Required Reading for Anyone in the Mortgage Business

I just finished reading “House of Cards: A Tale of Hubris and Wretched Excess on Wall Street” written by William D. Cohan and published by Doubleday. It’s a fascinating read for anyone curious about the current financial mess but an absolute requirement if you were part of the mortgage business. One caveat: I was a Bear Stearns employee for almost two and half years working for their subsidiary, Bear Stearns Residential Mortgage Corporation. My review, I think is very fair and I’ve tried hard not to editorialize.

Part I of Mr. Cohan’s tale begins with the play by play demise of one of Wall Street’s most prestigious firms. It paints a vivid picture of the last week of Bear Stearns’ existence before its “shotgun wedding” to JP Morgan Chase for $2/share, later revised to $10.00/share. Mr. Cohan had unprecedented access to the players of this unfolding drama as evidenced by the abundant quotes of the key insider players. This really gives the reader an insider view of this monumental event.

In part II of “House of Cards” Mr. Cohan takes on the role of a “pathologist” tracing the firm’s legendary roots, while shedding light on Bear Stearns’ evolving culture and idiosyncrasies. He attempts to correlate this culture to Bear’s eventual downfall.

Mr. Cohan paints a colorful portrait of CEO, Jimmy Cayne. A man, according to the book, with an autocratic and bullying management style who preferred playing bridge than focusing on day to day management of the firm.

Also interesting is the connection Mr. Cohan draws between Mr. Cayne’s decision to eliminate a program known as “CAP” (deferred income as company stock). Given to some executives in the firm, CAP had the potential of making employees who participated in the program extremely wealthy, assuming the stock continued to rise (as it did in the years leading up to the fall).

Warren Spector, heir apparent to Mr. Cayne’s job, was one executive who fully participated in the program. Mr. Spector, who oversaw the mortgage business placed 100% of his compensation in CAP. Mr. Cayne, the book said, soon realized that Mr. Spector could ultimately out-earn him and gain a larger ownership stake in the firm. As a result, he eliminated the program forcing Mr. Spector to sell a huge chunk of Bear Stearns stock. With his ownership stake in the firm declining, the author postulates that this caused Mr. Spector to sour on the firm. This was dangerous for Bear Stearns because Mr. Spector figuratively had his finger on everything. He was the day-to-day manager of the firm. This, according to the author, was a deadly cocktail.

While the book provides many colorful and titillating anecdotes that may horrify some, I believe Mr. Cohan fails to answer the one question that needs to be answered definitively. Was it Bear Stearns’ management and culture that doomed it to fail? Or was it simply the coming tempest in the mortgage business that would doom them regardless? It is worth pointing out that Bear Stearns was one of the least diversified firms on Wall Street, deriving the bulk of its earnings from Fixed Income products such as Mortgage Backed Securities. Monday morning quarterbacks can have a field day debating Bear’s strengths and weaknesses. There were plenty in each category. When the complete history is written, it may come down to this: The tsunami wave that hit the mortgage business was too big for a firm that placed the majority of its bets in that industry.