House of Cards: How Wall Street’s Gamblers Broke Capitalism: The Fall of Bear Stearns and the Collapse of the Global Market
William D. Cohan
Review by Richard Oldfield
This is two books in one, and both of them are thrillers. The first, in the anti-chronological order which Cohan adopts, is the story of the ten days in March 2008 in which Bear Stearns collapsed. The second is its history over the preceding 85 years.
Cohan, whose last book was an equally page-turning account of the history of Lazards, has plenty of material in Bear Stearns. The bank had three key leaders in its 85 year history. First was Cy Lewis, ultimately a morose alcoholic, in his heyday a brilliant investor whose first coup was to buy railroad bonds at five cents on the dollar after Roosevelt had commandeered the railroads for the war effort, as a result of which they ceased to pay interest.
Lewis realised that as long as the United States won the war the railroads would be needed, that the bonds would once again pay interest, and that the discount would vanish. It did.
The next leader was Alan Greenberg, cautious and parsimonious. One of his memoranda has become the stuff of legend.
‘I was just shown the results for our first quarter. They were excellent. When mortals go through a prosperous period it seems to be human nature for expenses to balloon. We are going to be the exception. I have just informed the purchasing department that they should no longer purchase paperclips. All of us receive documents every day with paperclips on them. If we save these paperclips, not only will we have enough for our own use, but we will also, in a short time, be awash in the little critters.’
He was too, a brilliant trader who, immediately after the 1987 crash when most of his colleagues were paralysed with fear, declared: ‘I think now’s the time to start buying,’ and began practising his golf swing on the trading floor, the epitome of insouciance.
The third leader was Jimmy Cayne, a champion bridge player. The relationship between Greenberg and Cayne was extraordinary. Cayne used to drive Greenberg to work most mornings. Yet they hated each other.
Cayne fined anyone $100 if he used in Cayne’s presence the nickname by which Greenberg was otherwise universally known, Ace. Cayne carved his way through the firm mercilessly, criticised Greenberg for bullying, but was himself a bully, always ready to threaten his resignation unless he got his way.
Bear Stearns was a maverick firm, hiring people from non-Ivy league backgrounds and behaving unconventionally, often admirably. One maverick action which cost it friends was Cayne’s refusal to participate, alone among a dozen or so Wall Street firms, in the bail-out of Long Term Capital Management in 1998.
Cayne himself lost friends, in the drama of 2007-2008, by a series of absences. During the week in which Bear Stearns was driven to ruin, Cayne, now chairman rather than chief executive, was away playing in a bridge championship in Detroit.
In the previous summer, in the midst of tense negotiations following the collapse of two Bear Stearns hedge funds, he took off Thursday afternoon and Friday morning as usual to play golf, and immediately after the hedge funds closed went off to Nashville, Tennessee to play bridge for ten days.
There was one other apparent absence: in a vital telephone conference call to analysts in August 2007, intended, and singularly failing, to reassure, someone asked Cayne a question and the chief financial officer replied that Cayne had ‘stepped out of the room.’ He got bad press for this apparent indifference to the analysts. But Cohan reveals that in fact he had not left the room. The question was not a difficult one, but Cayne had frozen. For all his bluster, Cayne was capable of breakdown.
One leader, its last, emerges at least as a decent man, and that was Alan Schwarz. It was Schwarz who, in January 2008, told Cayne that he had to step down as chief executive. To his credit, for once Cayne did not counter-attack. ‘I will do whatever you want,’ he said. ‘I am glad it’s you.’
After a sleepless weekend in March 2008 the board of Bear Stearns was strong-armed into selling the company at $2, raised a week later to $10, a share to JP Morgan, who had guarantees from the Fed.
Bear Stearns was at the sharp end of a craze for leverage and of the vast increase in exposure by banks to derivatives. Hence the house of cards. But one of the interesting points about this title is that ‘House of Cards’ was not a term applied alone to Bear Stearns and a few other banks which had gone dangerously wrong.
Cohan takes this title from a description by an analyst at Fox-Pitt Kelton of the nature of banks in general: ‘Once you have a run on the bank, you are in a death spiral and your assets become worthless. Banks and brokerages are a house of cards built on the confidence of clients, creditors and counterparties. If you take chunks out of that confidence, things can go awry pretty quickly.’
The message of this book is that with financial companies, the risk of something terrible happening may not normally be very great but that in extreme circumstances it suddenly becomes overwhelming: the message for others is much more ‘there but for the grace of God…’ than ‘serves them right’.
It is too early to tell whether Bear Stearns had to collapse. We will not know for a couple of years whether the scale of writedowns in real estate-related assets merited the evaporation of confidence which occurred during that dramatic March week. It is easy now to opine that Bear Stearns was an accident waiting to happen.
Many people saw that there was a real estate and leverage bubble but few foresaw much in advance the devastating consequences. As late as February 2007, Ben Bernanke, chairman of the Federal Reserve, testified that he did not believe a housing downturn was a ‘broad financial concern or a major factor in assessing the state of the economy.’
Maybe he was just kidding. But in retrospect it is easy to agree with Alan Schwartz , the last chief executive of an independent Bear Stearns: ‘In truth, it was a team effort. We all fucked up. Government. Ratings agencies. Wall Street. Commercial banks. Regulators. Investors. Everybody.’ Cohan ends his book with that judgement.