Posts Tagged ‘Bear Stearns’

The Great Read-cession, Part VIII

Crash of the TitansOn the eighth day, John S reviewed two more books of the financial crisis, including the final report of the Financial Crisis Inquiry Report.

Crash of the Titans: Greed, Hubris, The Fall of Merrill Lynch, and the Near-Collapse of Bank of America

by Greg Farrell 2010

 

Having read accounts of the failures of Bear Stearns and Lehman Brothers, it seemed appropriate to read a book about the third investment bank claimed by the financial crisis: Merrill Lynch. Of course, Merrill Lynch didn’t fail outright—it was sold to Bank of America, making the story slightly more complex. Greg Farrell’s book, Crash of the Titans, is really a soap opera about how two banks ended up in a reluctant and unhappy marriage.

The first step towards this malignant matrimony was the downfall of Merrill Lynch. Merrill Lynch occupied an odd position on Wall Street. On the one hand, it’s probably the investment bank normal people are the most familiar with, thanks to its “thundering herd” of brokers. On the other hand, it suffered from a clear inferiority complex for not being as profitable or as elite as Goldman Sachs or Morgan Stanley.

In its quest to catch Goldman Sachs, Merrill Lynch became one of the leaders in the CDO market, holding more CDO assets than any other bank. As the housing bubble inflated, this led a streak of immense profitability, but the lust for profits blinded many Merrill executives to the risks they were exposed to. Continue reading

The Great Read-cession, Part VII

The QuantsIt’s Part VII! (Remember, if you’re having trouble keeping up, check here for a complete list of all posts in the series.) Today John S looks at the magical world of hedge funds.

The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It

by Scott Patterson 2010

 

“Quant” is a word that pops up over and over again in descriptions of the financial crisis, but it never really gets defined. It tends to be used on Wall Street the way “sabermetrician” gets used in baseball or “Nate Silver” is used in politics: It just means someone who uses math in a slightly unconventional way while doing his job.

Nevertheless, these “quants” were blamed for much of the financial crisis, as those industry “experts” who concocted elaborate formulas showing that housing prices would never fall and homeowners would never default. I turned to Patterson’s book to find out who, exactly, these “quants” were and why their formulas—unlike Nate Silver’s and Billy Beane’s—went so awry.

Patterson’s title bills the book as a story of these “new… math whizzes,” and the cover even contains a quote from Warren Buffett: “Beware of geeks bearing formulas.”* Unfortunately, Patterson’s book focuses primarily on the world of quantitative hedge funds. In other words, instead of focusing on those within the banks themselves and how these whizzes were used to justify massive trading strategies, Patterson’s book is about some of the most successful outsiders. Continue reading

The Great Read-cession, Part V

House of CardsThe Great Read-cession is back! Today John S looks at two books that focus on banks that are no longer with us. Pour one out for Bear Stearns and Lehman Brothers, then read this…

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

by William D. Cohan, 2010

 

William D. Cohan* is a banker-turned-writer who has by now written three histories of different Wall Street firms: His first book was about Lazard Freres, his former employer, and his latest is about Goldman Sachs. House of Cards, though, is the tale of Bear Stearns, the first investment bank that was taken down by the crisis.

*Duke alum!

Bears Stearns’s collapse occupies an odd place in the narrative of the 2008 crash, having occurred in March, six months before the fall of Lehman Brothers, the subsequent panic, and the passage of TARP. At that time, nobody quite knew the enormity of the problem facing Wall Street, and there was hope that Bear Stearns’s collapse would be the nadir of the problem. The firm was the smallest of the major Wall Street investment banks—if there was going to be a casualty, it would make sense for it to be Bear Stearns.

So how does a Wall Street bank go bankrupt? Well, the same way Mike Campbell did: Gradually, then suddenly. The seeds of Bear Stearns’s collapse go back several years—and possibly, Cohan implies, several decades—but the proximate cause was the sudden grip of panic that seized the firm in March of 2008.

Continue reading

The Great Read-cession, Part IV

On the BrinkWelcome to Part IV of our eleven-part breakdown of the books of the financial crisis. Having trouble keeping up? Then check out this page for all previous and future posts in the series.

On the Brink: Inside the Race to Stop the Collapse of the Global Financial System

by Henry Paulson 2010

 

The unifying element of the first four books was pessimism: Whether it was Ritholtz’s scorn for those in power, Morgenson’s search for someone to blame, Lewis’s tragic tale, or Sorkin’s narrative of disaster, all four books had decidedly bleak outlooks on the events. Since there is only so much despair one person can read about, I wanted to read the account of someone who would be sympathetic to the policy-makers and CEOs who everyone else blamed.

Henry Paulson was perfect. If the financial panic of 2008 has a face, it’s Paulson’s. As Treasury Secretary during the collapse, he was the one who told Congress of the dangers of Fannie and Freddie (in his infamous squirt gun analogy), who proposed TARP, and who ultimately dispensed the bailouts. And unlike the other figures prominently involved—Geithner, Bernanke—he faded from public view almost immediately after the disaster passed.

Reading Paulson’s book, though, it is hard to dislike him. His prose is straightforward and he comes across as an upstanding, diligent worker with integrity. He’s honest, but polite and gracious to a fault—despite presiding over what many would describe as a complete disaster, he has nothing but kind words for almost everyone involved.* He worked for Presidents Nixon and Bush—two of the least popular Presidents of the last 50 years, if not ever—but says nothing negative about either. He clashed with another prominent public figure, Jon Corzine, for the top spot at Goldman Sachs, but all he says about that is “frankly, the pairing was never right.” Continue reading

The Great Read-cession, Part II

Too Big To FailIt’s Part II of John’s attempt to read every single book on the financial crisis of 2008. Check out Part I here if you missed yesterday’s introduction. Today we talk about the two most famous books the crisis produced.

Too Big To Fail: The Inside Story of How Wall Street and Washington Fought to Save The Financial System—And Themselves*

by Andrew Ross Sorkin, 2009

 

*See? I warned you about those subtitles…

The first book I read was probably the most famous book on the subject of the financial disaster. Sorkin’s book was an award-winning best seller, and it was adapted into an HBO film. It also has the most iconic name.

It’s easy to understand why TBTF was such a hit: The book is essentially a thriller, depicting the days and months of greatest turmoil. It’s not so much about the causes of the crisis as it is about the disastrous results.

Sorkin embraces the thriller-quality of his narrative, and he does it very well. The book is excellent at setting scenes and introducing a myriad of characters. His scenes are short—rarely more than two pages long—and colorful, with lots of detail and dialogue. Although there are over 150 people introduced (there is a helpful eight-page Cast List in the front of the book), Sorkin does an excellent job of making them all seem unique—a difficult task, since almost all are rich, middle-aged white guys. He includes just enough backstory to provide context and make them seem like real people, without weighing down his narrative.

The narrative begins in March 2008, with the bailout of Bear Stearns. Sorkin doesn’t spend much time on the specifics of that deal—in which the Fed guaranteed $30 billion of assets in exchange for JP Morgan buying the firm for $2 a share*—but instead focuses on the ripple effect of the deal. There is some irony, of course, in this ripple effect: The main reason the Fed intervened in the Bear Stearns failure was to prevent the failure from infecting other firms. Instead, all the Fed did was replace one ripple effect with another. Continue reading