E-mail a friendWilliam Cohan
airdate March 31, 2009
William Cohan is an award-winning investigative reporter who also worked on Wall Street for 17 years. He's written for several publications, including Fortune and The New York Times, and combined his journalistic skills and finance background to become a best-selling author. The Financial Times named his The Last Tycoons the best business book of '07, and his latest, House of Cards—on the Bear Stearns collapse—has been called a riveting read. Cohan is a graduate of Duke and the Columbia Business School.
Former investment banker talks about Wall Street: mistakes vs. greed. (1:48)
Full interview. (13:30)
William Cohan
Tavis: William Cohan is a former investment banker turned bestselling author whose previous book, "The Last Tycoons," was named book of the year by the "Financial Times" back in 2007. His latest is called "The House of Cards: A Tale of Hubris and Wretched Excess on Wall Street." He joins us tonight from New York. William Cohan, nice to have you on the program, sir.
William Cohan: Thank you for having me, Tavis. It's a pleasure.
Tavis: So you got a whole book about this, but in short, how much of the mess we are dealing with now has to do with Bear Sterns creating all this?
Cohan: Well, in fact, as I like to say, without being too boastful about it, if you can understand what happened at Bear Sterns you can understand what happened in this financial crisis.
I view Bear Sterns as sort of the Rosetta Stone of the crisis, and what I mean by that is that basically the same thing that happened at Bear Sterns happened at Lehman Brothers, happened at Merrill Lynch, happened at Citigroup, happened in almost every major firm on Wall Street, and that is in essence the manufacture, sale, and distribution of billions and billions of dollars of mortgage-backed securities that were a great source of revenue and profits for these firms for a long time during the last five or six years until about June of '07, when people began to realize that the market for these securities had deteriorated rapidly and that they could not sell these securities anymore into the marketplace.
Now unfortunately, that led to them building up a huge inventory of these securities on their balance sheet, which may or may not have been fine. But then they compounded that problem in a very big way, especially at Bear Sterns and Lehman and Merrill by financing their needs of their business in the overnight lending market.
In other words, they used these mortgage-backed securities that were rapidly losing value as the security, as the collateral, for loans that they received every night to the tune of $75 billion a night, in the case of Bear Sterns. And that fateful week in March a year ago -- these overnight lenders said, "We're not going to take those mortgage-backed securities as collateral for these overnight loans anymore. The return is not worth the risk."
And so they pulled the plug on Bear Sterns. That forced Bear Sterns to use its own cash, which was a mere $18 billion, to finance the needs of the firm, which quickly they realized they could not do and they were forced to seek a buyer or to file for bankruptcy.
Tavis: As the title "House of Cards" would suggest, by the time we figured out what was happening at Bear Sterns it was too late to stop all these others from going down like dominoes, like a house of cards?
Cohan: Yes, I think that is to some extent true, although firms could have done more, like Lehman Brothers. What happened to Bear Sterns on March 16th of 2008, when they essentially were sold to JP Morgan for $2 a share with government assistance and that was later increased to $10 a share because of poor legal drafting that gave Bear Sterns an opportunity to re-cut the deal, that should have been a serious wake-up call to Dick Fuld at Lehman Brothers about the dangers that his firm faced, which had many of the same risky securities on its books as Bear Sterns, only it was a magnitude bigger than Bear Sterns.
And it also did a fair amount of overnight financing and repo financing and they should have done more than they did. I think Dick Fuld at Lehman Brothers suspected that he would get the same treatment from the government that Bear Sterns got, which was a serious assist in the form of a $30 billion facility that allowed JP Morgan to buy only what it wanted of Bear Sterns and the government bought these 30 billion that it didn't want.
And I think Dick Fuld suspected he was going to get that same kind of deal, only it didn't happen -- he bet wrong.
Tavis: In retrospect, what do you make of the fact -- and hindsight is, as they say, 20/20 -- but I'm curious as to your take, William. In retrospect, what do you make of the process that the government engaged in of picking and choosing, as it were, who they were going to rescue and who they were going to save?
Cohan: Yeah, well, this is of course a very good question, and it would be great to have more from Treasury Secretary Henry Paulson on this question, but basically the government's line on this, if I may -- and that means Tim Geithner, who was then the New York Fed chairman, Ben Bernanke, the chairman of the Federal Reserve, and Hank Paulson, the Treasury secretary -- their collective view on this was that unlike with Bear Sterns, where JP Morgan was there, willing to step in and buy Bear Sterns at the eleventh hour, there was no similar buyer that fateful weekend in September for Lehman Brothers.
And as we all know, Bank of America, a potential buyer of Lehman Brothers, decided to buy Merrill Lynch instead. The other potential buyer of Lehman Brothers was Barclay's, a U.K. bank, and what they say is that the equivalent of the SEC in the U.K. would not allow Barclay's to buy Lehman Brothers that weekend and Barclay's ended up buying what it wanted out of Lehman Brothers, the U.S. business, a few days later out of bankruptcy.
But the problem with this line that the government puts forth, in my opinion, is that they sort of blew their argument out of the water a few days later when they did this rescue of AIG. The question is, why didn't they do the same thing for Lehman Brothers that they were willing to do a few days later for AIG, and that, I'm afraid, we don't really have a good answer for at this time.
Tavis: You mentioned Tim Geithner a moment ago. When one grabs the book and goes through the index, you see a whole lot of pages with his name on it. He is referenced a great deal in this text when you get a chance to read it. Tell me what Geithner was doing then. We know what he's doing these days, or not doing, as it were, but tell me why he's so prominent in this text about Bear Sterns.
Cohan: Well, because he was head of the New York Federal Reserve bank, which is one of the several Federal Reserve banks that make up the Federal Reserve system, and being in New York he was the most powerful non-Fed chairman. Second to Bernanke he was the most powerful figure, and he interacted with all these Wall Street firms and the banks on a regular basis.
He monitored them, he had conversations with them, and although he correctly points out that he was not the supervisor of Wall Street -- the supervisor of Wall Street securities firms was Christopher Cox at the SEC, and one can ask very correctly where he was in all of this -- but Tim Geithner had a very important role and he became part of the solution that weekend for Bear Sterns by agreeing to lend to a new company called Maiden Lane that bought these toxic assets from Bear Sterns that JP Morgan didn't want.
He agreed, along with Bernanke, to make the funds available in the tune to $30 billion, for that deal to happen. That put him front and center at the table -- one of the three most important men in the country during that time period. And that's why he was at the table again for Lehman Brothers and AIG and Fannie and Freddie and all the rest. And he is central to all of this, as everybody correctly says.
Tavis: Here again, in retrospect, how much of what happened at Bear Sterns in terms of what led tot his collapse of this house of cards, how much of this has to do with deregulation -- put another way, the lack of regulation?
Cohan: Well, I think there is a lot of blame to go around here, and one of the sources of the blame, the focus of the blame, would have to be the SEC which I think failed to properly regulate Wall Street firms.
There was a period of time in June 2004 where the SEC decided to allow securities firms on Wall Street to increase the amount of leverage that they could have on their balance sheet. And so for every dollar of debt -- how many dollars of debt they could have for every dollar of equity.
And it got to the point at the end where Bear Sterns was leveraged 50 to one during the quarter, and at the end of the quarter they would clean it up so it was about 30 to one.
Now, when the SEC allowed securities firms to increase that leverage in June of '04, the quid pro quo for that was that they were going to increase the amount of regulation that Wall Street got as a result. That meant SEC officials in these Wall Street banks.
Unfortunately, that part never happened, and that didn't happen until -- I don't think there was the first SEC supervisor in Bear Sterns until August of 2007, which I might add was quite late in the process and was a real shame.
Tavis: Admittedly, here is an over-simplistic exit question, but I'm going to ask it anyway because I'm curious to get your take on it, however you wanna answer it. how much of what happened with Bear Sterns, Lehman, AIG, all the stuff we're reading about and experiencing as a country every day -- on the part of Wall Street, how much of this had to do with mistakes, honest or otherwise, but mistakes versus greed -- just outright greed?
Cohan: I don't think they were mistakes, honestly. I think the compensation system on Wall Street provided huge rewards for firms to create financial innovation -- take a financial innovation like securitizing mortgages and selling them all over the world -- this is the creation of these so-called mortgage-backed securities.
That was a financial innovation at one point, started by Lou Ranieri at Salomon Brothers. That was a very interesting financial innovation, and a very effective one. But Wall Street has no carburetor, it has no ability to stop when it discovers a financial innovation. It pushes it to the limit because that's what the incentives are on Wall Street.
You get rewarded for doing more, more, more and more. More revenue equals bigger bonus. So they discovered this great thing called mortgage-backed securities and they sold it hard and strong for as long as they possibly could, until the bubble inflated and then burst and exploded all over the place.
Same thing with Internet IPOs, and it has to do with the way Wall Street is compensated. So a little less financial innovation, or if you're going to have financial innovation, then be a lot more careful about what you're rewarding people to do.
And I think to some extent, the market on Wall Street is taking care of that, but again, the short-term memory is a big problem, and I think we need to watch it very carefully.
Tavis: The new book from William D. Cohan is called "House of Cards: A Tale of Hubris and Wretched Excess on Wall Street." William, nice to have you on. Thanks for the book and thanks for sharing your insights.
Cohan: Thank you for having me, it was a pleasure.
Tavis: It's my pleasure to have you on.
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