Monday, April 27, 2009

Barbarians? On Wall Street?

Barbarians at the Gate: The Fall of RJR Nabisco Barbarians at the Gate: The Fall of RJR Nabisco by Bryan Burrough

My review

rating: 5 of 5 stars
I've been on a tear reading about smart people who do stupid things with other peoples' money, so I downloaded this classic to the Kindle and read it very quickly. RJR/Nabisco's President Ross Johnson was obsessed with his company's undervalued stock and with living the high life, and he hit on the idea of arranging a leveraged buyout. He evidently figured that a lowball bid would let him continue running the company as he saw fit. After he announced the idea to RJR's board, all hell broke loose. Johnson's team ended up losing out to Kohlberg, Kravis, and Roberts--in part because the company's board wanted to be rid of Johnson--and Johnson pretty much had run out of enthusiasm for the deal anyway (paying $112/share would mean a lot more cutting back than $75/share would). This book reads like a novel, with egos, ulterior motives, deceipt, grudges, broken friendships, and greed galore. The final sentence of the new edition of the book sums it up nicely: "you couldn't make this stuff up."

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Saturday, April 25, 2009

Yet another kid picture post

I got so bored at a recent school fundraiser at which DW and I were in charge of arranging bowls and mugs that I spelled out the honoree's last name (Greco) with coffee cups.

A loves the penny arcade at the mall.

T is over his fear of the zoo train. Maybe we'll get him to ride it next time we go.

I'm still decompressing from T's recent move crisis. He was moved from his mini-group home "pod" onto a regular dormitory with no advance notice to us. I was furious and immediately went into lawyer mode. It took a couple of weeks to get everybody together and straighten out everything. T's behavior warranted a move, based on the information I got after the fact, but it would have been easier on him had we been able to go up there and help transition him from one place to another. T still sees A on a regular basis, and the direct care workers on the dorm are being trained in Applied Behavior Analysis techniques for working with T (somthing that will help other kids who are not yet in the Autism Center program). Hopefully T's behavior will improve enough that he can move from the dorm into a group home when a new one opens up.

Waterboarding--all the cool kids are doing it!

Does Shepard Smith think he's on MSNBC now?

I've paroused the John Yoo torture memo--the most important one of the lot--and it's hilariously bad. No wonder the Bushies wouldn't let it be seen by skeptical lawyers in Bush's own administration.

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.

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