I am looking forward to the release of Inside Job so that I can get a better grasp on the financial meltdown of 2008. My first attempt at understanding it was to read William D. Cohan's House of Cards: A Tale of Hubris and Wretched Excess on Wall Street. Cohan worked on Wall Street for many years before turning journalist and he brings his insider's knowledge to bear (ahem) on the subject at hand: the fall and decline of Bear Stearns.
The first part of the book is some masterful story-telling which depicts the last 10 days of Bear Stearns' existence. Despite knowing how it all turned out, Cohan does a great job of taking something I would ostensibly find boring – Wall Street wheeling and dealing – and making it into an epic tragedy. Rumors ran rampant on the Street and people started pulling their money out of BS and no amount of spin could staunch the bleeding. Like I said above, I knew the end result yet I still found myself enthralled and wondering, for example, if the Feds would open a lending window in time to save the company.
You'd think that every moment of the lives of those involved was videotaped for those 10 days because the level of detail here is amazing. He doesn't just say that a meeting was held with these parties and this came out of it. Cohan quotes participants, tells you what time they left the office and went home to bed, and then gives you the time when they were woken up by phone calls in the wee hours of the morning.
While it might seem like overkill, it all makes sense in the second part of the book. With the trainwreck over, Cohan argues that the corporate culture there is what led to the sub-prime mortgage meltdown. He takes the reader back to the founding of Bear Stearns in 1923 and slowly weaves a history of the company stopping along the way to pay particular attention to three men who led the company over the years: Cy Lewis, Alan Greenberg, and Jerry Coyne. Lewis ran the company from 1949 until 1978 when Greenberg took over the reins. He, in turn, was succeeded by Cayne.
Unsurprisingly, all of these men were headstrong and had forceful personalities. And they all contributed to a culture where greed became the overriding concern. It's not that greed is unknown elsewhere on Wall Street but BS' pursuit of profit was particularly cold and opportunistic. Managing partners made a percentage of profits while others down the line made commissions. Clients were often seen as dimwits to be taken advantage of for the firm's gain. Again, I'm not a Wall Street insider and presume that this was how all such firms played the game but Cohan paints a picture of BS as being outside the norm. One example to illustrate this was when BS refused to help bailout Long-Term Capital Management in 1998. LTCM was a hedge fund and in ran into big trouble that year. Many in the industry saw systemic problems were the firm allowed to crash. And so the government got together with the biggest banks to try and orchestrate an "orderly liquidation" of LTCM instead of just having it flop and take everyone with it. At the end of the day everyone except BS banded together for the common good.
As Cohan's company history winds its way towards 2008, it becomes clear what took BS down. It was a hedge fund the equity of which mostly consisted of sub-prime mortgages. Essentially, the fund kept hemorrhaging money and BS' standing kept falling until no one would lend to them. Cayne comes off poorly here as it happened under his watch. He was largely unaware of what was happening and, according to many, wouldn't have understood the complicated financial instruments anyway. Cohan portrays the CEOs as not caring a whole lot where the profits come from as long as they keep coming in. They have their kingdoms and seek to stay in power until they are deposed by praetorian guards of executive management with the position given to whomever is willing to draw first blood.
It is a chilling thought that Bear Stearns was a microcosm of the larger world of finance and perhaps American business more generally.
If you're a layreader like myself, you might have some trouble keeping up with all the financial jargon. I think that Cohan does a good job of explaining things but he doesn't get down to a For Dummies level. He certainly presented enough information for me to understand why, say, certain financial instruments were "toxic" and why things went to shit for Bear Stearns but I still don't understand hedge funds at a granular level or how a company like Bear Stearns can survive by having employees line-up enough credit first thing in the morning for the company's quotidian business. While I don't blame Cohan for my ignorance, it would surely behoove me to read more to get a grasp on the larger picture of Wall Street. That Bear Stearns was gobbled up by JP Morgan and Lehman Brothers went out of business aren't events that happened in a vacuum. Cohan makes clear that that the financial world is a tangled web where companies' fortunes are inexorably intertwined with those of other companies. It's not his fault that I don't understand just how interconnected banks are but I do blame him for making me want to learn more.
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