Bear With Little Financial Brain

Fault No. 1: The subtitle is misleading. “How Wall Street’s Gamblers Broke Capitalism” promises to the reader a broadbrush account of all Wall Street biggies that either died or were put in private/public ICUs. But Cohan does a dissection of Bear Stearns,the firm that was rescued in March 2008 and whose fall from grace,with hindsight,should have started a bigger systemic response. Cohan’s postscript talks about Lehman and others,and he draws enormously important conclusions about Wall Street. But neither justifies the subtitle. This is a case of misselling by the publishers.

Fault No. 2: The book is too long,given that it is mostly about one firm. Cohan’s journalistic ability — his access,his due diligence (everyone who refused to return a phone call is mentioned),his enormous background research — is AAA. But there’s too much detail. We get to know that Cy Lewis,an early Bear Stearns legend and who once worked in a shoe store,sold two pairs of shoes to a dead man (to the dead man’s widow,actually). Great story,but it,and others like it,perhaps could have been left out and the book would have been slimmer and a better read.

These are ignorable faults,of course,because Cohan,whether you agree with him or not,analyses his subject superbly. He deserves to be quoted in extenso: “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…. 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.”

There one has it,in simple English. The greatest virtue of Cohan’s book is that it challenges anyone holding a different view to disprove his densely and convincingly argued thesis.

The 10 days that should have shaken the financial world more — the period in early March 2008 during which Bear Stearns went from being a Wall Street icon to a rescued wreck — are brilliantly recounted and analysed by Cohan. You want simple,intuitive explanations,he gives them to you — Wall Street is a confidence game,and once your trading partners start questioning your viability,you are almost done for. You want drama,he gives it to you in spades — panic conversations in Bear’s trading floor and boardroom are reported in terrific detail. You want big,bad Wall Street characters,he draws wonderful pen portraits — Jimmy Cayne,once CEO and at the time of Bear’s fall,its chairman,whose passion for bridge and golf seems to have far exceeded his comprehension of securities that were on Bear’s books. Cohan even gives you a sort of a good guy who no one listened to — Ace Greenberg,Bear’s chief in the 1980s who didn’t want the firm to go public (Bear,like most Wall Street firms,started as a partnership),wanted to sell securities that didn’t look good,was forever preaching cost cutting and who was outmaneuvered by Bear management who wanted to play big.

There are also wonderful stories and analyses of how the US Fed and Treasury responded. Paulson (Hank Paulson,George W. Bush’s Treasury secretary) f***ed us,one investment banker is quoted as saying. Indeed,after reading House of Cards,it is impossible not to wonder whether US politics could have served the Fed and Treasury better: they helped arrange a fire sale of Bear in March 2008,but,given politics,let Lehman fall in mid-September,whereas around that time,they rescued AIG and Fannie Mae and Freddie Mac. What if Lehman wasn’t allowed to fall is the most fascinating counterfactual question of this crisis.

So,a lot of free-market principles on the moral hazard of government rescue are tested by events described in Cohan’s book. A lot more free-market principles on finance are tested a lot more severely. Analysing Bear’s business model and

extending it rightly to Wall Street,Cohan says “every one (of Wall Street firms) was always just 24 hours away from a funding crisis”.
Those whose faith in the many virtues of the free market has not been fundamentally questioned by the crisis — this reviewer is a humble,lowly member of that hopefully still very large group — must ask themselves why capitalism needs such houses of cards,and why we didn’t spot them earlier.