Book Review Corner - The House of Cards by William D. Cohan


A Tale of Hubris and Wretched Excess on Wall Street

William D. Cohan

Anchor Books


This month again I have chosen to review a book that is about Wall Street and the 2007-2008 Financial Crisis. It could be said that we are the people in the Mortgage Industry who are the ‘boots on the ground’ people. We are that part of the Mortgage Industry that supplied the thousands of individual Mortgages for Wall Street to repackage and sell as Mortgage Backed Securities. I think it is insightful to understand or have a general knowledge if you will of the workings of Wall Street and Mortgage Backed Securities.

To that end the book that I recommend is The House of Cards by William D. Cohan. It is an easy read in that the author injects a lot of personal history of the Wall Street players on top of the mechanical workings of Wall Street. 

The author tells a story of how Wall Street got into crisis mode in 2008 and how it got out of it albeit scarred and changed. It is a book with Bear Stearns at the heart of the 2008 financial crisis. It is interesting how deep Bear Stearns [Bear Stearns was absorbed by JP Morgan in 2008] was in Mortgages. Their balance sheet was heavily weighted in Mortgages and Real Estate for that matter. Cohan points out that it wasn’t Mortgages per se that caused the 2008 Crisis. He goes into detail to point out that it was the leveraging of their balance sheet that caused the problem for Bear. The author points out that Bear Stearns, for example, leveraged itself up to 35:1 in 2008. In other words, for every dollar of equity, Bear Stearns had 35 dollars in debt!

This highly leveraged balance sheet was a massive problem in and by itself [Billions and Billions of Dollars of Assets]. Bear Stearns was borrowing the money on the Repo Market where the term of the borrowings was for just days at a time. It was the classic financial problem of borrowing on a short term basis against long term assets [30 year Mortgages]. When the short term lenders like the Money Market Funds spooked and did not want to roll over these short term loans, Bear Stearns was history. He points out that reputation and perception is critical to the workings of Wall Street. Once the Wall Street players suspected that the Mortgages and Mortgage Backed Securities on Bear Stearns’ balance sheet were tainted and not worth their face value, Bear Stearns was finished.

There is a particularly interesting chapter titled “The Joy of Mortgage Backed Securities.” It is Chapter 18 in the book with only a few pages but packed with some interesting facts. Here is a quote from that chapter:

“Bear’s mortgage-backed securities business rose from the ashes of the savings-and-loan crisis of the mid to late 1980s, when failed thrifts were desperately trying to get illiquid assets off their balance sheets. At that time, the margins on trading the bonds of Fannie Mae and Freddie Mac were huge, generally $2 to $3 on a trade sometimes $5. In other words, the difference between what a bond was bought for and what it could be sold for could be as much as five points. (Today that spread is calculated in thirty-seconds of a point.)

There is a lot of discussion throughout the book that pertains to our Mortgage Industry. It is an inside look into the mortgage workings of Wall Street. As always, tell me what you think of it and let me know of any books you have read lately. I’m always looking for a good read.