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Book Review: House of Cards, by William D. Cohan

A book about the financial crisis of 2008, If well executed, will tell a tale of business intrigue, social commentary, and human drama.  House of Cards strikes that balance well by telling the story of Bear Stearns, one of only two major investment houses which failed and were not bailed out in the crisis of 2008.  The story begins with the story of the founding fathers of Bear Stearns who largely scrabbled their way to wealth from poor backgrounds.  It ends with the the firm in ruins during the throes of the financial crisis of 2008…

 The subtitle of the book “A tale of hubris and wretched excess on Wall Street,” seems more designed to sell books than to describe any particularly strong opinion that the author takes, as the book is balanced and fair to its tragic actors – the managers of Bear Stearns.

From a business management point of view, the book illustrates the problems created when a firm is molded around the personality of its founders.  Contrary to much of Wall Street, Bear Stearns recruited young men (during the time frame of the book, the vast majority of the managers were male) who started out poor and showed either intelligence and grit through activities such as football and competitive bridge. They also cultivated an image of independence from the stereotypical Wall Streeter who had with an Ivy League degree.  Their independent, almost anti-establishment image helped them build a billion-dollar firm.  Their independence was a blessing during hard times and uncertainty because the management made hard decisions every day to survive and thus were very capable when there was no template to fall back on.  This runs counter to the stereotype of the MBA who works well on well defined tasks but lacks imagination.  One problem with this culture was that the firm’s independence walled it off from other Wall Street firms and, more importantly, from government regulators.  Unlike their rival Goldman Sachs, Bear employees tended to stay with the firm, and there was no revolving door to the public sector.  Ultimately, Bear’s fate was decided by Hank Paulson, a Goldman Sachs alum who became the U.S. Treasury Secretary.

For those who are looking for the cause of the 2008 meltdown, this book presents a fair summation of what is known.  Conspiracy theories abound, and partisan types look to blame their enemies.  These opinions generally fall into the theory that greed simply outran caution, that government regulation hindered market functioning, or that the politics of one or another political party were misguided.  While greed is a part of life on Wall Street, the management of risk is also. A look into the philosophy of Bear Stearns shows that it took risk very seriously.  Many if not most of the managers put all of their earnings back into Bear stock, so it is hard to say that they were reckless.  If they were, they were reckless with their own money.  Government regulation certainly helped to create 2008, as the leaders of both parties sought to increase home ownership and threatened banks into making loans to buyers who were not creditworthy.  The only criminal trial against Bear employees resulted in an acquittal, with a working-class Bronx jury deciding that it was not fair to blame two individuals for a market meltdown.

Finally, the book is a human drama.  Of course, there is a central tragedy, the collapse of a major firm.  It was an interesting look into the motivations of those who make more money in a year than most will ever see in their life.  Who are these people who make fifteen million-dollar bonuses, drive million-dollar cars, and live in thirty million-dollar apartments?  Why do they keep working at stressful jobs long after they have earned enough to retire in luxury.  Some are surprisingly thoughtful, staying up at night worrying about their employees or their clients, even long after they have enough money to simply walk away when the job got unpleasant.  Ultimately, the motivation is summed up in a statement on page 438 by CEO Jimmy Cayne: “…I have not walked into a room or a dinner party where I did not feel that why when people looked at me they thought I was O.K., successful, agile.”  So, it seems that although pride led to the fall, not having a government net to fall into made the fall fatal.