Kate Kelly's book, Street Fighters: The Last 72 Hours of Bear Stearns, the Toughest Firm on Wall Street, now on our recommended reading list, is a great source of information and fun to read. It is well-sourced, authoritative, and always interesting.
Does it provide, through a look at Bear, the answers to our financial crisis? We think not, but that is part of the fun. The reader can collect information -- raw data -- with real confidence. There will be many accounts of the financial crisis. Anyone seeking a complete understanding should consult many sources.
Street Fighters tells an engaging tale focused upon how a mighty firm was reduced to rubble in three days. You know the ending before you start reading, but it is no less engaging. The author has a nice sense of the characters and has done extensive research into backgrounds. We not only learn about the major players, we learn what everyone else thought about them.
Such an approach is open to challenge. Kelly provides footnotes for sources, and acknowledges disagreement. It is convincing support for her narrative.
The reader is treated to a view from several perspectives. It is an insider's take on the politics within an investment bank. There is genuine conflict over risk and which products to feature. Even the most jaded reader may have some sympathy for a wealthy guy who spent a lifetime building up his company and his position, only to lose it all in a few days. This is "inside baseball" at its best.
The story is dramatic and well-told.
The reader has raw data to draw conclusions on several interesting points. Here are some that stood out for us. Yours might be different. Please consider the following:
- Significance of CNBC. David Faber had a story about firms not trading with Bear. It was big news, but it was later denied by those in question. The damage was already done. The issue is how much information one needs to go with a story like this, when the story itself can affect the outcome. Should Faber have verified more completely before going with this story? Would it have made a difference?
- Significance of Kelly and the WSJ. Many readers will already be familiar with the three-part series in the Wall Street Journal. In the book, Kelly asserts that the series itself -- criticizing Cayne's leadership -- had an impact within the firm.
- Hank Paulson's Role. Paulson is portrayed as dictating a punishingly low stock price for Bear. Historians will combine this information with additional information, includeing his reversal on the use of TARP funds, the decision to force TARP on all of the major banks, and other similar decisions. From our perspective as public policy experts, this is an extraordinary and arbitrary use of powers. It is on a scale that is without precedent for a Treasury Secretary.
- The Fed Role. The decision of the Fed to expand lending to include investment banks, only two days after the Bear failure, was extremely arbitrary with respect to timing. We should all be concerned when public officials make decisions about which firms (and which investors) live or die, and do so without clear rationale. Bear was allowed to die while others were saved.
Kelly's conclusion is that Ace Greenberg built a firm on some principles and Jimmy Cayne violated those and lost it all. We are not convinced.
We can now see what happened to many other firms. It would not have mattered if Bear's leverage and risk had been a little less. Kelly is probably right in suggesting that Bear was an unloved firm on the Street, and therefore first to be challenged.
It was beyond her scope to consider other causes, although there is a paragraph or two on the trading in Bear stock. This was something we watched daily on our trading screen. Those betting against the firm could trade in the thin Credit Default Swaps market (CDS), buy puts (where premiums exploded in issues that were far out of the money), short the stock, pull your hedge fund accounts, and spread rumors.
These events were all taking place. The sequence of causation will never be determined. What we do know is that any business depending upon confidence and credit can be destroyed in three days. Those aiding the destruction can make millions as it happens. If that is a verdict on a business model, the entire banking industry is in question.
The book is fun to read and has plenty of raw data with authoritative sources. You should read it, and combine what you learn with other information. The story of the 2008 crisis is complicated. We look forward to reviewing other books on the subject.