Friday, May 01, 2009

Book Review: House of Cards

House of Cards, A Tale of Hubris and Wretched Excess on Wall Street By William Cohan

If you loved Den of Thieves and Barbarians at the Gate, you'll find this "Bear Stearns collapse" book to be a interesting ride down Wall Street's rabbit hole. The title is not exactly what the book was about though. I was expecting more details about how the firm and the nation got itself into the current mess, instead it was a documentary of the leadership of Bear Stearns and how there firm got railroaded by Wall Street. Honestly, the author wants you to believe that you are supposed to be mad at these people while portraying them in a light that makes you almost want to root for them - strange for a book about Hubris.

I enjoyed the book, but it wasn't what I was looking for NOW. I was looking for something relevant to what is happening today, this book isn't. It is however a good read and there were many times when I was reading that I thought to myself - these guys are idiots.

What struck me the most was the fact that you could have (and probably still do) Wall Street CEO's who have no idea about the risk that is being taken or even how to understand the risk. These guys didn't even know Bond basics yet they were leveraged 50 - 1 in the worst type of bonds. On page 421, the CEO (at this point only Chairman) Jimmy Cayne was referred to as "had no idea what we did for a living in fixed income...unlike Alan (current CEO), who didn't get and knew he didn't get it and tried, Jimmy had no clue." Going on, one of the traders in Fixed Income commented about the current CEO, "But it was like Bonds 101, You're starting with 'Prices go up, yields go down. ANd how do you calculate duration?' This is unbelievable. The people at the top who are supposed to be in charge don't have a clue as to what is going on in the firm. I don't expect a CEO to micro-manage, however I do expect them to understand how a product that makes up 40% of the firms profit actually works.

One of the most interesting incites of the book was how the Federal Reserve responded to each failure (Bear and Lehman). In both cases they ended up providing the needed liquidity to other firms that would have kept both in business and given both enough time for an orderly wind down. Literally the Fed came out with the programs at the last moment, the apex where the firms had no other options and the fed told them when the firms asked to be part of the programs "Yeah, we're doing that for everybody else but you. We're going let you guys go."

I'm not one to support government bailouts - but if you're going to provide liquidity to firms that have junk for assets, it should be done for all firms that have junk for assets, making an example of Lehman turned out to bite the Fed and the Treasury. Of course the Treasury secretary came from Goldman Sachs and I'm willing to bet had a smirk on his face when Lehman had to file (Paulson was trying to force Lehman into a Chapter 7 liquidation which would have put 10,000 people out of work, Lehman pushed for a Chapter 11 and was able to save many of those jobs).

The bottomline of this book is that Wall Street is full of characters and there is a lot of history between them all, the one thing they all have in common is that they apparently don't have a clue. This isn't to say they aren't smart - most are brilliant, some geniuses (try reading When Genius Failed, by Roger Lowenstein), but most of them don't have a clue (at the top at least).

House of Cards is a good read, but if you're looking to learn about the current crisis, how it started and how to solve it, this is not your book.

Scott Dauenhauer CFP, MSFP, AIF