New William Cohan Book Goes Inside Bear Stearns Collapse
Warren Buffett famously called them “financial weapons of mass destruction,” and as it turns out, he was right. Collateral debt obligations (CDOs) not only brought down investment powerhouse Bear Stearns, but eventually also wreaked havoc on the nation’s entire financial system.
The exotic world of structured finance products is the subject of new book by author William Cohan, a former Wall Street banker for 17 years and best-selling author of The Last Tycoons: The Secret History of Lazard Frères & Co.Cohan’s new book, House of Cards: A Tale of Hubris and Wretched Excess on Wall Street, explores the ripple effects of CDOs and how one of the country’s most formidable investment firms ultimately would bring about its own demise by betting heavily on these toxic mortgage-backed securities.
An excerpt of Cohan’s book is in the March 4 issue of Fortune magazine. Among other things, the article traces how an ill-fated decision by Bear Stearns management to become big players of CDOs and other risky financial instruments produced disastrous consequences for Bear Stearns and, later, financial markets everywhere.
At the center of Cohan’s story, of course, are Ralph Cioffi and Matthew Tannin, the two hedge fund managers largely credited with bringing Bear Stearns to its knees after losing billions in two collapsed hedge funds, while costing thousands of unsuspecting investors their life savings.
On June 19, 2008, the two men were arrested for allegedly misleading investors about the financial state of the two hedge funds they managed, the High Grade Strategy and Enhanced High Grade funds. Among other charges, Cioffi and Tannin were accused of deceiving their own investors and the funds’ institutional counterparts by fraudulently concealing from them the full extent of the funds’ deepening troubles.
Both the High Grade Strategy and Enhanced High Grade hedge funds failed in June 2007. Before crashing, the funds had more than $20 billion in assets.
The fall of 85-year-old Bear Stearns is without precedent. The company first joined the ranks of publicly traded Wall Street firms in October 1985. The share price of its initial public offering was $6. In January 2007, Bear Stearns stock peaked at $171.50. Throughout its entire history of doing business, the investment firm never had a losing quarter.
Then, in November 2007, the world changed for Bear Stearns. The company incurred a net loss of $854 million after lowering the valuation of its inventory of mortgage securities. Several months later, news of Cioffi and Tannin’s subterfuge came to light. And the rest, as they say, is history.
House of Cards: A Tale of Hubris and Wretched Excess on Wall Street by William Cohan is set for release on March 10.
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May 28th, 2009 at 11:18 pm
I have a question about the undermining cause of Bear Stearns collapes. Bear Stearns collapsed because they created packages of mortgages and sold them. These mortgages became losses because people couldn’t make payments on their mortages and demand dropped off.
Seems to me the real cause of this crisis was the Banks on Wall Street where giving loans to people on an Adjustable rate or interest only bases which eventually adjusted up and put people in a spot they couldn’t afford their loan payment.
My believe is the Banks actually created this problem. They didn’t educate people who they were giving these loans to. What is your opinion on this?