This week, amid everything else I was doing, I read the entirety of the newly released book, “Street Fighters: The Last 72 Hours of Bear Stearns, the Toughest Firm on Wall Street,” written by Kate Kelly, Wall Street Journal reporter who covered Securities firms like Bear Stearns, and wrote three major articles as it declined.
Here is how the book works: it takes you from Thursday evening to Sunday evening during the crisis. When a new topic or person is brought in in an important way, Kate Kelly does a flashback to give readers the needed background. It detracts from the urgency of the rest of the story, but does flesh out how Bear Stearns came to this ugly situation.
Culture matters in an organization. A well-run organization, such as existed under Ace Greenberg developed pride in the organization, because it worked so well. But pride, once engendered, is a fickle mistress. Under James Cayne, once he stopped checking the details, and even major issues like exposure to the mortgage markets, pride was destructive. Alan Schwartz believed that Bear Stearns was a great institution, and it blinded him regarding raising capital. They couldn’t need additional liquidity, until it was too late to raise it.
Kate Kelly interviewed many people extensively for her book, and includes footnotes where parties don’t agree with her renderings. She does make the last 72 hours live, with all of the uncertainty and fear of the situation. I liked the book, and would recommend it. That said, there are other books out on Bear Stearns, and I have not read them.
It’s a Small World After All
Now, what are the odds that a kid I used to stand with at the bus stop to go to kindergarten would end up in this book that I am reviewing? To an actuary, it boggles the mind. There is a “bit player” who appears twice in the book, my old friend Pat Lewis. He lived three doors down from me, and was the popular, tall athlete, while I was a short nerd who tried my best in athletics. We were both long distance runners, but he was my better by far.
After many years, I came back into contact with him in 2000 or so, when he had gotten a job in risk control at Bear Stearns. I met him for lunch during an actuarial conference in midtown Manhattan — what a place to meet for two guys from the Milwaukee suburbs. We caught up on each other lives and careers. Me, married with seven children (then — eventually eight) — he, unmarried, but still more handsome than me. Both of us are risk managers — he at Bear, me at F&G Life. As the book records, Pat and those working with him try to create mathematical models that will highlight the risks of Bear. James Cayne, not understanding the value of them, kills the project.
There are other references to him in the book, but this is a tale where those more powerful would not listen to reason. Pat Lewis is a standup guy, and stated what he believed, even when things were chaotic.
Though the book gives its own set of lessons, I want to give a few of my own.
Love beats fear… we need friends
Bear might have felt like a big swinging dick after LTCM, where they stiffed the rest of the securities industry by refusing to pony up capital, but that cemented the view of the rest of the industry: Bear was not a team player. That cost them when their disaster hit. My conclusion: love beats arrogance in the long run. Better to have friends than to suffer alone.
Don’t take your eye off the ball
Cayne clearly took his eye off the ball thinking that the business would do fine without close attention — he could go off and play bridge and smoke pot. Inattention destroys businesses.
Risk control wins in the long run.
Cayne ignored risk control. He was happy with a high ROE, and did not look closely to see how it was generated.
Liquidity is lifeblood — consider the BONY box.
Goldman is the only securities firm to come through this crisis almost unscathed. Rather than pressing it to the limit, they would add assets during good times to the BONY box. That is, they would save safe assets to protect themselves in the long run. What a wise strategy. No wonder that they run our government.
This is a good book that deserves to be read by those that want a clear view of how Bear Stearns went down. It is engaging and informative.
As For Me
Here are some posts that I wrote during the crises:
- Eleven Articles on Residential Real Estate (point 1)
- Dissent on the Significance of the Bear Stearns Call
- Thinking About the Bear Stearns Bailout
- Another Dozen Notes on Our Manic-Depressive Credit Markets (point 2)
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