House of Cards: A Tale of Hubris and Wretched Excess on Wall
Street
by William D. Cohan
(Doubleday, 468 pages, $27.95)
If the August 2007 implosion of the subprime mortgage lending
market signaled the impending burst of the housing asset bubble,
the March 2008 collapse of the old-line investment banking firm
Bear Stearns & Co. heralded the stock market crash and global
financial crash of 2008. Cohan is an ex-investment banker who
previously published a history of the investment-banking firm
Lazard Freres (best known for partner Felix Rohatyn, architect of
the 1975 New York City financial bailout). He has written a
riveting, richly detailed book that provides insights useful for
understanding how we got into the financial mess we find
ourselves enmeshed in, the first step in figuring how we might
extricate ourselves from economic purgatory.
Founded in 1923, the firm prospered under the guidance of three
dynamic leaders. First, in 1933, came Salim (Cy) Lewis, who made
a post-Depression financial killing for the firm by buying for a
song millions in railroad bonds that were worthless when
government-owned during World War II but when privatized, became
hugely valuable. Lewis in the 1950 was, along with Gustave Levy
of Goldman Sachs, co-pioneer of proprietary “block” trading, in
which the firm bet huge sums of its own capital on a daily basis,
trading in and out of huge blocks of stock bought and sold by
financial institutions, pension funds and the like.
Second, in 1949, came Alan (Ace) Greenberg, a legendary trader
with ice water in his veins, who expanded the edifice built by
Lewis and took Bear public in 1986, gaining access to vast pools
of public capital, while transferring most associated financial
risk from the firm’s partners to the shareholding public. A
fanatical cost-cutter, Greenberg urged his employees to recycle
envelopes and take paper clips off correspondence they received.
Third, in 1969, came Jimmy Cayne, a hustling middle-class
Midwesterner who combined natural salesman skills with financial
acumen and world-class bridge skills that gave him access to some
of his biggest clients. Cayne and Greenberg would live to see the
firm collapse, in the process costing them nearly all their
surviving investment in the firm.
The firm’s trading horizon was day by day, with rejection of
planning, prediction or projection. You bought, sold, and did not
mire yourself in bad positions. Greenberg never got angry with
his traders for taking a loss, only for whatever he perceived as
sloppy. Said Greenberg, when asked what makes for a great trader:
Oh, I don’t know. I think the important thing in the securities
business is just taking losses. Saying you are wrong. If you
own securities, and if you make a mistake, you can take a loss.
If you make a mistake in real estate, you have to buy a
for-sale sign. And I just think the ability to take a loss and
say you are wrong is something you should do.
Greenberg’s sang-froid paid off during the Crash of
1987, when a 22.6 percent single-day plunge wiped out $500
billion of market value and two-thirds of Bear’s $24B market cap.
Greenberg saw the debacle as a fantastic buying opportunity. To
rally his trader troops, he stood up in the trading room during
the pandemonium and causally swung a golf club, saying he might
go play golf the next day.
A fixed-income powerhouse, Bear entered the mortgage-backed
securities market in 1986 and quickly became a major player. It
rode the bubbles of the 1990s and 2000s blissfully unaware, but
in good company. On February 28, 2007, Federal Reserve Chairman
Ben Bernanke testified to Congress that he did not see a “housing
downturn” as a “broad financial concern or a major factor in
assessing the state of the economy.” Six months later the
subprime market imploded. In 2006 Bear realized that
diversification supposedly embedded in securitization of subprime
mortgages was fiction: the market was mostly NINJAs (No Income,
No Job/Assets). By mid-2007 Bear’s $12B of equity was leveraged
44 times, versus $525B of assets.
Treasury Secretary Hank Paulson and Fed Chairman Bernanke worked
to rescue Bear, lining up, after much cajoling, a reluctant JP
MorganChase whose dynamic CEO, Jamie Dimon, put together a bid
within two days. Dimon was prepared to pay $10 per share at a
time when Bear’s stock was carried on the books at $84 per share.
But Paulson, fearing moral hazard if Bear’s shareholders got $10,
forced the price down to $2, nearly 99 percent below Bear’s
$172.69 per share peak. Yet Dimon’s star lawyers made a huge
blunder, drafting a key clause poorly, thus giving Bear license
to shop for a higher bid without losing JPM’s bid, for up to one
year. Fortunately for Dimon, no one else was interested in buying
the wounded firm, whose dense contractual interlocking with over
five thousand firms worldwide created an accounting and
investment fog that could obscure countless billions in financial
perfect-storm surprises.
But if Bear failed, so did the federal government. When on the
Ides of March Bear was stabbed multiple times by suspicious
counterparties seeking more added financial assurance than Bear’s
cash could meet, Bear turned to the Federal Reserve. The Fed
authorized a revolving credit line — but it could not, for
administrative reasons, be activated until March 27. By then Bear
was long gone.
When Lehman Brothers went Bear’s way six months later, the feds
followed the script for Bear, except that they could not find a
buyer for Lehman and would not do anything like the $29B loan
they gave Bear’s buyer. Lehman sank, and sent a cascade shock
though the global financial system, causing a near core meltdown.
AIG and Washington Mutual imploded; Wall Street’s last two
investment banks, JPM & Goldman Sachs, converted to
commercial banks; Congress passed the first of several monster
rescue packages; the Fed pumped several trillion into the economy
and Treasury stumbled around in search of a plan to save zombie
banks.
The author sums up the deluge that followed by quoting a Wall
Streeter: “”But, in truth, it was a team effort. We all
f%^&*d up. Government. Rating agencies. Wall Street.
Commercial banks. Regulators. Everybody.”
It took Rome 224 years after Caesar’s murder in 44 BC to slide,
upon the death of Marcus Aurelius in 180 AD, into irreversible
decline. Born in 1790 under the fabled New York Stock Exchange
buttonwood tree, Wall Street expired in a mere six months, dead
at age 218. The cause of death, as Cohan’s book shows, was epic
hubris. Now America’s economic and financial future is
in the hands of the federal government, under a President and
Congress whose hubris trumps Wall Street’s, and is
combined with an ignorance no trader could survive with for a
single week.
