Centroids : If you have the chance to hear William Cohan on C-Span, you would do yourself a favor to tune in and hear him . The 3 reviews of his 2009 book will give you some idea but listening to him you get a real sense of just how well informed he is about the financial markets and the way investment bankers really do business --and how it is that they have Capitol Hill and the White House in their pockets. Maybe the way the government mismanaged Freddie and Fannie is a major part of the story of the collapse of 2008, which I think it is, but there is so much more to the mess and Cohan makes it clear that a huge part of the picture had nothing to do with government actions and everything to do with the ludicrous structure of the financial market itself and how vulnerable it made itself to financial storms through mismanagement when , over the course of years, it put sufficient pressures on gvt to gut Glass Seigal and was able to operate essentially unregulated from the 1990s onward Cohan explodes the myth --originally a baby of Alan Greenspan even if he has since abandoned it-- of self regulating capital as a "good." That's not how finance people work, and if anything, they are every bit as irresponsible now as they were in 2007 or 2008. Personally I think that this level of irresponsibility is just as rampant at the Congressional level and in the WH, but one problem at a time. How to fix the problem ? At least for Wall Street, Cohan proposes a new law, the assets ( everything, including the houses they own ) of the top 100 investment bankers must be put up as foundational collateral for all loans taken out by banks ( this includes Goldman Sachs ) which would be put in an equity pool . All losses from investments would always First be subtracted from this pool, NOT other assets, and if bad decisions cause CEOs to forfeit their homes, tough luck. Reason for this is the flagrant irresponsibility of people at the top these days, who spend inordinate time playing golf, playing bridge, and otherwise anything but concentrating on the intricacies of their businesses. Even in the case of those who do study finance as they operate in the business, there nonetheless are numerous incentives to gamble with other people's money, while their own assets are off the table and are guaranteed.safe. Well, make those assets unsafe by design and only assured by wise investments. And, yeah, to make sure, re-instate Glass Seigal. But, uhhhhh, don't expect DC, this extends from BHO to the newest freshman Congressman, to do one damned thing about almost any of this. This means both Democrats and Republicans. Rahm Emmanuel said, in late 2008, words to this effect, "let's not squander this crisis and use it to substantially revise the finance system." Which, needless to say, was exactly what the WH did, destroying a once in a generation or even once in a lifetime chance to focus attention on health care. With a ( structurally unsound ) recovery now under way, with $ 140 billion in bonuses paid to bank CEOs, with real estate in continued trouble, the mess is guaranteed to break out in the future all over again., albeit in new form. But we have a ( very much contested ) health care trillion dollar bill now enacted into law. And if the price of getting that passed was to perpetuate the finance system, that was the price Capitol Hill and the WH was more than happy to pay. We may not get one, but seems to me that the only way to end this madness is to organize a 3rd political party and to hell with both Democrats and Republicans. The system stinks and that is the reality we need to transcend. Billy ------------------------------------------------------------------- NYTimes The Tsunami that Buried a Wall Street Giant Michiko Kakatani March 9, 2009 In March 2008 when the 85-year-old firm Bear Stearns — the nation’s fifth-largest investment bank, which had survived every crisis of the 20th century, from _the Great Depression_ (http://topics.nytimes.com/top/reference/timestopics/subjects/g/great_depression_1930s/index.html?inline=nyt-classifier) to the market dive of 1987 without a single losing quarter — crashed and burned in little over a week, it became a harbinger of the credit crisis that snowballed later in the year and led to the current global financial meltdown. As William D. Cohan makes clear in his engrossing new book, “House of Cards,” Bear Stearns is also a kind of microcosm of what went wrong on Wall Street — from bad business decisions to a lack of oversight to greedy, arrogant C.E.O.’s — and a parable about how the second Gilded Age came slamming to a fast and furious end. Mr. Cohan, a former investment banker and the author of “The Last Tycoons,” a 2007 book about Lazard Frères & Company, gives us in these pages a chilling, almost minute-by-minute account of the 10, vertigo-inducing days that one year ago revealed Bear Stearns to be a flimsy house of cards in a perfect storm. He shows how quickly rumors about liquidity led to a run on the bank, and how fears that a bankruptcy of Bear Stearns could wreak fiscal havoc around the world led the _Federal Reserve_ (http://topics.nytimes.com/top/reference/timestopics/organizations/f/federal_reserve_system/index.html?inline=nyt-or g) to approve a $30 billion credit line to help JPMorgan Chase acquire the ailing firm for a bargain-basement price. He does a deft job of explicating the underlying reasons that put Bear Stearns in peril in the first place: most notably the failure of two of its hedge funds, which were stuffed full with subprime mortgages, and the shocking irresponsibility of many of its senior officers, who failed to exercise oversight over the firm’s investments or wisely diversify its revenue. And in a kind of epilogue he gives us a brief glimpse of the fall of Lehman Brothers several months later, an event regarded by many Wall Street observers as the trigger to the current financial crisis, and the Fed’s decision not to give it a bailout or to work out a Bear Sterns-like solution. Like Michael Lewis’s “Liar’s Poker” and Bryan Burrough and John Helyar’s “Barbarians at the Gate,” this volume turns complex Wall Street maneuverings into high drama that is gripping — and almost immediately comprehensible — to the lay reader. While the broader outlines of the Bear Sterns story will be familiar to readers from articles in The Wall Street Journal, The New York Times and a lengthy piece by Mr. Burrough in “Vanity Fair,” Mr. Cohan writes with an insider’s knowledge of the workings of Wall Street, a reporter’s investigative instincts and a natural storyteller’s narrative command, and he fleshes out the timeline of the firm’s calamitous final week with myriad new details and recent interviews with some of the firm’s principals, including its flamboyant chairman and longtime chief executive, Jimmy Cayne, who often seemed more interested in playing golf and attending bridge tournaments than in tending to his company’s business. Two things stand out in Mr. Cohan’s narrative. The first has to do with just how worried some Wall Street analysts and the federal government were about the liquidity crisis and the possibility of a dominolike collapse in the world financial markets in March 2008, six months before things really began to slide out of control in the fall, and just how many earlier warning signs there were in 2007, 2006 and even 2005 about the housing bubble and subprime mortgages. The second has to do with the power of the so-called butterfly effect (in which the flapping of a tiny butterfly’s wings can lead to a gigantic storm) in a globalized, interconnected world, where rumors fly around the planet by television and the Internet, where automated computer programs can magnify or speed up trends, where bad decisions made by a handful of powerful people can ricochet through a company or industry. As many reporters have observed, Bear Stearns was known for its sharp-elbowed, opportunistic culture; even in a notoriously aggressive business, it had a distinctly scrappy, results-oriented approach. Building upon many newspaper and magazine depictions of the firm, Mr. Cohan creates vivid portraits of the personalities who came to define Bear Stearns: the brilliant, authoritarian Cy Lewis, who pushed the firm into the limelight; his successor, Ace Greenberg, who put his imprimatur on the firm by looking for “people with PSD degrees,” that is non-M.B.A.’s who were poor and smart and had a deep desire to become rich; and Jimmy Cayne, the championship bridge player and former bond salesman, who stepped down as chief executive in January 2008, after a Wall Street Journal article questioned his laissez-faire management style (depicting him not only as a fanatical bridge player but also as a pot smoker, a charge he has denied) and the firm posted its first quarterly loss ever. Mr. Cohan writes that Mr. Cayne “had only a vague understanding” of the exotic securities that would imperil the firm’s liquidity, and that he alienated (and eventually forced out) Warren Spector, the man most familiar with these financial instruments, and that, in any case, the firm exerted little oversight over the hedge funds run by Ralph Cioffi, who had heavily loaded them with toxic investments in subprime mortgages despite assurances to the contrary to investors. Mr. Cohan also notes that Mr. Cayne left to play in a bridge tournament during the crucial period in the summer of 2007 when the firm closed its failing hedge funds, and that in the midst of the March 2008 crisis he was again out of town at a bridge tournament. Bear Stearns, whose stock had traded as high as $170 in 2007, ended up s elling itself to JPMorgan Chase for less than the value of its office building, and Mr. Cohan’s account of its death spiral not only makes for riveting, edge-of-the-seat reading, but it also stands as a chilling cautionary tale about how greed and hubris and high-risk gambling wrecked one company, and turned it into a metaphor for what the author calls “the near collapse of capitalism as we have known it.” ---------------------------------------------------------------------------- LATimes 'House of Cards' by William D. Cohan BOOK REVIEW March 06, 2009|Tim Rutten It seems almost achingly quaint to recall those warm and hazy days when "banker" was a synonym for sobriety and propriety -- a time when those who worked in finance, as well as those who reported on it, believed that a pinstriped suit connoted one thing and a chalk stripe something else entirely. Anyone who still retains such antique illusions will lose them in fewer than 10 pages into "House of Cards: A Tale of Hubris and Wretched Excess on Wall Street," William D. Cohan's masterfully reported account of the collapse of Bear Stearns, the investment banking house whose implosion a year ago this month signaled the beginning of the worst global financial crisis since the Great Depression.
Cohan, a former senior investment banker who has turned into one of our most able financial journalists, is the author of 2007's "The Last Tycoons," a highly regarded history of Lazard Freres & Co., Wall Street's most storied investment bank. In this new book, he deploys not only his hands-on experience of this exotic corner of the financial industry but also a remarkable gift for plain-spoken explanation. That's essential, because it may be that only quantum physics defies the descriptive powers of ordinary language quite so completely as the derivatives markets whose meltdowns have devastated Wall Street. The other great strength of this important book is the breadth and skill of the author's interviews. Essentially, with pauses for needed explanation, he has used them to construct a staccato narrative of the frantic 10 days in March of 2008 that began with the first doubts about Bear Stearns' liquidity and ended when the Federal Reserve and U.S. Treasury forced the firm to sell itself at a fire-sale price to JP Morgan Chase. That and the subsequent bankruptcy of Lehman Brothers, the sale of Merrill Lynch, the collapse of insurance giant AIG and the virtual incapacitation of much of the banking sector, including behemoths Bank of America and Citibank, marked the end of Wall Street's second Gilded Age and the onset of the current global financial crisis. Essentially, then, what 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 bank whose default signaled the globalization of the Great Depression. At the time of its collapse, Bear Stearns was one of the world's largest and most aggressive investment banks, securities traders and brokerage firms. It employed more than 15,000 people in offices around the world and, just a year earlier, Fortune had recognized it as "America's most admired securities firm." 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. That was Bear Stearns' undoing because, 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." That crisis came to Bear Stearns when analysts and other Wall Street players began to raise questions about the liquidity implications of the huge positions in mortgage-backed securities -- particularly subprime mortgages -- that it was carrying on its books. One of the things Cohan points out is that numerous analysts, including the respected Meredith Whitney, had for some years warned that the trade in credit default swaps and various mortgage-backed instruments was setting the stage for "a credit implosion" that "could begin a domino effect of corporate insolvencies." Welcome to our pain, circa 2009. Cohan does a brilliant job of sketching in the eccentric, vulgar, greedy, profane and coarse individuals who ignored all these warnings to their own profit and the ruin of so many others. It's impossible to do justice to his reportorial detail in a brief review, but suffice to say it's slightly horrifying to learn the importance bridge played in Bear Stearns' internal culture. The firm's last chief executive, Alan Schwartz, is philosophical about the collapse of his company. He can afford to be; he was paid $35,734,220 in cash less than a year before Bear Stearns' forced sale. As he sees it, he could have done a better job of running his business, but -- in the end -- "it was a team effort. We all [messed] up. Government. Rating agencies. Wall Street. Commercial banks. Regulators. Investors. Everybody." In the midst of all this devastating heedlessness and wanton venality we confront the mentality of looters rather than that of financiers, let alone captains of industry as we traditionally understand them. Schwartz's airy dispersal of responsibility into the rhetorical ether notwithstanding, it's hard not to feel nostalgic for those stodgy-sober old guys in the pinstripes and to hunger for their advice on where to go from here. Former Federal Reserve Chairman Paul Volcker, now 81 and an economic advisor to President Obama, certainly is one of those. Recently, he candidly admitted to a gathering of Nobel laureates and high-level investors that "even the experts don't quite know what's going on" in the global economy. The financial meltdown that began on Wall Street, he said, spread through the rest of the world with "shocking" speed, adding, "I don't remember any time, maybe even the Great Depression, when things went down quite so fast." While the precise structural causes of the current catastrophe still may be obscure, Volcker said he was confident that we won't "revert to the kind of financial system we had before the crisis." The future, he predicted, will hold not only more stringent regulation of the entire banking system -- particularly with regard to risk management -- but also of hedge and equity funds. To the remaining Wall Street smart guys who argue that re-regulation will stifle the "creativity" of the American financial sector, the sober old central banker had a dismissive rejoinder: The most heralded of these financial "innovations" -- like credit default swaps and asset backed securities of the sort that brought Bear Stearns and so many others down -- have created little but fees for their originators. The only banking "innovation" that has been of real importance to the vast majority of people over the last three decades, Volcker pointed out, is the automatic teller machine. As Cohan's remarkable new work of financial journalism shows, the current mess began when the investment bankers began to treat everyone else's finances like their private ATM. -- [email protected]_ (mailto:[email protected]) ---------------------------------------------------------------------------- - WPost Going, Going, Gone Review By David A. Vise Sunday, March 22, 2009 HOUSE OF CARDS A Tale of Hubris and Wretched Excess on Wall Street By William D. Cohan Doubleday. 468 pp. $27.95 When Bear Stearns and other venerable investment houses founded in the 1800s were private partnerships investing their own money, they kept extra cash on hand to survive lean times. But after they became public companies, they began doling out most of their profits in paychecks and bonuses. Instead of relying primarily on their own funds, they borrowed money, heaps of it. As these changes took place over the last 30 years, Wall Street's fortresses of stone began to resemble houses of cards. And, according to William D. Cohan, insiders knew it. "The men running Wall Street knew full well that any liability for their risk taking -- once borne by their partners -- now fell to nameless, faceless shareholders," Cohan writes in "House of Cards," an authoritative, blow-by-blow account of the collapse of Bear Stearns. "The holy grail of investment banking became increasing short-term profits and short-term bonuses at the expense of the long-term health of the firm and its shareholders." Buying stock in a Wall Street firm has always been a roll of the dice. You can look at senior management and decide whether you think it is seasoned and trustworthy. But the firms themselves are black boxes: There is seldom enough information to evaluate the risks they are taking versus the potential rewards. Even former Treasury Secretary Robert Rubin admitted that it was impossible for him, as chairman of Citigroup's executive committee, to evaluate many decisions about risk being made within his firm. While there certainly are villains in the demise of Bear Stearns, every tragedy needs a hero. In this story, it is the firm's CEO from the late 1970s until the early 1990s, a witty man named Alan "Ace" Greenberg. He wore bow ties, performed magic tricks in his spare time, required the firm's partners to donate at least 4 percent of their compensation to charity and was a hawk on expenses, even exhorting employees to reuse paperclips and rubber bands. In putting his scrappy mark on Bear Stearns, Greenberg avoided high-priced MBAs. "We are really looking for people with PSD degrees" -- poor, smart and with a deep desire to get rich, he said. "They built this firm and there are plenty around because our competition seems to be restricting themselves to MBA's." For decades Greenberg personally served wealthy clients, maintaining their confidentiality as they routed trades through him, no matter how exalted a title he held. While running Bear Stearns during the 1980s, he fought those who wanted to turn the firm from a private partnership into a public company, a Wall Street trend that began in the early 1970s. He was the lone dissenter when the firm's executive committee voted -- while he was away on business -- to go public in 1985. By 1993, he was out as CEO but remained a fixture on the trading floor. Greenberg increasingly disliked the risks being taken by the Bear, the firm's nickname. "When the going gets tough," he once said, "the tough start selling." So unlike most of his successors atop Bear Stearns, Greenberg sold his stock before it was too late, unloading more than $50 million of shares in the year before the firm's collapse. With Bear Stearns teetering on the brink in early 2008, its fate was in the hands of banks and competitors. They had to decide whether to continue trading with the firm and offer it the emergency cash infusion that it needed. But on Wall Street as on Main Street, what goes around comes around. A decade earlier, Bear Stearns CEO Jimmy Cayne had refused to join every other major Wall Street house in an orchestrated bailout of a failing firm called Long Term Capital Management. The disorderly collapse of that firm would have sent shock waves through the financial markets. Bear Stearns's failure to participate, and Cayne's subsequent boasting about the matter, left lingering bad feelings with more than a dozen competitors and banks, as Cohan, a former investment banker, ably recounts in this morality tale. So instead of having allies to lend a helping hand in its hour of need, Bear Stearns was left to fend for itself, a futile exercise in a game where remaining afloat requires the confidence and trust of the other players. David A. Vise, a former Washington Post reporter and the author of four books, is senior advisor to New Mountain Capital, a New York-based private equity firm, and New Mountain Vantage, its public equity fund.
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