House of Cards | William D. Cohan

Summary of: House of Cards: How Wall Street’s Gamblers Broke Capitalism
By: William D. Cohan


Embark on an insightful journey of revealing the tale of Bear Stearns, a monumental Wall Street securities firm that went from a stellar $400 billion balance sheet and roaring profits to a tragic downfall with a shocking speed. In ‘House of Cards: How Wall Street’s Gamblers Broke Capitalism,’ William D. Cohan dissects the disintegration of Bear Stearns, the complex factors surrounding its meteoric rise and the ticking time bombs that ultimately led to its catastrophic collapse. Amidst the treacherous 2008 financial landscape, this financial titan crumbled under pressures from the mortgage and housing bubble, leaving a lasting impact on the financial world. Delve into the inner workings of Bear Stearns, witness behind-the-scenes decision-making processes, and understand how a financial powerhouse lost everything.

Bear Stearns Crisis

The sudden collapse of Bear Stearns in March 2008 sent shockwaves throughout Wall Street. Despite assuring investors of its strong financial position, rumors of liquidity crisis plagued the firm as housing prices fell. Ultimately, the bank’s exposure to the collapsing mortgage market and over-leveraged portfolio proved catastrophic, leading to a run on the bank. Despite efforts to secure short-term credit, Bear Stearns was unable to stave off bankruptcy, culminating in a forced sale to JPMorgan Chase. The crisis highlighted the dangers of Wall Street’s over-reliance on complex financial instruments and loose credit.

The Collapse of Bear Stearns

The book delves into the events leading up to the collapse of Bear Stearns in March 2008. Executives touted the bank’s liquidity and reassured clients, despite insider concerns. As the pressure on mortgage-backed securities intensified, the firm started losing cash rapidly. On Thursday, March 13, the firm had only $5.9 billion in cash and owed Citigroup $2.4 billion. Schwartz asked for $30 billion from JPMorgan, which was denied. However, JPMorgan eventually agreed to provide crucial funding to Bear Stearns for up to 28 days. Bear Stearns’ reputation had taken a significant blow, and its ratings on debt were slashed. The book argues that the roots of the firm’s problems lie in its unique corporate culture.

The Fall of Bear Stearns

Bear Stearns’s collapse was a result of focusing on increasing short-term profits, overvaluing mortgage securities, and poor risk management.

In 2008, Bear Stearns was a renowned investment bank that led the financial world with its shares valued at over $172 each. However, a significant turn of events led to the company’s fall. Bear Stearns managers believed they had bought 27 days to save the firm, but Geithner and Paulson had begun to scrutinize Bear Stearns and had a different opinion. The executives faced the fact that the 28-day deal with the Fed and JPMorgan was a one-day deal.

Bear Stearns’s approach had been focused on short-term profits and bonuses at the expense of the long-term. Moreover, they overvalued their mortgage securities. JPMorgan’s top executives started digging into the company’s books and determined that Bear Stearns had overvalued its securities and walked away from the deal entirely, making Bear Stearns insiders outraged. The Fed agreed to take $30 billion of Bear Stearns’s most toxic assets, and JPMorgan re-entered the deal, but their offer plunged to $4 a share and then $2.

Finally, the company’s poor risk management played a role, making it challenging to understand the risks inherent in some of their investments, like collateralized debt obligations. Longtime CEO Jimmy Cayne suffered the most during the collapse as he lost around $988 million. Faced with the reality of bankruptcy, Cayne considered rejecting JPMorgan’s offer but eventually gave in as JPMorgan had almost acquired half of Bear’s shares. Bear Stearns’ shareholders overwhelmingly approved the deal.

Bear Stearns’s fate serves as a cautionary tale, highlighting the need for investment firms to balance long-term sustainability with short-term profits.

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