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BOOK REVIEW

When Wall Street bet the house

''House of Cards'' details the rise and fall of investment bank Bear Stearns. ''House of Cards'' details the rise and fall of investment bank Bear Stearns. (mark lennihan/associated press/file 2006)
By Chuck Leddy
Globe Correspondent / March 28, 2009
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William D. Cohan opens his economic narrative with Bear Stearns's dramatic March 2008 collapse, which concluded with a Federal Reserve-backed, last-minute merger with investment titan J.P. Morgan.

As Cohan's meticulous analysis makes clear, the investment bank's plunge was caused by a combination of factors, including a lack of internal controls, disengaged leadership, inadequate regulatory oversight by the US government, a plunging housing market, and Bear Stearns's overexposure to mortgage-backed securities.

Cohan, himself a former Wall Street investment banker, describes the rise and fall of Bear Stearns, detailing how its swashbuckling corporate culture and brutal internal politics undermined the bank at a time when the financial system suffered a liquidity crisis. Bear Stearns's customers and creditors, Cohan shows, reacted to the bank's overexposure to subprime mortgages in a predictable way: Customers began pulling their money out, and creditors stopped lending.

This liquidity crisis doomed the bank and kicked off the near-collapse of our entire financial system. Cohan explains why federal officials intervened last March: "Their concern was that the financial system had become increasingly fragile . . . and Bear Stearns's failure might cause tsunami-like damage if it was not contained." Cohan quotes a Morgan insider regarding its absorption of Bear Stearns: "This is insane. Why would you ever want to take on this piece of [expletive], other than out of some sort of patriotic sense of obligation?"

After describing the dramatic March collapse of Bear Stearns, Cohan goes back to discuss the beginnings of the bank. He discusses its "opportunistic culture" suspicious of theory. "If you made money for the firm," notes Cohan, you were given latitude to run things the way you wanted. "This haphazard strategy is key to understanding what happened in March 2008."

For example, when Bear Stearns got into the booming hedge fund markets by setting up its own line, it made money based largely on betting on the skyrocketing housing market in the form of mortgage-backed securities. Yet as abuses in the subprime housing sector began emerging, the housing market dipped and so did the value of Bear Stearns's securities. By the end, Bear Stearns would have billions of dollars of debt and a portfolio of toxic assets that nobody wanted to buy or accept as collateral.

Cohan shows the shocking results of Bear Stearns's lack of internal controls. One hedge fund manager, Ralph Cioffi, reacted to the subprime crisis by reassuring his investors that "only 6 percent of the funds' money was invested in subprime" mortgages, when, Cohan says, he "knew that actually the funds had closer to 60 percent of their money invested in subprime mortgages." Cioffi has since been indicted by a federal grand jury. Bear Stearns's CEO, Jimmy Cayne, appeared disengaged during much of the crisis, spending time golfing, playing bridge, and, according to a Wall Street Journal story cited by Cohan, smoking marijuana. Cayne stepped down as CEO a few months before last March's collapse, but the new leadership had no time to fix the mess.

Who's to blame? Cohan gives the book's final words to the last Bear Stearns CEO, Alan Schwartz (in the position for only three months): "In truth it was a team effort. We all [messed] up. Government. Rating agencies. Wall Street. Commercial banks. Regulators. Investors. Everybody." Cohan's epic account chronicles a watershed moment in Wall Street history, when a dysfunctional bank collapsed and helped to trigger our dysfunctional economy. Bear Stearns disappeared because it was absurdly overleveraged. Nobody knows how long it will take to recover.

Chuck Leddy is a freelance writer living in Dorchester.

HOUSE OF CARDS: A Tale of Hubris and Wretched Excess on Wall Street By William D. Cohan

Doubleday, 468 pp., $27.95

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