Arrogance topples a house of cards

October 11, 2009 

Before heading off to a 17-year career as an investment banker on Wall Street, William Cohan spent two years in the early 1980s covering education for The Raleigh Times. After getting fired as a banker in 2004, Cohan returned to his journalistic roots and has become an award-winning author of two books about high finance.

Cohan, 49, spoke by phone from New York City with staff writer David Bracken. Some edited highlights:

Q: How did you get so many of the key players involved in Bear Stearns' collapse to talk to you?

Honestly, I don't know. It's always either some sort of kismet or chemistry or some imponderable, and maybe it's partially because I worked on Wall Street. I'm certainly not a neophyte about the way Wall Street works, and I have a pretty good understanding of Wall Street.

Q: How did investment banks such as Bear Stearns adopt highly leveraged business models that proved so vulnerable during last year's crisis?

The short answer is that a culture developed on Wall Street where it was a sense that vast sums of money -- in terms of compensation -- could be made using other people's money. And you had nothing at risk. Wall Street is very good at financial innovation. These products would get innovated, would get developed, and then Wall Street's a selling machine, so it just sells the things that their brain trust comes up with without any regard or accountability whatsoever for the consequences of what they're selling. It's quite a system.

Q: How much do you think the people running these companies knew about the complex financial products they were selling?

Jimmy Cayne [former CEO of Bear Stearns] told me he really didn't understand the products and by the time he figured it out it was too late. And he takes sort of blame for that, as much as you can. I have trouble believing that. He certainly understood how much money the firm was making, and he understood how much he was getting paid and how much his net worth had expanded exponentially. ... And then to turn around and say, "Oh yeah, but by the way, I didn't understand the risks the firm was taking" -- I don't know. They're too smart for all that. ... One thing I've lamented over and over again is how not one, single CEO on Wall Street has come forward to explain to the American people what they did and what happened here and why. And I'm sure their lawyers tell them not to even think about doing such a thing. I think we're owed an explanation at this point.

Q: Do you think Wall Street investment banks have changed or learned anylessons from this crisis?

They're capable of learning from their mistakes in the sense that we don't repeat the crisis using the same old products. The behavior is actually consistent throughout. So, in October of 1987 we had the market crash, and that was related primarily to over-leveraging of junk bonds. A decade later we had the Internet IPO crash. And now we have the mortgage-backed security crash. The same thing that happened will not happen again. However, this passion for financial innovation and taking other people's money and trying generate as much revenue as you can -- that has not changed at all.

Q: What reforms need to be done to ensure this doesn't happen again?

To me it gets down to this question of accountability for behavior. Oversight from Washington is nice, if they bother to do it. You need to get back to something ... so that there's accountability for people's day-to-day roles and responsibilities and jobs. Human nature is pretty simple; people do what they're rewarded to do. If people are rewarded for selling mortgage-backed securities without giving it a second thought, that's what they will do.

Q: Do you think the executives at these firms have an understanding of the animosity towards them in the country?

I think they're not idiots, so on one level they certainly do understand the animosity that is directed their way. But on the other hand, they live in a bubble. They live in their own kind of world. The paperback edition of the book is coming out in January, and I have written a new afterward for it. I spoke to Alan Schwartz [Bear Stearns CEO] again, sort of like a year later kind of thing, and as much as like Alan, he continues to propagate this idea of having sort of minimal responsibility for what happened. So I think by and large there is this sense that, yeah, there's this anger directed at us and maybe it's because we make all this money but are we really responsible? I don't think they feel like they were responsible.

Q: What are you working on now?

I'm working on a new book about Goldman Sachs. Goldman, if people even know about it at all, seems like a black box to people. This sort of money machine, quite literally. I'm going to try to open up the black box and explain to people how they make money, what the culture is like and, of course, how they managed to navigate through the choppy waters of this crisis and come out smelling like a rose.

Q: Is your life better since being fired from Wall Street?

I'm much, much, much happier. When my kids come home at 4 p.m., I'm here. Not on a stupid airplane going to a stupid meeting.

david.bracken@newsobserver.com or 919-829-4548

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