PART II
You can have anything you want but you better not take it from me.
—GUNS N’ ROSES
9 | FREDDIE COOK
December 6, 2005
I AGREE TO MEET FREDDIE COOK AT A STARBUCKS A few blocks from the office. He had called my home again this morning with the hushed and rapid diction of a panicked target in a spy novel. Something serious had happened the night before, he said, and we needed to talk in person right away.
I pull open the door to the Starbucks and see Freddie sitting by himself at a table in the corner drinking a bottle of Pepsi. He’s wearing a suit and it seems his mission is to show that a man wearing a suit can look just as unkempt as a man in a T-shirt, shorts, and flip-flops. He’s making a statement to Bear that you can make me wear a suit but you can’t make me look good. I don’t think it’s deliberate, he just doesn’t know any better.
I pat him on the shoulder as I walk up to him and sit down. Even the pad in the shoulder of his suit is wrinkled and bent. His body looks soft like raw dough and I feel I could push my finger right through him and see it push out against the skin on the other side of him. He has light-brown hair, ruffled like his suit, and it covers his ears with a couple inches not because it is the style he chose but because he hasn’t had a haircut in a few months. He’s probably thirty-five and still speckled with pimples around his jaw and forehead from all the pizza and soda. Not even beer but just soda, like he’s still a nervous teenager.
“Pepsi?”
“I hate coffee.”
“Why the hell’d you pick Starbucks?”
“It’s a long story. Someone’s meeting us later. I need to talk to you first.”
“Okay. Who’s meeting us?”
“I’ll get to that in a minute. Nick, my analysis is pointing to some very strong conclusions. Very strong. People aren’t going to want to see it.”
“Take it easy, Freddie. You’re doing good work. People are going to want to understand your perspective.” Freddie takes an apple out of his jacket pocket and rips his teeth into it like a sailor off a ship. He has no manners at all.
“They’re not going to want to understand it, because then they’re going to have to deal with it. I’m already getting pressure from my boss to put it aside. He’s getting less subtle about it. I think he’s getting pressure from somewhere farther up.”
“You might just be reading into things. Your job is to analyze the risk of the firm.”
“But they don’t want me to analyze the risk. They don’t want me coming back and reporting that our current strategy is dangerously irresponsible. Have you talked about any of this to Joe?”
I report directly to Joe Sansone and Joe reports directly to Dale Brown, the president of Bear who runs all of sales and trading. Joe is inept and insincere and should never be put in charge of another human being. He’s a classic example of a very good sales guy who was then promoted to a management position for which he is wholly unequipped. He has the skills and personality to be a pure sales guy and nothing else. “No.”
“Good. I don’t think you should say anything to him yet.”
“I wasn’t planning to, but Freddie, don’t you think you’re making too big a deal of this?”
“There’s a lot of money at stake, Nick. I’m getting pushback on this report before people have even seen it. They just know what it might say and they don’t want to hear it. We’re selling mortgage-backed securities that are grossly inflated in value. In my opinion, fraudulently inflated. This will crash and at that point whoever holds a significant position in these securities will get burned. Right now, it’s us getting burned. If they get warned on the record about the risk and they don’t do anything about it, they can get burned if things go bad. But I’m not going to be silent. I’m not going to say what they want to hear and hang my own ass out there.”
“How bad is it?”
“This isn’t like losing a bet and you move on to try to win the next bet. Every bet is linked to a thousand other bets. It’s one bet for the whole system. It wouldn’t be like a fire that runs out of wood and burns itself out. Nick, this is like a nuclear reactor meltdown and the first small explosion becomes fuel itself for a growing problem that doesn’t end but keeps growing and getting worse and that can’t be stopped unless you sacrifice everything and shut everything down.”
Freddie looks so nervous and frantic that his story seems less credible. He looks like a mad scientist. But since he’s the smartest guy at Bear and one of the few whose salary is not directly linked to trading commissions, it’s worth hearing what he has to say. “How are you coming up with this?” I ask.
“I wrote a custom software program that takes into account our position and the risk of the mortgage securities but also the overall context of the market around us, basically what other companies will do. It’s the difference between roulette and poker. If you play roulette and put a million dollars on red, it doesn’t change anything around you. They still spin the wheel and it doesn’t have anything to do with your bet. But if you play poker and take a card, then bet a million bucks, every player around you reacts. They fold, call, or raise and build a strategy based on your action. A lot of models that look at Bear treat it like roulette, but it’s really poker. If we make a big move, it will set off a chain of reactions.”
Freddie looks down at his watch.
“Everything okay?”
“Yeah, we have a few minutes. The other thing is we’re desperate for trading volume. On the mortgage lending side, Fannie Mae and Freddie Mac are pushing out a ton of loans, to anyone. And the government is promoting it. The borrowers are obvious repayment risks, but nobody cares. As long as there is a commission today in making the loan, nobody cares that it will default in a year. Or less.”
“We have a few minutes until what, Freddie?”
He looks a little embarrassed as he puts down his apple and resets his focus. “I had a few drinks last night.” I didn’t know Freddie drank at all. “I started talking about some of this stuff. More than I should have probably.”
“Who were you with?”
“She’s a friend from college.”
“A girlfriend?” I have an attaboy look for Freddie and I hope he doesn’t feel I’m making fun of him.
“No, we just took some classes together in undergrad and she’s a nice person.” He takes another bite of the apple. “It’s just that she’s in a unique position now.”
“What do you mean? Who is she?”
“Look, before she gets here, I have a favor to ask.”
I’m annoyed at the stalling, so I just lean back in my chair.
“I have a meeting set with Dale Brown to present my report. I’m getting pressure to soften it, but I’m not going to. This is the big meeting with the president and I’m hoping you might come with me.” He looks at me like a geeky high school kid asking a girl to the prom.
“What do you want me there for? I don’t know anything about your report.”
He shrugs and looks a little sad. “I just think it would help. To have you there.” He looks down at his Pepsi and seems to catch a glimpse of how pathetic this appears and he pulls himself together and declares, “You wouldn’t have to do anything in the meeting, Nick. You’re one of the few people at Bear that’s always been kind to me. It would just be a real help.” I have a flash of Piggy and Ralph and for a moment I think Freddie isn’t a colleague from Bear but an angel who’s been sent down to test whether I’m a bully or a hero.
I was bullied for a couple months when I got to boarding school and it’s still close to the surface for me. I was so sad when I first got there after leaving my parents in the station that I must have looked like a natural target, that I expected to get picked on. When it happened, I didn’t know how to help myself and I felt that any outreach for help would get pounced on and make it worse.
After a while, you change how you act. You stay alone with your thoughts and create a separate world, all around you but just in your mind, so you can get by. And then you make one friend. That’s all you need. One generous, unafraid person to show kindness. You have your friend and get a little happier and after a while you realize you aren’t a target anymore.
Once you’ve been through it, it never leaves you. It puts something inside you that lets you feel things that others can’t, the way only dogs can hear a certain pitch of sound. Maybe I can help Freddie out the way I found a friend to help me, so I decide to lend a hand.
“Okay.” I already regret it. This isn’t about a schoolyard shoving match or a couple kids who want to trap Freddie in a gym locker. I should have just said I’ll think about it and then found a polite way to bow out, but now I’ve said okay and I’m stuck with it. Why the hell would I want to sit in a meeting with the president and associate myself with a report that is going to piss him off?
“Thank you, Nick. Really.” He seems so relieved I almost feel better about it. “Have you heard of a three-strike loan?”
“No.”
“It’s happening out there now. Let me try to explain it. Let’s say we take a thousand mortgages. Could be yours, my mom’s, or any mortgage. We take a thousand and bundle them into one security and sell it. We need to make representations about the security, so we test it by taking a sample. Let’s say we test fifty mortgages for the sample and ten come back as bad. These ten mortgages will default. That’s twenty percent of our sample, so you should say that we predict that twenty percent of the security is bad.”
I nod.
“That’s not what people are doing. If twenty percent is bad, that’s two hundred bad ones out of the thousand. What people are doing is to take out just the ten bad ones from the sample and then say that the whole rest of the security is good, even though the statistics say that there should be one hundred and ninety more bad ones. It’s statistical fraud!”
“This is happening?”
“Yes. And what’s worse, the ten bad ones don’t get thrown out. They just get put in the next security that we bundle up, even though they already tested bad. If they get pulled in the sample test of the next security, they get put into a third. Only if a mortgage gets pulled three times in the sample tests, which is very improbable, does it get thrown out. That’s the three-strike loan. It makes no sense. It’s obvious fraud.”
“Jesus, Freddie. Is this in the report?”
“It is.” He looks up behind me.
The door is over my right shoulder and has opened and closed several times since I’ve been here, but this time I turn to see and in she walks. The lighting in the room seems to change. Nothing is actually brighter, but it’s as though everyone in the Starbucks suddenly realizes we are sitting in seats of a theater and have in this moment located the stage. She seems to be a source of light herself, not blinding or imposing but warm and a subtle draw of attention.
I know her from somewhere.
“She’s here, she’s here, she’s here.” Freddie rocks in his chair and whispers this more to himself than to me, as an internal pep rally to get ready for the big game. He stands and makes his way over to her. He has an awkward heel-to-toe gait like he’s walking in a ski boot.
He wants to make a gallant greeting but can’t calm himself and instead roughly grabs her shoulders with both hands and delivers a kiss to the cheek that is a blow to the face, and I see her head snap to the side as though caught by a left hook. She smiles. This is clearly not the first time she has been greeted by Freddie. She gives him a short-armed but affectionate hug and he pulls her toward me and our table so that she has to skip a few times to catch up and get her heels back underneath her center of gravity.
I stand to shake hands. “Rebecca, this is Nick Farmer. Nick, this is Rebecca James.”
Of course I know her. She’s a correspondent for CNBC. She’s on the TV with the volume down in our office and I see her every day. She has wavy blond hair over the shoulder and wide-set icy-blue eyes that are smiling. Her hair and makeup are done for television, which is a little much for off camera but accentuates her already beautiful skin and the planes of her features.
“Nice to meet you, Nick.”
“Yes. It is.” Jesus, I have to do better than Freddie. “A pleasure to meet you.”
We all sit down. The Starbucks is in the downtown financial district and everyone seems to recognize her, though she would turn heads without recognition too. She seems not to notice it.
“Can I get you a coffee?” I ask.
“No, thank you. Already had one this morning.”
“Of course. One a day, et cetera, et cetera.” Son of a bitch. I sound like a fool.
We’re silent for a moment and Freddie drinks his soda and I drink my coffee as a tribute to her.
“So, Rebecca, I didn’t get a chance to catch Nick up on our conversation last night.” Oh, no. I’m starting to put it together. Freddie got drunk with an old college friend and spilled beans about confidential Bear information, and the old friend happens to be a reporter for CNBC who is looking for a scoop and now smells blood. I have the urge to excuse myself from the table.
“Freddie and I had a few drinks last night.” She laughs. I have an image of Freddie with his shirt off and tie around his head making Indian noises while photocopying his report for her.
“I see.”
“Freddie mentioned Bear is taking some aggressive market positions.”
“I see.”
“I know you’re in sales and trading. I’m wondering if you can tell me more about the strategy?”
“Would you excuse us for a minute? Freddie, a word in private.” I walk to the far side of the room and wait with my back to him.
Freddie comes around into my view. “Are you out of your mind, Freddie?” He looks ready for scolding. “What did you tell her?”
“Not much. Not everything.”
“What?”
“Nick, she’s cool.”
“She’s not cool. She’s a reporter. She’s looking for a story. The bigger the better.”
“She’s a friend. She wouldn’t screw us.”
“So she’s here for her health. Or for your health.”
“No, it’s for information, but she wouldn’t abuse it.”
“Freddie, you’re playing with fire and I don’t appreciate you pulling me into this. What did you tell her?”
He pauses. “I don’t remember exactly. I think I just told her there’s a lot of risky subprime debt out there and Bear is exposed to a lot of it. That’s stuff people have said before.”
“Maybe an independent mouthpiece. No official representative of a bank has come out and condemned his own bank’s positions. Especially not anyone who reports directly to the chief risk officer.”
His shoulders are getting lower and closer together in the front, which means he is understanding. “What should we do?”
“End this. Cut it off, right now.”
We walk back to the table and sit down. “Sorry to be so rude,” I say. I look at Freddie and push him with my eyes.
“Rebecca, I was talking with Nick and I think it’s better that we don’t get into any of this. I could get in trouble.” He looks over at me to see if that was enough, and I redouble my efforts to give a harsh look. “Not because of what the information is, but just because I’d be talking about it at all. Good or bad, it’s confidential, and I can’t talk about it.”
She knew this was coming. “I understand.” She turns to me. “Where are you from, Nick?”
“Westchester.”
“Have you lived in the city long?”
“Yeah, since college.”
“Where in the city?”
“We’re in the West Village. My wife and I.”
She looks down at my finger. “What a shame.”
I’m stunned. She’s flirting. Without thinking, I pinch my ring and twist it around a few times until I realize what I’m doing and I stop. I know I would have only something stupid to say, so I don’t say anything.
She smiles. “I hate the Village. So many strange and winding streets, I always get lost. It’s a shame. Otherwise I like the area.” Clever girl.
“It takes a while to get to know it all, but I still get lost sometimes too.”
She reaches into her purse and pulls out a business card and flicks the corner so it makes a popping noise. She leans across and brushes close to me and picks up my cup of coffee, then slides her card across the table and puts the cup back down on top of it. She has total control of her motion, as though this is the customary way for everyone to offer a business card. I love the confidence. “Nick.” I raise my eyebrows in response. “If you think of anything, you should call me at this number.”
She stands and I snap out of the spell. Freddie stands too. “It was good to see you, Freddie.”
“Good to see you.” He looks even more disheveled.
She walks out of the Starbucks.
“Freddie, I don’t know whether to thank you or punch you.”