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A compelling and timely new book, full of insider bile, investigates Bear's collapse and the crisis that has followed
House of Cards:A Tale of Hubris andWretched Excess on Wall StreetBy William D. CohanDoubleday; 468 pp.; $27.95
The March 2008 implosion of Bear Stearns abruptly signaled that the world was in the throes of something much more than your garden-variety market correction. One minute, the investment bank was Wall Street's preeminent bond shop—an operation that was taking its subprime lumps but seemed resilient enough to survive and profit as it had for eight straight decades. The next minute, clients were pulling their money and other firms stopped trading with Bear. The firm had to agree to sell itself to JPMorgan Chase (JPM) for a mere $2 a share (a price later bumped up to $10), down from $30 only 48 hours earlier.
A year—and a Washington Mutual (WAMUQ), Wachovia, Fannie Mae (FNM), Freddie Mac (FRE), AIG (AIG), and Lehman Brothers (LEHMQ)—later, with Citigroup (C) and Bank of America (BAC) facing possible nationalization, it's clear that Bear was no one-off flameout. This was deeper than most anyone had dared to imagine.
Which is why you should personally dog-ear a copy of William D. Cohan's House of Cards: A Tale of Hubris and Wretched Excess on Wall Street, so far the definitive work on how, as the author puts it, the "Bear Stearns cancer had metastasized and spread throughout the world." Cohan, a 17-year Wall Street veteran and the author of an illuminating history of Lazard Frères (LAZ), The Last Tycoons, vividly documents the mix of arrogance, greed, recklessness, and pettiness that took down the 86-year-old brokerage house and then the entire economy. It's a page-turner in the tradition of the 1990 Barbarians at the Gate by Bryan Burrough and John Helyar, offering both a seemingly comprehensive understanding of the business and wide access to insiders.
Bear was always known as that scrappy bond trader with a big chip on its shoulder. Although the firm never had an unprofitable quarter, all the respect seemed to go to the white-shoe likes of Goldman Sachs (GS) and Morgan Stanley (MS). But by this decade, explains Cohan, Bear had scored even bigger by riding the mortgage boom to sell and repackage loans, which sent its profits and share price skyward. By the end of 2006, he writes, Bear's Jimmy Cayne "was the only billionaire CEO among the titans of Wall Street securities firms—a fact that put extra swagger in his step...a college dropout and self-made man had bested the lot of them doing it his way."
More cocksure than ever, Bear set its ambitions on competing head-to-head with the big boys. It wanted to catapult Bear Stearns Asset Management, a perennial backwater, into stardom. "The cornerstone of BSAM's philosophy," Cohan writes, "was its focus on 'repackaging risk' "—specifically, taking arcane mortgage-backed securities with (theoretically) minimal default risk, goosing their yields with huge helpings of leverage, and then selling that coveted combo to investors via in-house funds, while collecting chunky fees. The upshot: By 2006, BSAM's revenue had shot up 47% over the past year, to $335 million.
So lofty were Bear's profits and so heady its $167 share price that management took to—what else?—middle-school-style infighting, backstabbing, and gossip-mongering. CEO Cayne and veteran Co-President Warren Spector, for starters, came to detest each other. Not only did Spector badly want to supplant Cayne, observes Cohan, but he also went out of his way to badmouth him to a major institutional shareholder and to taunt him at the bridge tournaments Cayne ardently frequented. For his part, Cayne wanted Spector out and sent out memos firm-wide to needle his subordinate. In the summer of 2007 as two BSAM leveraged hedge funds on Spector's watch blew up, Cayne had Spector fired.
A fateful move, it turned out. Bear was left with a C-suite that had shockingly little idea of its exposure to toxic securities. In the words of one bond trader quoted by Cohan, Cayne "had no idea what we did for a living in fixed-income....He had no clue." Cayne himself would be out in a matter of months. Ditto for all of Bear.
House of Cards does run on, particularly in what feels like an obligatory epilogue on the subsequent demise of Lehman Brothers. Even so, the book is annoyingly hard to put down, especially thanks to its dishy, often profane, quotes from insiders.
The book's galling takeaway: Bear Stearns earned billions setting the stage for the world to lose trillions.
Read it, learn—and weep.