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Sympathy for the Investment Banker

Who killed Bear Stearns? After all, it was you and me.

Tim Cavanaugh
June 15, 2009

House of Cards: A Tale of Hubris and Wretched Excess on Wall Street, by William D. Cohan, New York: Doubleday, 450 pages, $27.95

Bear Trap: The Fall of Bear Stearns and the Panic of 2008, by Bill Bamber and Andrew Spencer, New York: Brick Tower Press, 225 pages, $24.95

How would you like to make half a million dollars a year playing bridge? To understand the popularity of House of Cards, William D. Cohan’s narrative of the collapse of Bear Stearns & Co., you must know that Jimmy Cayne—the leatherfaced former CEO of the giant investment bank, trading firm, and broker-dealer—employed not one but four lucky stiffs, at six-figure annual salaries, to play tournament cards with him.

The New York Times bestseller ably details how Bear Stearns was brought down last year by a combination of high leverage, overinvestment in bum mortgage-backed securities, and a snowballing loss of confidence. But fans mainly simmer with moral outrage at the book’s depiction of an aloof, barely responsive tycoon playing cards at a swanky hotel while his company died and millions were plunged into poverty. In a more spacious age, Cayne might have been dubbed “colorful.” Now his vices—which may also include careless oversight, ignorance of derivatives, serious staff mismanagement, pot smoking (really), sexist comments, and more—draw only scorn. New York Times reviewer Michiko Kakutani notes that Cayne “often seemed more interested in playing golf and attending bridge tournaments than in tending to his company’s business.” Los Angeles Times employee Tim Rutten applauds Cohan’s depiction of “eccentric, vulgar, greedy, profane and coarse individuals” with “the mentality of looters,” whose “devastating heedlessness and wanton venality” make one “nostalgic for those stodgy-sober old guys in the pinstripes.”

And yet for all the vilification, Cayne is not the villain of Cohan’s dense, heavily reported book. Nor does he emerge as the bad guy in Bear Trap, a passionate cri de coeur by Bill Bamber, a former Bear senior managing director for derivatives, and literary agent Andrew Spencer. In both books, the insolvency of Bear Stearns occurs with a great indifference to who’s hissable and who’s kissable. While the plot involves plenty of bad decisions, it’s really just a small record of one part of a madness that swept the entire financial sector, the U.S. government and its foreign enablers, and the biggest criminals of all, the American people.

Both books focus on the period from March 10 through March 17, 2008, when Bear Stearns, abandoned by customers and lenders, became insolvent and was consumed, with government help, by JPMorgan Chase. The similarity ends there. House of Cards is a very widely sourced, exhaustive narrative at the level of what the Avalon Hill board game company used to call “grand strategy.” Its treatment of the fatal week is just a setup for a detailed accounting of how the 85-year-old firm ended up swimming in bad mortgages just when financial markets turned against mortgage debt. Bear Trap, on the other hand, is a first-person narrative essentially tracking Bamber’s mental state as the solid world he reared and lived in dissolved and dwindled, more quickly than he had thought possible.

If your goal is to find out what happened at Bear Stearns, House of Cards is your book. Although Cohan at times seems bent on reporting every conversation and anecdote he has collected, he has put together an excellent narrative. Many of the facts are new, including interesting details of a health crisis that laid up Cayne and spooked his inner circle in 2007.

Bear Trap, though, is more entertaining, fueled by Bamber’s panic, his growing recognition of doom, and a fondness for overcooked Bulwer-Lytton prose. Bamber and Spencer don’t just sustain a metaphor. They cram it with similes, festoon it with allusions and curlicues, and, wherever possible, throw in an adverb or three. In Bear Trap, all ignorance is “blissful,” collapses and disasters are both “complete” and “utter,” and despite the alpha-male milieu of the trading desk, fey phrasings like “all of Park Avenue is a-twitter with nerves about an impending disaster” pop up frequently. Here’s a description of the toughness of Bear Stearns: “On Wall Street, like on the playground when you’re a kid, reputation is everything. You’ve got to fight to earn it, but once you earn it, it’s yours to keep. We’d been around for 85 years and we’d been through our battles. We’d gotten beaten up, we’d grown tough, and we’d survived. We weren’t the biggest kid on the block, but we weren’t getting kicked around by the playground bully, either.” And that’s just the first third of the paragraph.

This passage is telling in another way. In an industry long on macho self-regard, Bear Stearns was especially known for its gunslinger/longterm-planning-is-for-girls culture. Bamber, who spends plenty of time describing his jet-setting adventures (there’s even a primer on the Maori tongue in the epilogue, to let us know he’s whiling away his retirement with an extended surfing layover in New Zealand), writes with apparent unawareness of how the market for captain-of-finance jock sniffing has cooled. (To be fair, the book was rush-written before the extent of the financial markets’ troubles was apparent.)

But Bamber’s immediacy makes Bear Trap and House of Cards complementary. You can read one as a readers’ guide to the other.

For example, you may be an aficionado of the Long Term Capital Management (LTCM) theory of Bear Stearns’ collapse. According to this explanation, Bear was selected for punishment by the Wall Street colleagues it had snubbed 10 years earlier (among them future Treasury Secretary Henry Paulson, who was then working at Goldman Sachs) by declining to join a team assembled by the Federal Reserve to bail out the broken LTCM hedge fund. Flip to page 132 of Bear Trap, and you can find this speculation from Bamber and Spencer: “If Jimmy Cayne had only had a crystal ball in those days, maybe things would have turned out differently. But whatever the reasoning, [refusing to bail out LTCM] was a professional posture, much like the prison guard refusing to bend the rules.”

Then swing on down to page 59 of House of Cards, and dig this cryptic, anachronistic, maybe-regretful-maybe-not koan from Jimmy Cayne himself: “So, that same lesson that we learned today, Long-Term Capital Management had back then [in 1998] and the tulip people had it back in the 1400s.”

Or if you’re partial to the Warren Spector alternative-history plot, both books also deliver. Spector, Cayne’s professorial heir apparent and an executive with a deep understanding of the company’s nuts and bolts, was fired by Cayne in August 2007, in a move attributed at the time to the collapse of Bear’s two hedge funds. After the death of Bear Stearns itself the following March, historians speculated that, had he been allowed to stay, Spector might have headed off the disaster.

House of Cards reveals in amusing detail the pettiness of Cayne’s ostracism of Spector—but it also is open to the interpretation that Spector, who was instrumental in building up the company’s stockpile of mortgage-backed securities in the first place, is as much to blame as anybody. Meanwhile, Bear Trap turns the decline of Spector into an ecumenical novena: “Warren Spector had been named the sacrificial virgin who would die so that the rest of us might live. Spector had died for our sins, making him some sort of Bear Stearns Christ figure, I suppose.”

The LTCM-revenge scenario in particular seems compelling. It’s hard to resist any crime hypothesis in which the triggermen are Henry Paulson, Ben Bernanke, and Tim Geithner (then CEO of the Federal Reserve Bank of New York, now secretary of the treasury). But the murder weapon—the Fed’s failure to open its “discount window” on an emergency basis to investment banks until March 16, when Bear Stearns was effectively deceased—is not persuasive. Nevertheless, the anger about the discount window expressed by Cayne and his successor as CEO, Alan Schwartz—and Bamber, for that matter—reveals more about these protagonists than any tales of their extravagant lifestyles or looter mentalities.

The emergency opening of the discount window allowed investment banks access to very large medium-term credit lines, with interest rates more attractive than you or I, no matter how good our credit scores, will ever see in our instant of life on Earth. Schwartz’s argument for opening the window to investment banks long preceded the March crisis, and it made sense—that the partial repeal of the Glass-Steagall Act in 1999 allowed universal banks such as Citigroup access to the Fed’s credit line while still barring investment banks like Bear Stearns. But it’s not this inconsistency Cayne has in mind when he rants against Geithner’s supposed delay in opening the discount window: “The audacity of that prick in front of the American people announcing he was deciding whether or not a firm of this stature and this whatever was good enough to get a loan,” he gripes to Cohan.

What comes across is not Cayne’s rage, but his sense of entitlement, his expectation that a firm in default, a firm that is deadbeating on its debts, a firm that has been deserted by its customers and judged unworthy of investment by its counterparts in the private market, should enjoy any better credit treatment than an apprentice landscaper getting a payday loan. It’s the usually unreflective Bamber, interestingly, who best captures the lesson about the discount window that his boss has missed: “This, to my mind, was how the Fed dealt with the moral hazard in the market; this was the point of the lesson they were trying to teach us all.”

So if it wasn’t Goldman Sachs alumni who did in Bear Stearns, who was it? Bamber and Spencer give this question a special flavor, because their narrative is one of blindness, a week in the life of a middle manager who is getting no guidance from his bosses and hearing louder and more convincing rumors of disaster. Bamber engages in who-is-Moriarty wool-gathering (“We were fighting an invisible enemy”). He blames the media (“the Bloomberg agency was, in their own little way, already lining up the nails for our coffin”). He considers unscrupulous short sellers (“I was contemplating the bizarre scenario I’d concocted whereby Bear had somehow fallen victim to some kind of Wall Street scam artist who was waging a rumor attack designed to destroy the firm”). At one point he calls all the suspects into the drawing room to announce that he will get to the bottom of this: “Were this a murder trial, the prosecution would have no burden to prove motive.”

The search for a killer is ultimately hopeless, though, for reasons that become clear as you work through Cohan’s moment-by-moment narrative of a week when it was already too late to save Bear Stearns. I kept hoping for an Oedipus Rex ending, in which one of the heroes would find out that he was himself the criminal. An even more apt antecedent would be Murder on the Orient Express, in which all the suspects are guilty.

But even these outcomes would lack a certain grandness, a recognition of a larger truth that makes both books already dated. To see the full story of the credit collapse is to understand what a small role Bear Stearns really played in it. The real star turn was shared by millions of people, and the whole superstructure of careless lenders, eager bond buyers, and willing underwriters existed merely to service the base unit of the collapse: the ordinary American deadbeat. Every time your local paper tells the moving tale of some poor soul who ended up in foreclosure, mysteriously owing $220,000 on a house that originally closed at $63,000, you’re finding out who killed Bear Stearns. (I’m not making those numbers up. They came from the opening anecdote in a recent A1 trend piece in my local rag.)

It’s hard, much harder than understanding the plot twists of an investment bank’s demise, to grasp the full measure of greed and venality involved in Main Street’s predatory behavior toward Wall Street. But it helps to consider the scale of seemingly real economic activity generated by the phantom economy of Americans living beyond their means: the way recycled mortgage-backed securities inflated house appraisals, the degree to which foolish auto loans kept Detroit on life support, the amount of gainful retail employment that was created through abuse of consumer credit.

As this economic acromegaly recedes (we still don’t know how big the monstrous growth was), it seems frivolous and beside the point to condemn Wall Street firms that merely delivered the bounty we all wanted. Consider that according to Federal Reserve “flow of funds” data, the United States lost $11.2 trillion in household net worth in 2008. The next flow of funds report, due in June, will tell us how much value was vaporized in the first quarter of this year, and the sum is likely to be substantial. At some point, this depreciation will bring the inflated-asset economy back into line with a more manageable reality—or at least that’s what we hope. In this context, the entire corporate history of Bear Stearns looks like what it was: a hill of beans in this crazy world.

Don’t expect to read that in a bestseller. Blaming Wall Street moguls for their devastating heedlessness is easy. Asking yourself why you didn’t see where all this was heading, or offering to reduce your inflated salary in the service of a sustainable economy, is hard. If you want a compelling rendition of the fall of a once-proud investment bank, Bear Trap and House of Cards are both worth reading. But if you want to know who got us into this mess, you already have your answer: You got us into this mess.

Contributing Editor Tim Cavanaugh (bigtimcavanaugh@gmail.com) is a Los Angeles–based writer. This column first appeared at Reason.com.


Tim Cavanaugh is Managing Editor, Reason.com


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