House of cards A tale of hubris and wretched excess on Wall Street

IN March of 2008, during one dramatic week, a crisis of confidence destroyed Bear Stearns, the 85-year-old Wall Street investment bank. The company had taken big risks - and made huge profits - on mortgages and securities. It was the first of many prominent firms that would soon crumble after years of high-wire deal making. And by the time the week was over, after furious negotiations and the intervention of the Federal Reserve and the Treasury Department, the government effectively ordered J. P. Morgan Chase to purchase Bear Stearns for a pittance. Bear Stearns was not Wall Street's biggest or most important firm. But it was certainly singular. Unlike the roster at blue-blood investment banks, Bear's stars tended to be underdogs, people from modest backgrounds and lesser-known schools. Aces Greenberg and Jimmy Cayne, the company's leaders in the years leading up to its demise, were eccentric, often larger-than-life figures. No wonder, then, that more than one writer smelled a story, and dived in quickly to tell the tale of the company and its collapse. In "Street Fighters: The Last 72 Hours of Bear Stearns, the Toughest Firm on Wall Street," Kate Kelly, a Wall Street Journal reporter, takes a you-are-there, just-the-facts view of the final days. And what facts they are. We have reports of Cayne, the Bear Stearns chief executive, smoking pot in the Doubletree Hotel men's room while taking a break from a bridge tournament, which he denies. Then there's his counterpart at J. P. Morgan, Jamie Dimon, frantically trying to reach a vacationing deputy in Anguilla to figure out how or if to make a play for Bear. A "death squad" of bankruptcy lawyers prowls the Bear Stearns building, and grown men find themselves in tears or forced to join late-night conference calls while zoned out on sleeping pills. Given that we know what happens, Kelly's depiction of the end of Bear Stearns can have the feel of a highclass snuff film. As she spins out the behind-closed-doors machinations, it's hard to turn away from the images of egomaniacal, often bullying Wall Streeters getting their comeuppance. Alas, it can be difficult to tell many of the book's "street fighters" apart. Each Bear employee seems scrappier and more working class than the next. And as they whiz around New York City and its suburbs, they blur together. Whom did we leave in Scarsdale, and who headed to Summit? Which one is driving himself (they're all men), and which is in the back of a Town Car? Perhaps Kelly - who does provide a helpful chart of the cast of characters at the front of the book - can be forgiven their relative sameness. It's the narrative itself that's the star here, and the twists and turns of those frantic few days make for lively reading. Kelly, whom I met once or twice when I was a reporter at The Wall Street Journal, lived through the whole tale as a beat reporter; in the process, she clearly developed a real affection for many of the people she profiles. (In fact, she dedicates the book to the firm's 14,000 employees - a decent, humane gesture, but one that's rather off key for someone trying to maintain a professional distance.) While telling the story in a book that covers just 72 hours is certainly dramatic, William D. Cohan's "House of Cards: A Tale of Hubris and Wretched Excess on Wall Street" reaches further back (and forward) to lay out Bear's rise and fall in much more detail. The first third of the book traces Bear's final days as an independent entity, and Cohan makes a convincing case that it was all but over for the company before Kelly's book even begins. He reports that before the fevered negotiations between Bear and J. P. Morgan, word got out that Goldman Sachs was reluctant to engage in a trade involving Bear Stearns. As news of the presumed lack of faith spread among hedge funds, some stopped doing business with Bear entirely. Cohan offers much of this detail in the form of lengthy quotations - some of them anonymous - from people who worked at Bear Stearns, the Treasury Department and the Federal Reserve. The result reads at times like unedited oral history. And while the events of the final week are riveting enough to excuse such tedium, the enormous amount of space Cohan devotes to the failure of two Bear Stearns hedge funds doesn't add much to the mix. In fact, the middle section of the book, which takes us from 1923 to 2001, can feel like homework. Littered throughout this section and the two that sandwich it are the on-the-record recollections of Cayne, Bear's chief executive. Included in his musings are blunt assessments of people he encountered along the way. The observations revealed plenty about Cayne too. Homophobia? Check. Misogyny? Sure. Cohan also helpfully offers up the executive's opinion of Kelly; Cayne uses an anatomical description better left to the Bear Stearns locker room. Cohan certainly got Cayne to open up; Kelly apparently did not get him to talk, at least not on the record. But Cayne ultimately comes off as such a megalomaniac that you can't trust his ad hominem ramblings. At points, Cohan allows Cayne to recount his version of events and then contradicts them with recollections from others. IT'S pretty clear Cohan believes that Cayne played a large role in destroying Bear Stearns. But how important was the company really? Both of these books must have seemed like great ideas in the spring of 2008. Who could have imagined, though, that we'd have a few days in September that were exponentially more important? First, Lehman Brothers failed; then Merrill Lynch, worried that it was next, persuaded Bank of America to acquire Merrill outright. The government spent $85 billion to bail out A.I.G., one of the world's largest insurers. In the following month, the stock market fell by about a quarter. At that point, the financial system really was at the brink. And as things worsened throughout 2008, we were reminded that as storied as Bear Stearns was, it was a second-tier bank, making its failure a second-tier event. Now, we have not just one but two books about the company. What the average reader really wants to know is how our economy went to pieces and what we can do to keep it from happening again. Kelly barely attempts to analyze the bigger picture, and Cohan's efforts aren't much more complete. That wasn't what they were trying to do, but it still leaves us waiting for a definitive autopsy of our latest Gilded Age. Within weeks 'death squads' of bankruptcy lawyers were prowling the Bear Stearns building, and grown men found themselves in tears. Ron Lieber writes the Your Money column for The Times.

The first murmurings of impending doom for the financial world originated 2,500 miles from Wall Street in an unassuming office suite just north of Orlando, Florida. There, hard by the train tracks, Bennet Sedacca announced to the world at 10:15 on the morning of March 5, 2008, that venerable Bear Stearns & Co., the nation's fifth--largest investment bank, was in trouble, big trouble. "Yep," Sedacca wrote on the Minyanville Web site, which is dedicated to helping investors comprehend the financial world. "The great credit unwind is upon us. Credit default swaps on all brokers, particularly Lehman and Bear Stearns, are blowing out, big time." Sedacca, the forty--eight--year--old president of Atlantic Advisors, a $3.5 billion investment management company and hedge fund, had been watching his Bloomberg screens on a daily basis as the cost of insuring the short--term obligations-known in Wall Street argot as "credit default swaps"-of both Lehman and Bear Stearns had increased steadily since the summer of 2007 and then more rapidly in February 2008. Now he was calling the end of the credit party that had been raging on Wall Street for six years. "I've been talking about it for years," Sedacca said later. "But I started to notice it that fall. Because if you think about it, 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 did just the opposite. They took on more leverage. Lehman went from twenty--five to thirty--five times leveraged in one year. And then they announce a big stock buyback at $65 a share and they sell stock at $38 a share. I mean, they don't know what they're doing. And yet they get rewarded for doing that. It makes me sick." Sedacca had witnessed firsthand a few blowups in his day. He worked at the investment bank Drexel Burnham Lambert-the former home of junk--bond king Michael Milken-when it was liquidated in 1990 and lost virtually overnight the stock he had in the firm as it plunged from $110 per share to zero (Drexel was a private company but the stock had been valued for internal purposes). "It was enough that it stunned," he explained. "It was more than a twenty--nine--year--old would want to lose." Many of his Drexel colleagues had taken out loans from Citibank to buy the Drexel stock and were left with their bank loans and worthless stock. "I know people with millions and millions of dollars of debt and the stock was at zero," he said. They either paid off the loans or declared personal bankruptcy. "That's what happens when everyone turns off your funding," he added. He then moved on to Kidder Peabody and watched that 130--year--old firm disintegrate, too. As a result of these experiences and those at other Wall Street firms, he had developed a healthy skepticism of both debt and the ways of Wall Street. Starting in the summer of 2007, he began to feel certain that the mountain of debt building across many sectors of the American economy would not come to a good end. He started betting against credit. "I've watched enough screens long enough to know something was wrong," he said. The problem at Bear Stearns and Lehman Brothers, Sedacca informed his clients and Minyanville readers, was that both firms had huge inventories on their balance sheets of securities backed by home mortgages. The rate of default on these mortgages, while still small, was growing at the same time that the value of the underlying collateral for the mortgage-people's homes-was falling rapidly. Sedacca could not help noticing that the effects of this double whammy were beginning to show up in other, smaller companies involved in the Excerpted from House of Cards: A Tale of Hubris and Wretched Excess on Wall Street by William D. Cohan All rights reserved by the original copyright owners. Excerpts are provided for display purposes only and may not be reproduced, reprinted or distributed without the written permission of the publisher.