Wednesday, April 22, 2009

And I thought bridge was an old ladies' game

House of Cards: A Tale of Hubris and Wretched Excess on Wall Street House of Cards: A Tale of Hubris and Wretched Excess on Wall Street by William D. Cohan

My review

rating: 5 of 5 stars
I began reading financial journalism on a semi-regular basis during the Enron collapse, and began watching CNBC after the panic last fall. I have absolutely no background in business or finance, but the ups-and-downs of the markets fascinate me. Given my lack of any background, I know whether a particular book or article is well-written based on whether I can actually understand it.

William D. Cohan's "House of Cards: A Tale of Wretched Excess on Wall Street" ranks with Bethany McLean's "The Smartest Guys in the Room" as an accessible work of business writing that is so well put-together one doesn't want to put it down. Cohan's book is the tale of the late Bear Stearns & Co., which went from being the fifth largest brokerage house in the U.S. to being flat broke in ten days during March 2008.

The book takes its title from a peculiar aspect of Bear's corporate culture--its long-time CEO Jimmy Cayne was a championship level player of the card game bridge, and Bear entered teams in high-level bridge tournaments. Indeed, Cayne was off at bridge tournaments during key crises in the collapse of his firm and couldn't be bothered to return to New York.

Cohan's book opens with a riveting blow-by-blow account of the ten-day collapse of Bear and its ultimate forced absorbsion by JPMorgan Chase at the behest of Treas. Sec'y Henry Paulson, Fed. Chmn. Ben Bernanke, and N.Y. Fed. Pres. Timothy Geithner. Cohan then provides a history of Bear and its overbearing, colorful leaders, most importantly Cayne and his predecessor Ace Greenberg. Bear was unlike its rival firms in its contempt for family pedigrees, MBAs, and strategic planning. It was the street urchin with a huge chip on its shoulder, and the firm's strategy was simply to make lots of money. Bear's corporate culture was very much like a mens' locker room, and the firm had clients that other Wall Street firms viewed as unsavory. Bear's employees were loyal to a fault, and its leadership team rarely changed, with the dictatorial Greenberg and/or Cayne running the show. Greenberg and Cayne lacked formal educations in finance themselfves and they tended to hire based on instinct rather than credentials. All of these factors led to a firm full of very specialized moneymakers, with nobody really understanding the full scope of the business or the risks inherent in some of Bear's operations.

Bear pretty much originated the infamous mortgage-backed securities, and the firm went heavy into debt obligations backed by subprime loans. Once those became near difficult to value, they could not be sold. Cayne did not understand much of anything about these securities, and he fired the one person in the firm who really did shortly after two of Bear's hedge funds collapsed due to plunging values and outright fraud.

Rumors about Bear having too many illiquid assets and not enough capital began spreading on the Internet in early March 2008. Cayne was off playing cards, and then-CEO Alan Schwartz was off in Florida at Bear's annual media event. Neither understood the gravity of the firm's situation or the likely effect of the rumors in an already jittery market. The rumors turned out to be largely true--although the firm had a large cash cushion, it was nowhere near enough to take a massively leveraged firm (Bear's leverage was usually around 50:1) through any crisis of confidence, which is exactly what followed. Redemption calls were fast and furious; short sellers (some perfectly legit) drove down the company's stock value; other firms (notably Goldman Sachs) refused to stand as counterparties for their own clients against Bear; and the overnight lenders who financed Bear's day-to-day operations stopped lending to the company. A loan from the Fed to Chase (a regular bank with access to Fed funds) to be loaned to Bear (an investiment bank with no access to Fed funds) had exactly the opposite effect it was supposed to have ("oh my God, they're worse off than I thought!" instead of "well, now they've got the money and time to sort things out"), and, one day later, forced negotiations began with JPMorgan Chase.

Cayne and other Bear muckety mucks were interveiwed extensively for the book, as was current Treasury Sec'y Tim Geithner. The book is well-sourced and well-written, and Cohan doesn't pull punches even as to the major contributors to his work.

"House of Cards" shows how thin was America's veneer of hyper-prosperity, much as Hurricane Katrina showed how thin is the veneer of the infrastructure of our advanced society, and much as the release of the torture memos showed how thin is the veneer of our supposedly evolving standards of decency. I seeem to like veneer today; anybody for a patina instead? When it comes down to it, we're never far away from a Hobbesian state of nature, where life is nasty, brutish, and short.

View all my reviews.

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