House of Cards By William D. Cohan

A firm that was established on May 1, 1923, and stayed through the 1929 crash and the Great Depression, had been ruined by bad management and the crisis of 2008. In famous March 2008 when the 85-year-old firm Bear Stearns crashed and burned in little over a week, it became a herald of the credit crisis that snowballed later in the year and led to the current global financial meltdown. Bear Stearns, whose stock had traded as high as $170 in 2007, ended up selling itself to JPMorgan Chase for less than the value of its office building, and Mr. Cohan’s narrative of its death spiral not only makes for absorbing, edge-of-the-seat reading, but it also remains as a prophylactic tale about how avarice and arrogance and high-risk gambling smashed up one company, and turned it into a metaphor for what the author calls “the near collapse of capitalism as we have known it.”
William D. Cohan as a former Wall Street man and a talented writer, has the unusual gift not only of understanding the wickedly complicated goings-on, but also of being able to explain them in terms the lay reader can hold. The real might of the book is not the financial elements, but its picture of the highly colourful and highly flawed characters who ran Bear.
The source of the crisis of March 2008 deep in the history of the firm, a business formed by three domineering individualities: Cy Lewis, Ace Greenberg and Jimmy Cayne. Far from building in an orderly corporate fashion, with planned succession at the top, Bear’s story is one of the frequent Oedipal conflicts between leading patriarchs and youthful pretenders.
Much of the commentary about the financial crisis has been about how the people who ran the banks had no idea of the risks they were running. The incompetence was basic. While the bank was in spasms last March, its chief executive, Alan Schwartz, was in Palm Beach and playing golf. Its chairman, Jimmy Cayne, was in Detroit, taking part in a bridge competition. At one point, when his decision was needed on whether to put Bear Stearns into bankruptcy, it transpired that he had left the conference call and had to be hauled back from the bridge table by his wife.
Cayne is the presence that dominates this book. He had joined the bank in 1969, at the age of 35, and rose to the top through a combination of cunning and cockiness. He ruled the publicly quoted company as his own fiefdom. Over the crucial weekend of the JP Morgan deal, he speculated about employing the “nuclear option” of bankruptcy, even at the risk of bringing down the global financial system. At first he appeared relaxed about the loss of part of his fortune: “The only people who are going to suffer are my heirs, not me,” he said. “Because when you have a billion six, and you lose a billion, you’re not exactly like crippled, right?”
At the time of its crash, Bear Stearns was one of the world’s largest and most aggressive investment banks, securities traders and brokerage companies. It also was the company most heavily invested in various forms of mortgage-backed securities, the novel financial instruments that subsequently sucked the world financial system down into a whirlpool of illiquidity, as American real estate inflation slowed and, then, declined. As Cohan explains, “Unlike a bank, which is able to use the cash from its depositors to fund most of its operations … pure investment banks such as Lehman Brothers and Bear Stearns had no depositors’ money to use. Instead they funded their operations in a few ways: either by occasionally issuing long-term securities, such as debt or preferred stock, or most often by obtaining short-term, often overnight, borrowings in the unsecured commercial paper market or in the overnight ‘repo’ market, where the borrowings are secured by the various securities and other assets on their balance sheets. These fairly routine borrowings have been repeated day after day for some 30 years and worked splendidly — until there was perceived to be a problem with either the securities or the institutions backing them up, and then the funding evaporated like rain in the Sahara. The dirty little secret of what used to be known as Wall Street securities firms — Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers and Bear Stearns — was that every one of them funded their business in this way to varying degrees, and every one of them was always just 24 hours away from a funding crisis.”
Cohan has given us is a day-by-day, conversation-by-conversation account of a financial debacle equivalent to the failure of Credit Anstalt, the Vienna, Austria, bank whose default signaled the globalization of the Great Depression.
A few weeks ago, a former UK central banker inveighed against the press at a business conference for characterising the credit crunch as a crude morality tale. But, as this book makes clear, the crisis is not just a dry matter of financial innovation gone wrong – it has moral failure at its core.

Post Scriptum

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