Writing a book is a serious challenge for anyone intrepid enough to attempt it – after all there is no delegating when it comes to writing – but writing a book about a subject where everyone knows the outcome is an especially perilous task.
Voltaire had the same dilemma when he undertook, in 1752, to write about whether Philip V would ascend to the throne as King of France.
And that was the Everest I was forced to climb when I decided to write "House of Cards: A Tale of Hubris and Wretched Excess on Wall Street."
Everyone in the world believes they know what happened in the current financial crisis.
And the CEOs of the fallen firms, such as Bear Stearns and Lehman Brothers, have gone out of their way to create myths about what befell them. In a typical comment that reinforces the idea that Wall Street was a “victim” of a “once-in-a-lifetime tsunami,” Lehman CEO Dick Fuld — asked what he could have done to prevent what happened — testified before Congress last October: “I wake up every single night thinking, ‘What could I have done differently?…What could I have said? What should I have done?’” he told the House Committee on Oversight. “…I made those decisions with the information that I had. Having said all that, I can look right at you and say this is a pain that will stay with me for the rest of my life...”
What people may not know is why this all happened.
My extensive reporting and research for "House of Cards"– including lengthy interviews with dozens of top executives at both Bear Stearns and Lehman — reveals that the conventional wisdom about what happened and why is wrong.
Wall Street was not the innocent victim of a force majeure or Act of God.
Indeed, quite the opposite is true. The leaders of Wall Street affirmatively made decisions year after year that made their firms extraordinarily highly leveraged and risky enterprises. They created a 24x7 production line that manufactured and sold hundreds of billions of dollars worth of mortgage-backed, and other asset-backed, securities placing them with investors all over the globe who were seduced by their high yields and their phony AAA ratings. Their reward was huge eight-figure bonuses year after year. What a great business! Over time, as the market choked on what they were selling, firms like Bear Stearns, Lehman, Merrill Lynch and Citigroup, had to lard more and more of these securities on their exploding balance sheets, all supported by an increasingly smaller and smaller slice of equity.
What brought the whole proverbial house of cards to its present calamitous state was the further decision these firms made to use the risky securities on their balance sheets as collateral to obtain overnight loans through “repurchase agreements” in the so-called “repo” markets.
When the rumors about Bear’s solvency or Lehman’s solvency started swirling a year ago and then again last September, these overnight lenders – such as Federated Investors or Fidelity – decided the risk of continuing to loan money to these firms overnight was not worth the return. They pulled the plug on making these loans, causing the ratings agencies to downgrade their stocks and forcing them to use their own cash to satisfy the demands of investors, brokerage customers and hedge-funds all clamoring to get their money out. The “run on the bank” had started, and the failure of these venerable institutions – that rely heavily on investors’ confidence and trust to keep operating – became inevitable.
Just as my first book, "The Last Tycoons: The Secret History of Lazard Frères & Co." shared with readers for the first time what that legendary and extremely private firm was all about while also debunking the myths that had grown up around it, "House of Cards" reveals many heretofore unreported details about what happened at Bear Stearns in the final weeks of its existence, how the firm became so vulnerable over the years and what role the firm’s two hedge funds – themselves stuffed to the gills with risky mortgage-backed securities – played in the firm’s demise. Most important, for the first — and perhaps only time – Bear Stearns’ longtime CEO Jimmy Cayne reveals what he was thinking and feeling every step of the way.
Ultimately, the story of what happened at Bear Stearns provides is sort of the Rosetta Stone of sorts for the current financial meltdown. If we understand what happened at Bear Stearns and why, we’ll have a good sense of what happened all across Wall Street and how to prevent anything like it from happening ever again.
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