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Going, Going, Gone

Review By David A. Vise
Sunday, March 22, 2009

HOUSE OF CARDS

A Tale of Hubris and Wretched Excess on Wall Street

By William D. Cohan

Doubleday. 468 pp. $27.95

When Bear Stearns and other venerable investment houses founded in the 1800s were private partnerships investing their own money, they kept extra cash on hand to survive lean times. But after they became public companies, they began doling out most of their profits in paychecks and bonuses. Instead of relying primarily on their own funds, they borrowed money, heaps of it. As these changes took place over the last 30 years, Wall Street's fortresses of stone began to resemble houses of cards. And, according to William D. Cohan, insiders knew it.

"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," Cohan writes in "House of Cards," an authoritative, blow-by-blow account of the collapse of Bear Stearns. "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."

Buying stock in a Wall Street firm has always been a roll of the dice. You can look at senior management and decide whether you think it is seasoned and trustworthy. But the firms themselves are black boxes: There is seldom enough information to evaluate the risks they are taking versus the potential rewards. Even former Treasury Secretary Robert Rubin admitted that it was impossible for him, as chairman of Citigroup's executive committee, to evaluate many decisions about risk being made within his firm.

While there certainly are villains in the demise of Bear Stearns, every tragedy needs a hero. In this story, it is the firm's CEO from the late 1970s until the early 1990s, a witty man named Alan "Ace" Greenberg. He wore bow ties, performed magic tricks in his spare time, required the firm's partners to donate at least 4 percent of their compensation to charity and was a hawk on expenses, even exhorting employees to reuse paperclips and rubber bands.

In putting his scrappy mark on Bear Stearns, Greenberg avoided high-priced MBAs. "We are really looking for people with PSD degrees" -- poor, smart and with a deep desire to get rich, he said. "They built this firm and there are plenty around because our competition seems to be restricting themselves to MBA's."

For decades Greenberg personally served wealthy clients, maintaining their confidentiality as they routed trades through him, no matter how exalted a title he held. While running Bear Stearns during the 1980s, he fought those who wanted to turn the firm from a private partnership into a public company, a Wall Street trend that began in the early 1970s. He was the lone dissenter when the firm's executive committee voted -- while he was away on business -- to go public in 1985. By 1993, he was out as CEO but remained a fixture on the trading floor.

Greenberg increasingly disliked the risks being taken by the Bear, the firm's nickname. "When the going gets tough," he once said, "the tough start selling." So unlike most of his successors atop Bear Stearns, Greenberg sold his stock before it was too late, unloading more than $50 million of shares in the year before the firm's collapse.

With Bear Stearns teetering on the brink in early 2008, its fate was in the hands of banks and competitors. They had to decide whether to continue trading with the firm and offer it the emergency cash infusion that it needed. But on Wall Street as on Main Street, what goes around comes around.

A decade earlier, Bear Stearns CEO Jimmy Cayne had refused to join every other major Wall Street house in an orchestrated bailout of a failing firm called Long Term Capital Management. The disorderly collapse of that firm would have sent shock waves through the financial markets. Bear Stearns's failure to participate, and Cayne's subsequent boasting about the matter, left lingering bad feelings with more than a dozen competitors and banks, as Cohan, a former investment banker, ably recounts in this morality tale. So instead of having allies to lend a helping hand in its hour of need, Bear Stearns was left to fend for itself, a futile exercise in a game where remaining afloat requires the confidence and trust of the other players.

David A. Vise, a former Washington Post reporter and the author of four books, is senior advisor to New Mountain Capital, a New York-based private equity firm, and New Mountain Vantage, its public equity fund.

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