In March 2008, when Bear Stearns was hurriedly pushed by the U.S. government into accepting a rescue act by J.P. Morgan Chase, many correctly thought it was the beginning of the end of investment banking as we know it. Lehman Brothers' collapse followed in September that year with Wall Street reeling, having believed in its own hype and covered wretched excesses for years. Bear Stearns' fall from grace typified the hubris writes William Cohan.
In a fast paced narrative, Cohan - a former banker himself - explains how the investment bank earned massive profits only to be trumped by even larger losses courtesy irresponsible investments. He articulates that Bear Stearns, though publicly listed since 1985, was a closeted and arrogant partnership of individuals fixated on profits. The architect of the "good years" and the spectacular fall which followed was Jimmy Cayne, its long serving CEO.
Cayne named by my former employers CNBC as one of the "Worst American CEOs of All Time" is classically described as by the author as a "Sophoclean tragic hero, ruined by his own terrible choices." He was the architect of Bear's over-exposure to mortgage backed securities (MBS) that became near impossible to sell as the US housing market first slowed and then started crashing.
Sums of capital invested and lost were staggering. Within a matter of days Bear Stearns went from a perceptively healthy corporate brand name to a dead corporation with severe doubts about its solvency. The story is there in this book with all the gory details.
It makes references to Jimmy Cayne's fixation on playing Championship Bridge and for lack of a better metaphor brands Bear's structure under his watch as a "House of Cards" that could and actually did come down with the slightest of headwinds. As its share price was tumbling from its perch of $170 towards $10 many of its management including Cayne grumbled that people could not separate fact from fiction. Many prudent observers, including the author, thought it was Bear's management holding that misleading notion.
For all this moaning and groaning, it is thought Cayne and co. were busy playing Bridge when two Bear Stearns hedge funds collapsed in July 2007, and again in March 2008 when their investment bank was driven in a state of near desperation to the arms of J.P. Morgan. These were the same management guys under whom Bear had been the only big Wall Street name that refused help to Long Term Capital Management (LTCM) - a hedge fund which ran into trouble in 1998. (See for example: When Genius Failed: The Rise and Fall of Long-Term Capital Management, By Roger Lowenstein)
Cayne's cardinal sin was the failure to diversify and an innate inability to take criticism from colleagues as well as external observers. Instead he pushed on with a strategy that sent Bear's balance-sheet swelling by as much as 45 times its equity. It banked on a relentless and aggressive push into complicated credit markets. Suspicions still exist on Wall Street that Cayne never really understood such complicated instruments but was blinded by the money.
The result, there for all to see, carries a much broader message writes the author. He opines that Bear's near ruin brought about a reality check on Wall Street. It was a moment that many professionals, including some at Bear, saw round the corner. I really enjoyed reading this book and would be happy to recommend it to anyone interested in the wheeling and dealing of toxic assets on Wall Street.
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