Friday, November 13, 2009

Bear's Market

House of Cards, William Cohan offers a crystalline reading of the opaque business practices that brought down an investment bank -- and the U.S. economy

The following review was published earlier this week at the books page of the History News Network.

Darling," said Judy, "Daddy doesn't build roads or hospitals, and he doesn't help build them, but he does handle the bonds for the people who raise the money.”


“Yes. Just imagine that a bond is a slice of cake, and you didn’t bake the cake, but every time you hand somebody a slice of cake, a tiny little bit comes off, like a little crumb, and you get to keep that.”

--Tom Wolfe, Bonfire of the Vanities (1987)

Finishing this book, it's hard not to wish the financial crisis of 2008 wasn't worse. Given the ongoing wreckage it has caused, and the likelihood that an even worse disaster may well have destabilized the political no less than economic system, this perhaps cannot be a responsible opinion. On the other hand, given the resistance of the banking industry to structural reform and the U.S. government's inability to extricate itself from the implicitly embraced doctrine that some financial institutions are too big to fail, perhaps we need a few more stories like the one William Cohan tells here to shake sober people out of their complacency.

That's the real value of this book: that it tells a story -- more specifically, in the words of its subtitle, a "tale of hubris and wretched excess on Wall Street." By this point, names like John Mack, Jamie Dimon and Lloyd Blankfein, and institutions like Bank of America, Citibank and Lehman Brothers, are at least vaguely familiar to people whose eyes never cross the business pages of a newspaper. To a greater or lesser degre
e, we understand the situation in its broadest outlines, one of excessive speculation and inadequate supervision, which intersected in the housing bubble of this decade. What we get here is a close case study of the first domino to fall: the collapse of the once-mighty investment bank, Bear Stearns, in March of 2008.

Cohan renders his narrative in three concentric circles. The first is a gripping, novelistic account of the final days of the firm. We're thrust into the hurricane of its credit crisis, and the lurching terror, hope, anger and resignation of the bank's leaders as it is sma
shed into a shadow of its former self and geets handed off, with government aid, to JP Morgan Chase. The second section of the book traces the origins of the Bear Stearns in the early twentieth century, focusing on a trio of chief executives: "Cy" Lewis, "Ace" Greenberg, and the flambouyant, bridge-playing Jimmy Cayne. The final section situates Bear in the larger feeding frenzy of Wall Street, as the firm's never especially scrupulous practices edge toward fraud and the increasingly hapless Cayne (off playing cards and smoking $140 cigars) is forced from leadership.

This approach has real advantages in segmenting the saga into digestible chunks (which can in fact be appreciated separately), though it does have the effect of marginalizing the otherwise central Cayne -- whose arrogance and narcissism become increasingly tiresome -- in the crucial first third of the book. Some readers may also have trouble, as I did, in following, both as a matter of comprehension and interest, the intricacies of investment banking. Editing may have been a factor here: the book was published in March, a mere year after Bear fell and six months after the financial crisis became acute. A long epilogue traces the collapse of Lehman Brothers in September; one hopes a new afterword will be in the offing for the paperback edition.

One service House of Cards performs uncommonly well is demonstrate something critics of modern finance capitalism like Kevin Phillips have been asserting for some time now: that investment banks like Bear Stearns produce little of value -- a term I used advisedly here -- to society at large. Industrial titans of yore like Andrew Carnegie and John D. Rockefeller actually made things. More to the point, a banker like J.P. Morgan, who was hardly an hardly attractive human being, not only acted to stabilize the economy at crucial moments like the Panic of 1907 and in the creation of U.S. Steel, but had to work to gain the confidence of depositors over time. Investment banks like Goldman and Bear, by contrast, did not even bother to take responsibility for the earnings of ordinary people, but rather relied on extremely large loans of 24 hours duration to finance their operations and skim off cream from the churn of their transactions. Or, to switch metaphors, this game of musical chairs seemed safe -- what, after all, could go wrong in a day? -- until one firm with nowhere to sit threatened to out the entire economy with it. Ironically, the one time these banks arguably participated in improving society through loan programs designed to foster home ownership (here the Clinton no less than the Bush administrations share blame for some careless social engineering), they abused their opportunities by throwing money at people who had no business receiving it and slicing their loans into "tranches" that metasisized in the banking system as a whole.

Again: in its broadest outlines, this is a tale often told, and well understood (most recently by New York Times reporter Andrew Ross Sorkin in Too Big to Fail). What's remarkable here is the speed with which Cohan, former investment banker himself, was able to gain access to talk to the principals, talk with them at length, and render a first draft of history that will be of considerable value for some time to come.

Some may hear stories like these and react with outrage, as the so-called "tea-baggers" have and generalize it to cast a pox on any government intervention in the economy at all. Others may shrug with indifference: greedy bankers, ineptly monitored, is something new? Still others may find satisfaction in that people like Cayne really were punished for their actions in the only language they understand: financial loss. But we will all stand to pay the price for allowing business as usual to resume, and if in what follows we are swallowed in the deluge we will suffer a rough justice. Allowing such commissions constitues a crime of omission.