Comments on economics, mystery fiction, drama, and art.

Tuesday, April 28, 2009

And just why did you have to learn this lesson in 2008?

I'm reading William Cohan's House of Cards about the implosion on Wall Street in 2008, in the chapters dealing with the collapse of Bear Stearns. (So far, this is a magnificent fly-on-the-wall picture of an epic collapse). I have just been struck by the reaction of Jimmy Cayne, emeritus CEO and current board chairman of Bear Stearns, to the company's financing crisis (other financial firms have quit making overnight loans to it): "I knew we were highly dependent on overnight repo...This was good collateral, and all of a sudden, poof! You're vulnerable to it any time you're leveraged. You didn't have a chance. So , that same lesson we learned today, Long-Term Capital Management had back then [in 1998] and the tulip people had it back in the 1400s." (On p. 59)

(Let's ignore his mis-dating the tulip mania, which was in the early 1600's.) But this is a lesson that everyone in the financial sector should have learned long ago. And the LTCM debacle should still have been in people's minds. And the people running Bear Stearns had to learn it in 2008? Being highly leveraged in a fragile market (which financial markets had been for going on a year) was highly risky, and you had to learn that? You had to learn that because people finally decided lending to you was to great a risk? Your firm had to collapse in order for you to learn that? And how much was Jimmy Cayne being paid before he learned that lesson?

The mind boggles.

(And, by the way, Roger Lowenthal's When Genius Failed, about the LTCM fiasco is also well worth reading.)

(P.s. Jimmy Cayne was playing in one of the north American contract bridge championships, in Detroit, when the crisis hit, with a team of professional bridge players that he personally had hired for about $500,000 a year, according to Cohan. Not fiddling. but...) (P.s.s. And I love to play bridge.)


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