to Medicare and Social Security, "the problems the U.S. faces are, in some sense, insurmountable," he writes.

Still, he has suggestions. He wants a bipartisan panel, like the National Commission on Fiscal Responsibility and Reform that issued its report in December, to propose specific legislation that Congress will then have to either pass or come up with alternatives for. "I just made it up," he said about the idea. "And then we found precedent."

According to donation records, Russo has given to members of both parties, and the book keeps its politics to itself. But, interestingly, its finale complains about politicians who promise tax cuts they know will threaten the country's solvency—a marvelously conservative argument against anti-tax fundamentalism.

*

Russo is livid about the dark future, but not about Wall Street's hand in having shaped it. He puts the phrase "bailouts" in scare quotes, dismissing the hubbub. "Yes," he writes, "it would have been far worse had the government failed to act."

If he concedes that mistakes were made on Wall Street, what upsets him are the regulators, the senators, the government-sponsored enterprises, the wrongheaded economists, the central bankers, the credit rating agencies, plus the overleveraged non-financial corporations and especially the overeager home buyers.

"On all sides, there are people who could have done things better," he said. "Everyone shares in this. And my issue is that if you pinpoint one or two and not everyone, you will solve one or two of the problems, but the problem includes everyone."

Still, he's not shy about doling out some blame. "Individual borrowers," he writes, "cannot escape responsibility." And though he concedes they were encouraged by easy credit, amazingly low interest rates and terribly lowered underwriting standards, he doesn't explain that the financial system was the one providing that encouragement. Likewise he writes that the central banks, legislators and regulators "cannot escape their share of blame for the crisis" for having allowed such high levels of leverage, and doesn't mention who'd been furiously lobbying them.

"I'm not saying all the practices were good. I'm not. I'm saying that it should not surprise someone that if you put the speed limit at 100 miles an hour, then A-type personalities will drive at 100 miles an hour," Russo said. "It is no surprise that people were driving at 100 miles an hour. Not a surprise."

The core problem, as he sees it, is that we live in a society that did "everything possible to push home ownership," not that Wall Street's creation of mortgage-backed securities, and its leveraged bets on them, amplified the catastrophe of a burst bubble. "Was it done in a secret way?" he said about securitization. "Was it something that if the government thought was bad they could have stopped?"

So it isn't surprising when he writes that essential job growth historically relies on small businesses, and that large banks have not been "enthusiastic lenders to small business," but does not cast aspersions. Instead, he briefly wonders if banks "are simply hoarding," but then warns that "one must also take account recent studies" suggesting that reduced small-business lending has to do with "softening demand." A page later, he reveals that only 1 in 10 small-business owners trying to borrow money have recently "had all of their credit needs met." He leaves it at that.

In that sense, the book provides a wonderful glimpse into the current state of mind on Wall Street: conflicted, angry, anxious and proud. "I'm not doing it for any other reason," Russo said, "except to give data to people in, I think, hopefully, a balanced form."

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