The Fall from Grace
"Bennet Sedacca announced to the world at 10:15 on the morning of March 5, 2008, that venerable Bear Sterns & Co., the nation's fifth-largest investment bank was in trouble, big trouble." The first paragraph opens with a bang. Ten days after Sedacca made that call, he was proven right. Bear Sterns was no more; JP Morgan bought Bear Stearns with backing from the Feds. William D. Cohan's House of Cards: A Tale of Hubris and Wretched Excess on Wall Street, explains how Bear Sterns got to that point.
Nine days after Sedecca's call, Bear Stearns filed their Quarterly Report. They reported $115 million in income for their first quarter ending February 29, 2008. (Yes, the leap year came into play). How did they fall so fast?
Cohan's background as an Investment Banker and access to top brass at Bear Stearns leads you into a world where confidence is the most important asset a bank has at its disposable. Once Bear Stearns lost the trust it had in the repo markets, their financing was quickly pulled by a number of lenders, and only JP Morgan Chase could save them from bankruptcy.
Cohan's account of the last days of Bear Stearns is fascinating. Channeling other business books like [amazon-product text="Michael Lewis's Liar's Poker" type="text"]0140143459[/amazon-product], [amazon-product text="Bryan Burrough's Barbarians at the Gate" type="text"]0061655546[/amazon-product], and [amazon-product text="James Stewart's Den of Theives" type="text"]067179227X[/amazon-product].
Cohan attempts to write this era's definitive fall from grace story. Using heavy quotes from top management like CEO Jimmy Cayne, Cohan pains a picture of a testosterone-fueled company with clashing personalities. For example, one of Cayne's idiosyncrasies is a penchant for playing bridge when major events happen at the firm (Collapse of Bear Stearns Hedge Funds or his decision to play at a bridge tournament in March 2008 while the company was collapsing).
There is even ample investigation into the beginnings of our current financial crisis. No one escapes blame... Government efforts to increase loans to lower income borrowers throught the modification of the Community Reinvestment Act, laxity (and conflicts of interest) on the part of ratings agencies, failed risk management processes at major banks, lying on mortgage applications by lenders, and even greed on the part of borrowers. Each group shares some of the fault for where we are, and Cohan makes sure to not scapegoat any one party in the book.
Worth a Read
The book isn't without its shortcomings... Cohan has a deep understanding of market mechanisms that may not be apparent to the average reader. It seems he assumes that his readers will have the knowledge to follow his writing, even in some of the more advanced sections. However, I have no doubt the readers of this site would have no issues with the topics in this book. Regardless, the book is worth reading for the quotes alone. Cohan had extraordinary access to Very Important People on Wall Street and in the ranks of Government and the Federal Reserve.
I'll leave you with a chilling quote, delivered by Hank Paulson in the last chapter of the book. The last chapter gives an overview of the bankruptcy filing of Lehman Brothers and the purchase of some of its divisions and real estate by Barclays.
"There will be no bailout for Lehman," Paulson said, according to someone who was there. "The only possible way out is a private sector solution."