By William D. Cohan
House of Cards describes in rich detail the rapid and complex series of events that led to the downfall of Bear Stearns in March 2008. Its real appeal, however, derives from its thorough analysis of the history of the firm since its inception as an upstart brokerage firm in 1923 and a riveting account of the demise of Bear Stearns Asset Management (BSAM) in 2007. This failure foreshadowed many of the issues that would eventually cripple the firm, and the author asserts that its departure from several historical operating practices led to its ultimate sale to JPMorgan Chase at $10 per share, down from over $170 just a year earlier.
The first of three sections, “Ten Days in March,” is an account of the last days of Bear Stearns as an independent entity. It is a fairly gripping account of executives embroiled in a crisis of confidence that overtook world financial markets and their participants.
The second section, titled, “Why It Happened: Eighty-Five Years,” explains the roots of the firm and its founding and operating principles, and it sets the groundwork for why several departures from these founding principles eventually led the firm astray.
Ultimately, however, it is the final section of the book, “The End of the Second Gilded Age,” that provides the real lessons for financial and operating business managers. According to Cohan, for many years the firm had maintained the policy: “If you make money, you can run your business any way you want to.” Additionally, the author asserts that CEO Jimmy Cayne, with his retail brokerage background, had only passing knowledge of Bear Stearns’ businesses outside of fixed-income and clearing.
A lack of leadership and a “siloed” business mentality allowed this independence to go unchecked as Cayne was absent in the midst of several crises (he was playing in world-class bridge tournaments). Ultimately, according to Cohan, Cayne admitted his failure to diversify the firm’s businesses. In my opinion, this was due to his reliance on an attitude of “if it ain’t broke, don’t fix it,” while not being directly involved enough to know what was actually broken.
In a partnership environment, this policy served the firm extremely well. As long as a significant portion of the partners’ wealth was on the line, risk management was thoroughly enforced. The partners (led by former CEO “Ace” Greenberg and before that the legendary Cy Lewis) enforced a consistent policy of cutting losses quickly. But once the company went public, incentives shifted to make many of the firm’s traders, especially the principals at BSAM, take on as much risk as possible in the hopes of extraordinary returns.
My interpretation of the author’s conclusions is that the firm’s history of independent business units, a pronounced lack of risk management oversight, and a disdain for risk management personnel (“[expletive-deleted] accountants,” in Cayne’s words) who might thwart efforts to make as much money as possible, hurtled the firm into a financial abyss.