KEN AULETTA: So, if your two sons come to you one day, and they say, "Dad, what's the major valuable lesson you learned from doing this book that I could share with my class?"
WILLIAM COHAN: As you are familiar with, after writing Greed and Glory on Wall Street, greed is the corrupting factor here, as it has been in many instances over many generations of businesspeople and politicians. The idea that you could make huge amounts of money and pawn the risk off to your shareholders came about as a result of Wall Street firms going from private partnerships to public companies. The whole ethos of Wall Street changed as a result of that from being a series of partnerships where the partners shared liabilities and shared profits to "Give me my bonus now, and any risks that I took to get that bonus, well, that will be fobbed off to shareholders later down the road, if at all, and I'll have my bonus. It will be in my pocket, and I'll be off to the Hamptons or Fifth Avenue or wherever I want to be."
"His ego is in check. Unusual in this book. Unusual in Washington milieu. Unusual among powerful people. You can see the way he carries himself. He's not boastful. He doesn’t seem to be prideful. I get a lot of comfort at night thinking that Tim Geithner is in that job."
And so, the biggest lesson is how that culture of greed evolved over the years and we ended up with one scandal after another. This isn't the first time this has happened. This is like the fifth time this has happened since all these firms went public. This one though was more devastating than the others.
But you quote Paul Volcker in your book, a warning he gave in 2005. Why was Wall Street and so many other people deaf to that warning?
Well, because it's no fun. It's no fun to listen to the guy who tells you to stop what you're doing. Telling you you're creating more risk than we're going to know how to deal with. You're creating a situation where you're going to stop a situation where everybody's having a big party. Everybody's making tons of money. The firm's making money. The bankers are making money. The traders are making money; the executive committee of Bear Stearns is making $30-$40 million each. Why stop that party?
But you grow up being taught that businesspeople are supposed to assess risk. Where was the assessment of risk?
There was no assessment of risk. I mean, one of the myths about Bear Stearns was that they were good risk assessors; they had good risk controls. They didn’t. They had people in those jobs. They had people supposedly doing that task, but if they were—in some instances, if they were doing their job, they were unable to convey that information effectively to the executive committee of the firm to get them to stop the bad behavior. So, I mean, what's the point if they're not willing to get it done?
You mentioned greed as a melody that runs throughout this crisis and many crises before when you deal with Wall Street. What about incompetence? What weight do you give to that? People in their silos and compartmentalized information and a lot of people didn’t know that should've known....
Or they say they didn’t, and they believe they didn’t.
But they should have known.
They should have known.
Is that incompetence?
Incompetence. That's an interesting word. They weren't good at their jobs if they didn’t understand how the firm was being funded, the risks it was—I mean, they were using these mortgaged-backed securities as collateral for their overnight financing—to not wonder if that was a good thing to do, aside from the fact that it was cheap financing, is absolutely incompetent. Absolutely incompetent.
I've had some members of the board of Bear Stearns tell this to me: that they feel they should have done a better job in terms of succession planning. Jimmy Cayne stayed 'til he was 74. He, by his own admission, says he didn’t understand how the firm was making money.
Well, if he's getting paid $30 million, $40 million a year, he should know those things, and he should be able to take corrective action. And the fact that the board let him stay in place that long and he didn’t understand really how the firm was making money or the risks it was taking is also the board's responsibility. But as we all know, the cozy relationship that exists between boards of all kinds and CEOs of all kinds is legendary, and it's especially so on Wall Street. Nobody likes somebody who's asking too many questions.
Cayne talked to you and his revelations and candid comments are quite extraordinary. Do you think because he gave you that access he comes out better than he would have had he not given you that access?
I really tried to be fair to him. I think he's very charming, as a lot of these Wall Street guys can be. But he and they can also be very ruthless. A lot of the more salacious rumors that surround him and the firm—they're not really a part of this book. I asked him about things. He denied them. I certainly asked him about the Kate Kelly story about him smoking marijuana. But he denied it.
How important was bridge?
That is, of course, why the book is called House of Cards because of the double entendre. What ended up getting cut, unfortunately, was a story about when I asked Jimmy, "Do you go to casinos? Do you play in casinos? Because bridge is not really a gambling game. There's no money at stake. It's prestige. But do you go into casinos?
All of a sudden, out of his mouth came like 20 minutes of this most technical and pristine and insightful analysis of games of chance in a casino. I mean, this guy really understood this stuff, which, of course, makes the irony all the richer because in bridge you're supposed to understand the cards on the table that can hurt you. I think he understood them on the bridge table, but he obviously didn’t understand them in his firm.
Did you hear from Cayne after the book came out?
Not a word.
When you look at this crisis, broadening it beyond Bear Stearns, what blame do you place on the public?
The book ends with the speech that Alan Schwartz gives about the responsibility here, and he correctly apportioned blame to everyone, and I think he's not wrong about that. As I pointed out in the book, I spent some time in Baltimore at a sort of hospice for people who had trouble paying their mortgages and looked at some documents, and you see fraudulent loan documents, which everybody knows about now. But the point is that the borrowers signed the documents, even though they saw all the information, or had to have seen, was not accurate about them. They wanted the house. They wanted the loan. They got it.
So to absolve them of responsibility is not right. I think for a while there a mortgage became the most desirable product ever made. Everybody who touched it made money for a while. There's regulators to blame. There's Congress to blame. There's the Federal Reserve chairman to blame. There's bankers to blame. There's ordinary citizens to blame. There's public-policy makers to blame.
It all came together and turned out in a perfect storm, but it's not, as many Wall Street CEOs would have you think, a tsunami that came and affected them and there was nothing they could do about it.
Other decisions could have been made. This group of banks, unfortunately, decided to make the decision to go whole hog, all in on mortgage-backed securities and other risky securities that have got us into this mess.
You turned around this book very quickly. There's also a wealth of information in the book. How'd you start to report the book?
Well, literally, the weekend that Bear Stearns imploded and was sold to JP Morgan, I wrote a proposal and sold to Doubleday on the Monday morning, the same day the deal with JP Morgan got announced.
Now, unlike the Lazard book where I knew most of the people who worked at Lazard and figured I could, one way or another, get access to a lot of them, I didn't know hardly anyone at Bear Stearns. I felt like an ambulance chaser, and I felt even worse that there was a death—a major death in this family, and people were shell-shocked, and here I was asking them to do interviews?
It became apparent after sort of the 12 stages of this grief people ran through it that there were people who felt that the mainstream media had not accurately portrayed what had happened, and they felt very deeply that it needed to get out in another forum, and I was the beneficiary of that.
You had access to Tim Geithner. What did you learn about him that's relevant to the kind of job he has as secretary of the Treasury?
His ego is in check. Unusual in this book. Unusual in Washington milieu. Unusual among powerful people. You can see the way he carries himself. He's not boastful. He doesn’t seem to be prideful. His ambition seems to be in check, which is so refreshing. Washington is filled with people of huge egos, especially around the president. I get a lot of comfort at night thinking that Tim Geithner is there.
He understands all of the risks that were built into the system. You can criticize him for not trying to deflate the balloon a little beforehand, and even he questions his own decision-making in that regard and correctly says, "Is that really my role as a regulator to deflate the balloon?" But he understands derivatives. He understands the risks in these securities. He understands all of the risks these firms are taking and how they finance themselves.
He's also a guy who was at the table when they decided to let Lehman go. Some people believe that Lehman Brothers probably had more impact on subsequent events with the crisis we're in now than Bear Stearns did.
It's like asking a question where you'll never know the answer because they didn’t let Bear Stearns fail. A lot of Lehman people especially are quite critical of the decision-making that led to letting Lehman fail.
I think about it a lot. I mean, on the one hand, I'm very sympathetic to the human cost. And there was substantial financial cost. On the other hand, the firm was bankrupt, as Bear was, as AIG is, as Merrill was. And the question is why they saved some and not others, and that's why I'd like to know the answer to that.
The big moment, I think, was, of course, when Congress voted down the first TARP bill when the market fell 780 points. That was calamitous, and then we had to dig back out. I think the logic here is that the failure of Lehman alerted—was Paulson's little gambit to get the $700 billion bill in front of Congress, and then Congress called his bluff and rejected it, and that was—the combination of those two things really created the crisis. The crisis of confidence.
One last question. When I ask what's the lesson you will tell your sons, and you said it was greed. Overwhelming greed. That would suggest if I posed the question to you, "How do we prevent this from happening again?" Greed is eternal.
It's human nature. I don't know whether the first recorded bubble was the tulips in Amsterdam. I'm sure there were others before that. We have a very global economy, human nature—it's a capitalistic economy. It's a very efficient way of allocating resources and capital. Unfortunately, it gets out of control. Every 20 years or so—25 years, it just—history repeats itself. The problem is that most Wall Street firms kill off their institutional memory.
As people get to be 40, 50, they get rid of them. So, anybody who's lived through these before is gone because they're too expensive. They're potential rivals to the top. So, they get rid of 'em. They all do it. You have people who are running the firms 20 years later who don’t know what happened 20 years before.