House of Cards A Tale of Hubris and Wretched Excess on Wall Street

by COHAN, WILLIAM D.

• ISBN13: 9780767930895
• ISBN10: 0767930894
• Edition: 1st
• Format: Paperback
• Copyright: 2010-02-09
• Publisher: Anchor

Summary

A blistering narrative account of the negligence and greed that pushed all of Wall Street into chaos and the country into a financial crisis. At the beginning of March 2008, the monetary fabric of Bear Stearns, one of the world's oldest and largest investment banks, began unraveling. After ten days, the bank no longer existed, its assets sold under duress to rival JP Morgan Chase. The effects would be felt nationwide, as the country suddenly found itself in the grip of the worst financial mess since the Great Depression. William Cohan exposes the corporate arrogance, power struggles, and deadly combination of greed and inattention, which led to the collapse of not only Bear Stearns but the very foundations of Wall Street.

Author Biography

WILLIAM D. COHAN, a former senior Wall Street investment banker, is the bestselling author of The Last Tycoons and the winner of the 2007 FT/Goldman Sachs Business Book of the Year Award. He writes for The Financial Times, Fortune, the New York Times, the Washington Post, the Daily Beast, and appears frequently on CNBC.

Excerpts

The first murmurings of impending doom for the financial world originated 2,500 miles from Wall Street in an unassuming office suite just north of Orlando, Florida. There, hard by the train tracks, Bennet Sedacca announced to the world at 10:15 on the morning of March 5, 2008, that venerable Bear Stearns & Co., the nation's fifth--largest investment bank, was in trouble, big trouble. "Yep," Sedacca wrote on the Minyanville Web site, which is dedicated to helping investors comprehend the financial world. "The great credit unwind is upon us. Credit default swaps on all brokers, particularly Lehman and Bear Stearns, are blowing out, big time."

Sedacca, the forty--eight--year--old president of Atlantic Advisors, a $3.5 billion investment management company and hedge fund, had been watching his Bloomberg screens on a daily basis as the cost of insuring the short--term obligations–known in Wall Street argot as "credit default swaps"–of both Lehman and Bear Stearns had increased steadily since the summer of 2007 and then more rapidly in February 2008. Now he was calling the end of the credit party that had been raging on Wall Street for six years. "I've been talking about it for years," Sedacca said later. "But I started to notice it that fall. Because if you think about it, if you have all this nuclear waste on your balance sheet, what are you supposed to do? You're supposed to cut your dividends, you're supposed to raise equity, and you're supposed to shrink your balance sheet. And they did just the opposite. They took on more leverage. Lehman went from twenty--five to thirty--five times leveraged in one year. And then they announce a big stock buyback at $65 a share and they sell stock at $38 a share. I mean, they don't know what they're doing. And yet they get rewarded for doing that. It makes me sick."

Sedacca had witnessed firsthand a few blowups in his day. He worked at the investment bank Drexel Burnham Lambert–the former home of junk--bond king Michael Milken–when it was liquidated in 1990 and lost virtually overnight the stock he had in the firm as it plunged from $110 per share to zero (Drexel was a private company but the stock had been valued for internal purposes). "It was enough that it stunned," he explained. "It was more than a twenty--nine--year--old would want to lose." Many of his Drexel colleagues had taken out loans from Citibank to buy the Drexel stock and were left with their bank loans and worthless stock. "I know people with millions and millions of dollars of debt and the stock was at zero," he said. They either paid off the loans or declared personal bankruptcy. "That's what happens when everyone turns off your funding," he added.
He then moved on to Kidder Peabody and watched that 130--year--old firm disintegrate, too. As a result of these experiences and those at other Wall Street firms, he had developed a healthy skepticism of both debt and the ways of Wall Street. Starting in the summer of 2007, he began to feel certain that the mountain of debt building across many sectors of the American economy would not come to a good end. He started betting against credit. "I've watched enough screens long enough to know something was wrong," he said.

The problem at Bear Stearns and Lehman Brothers, Sedacca informed his clients and Minyanville readers, was that both firms had huge inventories on their balance sheets of securities backed by home mortgages. The rate of default on these mortgages, while still small, was growing at the same time that the value of the underlying collateral for the mortgage–people's homes–was falling rapidly. Sedacca could not help noticing that the effects of this double whammy were beginning to show up in other, smaller companies involved in the mortgage industry. He could watch the noose tighten in the credit markets. "Look at what is happening to Thornburg Mortgage," he wrote, referring to the publicly traded home mortg

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Excerpted from House of Cards: A Tale of Hubris and Wretched Excess on Wall Street by William D. Cohan
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