Thursday, 23 April 2009

“House of Cards”, by William D. Cohan (Allen Lane)

Cohan-HouseOfCardsHow Wall Street’s Gamblers Broke Capitalism

On March 16th 2008, 85-year-old Bear Stearns sold itself to JP Morgan for the incredible low price of $2 per share. Brokered behind the scenes by Federal Reserve Chairman Ben Bernanke, it was hoped that the deal would avert a feared financial cataclysm or a par with the Wall Street crash that precipitated the Great Depression. House of Cards focuses on the collapse of Bear Stearns; how a business that had been riding high mere months before unraveling with catastrophic knock-on effects felt around the globe. The process involved a number of events and developments in international finance.

“Nothing seemed amiss at Bear. But some inside the firm were very scared indeed,” Cohan tells us. It was not only some on the inside, though as rumours and insinuations set investors and lenders against Bear Stearns, what really brought Bear down was when analysts and other Wall Street players started to question Bear’s liquidity and the considerable investment in mortgage-backed-securities (specifically sub-prime mortgages). Ignoring the warnings, Bear’s management just kept on doing what they’d always done, playing bridge and borrowing copious amounts of money all while greed grew and grew.

“The holy grail of investment banking became increasing short-term profits at the expense of the long-term health of the firm and its shareholders.” (Less than a year before Bear Stearns was sold, Alan Schwartz, then CEO, was paid in excess of $35million in cash.)

What becomes very clear from reading the book is that those in charge of Bear Stearns clearly were working from a different script, pursuing policies that made no sense to those on the outside:

“if you have all this nuclear waste on your balance sheet, what are you supposed to do? You’re supposed to cut your dividends, you’re supposed to raise equity, and you’re supposed to shrink your balance sheet. And they just did the opposite. They took on more leverage.”

House of Cards is a rare book. Covering the ten disastrous days in March 2008, it is written with considerable narrative flare, not to mention a pace that is reminiscent of a thriller (perhaps like Brad Meltzer’s The Millionaires, given the subject matter). While this is certainly a boon in the currently-choking market for books about the current economic crisis, Cohan’s focus on pace does bring with it a couple of downsides.

Most importantly, and certainly in the first two chapters, the reader is under an almost constant barrage of new names, data, and Wall Street patois that, if you’re not familiar with them already, might leave you a little lost. (It was only thanks to Charles Morris’s Two Trillion Dollar Meltdown that I wasn’t left completely adrift.)

Overall, House Of Cards is an engaging book about corporate greed on a truly epic scale. Showing how what befell Bear Stearns can be seen as a microcosm of what ultimately felled the rest of the financial system, the book is filled with plenty of insider information (and a lot of hind-sight backstabbing), colourful characters and plenty of detail, the book is both engrossing, illuminating and to learn about the antics and methods of those involved is often horrifying and unbelievable. Cohan draws on a great level of access to and interviews with the key players in the crisis (and some on the periphery) to paint a devastating picture of Bear Stearns’s actions and condition. This is especially true of Jimmy Cayne who, along with Cy Lewis and Ace Greenberg, helped shape Bear Stearns over its 85-year history. Cayne is frequently present in the form of long, expletive-peppered quotes.

One of the most readable, riveting books about the economic crisis, and the colourful (in many ways abhorrent) characters involved, House Of Cards is a recommended read for everyone.

Also try: Jeffrey Goldberg, “What Now?” (The Atlantic, May 2009); Henry Blodget, “Why Wall Street Always Blows It” (The Atlantic, December 2008); Simon Johnson, “The Quiet Coup” (The Atlantic, May 2009); Charles Morris, The Two Trillion Dollar Meltdown (2009); George Soros, The Crash of 2008 (2009); Bryan Burrough & John Heylar, Barbarians At The Gate (1990); Tom Wolfe, Bonfire of the Vanities (1987 – obviously fiction, but it’s an interesting counterpart)

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