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Too Big To Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System from Crisis – and Lost

by Andrew Ross-Sorkin

Reviewed by Michael Connor

As the drama unfolds in Too Big to Fail, Andrew Ross Sorkin’s sensational fly-on-the-wall chronology of the 2008 financial crisis, it becomes clear that not all millionaire bankers are alike.  Some are more observant than others.

JP Morgan CEO Jamie Dimon, for example, understood why Treasury Secretary Hank Paulson couldn’t come to the rescue of investment banking giant Lehman Brothers in September 2008.  As he paced the bank’s 49th floor executive dining room, Dimon explained to his JP Morgan colleagues that the American public would not accept yet another financial bailout, according to Sorkin’s account.

“They want Wall Street to pay,” Dimon said. “They think we’re overpaid assholes.”

Dimon’s off-color but accurate observation is but one example of what makes Too Big to Fail too good to put down. Chock-a-block with color and detail, it follows in the tradition of great business thrillers like Barbarians at the Gate by Bryan Burrough and John Helyar, and James B. Stewart’s Den of Thieves.  Sorkin, a business reporter for the New York Times, doesn’t exert much energy exploring how the global financial system came to the brink of collapse (“If we don’t act boldly, we could be in a depression greater than the Great Depression,” Paulson tells President George Bush); nor does Sorkin provide the intellectual framework for a discussion of concepts such as “moral hazard,” by which the possibility of financial rescue creates incentives for business to pursue irresponsible risk.

But he doesn’t have to; the players tell the story.  Even as Jamie Dimon explained to colleagues why no bailout was in the offing, Sorkin recounts how Lehman CEO Dick Fuld believed until the very end that his firm would be rescued, probably through an investment by a rival bank with the support of the Federal Reserve Bank or the U.S. Treasury.  But he was dreaming, according to Sorkin.  Treasury Secretary Paulson told rival bank executives, assembled at the New York Federal Reserve Bank in downtown Manhattan, why Lehman’s Fuld had not been invited to a critical meeting. “Dick is in no condition to make any decisions,” Paulson announced. “He is in denial.” Paulson called Fuld “distant” and “dysfunctional.”

The irony is that the politically astute Jamie Dimon was ultimately wrong while the dysfunctional Fuld had it sort of right.  The Fed and the U.S. Treasury did provide hundreds of billions in bailouts; Fuld’s problem was that none of it was for Lehman Brothers.  After first brokering a deal for the sale of investment bank Bear Stearns – and then letting Lehman Brothers drift into bankruptcy – the federal government provided massive guarantees and investments for mortgage behemoths Fannie Mae and Freddie Mac, insurance giant AIG and the carmakers GM and Chrysler.  With its Troubled Assets Relief Program (TARP), the federal government became an investor-owner in virtually all the nation’s top banks.

One frightening lesson in Too Big to Fail (and there are several) is that regulators and bankers were making up the rules, and frequently discarding them quickly, as the crisis-of-confidence in the global banking system expanded and deepened. Financiers and government officials alike were ambivalent as to whether banks and investment firms should have been allowed to fail in 2008.  With the federal government allowing Lehman to fail, then abruptly moving to save others, Democratic Rep. Barney Frank jokingly declared that Sept. 15 should be declared “Free Market Day.”  “The national commitment to a free market lasted one day,” he said.  “It was Monday.”

Was the crisis a systemic failure of the financial system, or primarily a panic?   Or perhaps a bit of both?  Lehman’s Fuld blamed short-sellers and financial market speculators.  Most economists now blame a decades-long national credit binge, coupled with lax (or no) regulation, and incentives for business to assume irrational risk.   Fueling all of those, Sorkin suggests, were insanely wild compensation levels for bankers.

An “astounding” $53 billion, for example, was what the financial industry paid its workers in 2007, according to Sorkin.  At Goldman Sachs, the average Goldman employee earned $661,000, with the firm’s CEO, Lloyd Blankfein, pulling in $68 million. While Goldman co-president Jon Winkelreid had paychecks totaling $53.1 million in 2006 and $71.5 million in 2007, he was nonetheless experiencing a “cash flow” crisis in 2008 as the result of spending on a Nantucket waterfront estate and a Colorado ranch, among other luxuries.  But Goldman wasn’t unique; Barclays Capital, CEO Bob Diamond earned $42 million in 2007.

As the financial crisis spread, that perspective was maintained. During one negotiating session, Morgan Stanley banker Wallid Chammah, who owns a Manhattan town house that has its own doorman, served $180-a-bottle Bordeaux to “help settle the mood while keeping things proceeding” in takeover discussions with Lehman.  Even Lehman’s bankruptcy lawyer, Harvey Miller of the Weil, Gotschal & Manges, billed $1,000 an hour for his services.

In addition to an intentionally lax regulatory environment, Sorkin suggests, there was also incompetence.  Taking a body blow to his reputation is Christopher Cox, chairman of the Securities and Exchange Commission during the meltdown.  When it came time for a call from Wall Street’s chief regulator to press Lehman to file for bankruptcy, Sorkin reports, Cox, “for whom Paulson had very little respect to begin with, was proving how over his head he really was.”  According to Sorkin, Paulson told Cox: “You guys are like the gang that can’t shoot straight!  This is your fucking job. You have to make the phone call.”  (Cox’s viewpoint is not reported.)

“They were trying to save themselves from their own worst excesses, and, in the process, save Western capitalism from financial catastrophe,” writes Sorkin.  Corporate and personal reputations and livelihoods were on the line.  Lehman CEO Fuld, a hardened Wall Street fighter, emerges as a sad character.  The tension and physical wear and tear take their toll on Treasury Secretary Paulson, himself a tough former Goldman banker.  On one occasion, Paulson felt light-headed and nauseated: “From outside his office, his staff could hear him vomit.”   On another occasion, Paulson retreated to House Speaker Pelosi’s office: “Hurriedly pulling a trash can before him, he began having the dry heaves.”

In the end, Sorkin provides no prescriptions or remedies.  In fact, he writes, the outlook is gloomy:  “Washington now has a rare opportunity to examine and introduce reforms to the fundamental regulatory structure, but it appears there is a danger that this once-in-a-generation opportunity may be squandered.   Unless those regulations are changed radically – to include such measures as stricter limits on leverage at financial institutions, curbs on pay structures that encourage irresponsible risks, and a crackdown on rumormongerers and the manipulation of stock and derivative markets – there will continue to be firms that are too big to fail. When the next, inevitable bubble bursts, the cycle will only repeat itself.”

The question, of course, is whether the outcome – so painful in 2008 – would be survivable next time around.   Too Big to Fail provides an important warning.