How to Destroy a Bank

O

n the night of March 10, 2010 an other­wise anonymous American financial writer working under the name of Eddie "Edmundo" Braverman sat at his computer and took a sip of rum. He was about to take the biggest risk of his life.

On liis screen was an article he had written for WallStreetOasis.com, an investment-banking website. 'Ihis article set forth a plan for how consumers coulcl destroy one of America's four largest banks. Customers would deliver a series of escalating threats against Wells Fargo, Bank of America, JPMorgan Chase and Citibank, demanding policy changes. The threats would

culminate in a series of flash-mob bank runs that targeted one of the banks.

Eddie was hardly alone in believing today's finance industry rested on accounting fraud and government complacency. Wliile perhaps naive in its assumptions and overreaching in its goals, Eddie's plan held promise: ordinary people taking control of an industry that was out of control. If Eddie's plan was followed and his identity revealed, he could be held legally accountable for unleashing the destruc­tive power of the mob. He took another sip and reviewed liis plan one more time.

I Iere's how Eddie would destroy your bank.

And how you can help him do it.

Step one: Give the- plan a recognizable name. Like many ex-commodities bro­kers, Eddie appreciates action. A few months after he published his plan, he told me about it from the security of a Parisian cafe: "You could call it Tank-a-Bank or Flashrun or Bankbusters. Give it a name that tells people they're sign­ing up for direct action, with one bank chosen to fall if the public's demands are not met." Tank-a-Bank is the name he used in his plan.

Step two: Recruit. Gather online signatures, using three compelling demands. Eddie chose changes he believes in: lower banking fees, greater leniency in home foreclosures and the separation of investment banking and consumer banking.

Tank-a-Bank, as Eddie envisioned it, allows website visitors to take instant action. They pledge to take part in the run if their particular bank is chosen. They input a user name, location and estimated amount of withdrawal. This anonymous database protects consumer privacy while allowing the flash-mob organizers to manage the run.

Step three: Activate media. Using his database of Tank-a-Bank partisans, Eddie asks a small percentage of them to attend flash-mob protests outside banks in New York, California and Illinois. Local media coverage turns national, with the organizers on the squawk shows and radio call-ins repeating the name (Tank-a-Bank!) and disseminating their demands. Every new recruit strengthens Tank-a-Bank's bargaining power, while every conversation about the health of the banks weakens the banks' stability.

Step four: Physically deliver a list of demands to the four banks, and begin the countdown. This reminds the banks that though four are being pressured, only one will be chosen. The countdown ends with a monthlong window, the exact date and target remaining secret until the last possible moment. At each step the plan remains unpredictable. Institutions are thus forced to prepare for an event with no way of knowing when, where or how it will occur.

Step five: Now conies a broader form of pressure. One month before the flash-mob runs, protests, publicity stunts and e-mails warn regulators and members of Congress that they should not save the selected bank. The Fed­eral Reserve responds aggressively, but financial markets likely remain in tur­moil as long as there are doubts about tile government's response.

Step six: When the countdown ends, the date range for the run begins. Tank-a-Bank could strike any day, at any of the four banks. Countdown clocks in downtown Manhattan flash a line of red zeros, reminding everyone

the hammer could fall at any time. The question is no longer if the run will happen but which bank it will happen to.

If you're participating, you've already withdrawn enough cash to last until your next paycheck (or, more likely, transferred part of your checking account to a local bank). You watch news of falling share prices, the angry Federal Reserve, the depressed markets. Maybe some networks even demoni/e Tank-a-Bank. A few leg­islators may call you names—socialist!—or try to prosecute the organizers.

Step seven: The bank run is announced on a live webcast at 11:00 a.m. EST, mid­week. The chosen bank is declared, and participating "tankers" are sent to specific branches. People close their accounts in person, creating long lines. You arrive early at your bank and spend most of the morning either trying to get money out. or waiting in line to do so. The twinge of guilt you feel as other customers join the mob to tiy to get their money out could foreshadow violent confrontations

between Tank-a-Bankers and those consumers locked out of their accounts. Fringe groups may smash windows at some banks, while other loca­tions are locked down by police. This is where Eddie's plan ends, with a glib comment: "Then pick tiie next one and start over."

As he told me later, Eddie remembered the exact time he pressed send and shared his plan with his readers: 10:03 p.m. He knew the thousands of investment bankers who read liis weekly articles would respond quickly—they always did. His articles were among the most popular on the site. Eddie had spent two years

building an audience. He was sure his plan would provoke discussion. What he didn't count on was being labeled a terrorist.

Why would an independently wealtliy former stockbroker writing for an invest­ment-banking website create such a plan? When I asked Eddie, we were sitting in a cafe on the Rue de Rivoli, watching people enjoy their afternoon carafes of wine. Eddie sat with his back to the wall, a middle-aged guy with the hunched, broad-shouldered build that marks American men in Europe. He grinned at my question. "I learned a long time ago that bullies respond only to strength. You want the banks' attention? Put one of them in the morgue. Anything else is a minor inconvenience to them." But why would anyone want to destroy a bank in today's fragile economy? At this question, Eddie's smile faded. He had written the plan to save our economy. "It's inevitable that another crash (continued on page 113)

DESTROY A BANK

(continued Jmm page 9-1) is coming," lie said, "and soon. In the wake of the greatest theft in the history of mankind, there still hasn't been a real change in how investment banks do business. The toxic assets ale still there, only now they're even worse. The next time it happens, it will be coupled witli a sovereign-debt crisis because the rest of the world knows we can't pay our bills."

Eddie told me why he believed financial mass destruction was coming. As he talked, something happened to him that happened to almost eveiy other person I interviewed for this article. It was as though he went into a trance, listing example after example of why finance was fundamentally unstable. For instance, he spent 20 minutes explain­ing how synthetic derivatives allowed banks to take out insurance on property or assets they had no vested interest in. The facts he listed were arcane but public knowledge, albeit to a public without the ability to digest such knowledge. It was dark before he finished. I got the sense the only reason he had stopped was the time; for Eddie, there are more rea­sons to be scared about what is happening in finance than there are minutes in the day.

It is, of course, possible that Eddie's plan isn't purely altruistic. Twenty years ago Eddie wasn't allowed to become an invest­ment banker. Sitting in the Marais district of Paris on a c<x)l night, he explained why. After high school in San Diego, instead of going to the Ivy League, Eddie wore the ivy colors of the Marine Corps. "These days I might have become a quant, I guess, because I always had an ability with numbers," he said. "Investment strategy and markets were the most interest­ing things to me as a kid. But on graduation day I couldn't bear the thought of four more yeai? of school. I just wanted to be a marine." Eddie painted a picture of a young grunt who had shipped oil'to the first Gulf war already playing the markets, loading up on invest­ments the war would affect. And it was in Saudi Arabia, in a U.S. Marine lent City, that he found his first investment clients.

Weeks before the conflict started, Eddie held an investment seminar for other marines in his squadron. He charged $50 a head for cot space he set up inside a tent, with oversize printouts taped to the can­vas tent flaps showing wartime investment opportunities their squadron was helping create. "I was 21 years old," he told me, "showing them charts about no-load mutual funds they should be getting into. I had the application forms ready, and they signed them. And they all made money on those buys, because I did too."

When Eddie returned from his three-year tour, no investment bank or respectable broker-dealer would touch him. lie was a high scIkxJ graduate with the wrong back­ground. So he entered finance at the only level that would have him: at the bucket shops, the kind of firms that cold-called retirees for penny stocks and ran late-night infomercials promoting commodity trading.

Eddie worked in windowless offices, com­peting with former used-car salesmen and

genius dropouts, hustling trades on the phone. He was trained using the so-called Eddie Braverman method, a three-step cold-calling technique named after an infamously amoral trader of the 1980s. The bucket shops were constantly under investigation for over­charging their unsophisticated customers. But among the hustlers and cold-callers, every bucket shop has a few stars, the bro­kers who make the returns bragged about in advertisements. Eddie was one of those bro­kers, lie earned his bonuses not only for the fees his trades generated but for the returns they earned for his clients.

Eddie's eyes lit up when he talked about his trading days. "Most guys just shoved whatever crap IPO or stock the analysts picked and made their money on the fees. Who cares what the clients make? They'll just cold-call all day and get new clients. But if you tried to make your clients money, you could actually make more. A lot more."

He told me a story about revenge. "I sent my resume everywhere. I even knocked on a vice president's door at a small branch office of [a major retail investment firm]. The guy looked at me like he smelled shit and told me I'd never work in finance. Then, at my first firm, I learned how you could Dumpster-dive the competition and find client names under trading receipts and account statements. So that's what I did. I cold-called the names I found in that VP's Dumpster constantly, like I was on a mis­sion. I stole so many clients from his office that they fired him." Eddie leaned forward, grinning, 20 years later. "They fired him because of me."

In 1999 Eddie burned out. His biggest weekly bonus—$40,000, in a month when he made $80,000 total—was enough to put him over his "walk-away number," the sum that buys independence from trading. Eddie spent the next 10 years turning that number into lasting wealth through further investing.

When he wasn't minding his investments, Eddie wrote articles for magazines and web­sites. In 2008 he found a way to connect with a new generation of bankers by writing full-time for WallStreetOasis.com. Ib make sure readers wouldn't question his credentials, he took his name from the master scoundrel of his cold-calling days. "I assumed everyone would just get it—that Eddie Braverman was an obvious fake name. He was a legend in the 1980s, the ultimate bullshit artist. But by the time I came back, nobody remembered Eddie anymore."

WallStreetOasis is part financial journalism, part locker room. Populated by what seem to be younger investment bankers and their home-trading equivalents, the first page of the site is a collection of rumor, insight and scandal. Most posts aren't about investing opportunities but about working: how to interview at a certain bank, what a mid-level analyst can expect from liis freshman col­leagues or which city is the best place to live in if you make more than $200,000 a year. What it does not often feature is instructions on how to destroy a bank.

Eddie's plan generated so many negative reactions that Eddie and his editor decided to pull it within hours of posting, removing

both article and comment thread. Eddie's follow-up post explained why:

The response to the plan was immediate and visceral. The first comment asked if I was an econ­omist for Al Qaeda. I started gelling e-mails. I got the sense it might not have been tlie best idea to put such a comprehensive plan out there, so I pulled it down. Patrick [Patrick (Curtis, the site's founder] and I talked about it, and he com­pared it to publishing detailed, plans for how to build a bomb and then telling people, "But you really shouldn't build it." Since then, however, ttie e-mails and messages haven't stopped. Obvi­ously, a few people read it and wondered where it went, and others who didn't read it have been, wondering when we were going to publish it. The answer is: We're not.

After the plan was taken down, readers continued to discuss it. Someone calling him­self physconomist demanded, "Name one good reason why any single person would engage in this behavior?" Banker88 asked Kddie, "What are you afraid of, Braverman? Post it front page!" I learned from Curtis, a recent Wharton graduate, that Eddie's plan was one of the most controversial arti­cles in WSO's five-year history. "The site is a place where these guys who are stuck at their monitors 70 hours a week can log in, vent, read, listen and learn from other guys stuck at other monitors," said Curtis. "Eddie is kind of a hero to many of the guys cur­rently making their number—he's someone who made his money and left the industry. The fact that he wrote this plan felt to some readers like a betrayal."

"He published it in the wrong place," said Yves Smith. "Or maybe the right one, really." Smith is a former corporate finance staffer at Goldman Sachs and founder of the blog Naked Capitalism. When 1 spoke with her over the phone, Smith was in her Manhattan rondo working on an expose involving mort­gage securiti/.ation. "The myopia on Wall Street is amazing," she said. "Those guys had probably never heard of anything like it. Inside the banks and hedge funds there's a small percentage of producers—the peo­ple actually moving money around. These guys are interested in any data, so some of them read us. But the vast majority of peo­ple in finance trust only mainstream media. The bloggers are not part of the status bub­ble. We don't have an institutional reference. Yet because we're not part of a mainstream name-brand firm, we can say things the peo­ple they see on Bloomberg can't."

I had called Smith to understand a strange contradiction. The same sense of despair and cynicism was shared by nearly everyone I had spoken to, from former regulators to current VPs of investment banks. Yet those currently working at banks would hesitate to condemn their institutions or agree that their institu­tions' flaws could lead to another crash. The idea of shame seemed alien. Smith agreed. "Wall Street has become profoundly narcis­sistic," she said. "Entitlement isn't a strong enough word to capture the preening self-regard of the industry. Look at what they have accomplished: the greatest looting of the public purse in liistory, with no one held to account, no one in authority putting in place measures to prevent it from happening again.

The success of this heist, if anything, confirms Wall Street's exaggerated sense of self-worth. It was such a profitable exercise that the industry has every reason to repeat it."

I met with a high-level investment banker to talk about the current state of finance. Were the Citigroups and Goldman Sachs of the world already leading us to the next crash? His response was straightforward: "Anybody who tells me there were no consequences to the financial crisis, I want to chop them in the fucking neck like this," he said, mak­ing a quick motion with liis hand. He was talking to me in a run-down bar in Tokyo because investment bankers generally don't like reporters. He was also a badass, and his chop was quite a chop. But he wasn't trying to make me feel scared, just silly. "Opinion? Whose opinion? Nobody I know reads those sites. They're famous? I've never heard of them. The people I work with read reports. The people I work with watch Bloomberg. Nobody's talking about this stuff you're talk­ing about. Nobody's /'logging." He motioned for another drink. "There's been plenty of consequence to the crisis. A lot of my savings were in stocks, just like a lot of people's. I took a liit." He was keen for me to under­stand what he was saying. "We all got wiped out, and we're still wiped out, so now we're taking less risk. But bankers don't complain. They work. They go and make it back. They don't fucking blog about it." If systemic risk isn't addressed in regulation, why wouldn't it keep increasing to the point where a govern­ment that backs the banks will also lose value when the next crash comes? Don't the blog-gers have a point? I could sense his distaste for such scenarios. "It's investing, all right? It's chaos; it's pure competition. But some kind of end-of-the-world thing? Nobody has a plan. These; people are good at figur­ing it out as they go along. They'll figure it out—they always do. So forget doomsday.

Doomsday is bullshit." He waved his hand and the subject was dismissed.

I asked other investment bankers in New York, London and Tokyo if they were dis­cussing systemic risk. They weren't. Two years after the debt bubble burst, invest­ment bankers seemed more concerned about which firm has the best parties or which trad­ing team gets the best bonuses. Doomsday? What's that?

Eddie's Tank-a-Bank plan is a radical chal­lenge to Wall Streeters' belief that they should keep their profits while their gov­ernment absorbs their losses. But to be a true challenge, Eddie's plan would have to work. Could it actually damage or destroy the banks? The answer has less to do with banks and more to do with the government, particularly the Federal Reserve. Speaking with current Reserve stafland retired regu­lators, I learned that such a challenge would be aggressively met. Flash-mob bank runs would hurt the banks, but the Fed would likely be able to stop the runs from destroy­ing the targeted institution. Even worse, the leaders of such a plan would probably be jailed by prosecutors and personally sued by the banks they targeted.

One expert on regulation who spoke with me on the record was William Black, asso­ciate professor of law and economics at the University of Missouri-Kansas City and for­mer litigation director for the Federal Home Loan Bank Board. As he tells in his book, The Best Way to Rob a Bank Is to (him One, Black and a few others broke ranks with the passive regulatory establishment during the 1980s to battle fraud in the savings and loan industry. To put more than 1,000 senior S&L lead­ers and insiders in jail, their investigations produced referrals for federal prosecutors, outlining the laws broken and the witnesses to interview. But that was 20 years ago. Pros­ecutors now have to rely mostly on the banks

for detailed reports of fraud.

Black came to the phone early on a Flor­ida morning, his voice becoming animated as we discussed Eddie's plan and the Fed­eral Reserve's response. Black has 10 years of experience as a banking regulator and 15 years as an academic studying the Fed. "The Fed's mantra is independence from politics. Which is to say," he adds, "independence from democracy. Responding to the will of the people is their greatest fear. The Fed would never allow this plan to work, because it would mean the people were dictating which institution or leader was fit. If they want a bank closed, they close it. No one else." Would the plan's last-minute method of execution hinder their response? "Let me put it this way: They'd do anything to stop something like this from happening. They'd hang bags filled with millions of dollars from the teller windows. They'd surround banks with armored Brink's trucks. They'd maybe even use this run as a form of theater, to demonstrate their own strength. And the banks would probably try to use the run as a scapegoat for any future problems." He laughed again when I mentioned Tank-a-Bank's plan to pressure Congress. "You would maybe get fast-track legislation that would make this a felony to organize. There are already some state laws against spread­ing false rumors about banks. A bunch of state prosecutors would be responsive."

It was strange to hear such honest answers. But this is probably why Black was talking to me rather than regulating banks. President Obama's campaign team filmed a video at Black's house to remind people of Senator John McCain's role in the S&L crisis. But since the election, Black has been persona non grata with regulators.

I asked Black what Eddie's plan could accomplish if the Fed responded the way he was predicting. If enough people were to join Iank-a-Bank, the banks' businesses would be affected through stock fluctuation and short selling. Such uncertainty might trigger a run not only by individuals but by their unin­sured commercial depositors too.

Black agreed, to a point. "To be a threat, it would have to trigger a run from com­mercial accounts, $250,000 and above. Which it well could. The Fed would see that as the greatest threat imaginable. But it would simply Hood the bank with endless, bottomless cash. The run could continue for weeks and they would just keep pouring money out the door. They'd do anything to make sure the bank stayed open."

The bank's business would be damaged, and the economy would be shocked. But if the bank stayed open, would that mean a flash-mob bank run was pointless? "No. It would be incredibly useful," said Black. "It would wake people up and force a confron­tation with reality. You can't underestimate guerrilla theater like that. It would reveal the truth about how totally and utterly insane the current situation in finance is."

I expected another complaint trance to begin. But Black surprised me. lie told me that flash-mob runs had already been car­ried out many times over the past 15 years and on a greater scale than Eddie had ever dreamed of. But it hadn't been individuals working together to withdraw their money

from consumer banks. It had been invest­ment banks, moving in sync to attack their own. "The current institutions—the banks and broker-dealers and hedge funds and shadow-banking people—already move as organized mobs to take billions of dol­lars out of institutions in minutes." Black was referring to the rapid trillion-dollar movements out of Long-Term Capital Management, Bear Stearns and Lehman Brothers, movements that occurred when it was rumored these institutions were unsta­ble. "The banks will inevitably do it to each other again," said Black. "If this plan you're describing is disruptive, it's nothing com­pared with what the system is set up to do. During the next crash, they won't target just four institutions; they may bring down 20. They will blow up marketplaces and in turn require trillions of dollars in fed­eral bailouts to save them. And we have rewarded them richly for doing so." Black objected to Eddie's plan—he made it clear he didn't think it was a good idea. But it wasn't because of moral objections. lie was just afraid it wouldn't work or could give banks an excuse for more wrongdoing. "What you need is a failure, which would lead to an investigation. That would docu­ment and uncover wrongdoing and allow for criminal referral. Anything less than that would lead to the banks using this as cover, pretending to be victims. When Senator Charles Schumer made a public comment on the fact that IndyMac [a sub-prime specialist bank] was grossly insolvent, the bank collapsed and the regulators and bank officials publicly blamed Schumer."

I began to understand why Eddie Braver-man had showed fear when I asked him to release his real name. "If this worked to any degree it would screw over a lot of wealthy and powerful people," said Eddie. "I don't fear the banks as much as I fear their lapdogs in the government. I've already had the IRS so far up my ass I could taste Brylcreem. I'm not interested in going through that again." When Eddie first told me this, it sounded paranoid. Now I wasn't so sure. "Back when I was working," Eddie said to me, "it was the individuals in the system, the traders, maybe their managers, who were bending the rules and doing the dirt. But now it's the leaders of the system who are dirty."

Apparently that applies not only to lead­ers of institutions but to regulators as well.

I've described the "complaint trances" of almost everyone I've spoken with in finance. Most of them were conversational mazes of historical context and technical detail. Io understand why Eddie's plan could be necessary, I'll tiy to summarize what these; people told me.

First, banks are too vulnerable to chain reac­tions. They are over-linked via counterparty exposures, which in finance-speak means they borrow from and lend to each other too much. This isn't always through loans but also through complicated seeuritization products (most subpiime mortgages, for example, were securitized) and over-the-counter derivatives. This makes borrowing and lending harder to monitor. Ihc Dodd-Frank Wall Street Reform and Consumer Protection Act, passed this past summer, attempts to address one form of linkage—credit default swaps—but only to make such transactions more transparent, not less widely used. If even a medium-size player is weakened by a bad decision, the link­age could cause the failures to spread, with the weakest ones also attacked en masse by institutional withdrawals.

Right now almost all large Western banks are weak. They lack real capital and also have a lot of hidden losses. This unsafe ratio of loss to capital is further complicated by lax accounting standards and byzantine expo­sures. Ihe Dodd-Frank bill has declared that investment-banking standards must be set but only when international rules are agreed upon. Until then (if that ever happens), the weakness will continue.

Why would a bank's leaders be so deter­mined to drive their institutions to the brink? Because they're compensated for doing so. Leaders and producers within investment banks are paid percentages of their bank's short-term gains, while their underlings—both shareholders and sov­ereign states—absorb any losses. An entire industry is driven toward disaster, with the economy along for the ride.

Of course, destroying a bank wouldn't directly fix any systemic or regulatory prob­lems. In fact, consumers would be attacking the most responsible part of the bank—the consumer banking division—to punish the

risk-taking cowboys of the investment banks. A former senior bank oflicer was horrified by Eddie's plan. "The consumer bank divisions are the ones with the rules," he told me. "They're the ones that help the community. They're the real bankers. Why attack them?" But according to Eddie, the banks are "using their consumer banking customers like human shields." While the investment and commercial segments of a bank are separate, major losses from the investment side could still destabilize consumer accounts. That's a fundamental reason bailouts are needed if catastrophic losses occur. Eddie's plan allows those human shields to mutiny.

I asked Yves Smith why people would ever consider using Eddie's plan, human shields or not. "A lot of people are extremely angry," she said. "They cannot necessarily explain the mechanisms that produced the financial crisis, but they know they've been screwed. They know Wall Street got bail­outs, yet no one has been held accountable. If you're not angry about what's going on, you're either not paying attention, deluded or you're part of the problem."

By sharing his plan with the world that night, Eddie defined himself as one of the angry ones. As someone whose life was shaped by staik competition, he believes true value is always eventually revealed. Eventually the underdogs in the Dumps!el's get their revenge and those in the towers stop laughing.

Eddie's plan is a new form of extreme action. Its reliance on millions of participants means that only mass desperation could lead to its use. But a flash-mob bank run could come in many forms. If a Facelxx>k group that called itself BofA Customers Totally Sick of Their Fees reached 2 million memtxTS, would we suddenly see cheaper checking accounts? How much anger would it take for people to join such plans or to attempt one as grand as Tank-a-Bank? Let us hope the many dooms­day scenarios put forth Uxlay won't come tiiie, because then we might find out. But if they do, Eddie Braverman's plan for flash-mob bank runs has created a new kind of risk for the banks to consider: the will of their customers. The only way to hedge it will be to listen.

"YOU WANT THE BANKS' ATTENTION? PUT ONE OF THEM IN THE MORGUE.