A Review of HBO's "Too Big To Fail"

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Nearly three years after the worst of the financial crisis, we are still living with its residue of slow growth, anemic job creation, and a moribund housing market. On top of these real-life reminders have come movie depictions of the crisis, including the May 2011 HBO version ofAndrew Ross Sorkin's book Too Big to Fail, and the 2010 Academy Award-winning Inside Job.

The essential cinematic prism on the Great Recession remains 2009's Up in the Air, featuring George Clooney in a crushing tale of dislocation and downsizing. The two more recent movies both focus on Wall Street rather than on the broader societal impacts, but with very different approaches. Ironically, it's the HBO picture, not the award-winning documentary, which comes closest to a balanced treatment of events.

With a 624-page bulk that inspires the quip"Too Big to Read," Sorkin's book relates everything that was said and done by everyone involved in the crisis. This makes it an essential history of the period from the collapse of Bear Stearns in March 2008, to the demise of Lehman Brothers in September, and the subsequent launch of the TARP. Squeezing everything into a 96-minute movie inevitably means a narrow focus on a few key elements, leading to somewhat abrupt jumps from Lehman to AIG to Congressional TARP votes, and then to the Columbus Day gathering of bank CEOs.

The film takes some liberties to increase dramatic tension. Most notable is that it invents a debate inside Treasury about whether to use the TARP to purchase toxic assets as originally planned, or to buy shares in banks, as was ultimately done. In reality, Treasury officials well understood that capital injections would provide more support for the financial sector than asset purchases.

They were nervous, however, about having the government take large stakes in private banks - a concern borne out in 2009 when firms scrambled to free themselves from a more intrusive TARP, thereby nullifying some of the program's potential support for private lending. Moreover, it was clear that a proposal that seemed to nationalize the U.S. banking sector would be hard to sell to Congress.

While jazzing up events within the Treasury, the movie understates the vital role played by the Federal Reserve. As played by Paul Giamatti, Fed Chairman Bernanke's mainly shares oatmeal breakfasts with William Hurt's version of Hank Paulson, speaking up to give an occasional warning to members of Congress or bank CEO's of dire consequences if they don't toe the Treasury line.

In reality, the Fed was the first responder from August 2007 until summer 2008 when Treasury gained new authorities through the Housing and Economic Recovery Act, and then with the TARP in October. Fed programs targeting money market mutual funds, commercial paper, and asset-backed securitization were crucial elements of the crisis response in late 2008.

Other fudges are movie trivia: to demonstrate that the Secretary is an avid birder, William Hurt remarks on the first red-tailed hawk of the spring out his window - even though these creatures can be found year-round in Washington, DC.

But while Too Big to Fail rounds off some corners, the movie gets the basic story right: the crisis resulted from serious mistakes made by many people, especially on Wall Street and in government. But these people are not portrayed as evil; they just made mistakes. Even Lehman CEO Richard Fuld, who comes off poorly in the movie for scaring away potential investors, is shown making mistakes because he so badly wants to save his firm. He did the wrong thing for the right reasons.

In contrast, Inside Job is all about assigning blame. The documentary makes a moralistic case that the crisis was all the fault of Wall Street villains and their helpers. To be sure, mistakes can cross over into villainy - some creators of toxic securities must have known that they were not doing God's work. But Inside Job takes this to a populist extreme, assuming malevolent motivations and spattering blame through ambush interviews of hapless crisis participants who agreed to speak on camera (I took a pass when the filmmakers called me in the spring of 2009). The portrayal of Eliot Spitzer is especially ironic, with the former New York Governor shown as a saint commenting on all the sinners.

In truth, the striking feature of the crisis was how many different people committed mistakes: banks and other firms made bad loans and packaged them into subprime securities; rating agencies rubber stamped them as AAA; pension funds bought the junk assets; government officials missed the mounting problems; and so on. But surely also at fault are the multitude of individual homebuyers who turned into mini-speculators during the housing bubble. These folks are off the hook in Inside Job.

With all the understandable anger about the financial crisis, it's not surprising that a widely distributed movie would push some populist buttons. Too Big to Fail ends on a critical note, with Paulson and Bernanke pondering whether banks would lend out their TARP money. The movie closes with on-screen text stating the answer: lending declined. The reality is more complex. Lenders pulled back, but so did borrowers, who were understandably wary about taking on new loans just as the economy was tanking.

Just as in Hollywood, there is sure to be an eventual sequel; as in another financial crisis. The non-bank resolution authority in the Dodd-Frank financial regulation bill means that future officials will not have to cajole the industry into forced mergers, but could instead unilaterally put money into failing banks to keep them on life support and then dun creditors and competitors for the costs.

It's hard to know whether resolution authority will make a future crisis less harmful. A hint can be seen in the European response to the debt crisis in Greece, where fear of another Lehman-like situation has led to a protracted bailout in which private creditors have slowly walked away to be replaced by taxpayer money (including from U.S. taxpayers through the International Monetary Fund). U.S. policymakers pledge that there will be no more bailouts, but one can easily imagine the same fear leading to an opening of the public checkbook.

This is more likely the legacy of the events depicted in Too Big to Fail and the subsequent regulatory response: by making it easier for the government to intervene, the Dodd-Frank legislation makes future bailouts more probable. If this is the case, the next bailout truly will be the inside job.

Phillip Swagel is a non-resident scholar at the American Enterprise Institute and a professor at the University of Maryland's School of Public Policy, where he teaches courses on international economics and is a faculty associate of the Center for Financial Policy at the Robert H. Smith School of Business.  He was Assistant Secretary for Economic Policy at the Treasury Department from December 2006 to January 2009. 

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