Sense on Cents

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)

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