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So You Just Squandered Billions . . . Take Another Whack at It

By Steven Pearlstein
Wednesday, September 2, 2009

You've probably never heard of Jay Levine, Chris Ricciardi, John Costas or Stanford Kurland, but they are charter members of Wall Street's Mulligan Club.

Back during the heyday of the credit bubble, they were the financiers who earned huge bonuses for creating, trading and investing other people's money in those complex securities that resulted in trillions of dollars in losses and brought global financial markets to their knees. And now they're out there again hustling for investors and hoping to make another score buying and trading the same securities.

Like golfers who treat themselves to a second drive after hooking the first one deep into the woods, these guys play on without apology or penalty. The maddening thing is that they're getting away with it and nobody seems to care.

Consider the case of Jay Levine, once the co-chief-executive of RBS Greenwich Capital, the American investment banking arm of the Royal Bank of Scotland. Under Levine's direction, RBS Greenwich went from the bottom of the "league tables" in terms of issuance of asset-backed securities to a perch near the top -- right up there, one industry publication wrote at the time, with Bear Stearns and Lehman Brothers as one of the "best mortgage-backed houses" in the business.

At the height of the mortgage frenzy, Levine's group generated more than $350 million in profit annually for RBS and Levine was reportedly RBS's highest paid employee, earning more than $60 million during the three years before his departure at the end of 2007.

Now, two years later, RBS is a financial ward of the British government, which has had to put in more than $30 billion to keep it from collapsing. RBS's biggest mistake was an ill-timed and overpriced purchase of a Dutch bank, but there were also tens of billions of dollars in U.S. credit losses, many of them attributable to RBS Greenwich.

Levine, meanwhile, left RBS at the end of 2007 to take the top job at Capmark Financial Group, a spinoff of GMAC that had become one of the country's biggest commercial real estate lenders. Since then, of course, things have only gone from bad to worse in the world of commercial real estate finance, forcing Capmark to post more than $2 billion in operating losses before it stopped filing public reports this spring. Its biggest shareholder, the buyout firm KKR, has now written off its entire investment in the company. Levine volunteered to reduce his base salary from $5 million to $4 million.

But don't shed too many tears for Jay. Even while remaining at Capmark, he's reassembled some of the old team from RBS Greenwich at a new firm, CRT Capital Group, a small trading house in Stamford, Conn., that he bought in July with former RBS Greenwich co-chief-executive Ben Carpenter and Ron Kripalani, who once headed the capital markets group at none other than Countrywide Financial. In a statement announcing the purchase, the new managers suggested that with so much of Wall Street operating under government-imposed pay caps, it was a perfect time to lure away the industry's "best producers."

Then there is Chris Ricciardi. In the world of finance, nothing has proven more toxic than collateralized debt obligations, or CDOs, and no one did more to expand their reach than Ricciardi. He pioneered them at Credit Suisse First Boston, then was lured away to Merrill Lynch, where he expanded the CDO business from less than $4 billion in new issues underwritten in 2003 to $28 billion in just the first half of 2007. That's when the music stopped and the venerable brokerage house found itself with $41 billion in CDOs and nobody to buy them.

By then, however, Ricciardi had already left Merrill and an $8 million-a-year pay package for what looked to be even better opportunities at Cohen & Co., a big Merrill client. Under Ricciardi as chief executive, it became a big CDO issuer in its own right, pumping out $25 billion of the stuff before the market collapsed.

Cohen & Co. is still limping along, but the publicly traded real estate investment trust that it manages -- and with which it merged -- now trades as a penny stock after its holdings lost more than $5 billion in value. Last month, its auditors cited material weaknesses in the company's internal controls.

There was a time when Swiss banks were known as much for their conservative investment strategy as for their secrecy and discretion. But that was before John Costas showed UBS how to turn its small American investment bank into one of the five biggest on Wall Street, and the source of nearly half of its profits.

Then, UBS asked Costas to open a hedge fund with $3 billion of the bank's capital, $1.1 billion raised from the outside and lots of borrowed funds. And, indeed, over the next two years, the hedge fund, Dillon Read Capital Management, bragged of gains of $2.5 billion, even after paying generous bonuses to Costas and his team. But when the market turned in the spring of 2007, UBS found itself hip-deep in soured U.S. real estate investments. UBS rushed to close Dillon Read and took its assets onto its own books. But when the dust finally settled, UBS was forced to recognize $37 billion in credit losses and write-downs, including $3 billion directly attributed to Dillon Read.

Costas, however, seems to have landed on his feet at 623 Fifth Ave., where he and a few partners used their bubble earnings to open the PrinceRidge Group, which provides trading and investment banking services to institutional investors. Company officials say their aim is to fill the vacuum left by the disappearances of Lehman, Bear Stearns and Merrill.

And then there is Stanford Kurland, who helped turn Countrywide Financial into the biggest mortgage lender in the United States, rising to chief operating officer and heir apparent to founder Angelo Mozilo. Kurland helped to create the growth-oriented culture at Countrywide and oversaw the introduction of new loan products that would later land the company in trouble. In late 2006, Kurland was forced out, reportedly in a dispute with Mozilo over succession and declining lending standards.

Not long after a failed Countrywide was forced into the arms of Bank of America, however, Kurland was back in action. Starting with some of the $140 million he had earned from Countrywide stock sales, he earlier this year put together a $600 million war chest and began buying up mortgages and securities backed by mortgages that were just like the ones he used to write back at Countrywide. And at the end of July, Kurland raised an additional $300 million from an initial public offering for his PennyMac Mortgage Investment Trust.

I contacted Kurland, Costas, Ricciardi and Levine, along with a number of other, less prominent members of the Mulligan Club, to talk about their attempts to cash in on the crisis they helped to cause. Some declined to talk, while others spoke only on the condition that they wouldn't be quoted. The message that came through in those conversations, and in comments made to other news outlets, was remarkably consistent:

The bad stuff happened after I left. . . . The losses that occurred on my watch were more than offset by our profits during the boom. . . . I saw it coming and sold off most of it before the crash. . . . Our securities performed better than most.

There is probably some truth to these excuses, but taken as a whole, they are really nothing more than a cop-out. It's hard to believe that large organizations could really go from being smart and honest one day to being stupid and deceitful a year later. Nor is it credible that the money they earned during the good years was the result of individual brilliance while the money lost in the bad years was the result of uncontrollable market forces. It is also a peculiar moral code that says it is okay to traffic in crappy securities, just as long as you don't get stuck with them in your own portfolio when the market finally craters.

What's most curious, however, is why anyone would want to invest new money with people whose record is so tarnished. And then the answer hits you right between the eyes: The money isn't coming from savvy outsiders; it's coming from other members of the Mulligan Club -- members who are lucky enough to still have money to manage, and clever enough to know that some day they, too, might be looking for a second swing at the ball.

Steven Pearlstein will host a Web discussion today at 11 a.m. at washingtonpost.com. He can be reached at pearlsteins@washpost.com.

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