House Of Cards: How Wall Street’s Gamblers Broke Capitalism;
By William D. Cohan; Allen Lane (Penguin);
Pages: 468; Price: £25
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About nine decades ago, John Reed, a US journalist, wrote the famous Ten Days That Shook The World. The book described the last 10 days of the Czarist empire in Russia and the Bolshevik revolution that ushered communism in that country. Communism disappeared since then, not only in Russia but also in large parts of the world. By the 1990s, capitalism dominated economic policy across the globe, and finance and capital became the drivers of market economy all over the world. Now another veteran journalist, Bill Cohan, has written a blow-by-blow account of 10 critical days in March 2008 on how Wall Street gamblers broke capitalism.
Cohan is not only a well-known financial correspondent, but was also a former investment banker. He has an insider’s knowledge of how Wall Street functions. His expert views on this were published regularly in the Financial Times and Fortune.
Cohan shows how a combination of risky bets, corporate political infighting, lax government regulations and truly bad decision-makings have wreaked havoc on the world financial system. He describes how the giants in the world of finance such as Lehman Brothers, Bear Stearns, Goldman Sachs and Merrill Lynch collapsed like a pack of cards almost overnight. The irony is that many of them survived many financial crises in the past. But this time, a combination of irrational financial exuberances and bad decisions brought their houses down. Cohan gives an example: Lehman Brothers went from 25 to 35 times leverages in one year, it announced a big stock buyback at $65 a share and then it sold stock at $38 a share. It is difficult to understand whether the company was conscious of what it was doing, and yet it got rewarded (huge bonuses for doing that).
 William D. Cohan was a journalist before embarking on a 17-year career as an investment banker. He spent six years at Lazard Frères in New York, and later was a managing director at JPMorgan Chase & Co. He is a graduate of Duke University, and also received an MS from Columbia University’s Graduate School of Journalism and an MBA from its Graduate School of Business |
A lot has been written since then on how such mighty giants brought self-destructive collapse through sheer greed and misjudgement. Cohan gives a bit-by-bit discussion among the bigwigs in the financial circle before and during the collapse. He also provides bio-sketches of major financial players. The book gives painstaking details of how investment bets misfired, how desperately the banks and financial institutions tried to cover the losses by raising funds from each other as well as from shareholders and hedge-fund investments. He describes the role of Tim Geithner, president of the Federal Reserve, and Lawrence Summers and Robert Rubin, key negotiators for the US government, in the bailout dialogue in the US. Geithner feels that a number of unusual factors had come together to undermine the country’s economic foundation, such as irresponsible availability of credit to less than creditworthy, allowing them to buy homes, cars, and other goods and services they could not afford but thought they needed, a rapid innovation in Wall Street financing and decision-making, including extending derivatives to non-bank financial institutions.
What intrigues the reader is how did it all happen? How come the US financial regulators did not know all these things that they had to lament after the system collapsed? The eventual bailouts, estimated at $3 trillion, have now provided temporary stabilisation of the system, albeit at a loss of trillions to shareholders and ordinary people. The worst is that not only the millionaires and billionaires suffered in this crisis, but millions of ordinary people also suffered due to retrenchment and joblessness. Why could not the US regulators monitor the financial system and anticipate the crisis, even after knowing that similar irrational exuberances witnessed in the past, such as the collapse of Long Term Capital Management Company about a decade ago?
This book, though undoubtedly aimed at the common people, is very difficult to follow, especially for those not aware of the nitty-gritty of finance. It also makes a monotonous description of decision-makings in one bank after another, the misdeeds of the funds manager, CEOs and stockholders. The overall picture that emerges shows the world’s biggest financial system in bad light. Time and again, as Cohan cites, big investment firms were making risky investments merely with hope rather than on the basis of rational calculation of risks and returns.
It is too early to state whether the predictions made in the book would come true or not. But surely, an insider’s view of a make-believe world of finance should be an eye opener for all. It also calls for a relook into the nature of financial deregulation. Cohan surmises, and rightly, the foundation of a capitalist financial system must be based on fundamentals and not irrational exuberances.
B.B. Bhattacharya is vice-chancellor of Jawaharlal Nehru University.
This review was published in the Businessworld Issue Dated 30 June-06 July 2009
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