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Book Review: House of Cards by William D. Cohan

Posted by Larry Doyle on August 20, 2009 12:53 PM |

Was the failure of Bear Stearns a function of excessive greed, poor risk management, a weak Board, a lack of diversity in business lines, or all of the above?

Having worked at Bear Stearns from 1990-1996, I have a real appreciation for the depth of penetration William D. Cohan brings to this enormous failed enterprise in his book, House of Cards: A Tale of Hubris and Wretched Excess on Wall Street.

Cohan does an excellent job in capturing the culture of Bear. What were the key points within the culture? In my opinion . . .

1. Everything (including principles) was secondary to maximizing profits each and every day

2. Silo mentality promoted a lack of teamwork and allowed ‘people without principle’ to advance as long as they generated profits.

3. As people progressed and careers grew, senior management openly promoted individuals to ‘have at it’ in order to move forward.

4. The most senior management at Bear ultimately did not fulfill their responsibility of protecting shareholder interests. Why? They were totally consumed with maximizing their own wealth. On Wall Street, it is often said, there are bulls, bears, and pigs. At Bear Stearns, certain senior managers fell into the pig category.

5. Cohan highlights the collapse of two hedge funds managed by Ralph Cioffi and Matthew Tannin. These funds operated under the Bear Stearns Asset Management umbrella. The failure of these funds is often pointed to as the linchpin event leading to the downfall of Wall Street. Cioffi and Tannin are currently awaiting trial. If, in fact, the details Cohan highlights about misrepresenting the portfolio holdings are proven to be true, I have a hard time believing that Cioffi and Tannin will not face a stiff sentence.

6. Longstanding CEO Jimmy Cayne displays a hardened, street-smart approach throughout the book. At times of stress, however, Cayne showed himself to be a classless individual. I remember this well. Cayne’s heir apparent Warren Spector is widely praised by Cohan. That said, Spector played the game much like Cayne. He was fortunate to be pushed out of the firm when he was.

I thoroughly enjoyed Cohan’s book.  While many within Bear Stearns and across Wall Street continue to maintain that the failure of Bear was due to extraneous forces, the fact is Bear lacked real moral integrity at the most senior levels of the organization. They never fully appreciated how dangerous it was to subjugate the firm’s reputation at the expense of immediate profit.

That glaring void led to a mindset which promoted selfish behaviors, numerous blind spots, and a lack of real discipline. Ultimately it cost them the firm. From my perspective, they got what they deserved.

There is a real lesson here for everybody.

LD

P.S. Don’t think for a second that I didn’t appreciate my experience at Bear Stearns. There were many aspects that were very fulfilling. I made many great friends (mentors, colleagues), and I learned some strong business disciplines in terms of expense and risk management.

I owe a debt of gratitude to my two immediate bosses, John Sites and Kevin Finnerty.  In fact, it is a shame that the strong, principled integrity of these individuals was not embraced or promoted within Bear. When Mr. Sites left Bear in 1995 and Mr. Finnerty a year later, I knew I would have a tough time staying at a firm which more cherished profit over principle.

I left Bear in December 1996 to join Mr. Finnerty at Union Bank of Switzerland. I worked with Mr. Finnerty for the better part of 15 years from 1990-2005. He is highly regarded and respected. He gets no mention in Cohan’s book, but he hired more talent in the mortgage business at Bear Stearns than any other single individual. He’s the best.

Related Sense on Cents Commentary:
    The Greatest Risk (December 21, 2008)

  • coe

    It seems to me, LD, that the book that should be written might be better titled, “Deck of Cards” or “Fifty-Two Pick-Up”. There have been several well written books chronicling the cultural rise and fall of a number of Wall Street houses – including the morality tales of Kidder, Salomon, and Lehman – that quickly come to mind. What is the common theme, or the tragic flaw, that permeated all of these places – perhaps you said it quite accurately in describing your experiences at Bear – selfish behaviors, multiple blind spots, and lack of discipline. Maybe we should add lack of competent regulatory oversight to the mix.
    I guess I want and have to believe that the majority of folks at these dealer firms report for work every day and do the right things – work hard, collaborate with their colleagues, and care for their clients. It seems to me, though, that the one simple business principle that is inviolate is that incentives drive behavior – and one has to point the finger at the leadership of this industry and to their Boards for not only allowing, but condoning and promoting the kind of behavior at the top of the food chain that you observed in your tour at Bear. With the vapor trail of zeros associated with these businesses, and the culture that has grown to promote Wall Street mediocrity as though they are rock stars, clearly the stakeholders’ interests got and continue to get trampled. When the government steps in as it has, the burden is pushed further afield to the taxpayers. What a sad commentary.

    I do take heart from your positive commentary about several of your leaders/mentors…why too few of these quality people find their way to the top is further evidence of the misaligned incentives, the drive for the immediacy of gratification, and the total lack of care of the employee, the customers, the shareholders, and now the American taxpayers.

    I also submit that if you look at the current performance and behavior of the big banks and investment banks, it seems that they are turning right back to the old playbook, as you call it. Sure sounds like a good idea to solve the self-created problems by using structured solutions and derivatives to address these embedded balance sheet problems, doesn’t it? I’m not sure how many tens of thousands of people have been fired in America both directly and indirectly tied to the behavior described by you, but wherever that number ends up, it is shameful.

    Keep at it, LD!






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