William Cohan wrote "House of Cards: A Tale of Hubris and Wretched Excess on Wall Street", detailing the collapse of Bear Stearns. He's speaking tomorrow at 92YTribeca from 12-1pm, at 200 Hudson Street- tickets are $16. We asked him some questions about Bear Stearns and the financial crisis.
Bear Stearns was founded in 1923. Over 86 years, it managed to survive the Depression, many recessions, and grew to more than 15,000 employees, with offices in two dozen cities. What made it unique among the big Wall Street firms? Its culture was focused on making money and allowing anyone to work there who felt the same way. There was not a whole lot of polished people at the firm. Just hard working, very smart people focused on making a lot of money. Bear was scrappy, just like the people who worked there.
In November of 2006, the company had more than $66 billion in capital. Yet in late 2008, Bear nearly imploded and was sold to JP Morgan Chase for just $236MM (though that amount was later increased.) What went wrong? The answer to that is what House of Cards, my book, is all about. I would be happy to go into this during my talk but it is too difficult to summarize here, other than to say that Wall Street has always been a confidence game and the market lost total confidence in a short period of time in Bear's ability to stay in business. The same thing also happened to Lehman Brothers and Merrill Lynch, and was about to happen to Morgan Stanley and Goldman Sachs as well.
Why wasn't Bear Stearns allowed to go bankrupt, as its competitor Lehman Brothers was allowed to do just six months later? That's a good question. Bear Stearns was bankrupt, no question about that. But the government decided to rescue it, rather than allow it to fail, on the theory that maybe things would improve if Bear were saved. Interesting idea, and an understandable one, but in retrospect, Bear should have been allowed to fail. Had that happened, Dick Fuld at Lehman would have gotten the message big time.
Who deserves the blame for what happened to Bear and Lehman? It seems like there are a lot of suspects: the irresponsible executives who ran the companies, the traders who ran up enormously leveraged bets, the regulators who failed to police the companies, and even the American home owners who took on far more debt than they could ever afford to pay back. All of the above had a serious role to play but without the managements of these firms making the greedy decisions they made, without them abdicating their responsibility for their actions, and without them having accountability for their actions, this could not have happened.
The collapse of Bear and Lehman began a financial panic that marked the beginning of this recent Great Recession. Were they and their fellow banks responsible for what happened to the American economy the last two years, or were there larger forces at work? To a large degree, Wall Street was directly responsible for what happened by encouraging the issuing of mortgages to people who could not afford to pay them back, and then buying up all those mortgages and packaging them into securities and selling them off as investments around the globe. The crisis could never have happened if Wall Street had not come up with that beauty. Now, Wall Street had plenty of help in making it happen too: borrowers should never have taken out loans they could not pay back, the ratings agencies should never have rated all of those securities as AAA, investors should have been more wary, and Congress should never have encouraged Fannie Mae and Freddie Mac to buy all those mortgages too. Then there was the failure of the various regulators, especially the SEC. But without Wall Street as an accelerator, this would not have happened.
It's 2010, and we still don't have a financial reform bill that would do anything to stop the practices that led to these bank blowups. What do you think the Government needs to put in this legislation to keep this stuff from happening again? Is there any chance an effective bill can be passed? You need to get to the root of the problem to expect people's behavior to change on Wall Street. That gets to incentives. Until the bankers and traders who construct, sell and trade these risky securities have real skin in the game, there is no hope for preventing another crisis in my opinion. This means having their entire net worth on the line for their decisions, just like Wall Street used to run when all the firms were private partnerships. We need to get back to that kind of ethic to prevent a recurrence. But yes, a bill will get passed and there will be a new law, but don't expect it to prevent another crisis.
You spent 17 years on Wall Street yourself, at Lazard Freres and JP Morgan Chase. How do you feel about the current American outrage directed at bankers? I think it is fair. Sometimes I even wonder why there is not more of it. This crisis was largely Wall Street's creation and then we have to bail them out. Then, in short order, they are making billions in profits and compensation again. Main Street, meanwhile, is hurting. No wonder people are upset.
This week the bankers at Goldman Sachs were in the news. They're accused of selling securities they knew to be bad for their clients, and then betting against those same securities. What do you think of that kind of behavior, and the case made against them? I think the SEC's case is a weak one, and the more we learn about it, the weaker it gets. This whole idea that Goldman sold securities it knew would "fail" and then bet against them is pretty ridiculous. They were doing what their counterparts wanted them to do. One wanted to take one risk, one wanted to take another risk, and Goldman just put them together. A more legitimate question is why they would want to do this kind of business in the first place, but I would be very surprised if there was anything illegal about it.
What are you working on next? It seems like there's so much malfeasance in the financial world, that you could have your hands full writing books for a long time! I've been working on a new book about Goldman Sachs for almost a year now, along with writing magazine articles for Vanity Fair, Fortune, Institutional Investor and ARTnews. I also write a bi-weekly opinion column for The New York Times.