Editor’s note: March 12, 2009. House of Cards (Doubleday) is a fascinating account of how Bear Stearns collapsed. Portions of the review written by James Freeman, an assistant editor of the WSJ’s editorial page, are excerpted below.
In House of Cards, William D. Cohan calls the collapse of Bear Stearns a "tale of hubris and wretched excess on Wall Street." Of course, tales of hubris and excess on Wall Street are nothing new, fueled by large bets with other people's money. What was new in March 2008 -- and what still amazes even former Bear employees -- is that government officials somehow talked themselves into rescuing the bettors….
…Meeting the characters in "House of Cards," it's not easy to conceive of people less deserving of federal assistance. In 1997, Bear Stearns helped pioneer the subprime mortgage-backed security by serving as co-underwriter on a $385 million offering. By the mid-2000s, Bear was the leading issuer of such securities and a leader in collateralized debt obligations, which offered even less transparency to investors. Bear was a vertically integrated manufacturer of mortgage chaos, making individual loans to home buyers, servicing the loans, bundling them into pools for investors, marketing the securities and also borrowing huge sums to finance internal hedge funds that held onto these dodgy assets.
Mr. Cohan describes the succession of government policies that encouraged Bear and others to invest so heavily in mortgage finance, from the Fed's easy money to Clinton-era changes to the Community Reinvestment Act requiring more loans to low-income borrowers. But the firm itself deserves the lion's share of the blame for its own collapse. Suggestions to sell some of its risky mortgage assets, or to raise capital, or to consider merger partners were brushed aside in the years and months leading up to the debacle. Paul Friedman, chief operating officer of Bear's fixed-income division, tells Mr. Cohan that "we did this to ourselves. . . . It's our fault for allowing it to get this far, and for not taking any steps to do anything about it.”
…Taxpayers reading this fascinating tale may wonder whether the fallout from the government's intervention can be contained and, if so, at what cost.
Editor's Note: Click Here to read the entire review.
To comment on this article, please visit our blog.