Fortune Smokes Out Details in Subprime Mess

By Jennifer Hopfinger
November 27, 2007 04:14 PM

“What Were They Smoking?” is splashed across the cover of Fortune magazine’s November 26th issue, above photos of the heads of four major Wall Street firms and the amounts they lost in the subprime mortgage meltdown: Chuck Prince of Citigroup lost $9.8 billion, Jimmy Cayne of Bear Stearns lost $450 million, John Mack of Morgan Stanley lost $3.7 billion, and Stan O’Neal of Merrill Lynch lost $7.9 billion.

Ouch, that’s harsh. But you’ve got to wonder. In the cover story, “Wall Street's money machine breaks down,” writer Shawn Tully explains how this mess happened.

“Two things stand out about the credit crisis cascading through Wall Street: It is both totally shocking and utterly predictable. Shocking, because a pack of the highest-paid executives on the planet, lauded as the best minds in business and backed by cadres of math whizzes and computer geeks, managed to lose tens of billions of dollars on exotic instruments built on the shaky foundation of subprime mortgages,” Tully writes. “Predictable because whether it's junk bonds or tech stocks or emerging-market debt, Wall Street always rides a wave until it crashes. As the fees roll in, one firm after another abandons itself to the lure of easy money, then hands back, in a sudden, unforeseen spasm, a big chunk of the profits it booked in good times.”

The toll has been enormous. CEOs O'Neal and Prince have left their firms, thousands of workers have lost their jobs, and the companies themselves have lost billions in market value. The dollar has fallen, commodity prices have skyrocketed, and the economy has weakened. And according to the article, it could get much worse.

Tully takes a close look at Merrill Lynch, putting together the pieces that led to disaster to shed light on what may have happened at the other firms -- all without the help of Merrill, which declined to speak in detail for the story. With news reports frequently referring to the subprime crisis with lots of alarming statements and little elaboration, Fortune’s clear and detailed coverage of a complex topic is a welcome explanation.

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Copyright © 2008 Donald W. Reynolds National Center for Business Journalism