Bear's Market

In 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.”

“Bonds?”

“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 degree, 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 smashed 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.

The price of book publishing

Some notes on an industry in transition

When the reading group to which I belong provisionally decided recently that our next book would focus on origins of the financial crisis, I suggested we take on William Cohan's House of Cards, which I had heard was a compulsively readable account of the collapse of Bear Sterns. My friend Dan countered the next day with Andrew Ross Sorkin's Too Big to Fail, a more general account about the near-collapse of the economy generally in 2008, a book about which I knew nothing. That was not particularly surprising, given that it had been published that very day. What was surprising is that when I looked the book on Amazon.com, the first three reviews were resolutely negative. And negative for the same reason: Readers were outraged the the price of the e-book was higher than that of the hardcover. Instead of charging what has now become a customary $9.99 at Amazon's Kindle store, (the price of House of Cards), Too Big To Fail was listed about about twice as much, though still considerably less than its list price of $32.95 (which is what it would cost if you bought it an an independent bookstore, which is why there probably won't be independent bookstores much longer).

Intrigued by this reaction, and thinking I might like to write about it, I returned to the web page the next day, upon which I saw that two key things had changed. The first, in effect, was a counterattack: not only were there a string of positive reviews for Too Big to Fail, but a number of reviewers chastised earlier reviewers for complaining about the price, which these reviewers regarded as irrelevant to evaluating the value -- I noun I use advisedly here -- of the book. But the other was that the price of the Kindle edition had changed to $9.99. Whether this was a matter of correcting an earlier error or responding to the criticism, Too Big to Fail was now towing the orthodox price line that comported with consumer expectations.

I found this little incident interesting in light of recent press stories that Amazon.com, Wal-Mart and Target were engaged in a price war to offer forthcoming blockbuster titles in hardcover for under $9 to customers willing to pre-order them, a discount on the order of 65%. A number of sources in this story fretted that such tactics would damage the viability of the publishing industry. And yet the next day, a day which featured a Times story on the unveiling of Barnes & Noble's "Nook," an e-reader that will compete with Amazon's Kindle, the Times also ran a story suggesting that e-books could revitalize publishing by encouraging readers to buy books in greater volume by allowing them to do it easily and quickly. It remains to be seen whether this will be the case. (The sheer number of these stories in the paper in these two days alone reflects the ongoing interest in this as a technology, business, and cultural phenomenon.)

What's beyond doubt is that the book business, from textbooks to bestsellers, is on the cusp of a transformation. The fact that only a tiny minority of readers currently use electronic texts is beside the point; such texts are nevertheless exerting an enormous gravitational pull both in terms of perceptions of the future as well as pricing in the present on traditional books no less than electronic ones. Moreover, that tiny minority of e-readers is relative, not absolute: According to the story on the Nook, Kindle sales are closing in on a million units (the Sony E-Reader has sold about half as many). I myself read e-books on my iPod. Critical mass is at hand.

Book discounting is nothing new, of course. Retailers have been doing it for a long time, and the entrance of online bookselling in the 1990s made the list price of a book akin to the sticker price on a car: not something to be accepted at face value. Up until now, however, it's been the retailers who have typically absorbed the cost of such discounts, to the point of considering them loss leaders, which is certainly the case in the Amazon/Wal-Mart/Target price war. That's true of e-books, too. But it won't be forever. Sooner or later -- and stories like the one above suggest it will be sooner rather than later -- publishers will be under terrific pressure to slash production costs, of which paper, glue and shipping are only a part (how much a part is still unclear). Actually, it's conceivable that retailers themselves could become publishers, something that Barnes & Noble has been tinkering with for many years with out-of-print titles. Whether or not this happens, the business is going to be iTuned (if not Napstered), with implications that remain unclear.

Let me be clear: I don't think books won't go away any more than records have. They're too useful a technology to disappear, in part because you never have to charge them, for example. My guess is that cherished books -- by definition, a minority -- will be ones you have in print form the way you have enlarged or extra prints of beloved photographs (or, to shift the analogy, books printed and bound will be like photographs framed and mounted). There may even book bookstores like there are photo stores, or machines in other retailers, like drug stores, that can print a book. But such a model portends vast, if still unknown, changes in what it means to be a writer, editor or publisher in ways that are as likely to be encouraging as dismaying.

The presses will be stopping. And you can be sure the revolution will not be televised. You will, however, be able to download it -- at what one hopes will be a modest price.