AMA 47 – “House of Cards” with William Cohan

WilliamDCohanJason Hartman interviews author, former Wall Street senior banker, and best-selling investigative journalist, William (Bill) D. Cohan on the events that led up to the current economic crisis. Bill explains the choices that the big firms, such as Goldman Sachs, JP Morgan, etc., made regarding what type of institution they were going to be, the path of these firms that led up to the current crisis, and how they used the bailout money gifted to them. He said it was one big party on Wall Street, during which brokers were to bring in revenue using a lot of whacky products, until everything came crashing down. Huge bonuses were paid out from the revenue collected from unsuspecting clients. For more details, listen at:

Bill and Jason also discuss the Occupy Wall Street Movement. Bill expressed disappointment in the message of the movement, saying it isn’t clear and they need to learn how Wall Street really works so that they can be more effective in bringing about reform. Wall Street has been influencing what goes on in Washington and paying lobbyists and donating to congressional coffers so that they can get the regulations, or lack thereof, that they want, i.e. the Dodd-Frank Wall Street Reform and Consumer Protection Act. Bill talks about how the expansion of Wall Street into Middle Class America was not an accident, using the example of Merrill Lynch being a public company. This ultimately led to broken trust between Wall Street and Main Street, as people have now shied away from risk taking.

To solve the problems, Bill suggests changing the incentive system on Wall Street, in that it can no longer be okay to take huge risks with people’s money or get paid big bonuses whether they lose money for the firms or not, as well as going back to having to use their partner’s capital to operate. William D. Cohan offers audiences a unique, close-up perspective of the greatest financial crisis since the Great Depression. He combines deep knowledge of the investment banking world with the fine storytelling skills of an award-winning investigative journalist. Bill’s new book is titled Money and Power: How Goldman Sachs Came To Rule The World, a revelatory history of Goldman Sachs. His previous book, House of Cards: A Tale of Hubris and Wretched Excess on Wall Street, lays out in gory detail how the financial crisis began with the collapses of Bear Stearns and Lehman Brothers. The Last Tycoons: The Secret History of Lazard Frères & Co. won the 2007 Financial Times/Goldman Sachs Business Book of the Year Award for its candid revelations about how Wall Street works.

He should know; he spent six years at the firm. Bill Cohan has a long-time insider’s in-depth knowledge of investment banking—he was a Wall Street banker for 17 years. In addition to his years as Associate and then Vice President at Lazard Frères, he was a Director in the Mergers & Acquisitions Group at Merrill Lynch and a Managing Director at JPMorgan Chase. He left JPMorgan to write The Last Tycoons, which appeared on the bestseller lists of The New York Times, The Wall Street Journal and USA Today. It edged out Alan Greenspan’s Age of Turbulence to win the FT/Goldman Sachs award. and The Evening Standard named it Book of the Year. William D. Cohan writes regularly for The New York Times, Vanity Fair, Fortune, The Daily Beast, ArtNews, and The Financial Times. His columns have also appeared in The Washington Post. He is a contributing editor for Bloomberg TV and is a contributor to Bloomberg View. His series of articles on the controversy of the ‘recently discovered’ Degas plaster casts in ARTNews won the Silurians 2011 Excellence in Journalism Award.

Be sure to check out our prior shows with Richard Kiyosaki, G. Edward Griffin, Peter Schiff, Doug Casey, Chris Mayer, T. Harv Ecker, Denis Waitley, John Stapleford, Addison Wiggin, Thomas E. Woods, and many more.

Narrator: Welcome to the American Monetary Association’s podcast where we explore how monetary policy impacts the real lives of real people, and the action steps necessary to preserve wealth and enhance one’s lifestyle.

Jason Hartman: Welcome to the podcast for the American Monetary Association. This is your host, Jason Hartman, and this is a service of my private Foundation, the Jason Hartman Foundation. Today we have a great interview for you, so I think you’ll enjoy it. And comment on our website or our blogpost. We have a lot of resources there for you. And you can find that at or the website for the foundation which is Thanks so much for listening and please visit our website and enjoy our extensive blog and other resources there.

Start of Interview with William Cohan

Jason Hartman: My pleasure to welcome William Cohan to the show. He is the author of several books, including House of Cards, a tale of hubris and wretched excess on Wall St. William, how are you?

William Cohan: I’m very well. Thank you for having me.

Jason Hartman: And thank you for joining us. So you’re coming to us today from New York, and you’re right in the thick of it there. When we talk about a house of cards, give us some insights as to what you cover in the book and what’s going on on Wall St in general maybe.

William Cohan: Well, I think one has to of course, reflect a little bit. Nothing comes to us sprung full born. Everything has a history and an antecedence. And on Wall St was a series of partnerships that have been around for something like two hundred plus years until one by one, beginning in 1970, they all started going public and substituting other people’s money in their capital structures for the money that was originally supplied by their partners. So for the first say, two hundred years of Wall St’s existence it was a series of small underfunded private partnerships and the American public had very little interaction with them and basically knew very little bit about them.

Beginning in 1970, as I mentioned, this one firm called Donaldson Lufkin & Jenrette, which was a New York private partnership decided it was going to go public. Other Wall St firms were aghast and offended it was against the New York stock exchange rules, but they persisted and went public. Then of course one by one everyone else on Wall St went public too. So, over time what had been partner’s money that had been risked every day and therefor forced every one of these small firms to be prudent about the risk they were taking, went from being sort of a partnership culture to being what I call a bonus culture, where people were encouraged to take risks with other people’s money.

Their own net worth wasn’t on the line anymore; they had no accountability whatsoever. And as a result they were encouraged to take huge risks with their investors and with their creditors’ money. And as a result over time, they took more and more risks, they used more and more leverage, they essentially became, hence the title of the book, a House of Cards. And every firm on Wall St was pretty much like this. Bear Stearns was just the first to fail in March of 2008.

Jason Hartman: And when you talk about these firms going public and so forth, are you talking about investment banks then specifically or just general financial services firms that serve consumers, like Meryl Lynch for example, or…

William Cohan: Basically I’m trying to make a subtle distinction between securities firms and commercial banks. Although now, since the collapse of the ending of the Glass Steagall Act, so you have to go back to the depression and the creation of what was called the Glass Steagall Act in around 1934, which forced investment banks, securities firms, like Goldman Sachs and Morgan Stanley, in fact that’s how Morgan Stanley got created because to separate from commercial banks.

So the great JP Morgan used to have both commercial banking and investment banking under one roof, but the Glass Steagall Act required that they separate commercial banking from investment banking because investment banking was perceived as being very risky business, where people were encouraged to take risks, and commercial banking of course had depositors money, so they didn’t want to put that money at risk.

And that’s what people experienced during the great depression when so much money was lost because of bank deposits that they couldn’t get out, and people lost a lot of money. So they wanted to separate commercial banking from investment banking; that’s how Morgan Stanley got created. Because two of the partners from JP Morgan started an investment banking firm called Morgan Stanley. And Morgan Sachs stayed as an investment bank; it didn’t really have a commercial banking operation, and other firms chose which way they were going to go.

So it wasn’t until 1999 when Glass Steagall was repealed that investment banks and commercial banks could be in the same business again. So now, by the time this crisis rolls around in 2007 and 2008, it’s very hard to distinguish between a commercial bank, and an investment bank, and a securities firm and a non-securities firm. But the fact of the matter was the US government had never saved a securities firm until it decided to step in and save Bear Stearns. In the past, it had always let securities firms went to trouble fail, as opposed to commercial banks who got into trouble, they were rescued.

But now you’ve got this system where it was hard to tell one from the other; they were all interconnected, and they were all too important and the risk of their failure was too great and so we had to save them.

Jason Hartman: And during the financial crisis, I think the question is which one, but the most recent one, these investment banks on Wall St were becoming bank holding companies, right? Was that so they could receive bail-out funds from TARP?

William Cohan: No, not really. In part it was, yes. So in September, the 22nd of September in 2008, the two remaining big securities firms, Goldman Sachs and Morgan Stanley, and when I say remaining I say that sort of tongue and cheek in the sense that Bear Stearns had failed in March, Lehman Brothers had gone into bankruptcy on September 15th, a week earlier, and also a few days before September 22nd Meryl Lynch, which was going to go out of business and fail was bought by Bank of America. So there used to be five big securities firms, and by September 22nd of 2008 Bear Stearns, Meryl Lynch and Lehman Brothers had all failed, leaving Morgan Stanley which was about to fail and Goldman Sachs which was not far behind.

So what they did was appeal to the Fed to allow them to become “bank holding companies” which gave them basically infinite access to the Federal Funds at a very low cost, and was basically a gift from, an underappreciated gift, from the American public to these two firms allowing them to have all the liquidity they needed to fund their business and to survive. But they became bank holding companies and in that they joined the other big banks like Bank of America, JP Morgan, and Deutsche Bank and things like that, who were also bank holding companies.

So, therefore what happened on September 22nd, 2008 was basically the big securities firms all went away and they became bank holding companies which has given Goldman Sachs and Morgan Stanley, like these other banks, infinite access to low cost funds from the Federal Reserve Bank. Which has been a gift from the Federal Reserve Bank to these firms because then they can turn around and invest this money in treasury securities and take the spread or they can lend it out and get an even bigger spread.

So it’s an incredible gift that the Fed keeps giving to these firms, and at the expense I might add, of the American public who not only helps pay for it, but also who’s interest rates that they get on their savings are kept incredibly low. And now that we’re a nation of savers again, savers are being penalized for saving. I don’t know when the last time you looked at your savings account…

Jason Hartman: It’s below the rate of inflation. So, we’re certainly getting penalized for saving.

William Cohan: Exactly, yeah.

Jason Hartman: Saving money is about the worst deal going unfortunately. Which that incentivizes bad behavior in the economy, and of course very speculative behavior and I don’t think that’s good overall. But you know, you have some very interesting chapter titles in your book. One is a section rather than a chapter, where you talk about the end of the second gilded age. And then the ten and ten strategy. Tell us about some of that if you would.

William Cohan: I think that it was truly… basically it’s been one big party for Wall St since the early 1980s when inflation was tamed by Paul Volcker, Reagan came to town and basically loosened the regulatory environment. There was a lot of financial innovation, whether it was the creation of securitization, which led to the creation of securitizing mortgages or auto loans or credit card receivables; the innovation of high yield finance, which was Mike Milken and Drexel Burnham who created so-called junk bonds, and Wall St’s animal spirits got unleashed, if you will.

And that just has led to the combination of that with this other fact of life on Wall St that I mentioned before, that these were no longer private partnerships. By the mid 80s all the firms except for Goldman Sachs had gone public. Goldman Sachs didn’t go public until 1999. But basically, all of these firms, the people at all of these firms were encouraged to make big bets with other people’s money.

So you had this one big party, whether it was leverage buy outs or internet IPOs or emerging telecom hysteria, mortgage backed security hysteria… just on and on and on. It’s been one crisis after another that was created by this combination of the fact that people got rewarded to take risks with other people’s money, all these new kinds of products were being developed and brought into the market without any accountability on people’s behavior, because there was no threat of losing your entire net worth because there were no private partnerships anymore.

In fact, people were encouraged to take these risks because they wanted to get big bonuses, and the way to get a big bonus was to generate revenue and the way to generate revenue was to sell these wacko products to unsuspecting buyers.

Jason Hartman: And they may not come home to roost during your tenure, so you can just… like our politicians, just kick the can down the road to the next group.

William Cohan: And even when they do come home to roost during your tenure, like they did in 2007 and 2008, what happens? There’s no accountability; they get bailed out. And they still get their big bonuses.

Jason Hartman: It’s just disgusting and you can really see why people are so angry about it. Which actually brings me to another question, just to get your comments on… it’s not in the book obviously or anything, but the Occupy Wall St movement: your thoughts?

William Cohan: Well, I’ll be honest with you. This is something that I’ve been wrestling with lately, I’ve written a few columns about it lately. I was on a daily show on April 28th talking about my Goldman book, and during that show I talked about how I couldn’t believe that there was nobody out in the streets protesting about what Wall St has been doing.

Jason Hartman: And then here they are!

William Cohan: And so, here they are. But I have…I guess I’m saddened and disappointed with what here we are means. I wish that these protestors, whoever they are, and they really are a cross section of America and I applaud protesting; I believe it’s an important part of America and what makes America great or what has made America great.

So I’m all for it. But I’m really kind of disappointed that whoever these people are, they haven’t taken the time or asked people like me who understand these things or other people to share with them the way that Wall St really works so that they can be clear in the changes that need to take place, so that we don’t have this recurring boom bust cycle on Wall St, this recurring series of crisis that really are extremely debilitating to not only our economy, but to our entire culture and society.

And so, just sort of blithering away with the usual revolutionary Pablum, which you often see now down at the Occupy Wall St movement, I find very frustrating and disappointing and I wish they were more focused and had a better understanding of the way Wall St really works so we could get real reform. So I’m all for the protest. I was an early person wondering why people hadn’t protested, but now I feel like there’s no there there, and I’m not quite sure what it’s all about.

Jason Hartman: Yeah, it just seems that they need to get clear on a real message. Otherwise, they’re just sort of being rather childish. But another interesting point, and this has been circulating around Facebook and in the social media, where there are two newspaper clippings and one is entitled Ex Morgan CEO sentenced to prison for a three billion dollar fraud, and it talks about how he got a forty month sentence. And the other article says Homeless Man gets fifteen years for Stealing a hundred dollars. The contrast here is mind boggling, and it is just amazing how little account there has been, at least so far, for the crimes that have gone on in our financial system at the highest levels.

William Cohan: I know exactly what you’re saying. As I wrote in the Goldman book, crime is not what’s illegal, the crime is what’s legal. You have to remember that for decades now, generations now, Wall St has been influencing what goes on in Washington, Wall St has been paying lobbyists and donating to congressional coughers so they can get the kind of regulations or lack thereof that they feel comfortable with. There’s been the revolving door between Wall St and Washington that’s been going on for decades.

So you get something like the Dodd-Frank Law, which is twenty two hundred pages long that nobody can figure out. While we’re having this conversation now, Wall St lobbyists are working away in Washington to make sure that the regulations that are still being written are ones that they can live with. And they’re willing to take out all the stops to make sure that that happens. It’s just shocking to me.

And I think in House of Cards, about Bear Stearns, I didn’t do this intentionally, but I think it’s clear that there’s sort of a prosecutorial road map that shows in documents and conversations I’ve had with people what was going on with the Bear Stearns Hedge Funds which led to the collapse of Bear Stearns, the collapse of the hedge funds led to the collapse of Bear Stearns.

And there was a trial. Actually these two hedge fund managers were the only time that anybody in all this has been brought to trial criminally and then they were acquitted. They were acquitted because the government chose to go down a prosecutorial path that totally missed the boat.

Jason Hartman: How could the government mess that up? It seems like it’s almost intentional, like there’s a pay-off. I hate to sound so conspiratorial, but it’s just funny. Like another case that just bugs the heck out of me is the Bernie Madoff case. There was no trial; he just plead guilty and that was it. It almost seemed like that was to cover things up so we wouldn’t hear about them, and evidence wouldn’t be made public. I don’t know, that all just happened far too smoothly for me, I thought.

William Cohan: Well of course everybody who is charged with a crime does have the option of pleading guilty, and avoiding trial. And so he clearly decided to go that route, for whatever reasons I don’t know. On the other side, you have somebody like Raj Rajaratnam, the hedge fund manager that decided to plead not guilty so we had a theater of the absurd as his trial progressed and he tried to defend himself, but it was clear that he was caught red handed.

This is one of the rights that people who are charged with crimes have, is to plead guilty. I guess it’s not dissimilar to the way some people in Libya feel when they see that Gaddafi has been killed, and some people would have preferred that he be captured and put on trial and put away in prison for the rest of his life so he really continued to suffer.

Jason Hartman: That’s kind of interesting. So what is your thought about the future? Wall St had its big changes in the 80s, and it’s interesting because that’s shortly after that, is when it seems to me that the stock market just expanded so much into middle America, owning stocks, later with the advent of the internet and the online trading and it seems like everybody and their brother got into the stock market, whereas in the old days it was more for the wealthy and the insiders. And I don’t mean insiders like insider trading, but just the people at higher levels of finance. But the stock market became really, really public after the big changes. And maybe that’s what caused even more pain into the American middle class.

William Cohan: It wasn’t by accident, right? Meryl Lynch is now a public company; he’s got to report quarterly profit growth all the time. It’s the biggest broker, it’s a global brand name, so what does it do? It pushes relentlessly through its advertising encouraging people to own stocks. And of course that serves them well, because they get fees every time they do a trade or open a brokerage account. And so it just became an international industry to encourage people to own stocks. And so you’re absolutely right. And when the market crashed in 1987, twenty four years ago today, or yesterday, two days ago, you had the market going down 22.6% in one day. And the little investor got totally screwed, just completely taken advantage of and lost a lot of money.

Basically, ever since then it’s been a complete and utter loss of trust between Wall St and Main St, but I think that a slow economy does a tremendous amount of damage to Wall St firms. It’s much harder for them to make money in these slow economies, and you see that in their results that came out in the third quarter, I think that you combine that, the slow economy, and people shying away from risk taking with the Dodd-Frank law, the Volcker Rule and the new regulations being written, even though we’re not quite sure how it’s all going to come out.

Basically, the casino that used to operate, as we’ve talked about, for the last generation on Wall St is clearly in the process of being, if not closed, then certainly it’s hours are being greatly diminished.

And so a firm like Goldman Sachs which has prided itself on sort of having the best trading operation, which could also be the best “gambling operation”, that gambling apparatus to a large degree I think is going to be a lot tougher in the future. And Goldman and places like Goldman on all the rest of Wall St which prided itself on making these proprietary bets and making a lot of money from them, are not going to be able to do it anymore. So I think that either intentionally or not, I think that was it likely to happen in the future is that these Wall St firms are not going to make as much money that they used to make.

Hopefully, they will then not pay their people as much as they’ve been paying them because they get way over paid, and thirdly I suspect that they will go back to being what they used to be when the Glass Steagall Act was in effect where they provided the services we want them to provide, which is capital to companies around the globe whenever they need it, twenty four by seven. Whether that’s debt financing or equity financing, providing investment advice, providing advice on mergers and acquisitions. But closing the casino. And I think that will make the world safer for all of us because we just can’t tolerate this kind of risk taking anymore that Wall St’s been doing for the last 25 years.

Jason Hartman: Well, I very much hope you’re right. However, my pessimistic side says that Americans have very short memories and when the frenzy starts again, which it undoubtedly will, Wall St will have their lawyers, lobbyists, PR firms and spin doctors, and all of it out in mass and the general public will just soak it up like the pawns or suckers they are. I don’t know. I’m pretty pessimistic, I guess.

William Cohan: Well again, I think it remains to be seen. We’ve been taught a lesson here, there’s no question about it, but you’re right. We’ve been taught this lesson many times in the last twenty five years. Ten times at least. And when the market crashed in 1987 I saw grown men standing around Quotron machines crying. And everybody swore this kind of thing would never happen again, and then it’s only happened about ten times since. So there’s certainly nothing in the Dodd-Frank law or any of the regulations that are being written that is going to change the way people behave on Wall St or change the incentives on Wall St, so I suspect before long we will have another problem.

Jason Hartman: Yeah, and what do we do, just in closing here, what do people need to do, or what needs to happen I guess in government to change it? Do we need to change Glass Steagall back to the way it was before ’99? What would solve the problem?

William Cohan: Well, I think while reinstating Glass Steagall or something like that separating commercial banking from investment banking, separating risk takers from non-risk takers, I think it would have to be updated obviously. I think it would be a very effective rule or law. I think getting it implemented is very tough in this political stale mate environment. I would call on these Wall St firms…they can do this without a law. They need to change the incentive system on Wall St. It can no longer be right that people get paid to take huge risks with other people’s money, and they get paid big bonuses whether they lose money for these firms or don’t lose money for these firms.

One thing that was a common denominator through much of the years until 1970 was that these firms had to operate using their partner’s capital. And as a result they were much more prudent about the risks they were willing to take. And they weren’t rewarded to take risks; they were rewarded to create pre-taxed income so that they would have something to divide at the end of the year. So we need to go back to something like that.

I’ve made a few proposals that never of course get any traction, but I think that this is something that real leaders on Wall St… if Lloyd Bankfein at Goldman Sachs were a real leader, he would implement a program that put the top hundred people at his firm or the top three hundred or four hundred, have real skin in the game, have their entire net worth again on the line so that they were really cognizant every day about the risks they were taking and where really prudent about the risks they were taking.

And I think if something like that would help even if we don’t get this legislation passed that would really do it, but that kind of self-regulation, that kind of leadership would help reduce the tensions and the risks that Wall St poses to the rest of us. And it’s long over-due and that’s the kind of thing that I think needs to happen.

Jason Hartman: Well, and I couldn’t agree more, but the question is, you look where the incentive lies, why would they do that? Why would Blankfein care? Playing with other people’s money and taking big risk, that’s rewarding to Goldman Sachs, it’s rewarding to all the other firms too isn’t it? Your vision is a good long term vision; it seems like it would inspire public trust and more money ultimately would come back to the market, I agree with you there.

William Cohan: But Goldman used to pride himself on being long term greedy. What better way to be long term greedy than to try to take a quantum leap forward in trying to restore the trust that has obviously been lost between Wall St and the American public, clearly been lost, and one way to do that is to try to instill into the American public some level of confidence that hey, we have our own net worth on the line again and we are the first ones that are going to get wiped out if we do things that are stupid or not in our own interest that really damage the American public and the world economy. And that will make them more prudent, and I think change the kinds of risks they’re willing to take.

And the great thing is on Wall St, it’s basically a cartel at this point. So if one firm like Goldman Sachs does it, they’ll all do it relatively quickly. And we will all be much safer as a result because counting on congress to come up with laws that make sense and to change people’s behavior is a long putt in and of itself too.

Jason Hartman: Sure it is, sure it is. And you talk about it at the investment bank level and the Wall St firm level, but at the corporate level, the companies that people are actually buying shares in, more broadly than in the investment banks, wasn’t Sarbanes-Oxley supposed to solve that problem? Did it help even or are things just sort of business as usual with a lot more accounting fees than before?

William Cohan: Well, there are a lot more accounting fees than before. We haven’t… I don’t know whether Sarbanes-Oxley has worked or not, but it’s harder to come up with clear examples of sort of Enron, Worldcom, Tyco kind of horrific corporate behavior. Again, this time it was confined largely to the financial sector. This was a crisis of Wall St’s own making that was entirely preventable. But they couldn’t… it’s like the parable of the frog and the scorpion. Why do scorpions sting? Why does Wall St do this? Because that’s what they’re… unfortunately that’s what they’re incented to do now.

Jason Hartman: That’s their nature.

William Cohan: That’s their nature. Exactly right.

Jason Hartman: Well, very interesting stuff. I sure hope that your vision pans out. I’m less optimistic, but if your vision pans out I think everybody would be better off for it. And I think Wall St just needs to really just rein in their greed a bit and set a good example. Boy, I sure hope that happens one day because I think it would inspire a lot of confidence.

William Cohan: Well, and if it doesn’t happen then I’ll have another book, I’m sure, to write about the latest crazy behavior on Wall St.

Jason Hartman: That’s for sure. Well, William Cohan, author of The House of Cards and several other books, A Tale of Hubris and Wretched Excess on Wall St. Thank you so much Bill for joining us today. The book is getting great reviews on Amazon; looks very popular. Did you want to give out any other websites or any other information about where people can get them?

William Cohan: They can get them on Amazon. If there are any bookstores in existence anymore, I’m sure they still have them, they’re paperback versions. I’m sure Amazon sells them for two cents each. So, the more important thing is that people get a hold of them, read them and understand how Wall St really works so that they can put pressure on people, congressional leaders and people on Wall St to change the way they’ve been behaving.

Jason Hartman: Fantastic. William Cohan, thank you so much for joining us today.

William Cohan: Thank you for having me.

Narrator: The American Monetary Association is a nonprofit venture funded by The Jason Hartman Foundation which is dedicated to educating people about the practical effects of monetary policy and government actions on inflation, deflation and personal freedom. Our goal is to help people prosper in the midst of uncertain economic times. This show is produced by The Jason Hartman Foundation, all rights reserved. For publication rights and media interviews, please visit or email [email protected] Nothing on this show should be considered specific personal or professional advice. Please consult an appropriate professional if you require individualized advice. Opinions of guests are their own and the host is acting on behalf of The Jason Hartman Foundation exclusively.

The American Monetary Association Team

Transcribed by Ralph

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