Red-Blooded Risk: The Secret History of Wall Street

Cash

One of the indelible memories of the descent into financial crisis in 2008 was bank CEOs coming on television to announce how much cash their bank held. That was scary, because no one had any idea what the number was supposed to be, or even exactly what it meant. Naive people might have thought the bank had a vault with dollar bills in it, or that the cash was on deposit with the Federal Reserve. Sophisticated people knew it was something far more complicated than that, but only a few back-office people and risk managers—and likely not the CEO making the speech—knew exactly what it was. What everyone knew was that if the guy was giving the number on CNBC his bank was in some kind of bad trouble.

Once he told you the number, it was also scary because it was so small compared to the obligations of the bank. For example, in the last financial statements Lehman Brothers filed before failing, it reported $20 billion of cash and cash equivalents. But it had $263 billion of short-term liabilities, so the cash wasn't going to make much of a dent. That's even more obvious when I tell you the $20 billion of cash wasn't Lehman's anyway; it was cash deposited by customers as margin for securities purchases. One particularly shaky $3 billion of it was short-term notes issued by a Lehman-related entity and guaranteed by Lehman, then pledged to JPMorgan as collateral. In effect, Lehman printed up its own money and gave it to another bank, but still claimed it as part of its “liquidity pool.” ...