Book Review: Andrew Ross Sorkin's Too Big To Fail
The financial struggles of 2008 led to myriad books on why the crack-up occurred, and many have been reviewed here. Andrew Ross Sorkin, a writer for the New York Times, approaches what happened differently. He has written a very interesting behind-the-scenes account of the people within government and finance who saw the crisis up close.
For those interested in what went down behind closed doors, Sorkin's Too Big To Fail is essential. Thanks to his global access to the individuals involved, the interested reader can expand his or her knowledge about the events behind the events.
Too Big To Fail begins in riveting fashion at J.P. Morgan CEO Jamie Dimon's Park Avenue apartment the day before the collapse of Lehman Brothers. Having spent part of the previous evening at the New York Fed, Dimon knew better than most what was ahead, and in a conference call with his top lieutenants, Dimon dismissed the view - one held by Lehman CEO Richard Fuld no less - that the prominent investment bank would be saved by Washington.
Dimon's take was "That's wishful thinking. There is no way, in my opinion, that Washington is going to bail out an investment bank. Nor should they (my emphasis)." Instead, Dimon told the listeners on the call that "We need to prepare right now for Lehman Brothers filing. And for Merrill Lynch filing. And for AIG filing. And for Morgan Stanley filing." Before each company mention Dimon paused, then paused the longest ahead of his last warning, that his employees should prepare for the potential bankruptcy of Goldman Sachs.
With the stage set, Sorkin then takes readers on a fascinating journey into a financial crisis that will not soon be forgotten. Indeed, by the end of the book the makeup of the symbol that is Wall Street had changed profoundly, and while there existed five major investment banks in March of 2008, by October two had collapsed, one had been swallowed, and the two remaining morphed into bank holding companies in order to avoid bankruptcy themselves.
Too Big To Fail is to a high degree a book about people and their actions under fire, so it's probably best to begin with Hank Paulson, the U.S. Treasury Secretary amid the crisis. Full disclosure, I worked at Goldman Sachs when Paulson was second in command, and was also there once he took control ahead of the firm's IPO.
Most interesting to this former employee was a talk Paulson gave to the summer associates in the equity division during the summer of 1997. Asked what kept him up at night, Paulson quickly responded that in a firm of 10,000 there always existed the possibility that one or more bad apples would make a mistake that would take the firm down.
This digression is hopefully worthwhile in that Paulson's point was that investment banks had and have an ephemeral quality to them. In that sense it's no surprise that when told by Dimon that he'd upped the offer for the shares of bankrupt Bear Stearns to $10 in the spring of 2008 that Paulson said, "That makes me want to vomit."
Strongly of the view - at least at the time - that poorly run investment banks should be allowed to fail, Paulson at least initially believed like Dimon that Washington shouldn't be saving financial firms on the backs of taxpayers. That Paulson later changed his tune strikes this reader as unfortunate. If country economies can recover from the devastation that is war, surely they can weather the death of one or many investment banks that are nothing more than a collection of talent.
As is well known now, Paulson was willing to let Lehman fail, but as Sorkin recounts in vivid detail, in the months leading up to its bankruptcy, Paulson grew closer to his former competitor at Lehman in Dick Fuld, and was in regular contact with him, pushing him to find capital or a buyer so that what happened to Bear would not happen to Lehman Brothers. It is through Lehman that Sorkin dispels a lot of long-held myths about Wall Street.
For one, there remains the belief that investment banks were eager to package all manner of toxic mortgages into securities given the knowledge that they could sell these assets to others. But as Sorkin notes early on, "it can't be denied that these institutions ‘ate their own cooking' - in fact they gorged on it, buying mountains of mortgage-backed assets from one another." Regarding the view that publicly held investment banks necessarily took risks with the "money of others", Sorkin points out that Lehman employees owned 1/3rd of the firm's shares.
Lehman's mistake was one of asset mismatch. Austrian School economist Ludwig von Mises long ago observed that the failure to match the term structure of assets to liabilities would be the death of financial firms, and in Lehman's case, the increasingly toxic long-term assets on its books did not jibe well with the overnight funding it required in order to remain a going concern.
Rather than acknowledge this, Lehman CEO Dick Fuld took to doing what troubled company heads often do in times of distress: he blamed short sellers for having sleuthed how dire the firm's circumstances actually were. No doubt Fuld loved the investment bank whose death he oversaw, but he doesn't come off well in Sorkin's account. Instead, as the pressure grew, he appeared increasingly delusional, particularly during a meeting with potential Korean investors in which he talked up the firm's real estate holdings despite broad knowledge that they were in freefall.
Where it gets interesting is Sorkin's recount of the pushy nature of Tim Geithner's New York Fed, along with Paulson's Treasury when it came to Lehman filing for bankruptcy. While SEC Chairman Christopher Cox wasn't sure if Lehman could be forced to file, let alone if it was a good idea, Geithner and Paulson seemingly wanted it done with. Sorkin's book is not an analytical one, but given his proximity to the various personages involved with Lehman's decline, it would have been interesting to this reader if he'd offered his own thoughts into why Paulson and Geithner were so strident.
Notably, as Lehman's death drew nearer, Geithner asked for Fuld's resignation from the New York Fed's board, and as Sorkin noted, this seemed to serve as one signal that a bailout was in the works from the same entity, and that it would look improper if Fuld remained on its board. Added to that, most media accounts pointed to a bailout, and even former Shearson Lehman CEO Peter Cohen, according to Sorkin, kept his hedge fund's capital inside Lehman.
This looms large in that while Sorkin didn't get into it, it bears reminding that the post-Lehman frenzy in the markets didn't have to be. Indeed, the reason its collapse created a market panic had to do with the fact that investors suffered a lack of information about what the government would do; the latter always and everywhere the driver of panics.
Instead, had Bear Stearns been allowed to die, various market actors would not have expected Lehman to be saved, and they would have prepared for its demise well ahead of September of 2008. To this day Lehman's collapse is viewed as the "game changer" (to quote George Soros) in the crisis, but it's fair to suggest that absent the initial, and very mistaken intervention in Bear's demise, Lehman's bankruptcy would have been a minor blip in the natural, economy enhancing process whereby the assets of failed firms are swallowed by their more healthy competitors.
Throughout Too Big Too Fail Sorkin wrote of bank CEOs wanting a "Jamie deal"; as in they would buy a failing entity if they could be given terms similar to what J.P. Morgan received when Bear was going under. This expectation that the Fed would take a failed entity's toxic assets onto its balance sheet made finding buyers for future gasping banks far more difficult. Governments always distort, and they rarely improve things.
Perhaps most scary about the Lehman debacle is how it seemingly changed Paulson. Known previously for at least being somewhat in favor of free markets, Sorkin's excellent reporting reveals a Treasury secretary who, in the middle of the Lehman frenzy, told Bank of America Chairman Ken Lewis that the Lehman sale was "out of Dick's hands." As Sorkin put it, Paulson made plain to Lewis that "You can negotiate directly with me." A nominally free market type went interventionist, this evolution not a good one.
And to a room full of Wall Street eminences, Paulson made plain that "We will remember anyone who is not seen as helpful." Awful as the unconstitutional imposition of TARP was, Paulson's chilling countenance makes it understandable that the various bank CEOs would take TARP money whether they needed it or not. Government is about force in the end, and it becomes apparent in Too Big To Fail that Paulson was ready to make life miserable for those who didn't follow his orders. Scary stuff to say the least.
To see why more clearly, it's important to consider how TARP impacted J.P. Morgan. Jamie Dimon perhaps comes off best in the book, and when Paulson shoved TARP down the collective throats of the bank CEOs, Dimon acknowledged to his board that "This is asymmetrically bad for JP Morgan." Translated, it is through the failure of the weak that the strong can grow, and Morgan could have grown from the necessary failures of its competitors. But perhaps fearful of what Paulson, Bernanke and Geithner could do to his firm if he didn't cooperate, Dimon didn't argue even though J.P. Morgan would have profited from the demise of others.
Easily the book's best scene involved Morgan Stanley CEO John Mack. Desperately trying to save his firm through the accession of capital from Japan, Mack suffered regular calls from Bernanke, Paulson and Geithner in which they pushed him to sell his firm for anything, including $1 per share.
Very frustrated, Mack eventually responded to all three with, "Let me ask you a question: Do you think this is good public policy? There are thirty-five thousand jobs that have been lost in this city between AIG, Lehman, Bear Stearns, and just layoffs. And you're telling me that the right thing to do is to take forty-five thousand to fifty-thousand people, put them in play, and have twenty thousand jobs disappear. I don't see how that's good public policy." Further on, Mack happily refused one of Geithner's calls, telling his assistant to tell Geithner "to get fucked. I'm trying to save my firm."
Sure enough, Geithner does not come off well in the book. Despite having never achieved anything of discernable importance in his life, Geithner's apparent skill has been to successfully navigate the world's government-sponsored economic bureaucracy. This has doubtless given him a false sense of confidence in that as Sorkin noted, Geithner took to regularly "instructing" the far more accomplished Wall Street minds on how to do things.
As for Bernanke, his proverbial "do you know who I am" moment occurred one weekend with Mack. The latter, once again trying to save his company, was told by the aforementioned triumvirate that a resolution of Morgan Stanley's problems was essential ahead of the following Monday when stock markets would reopen. Bernanke told him, "You don't see what we see", which quite simply screams the governmental hubris that the U.S. economy continues to suffer.
And as a self-proclaimed expert on the Great Depression, Sorkin reports that Bernanke naturally trotted out his tired line about his alleged expertise, and in a meeting with House Speaker Nancy Pelosi, observed that "if we don't act in a big way, you can expect another great depression, and this time it is going to be far, far worse." That the collapse of financial institutions during the ‘30s could in no way have caused a decade-long downturn never seemed to concern Bernanke, not to mention that by 2008, 80% of finance occurred outside the banking system.
To our falsely proud Fed Chairman, bank failures caused the ‘30s no matter the evidence, and if the economy were happily cleansed this time around of non-economic banking practices, much the same would occur again in his analysis. It's seemingly never occurred to Bernanke that the very government intervention that he espoused two years ago was at the heart of the ‘30s decline, and that if our hardships continue, we can expect another repeat. Bernanke believes his illogic, believed it two years ago, and we're all paying for it.
Paulson should not be spared criticism here either in that he bleated "heaven help us all" absent TARP. Mildly sentient minds at the time disagreed, that failures show capitalism is working, but convinced that Congress and the voters were wrong about the need for the federal government to essentially nationalize our banking system, Paulson bought into Neel Kashkari's line that to ram an unwanted bailout bill through Congress, "We've got to scare the shit out of the [Congressional] staff."
Disagreements with the author were minor in that the book, rather than an analysis of the crisis, was mostly a retelling, and a great one at that. Still, early on Sorkin wrote of a financial calamity that "would definitely shatter some of the most cherished principles of capitalism." Nice rhetoric for sure, but when the most heavily regulated sector (banking) in the economy fails for doing what Washington wanted it to through bad loans to those with bad credit, it's hard to blame capitalism. In a capitalist system based on profit there would be no social lending, let alone government bailouts of those who did lend without profits in mind.
Sorkin also promoted the widely held - and false - view that Fannie Mae and Freddie Mac "had been the engine of the real estate boom." That's an easy assumption, but property spiked in places like England and Canada where home loans are hard to get (particularly Canada), there are no mortgage interest deductions for home loans, and there are no Fannies and Freddies.
The weak dollar promoted by the Bush Treasury remains the elephant in the room when it comes to the rush to housing this past decade, but analysts and historians continue to ignore it. Simply put, weak currencies were a factor in every property boom of the 20th century, and they explain what just happened. With the dollar in decline beginning in 2001, monetary authorities globally followed our lead, and assets like housing least vulnerable to currency debasement were the predictable and inevitable beneficiary around the world.
All that said, the genius of Andrew Ross Sorkin's Too Big To Fail is its up close reporting that takes the reader inside the minds of the individuals involved in the greatest financial story of modern times. I found the book hard to put down, and highly recommend it to those who want a better sense of what happened not so long ago.