Yesterday (11/28), federal judge Jed Rakoff slammed the Securities and Exchange Commission for making a toothless settlement with Citigroup over financial crisis misdeeds, arguing that it obscured the basic facts of what actually happened. Today (11/29), Bloomberg has an important story by Richard Teitelbaum that, from a very different vantage point, demonstrates the same infuriating point: Despite the economic wreckage we are still trying to repair, we have yet to have an adequate accounting of how the financial crisis happened, what caused it, and who knew what when.

Former U.S. Treasury Secretary Hank Paulson (2006).

According to the story, on July 21, 2008, then-Secretary of the Treasury Hank Paulson met with "a dozen or so hedge-fund managers and other Wall Street executives" and discussed "a possible scenario for placing Fannie [Mae] and Freddie [Mac] into 'conservatorship.'" That's a fancy term for a government seizure that would have allowed the entities to keep operating, but would have caused severe adverse consequences to holders of the Frannies' equity and, possibly, debt. A fund manager told Bloomberg he was "shocked that Paulson would furnish such specific information -- to his mind, leaving little doubt that the Treasury Department would carry out the plan." After the meeting, this manager consulted a lawyer, who told him to cease trading immediately in the Frannies, lest he later be accused of - here's the rub - insider trading.

The Bloomberg story cites law professors to say that Paulson did not break the law. But the story's implicit allegation is that the former head of Goldman Sachs was so clueless - or contemptuous - of his role as Secretary of the Treasury of the United States of America that he engaged in a clubby tête-à-tête with his former peers and handed them what Bloomberg says "amounted to inside information."

It's actually worse, because as Bloomberg also reports, Paulson was publicly playing down the possibility of dramatic government action -- practically the opposite of what he confided behind closed doors to those elite traders.

Paulson didn't comment for the Bloomberg story, and his spokesperson referred questions to his book, On the Brink: Inside the Race to Stop the Collapse of the Global Financial System - which, Bloomberg points out, doesn't mention the meeting.

There are limits to what a reporter can get - starting with whether any of those powerful and canny Wall Street sharks profited on the information. They may have shorted the Frannies, but, as the Bloomberg story points out, "tracking firm-specific short stock sales isn't possible using public documents." We need a more powerful entity - perhaps a Congressional committee? - to find that out. And, here are a few more questions that cry out for answers:

1. What is the justification for such a meeting? Former St. Louis Federal Reserve bank president William Poole suggests that the Treasury needs to be able to prep the market with information.

Fair enough. A Treasury Secretary should talk to smart market participants, and needs to know how the market might react to any given action.

But there's a difference between meeting to receive information and telling a chosen few market-moving plans. Hank Paulson and now Timothy Geithner should receive information from all types of parties. If they want to float a trial balloon, they have to float it in such a way that doesn2019t give select participants market sensitive information.

2. Why did Paulson meet with these people specifically? The Bloomberg piece notes that Eric Mindich, a hedge fund manager who is a former Goldman Sachs employee, hosted the meeting. Several Goldman Sachs executives attended.

If the Treasury secretary is going to hold meetings with market participants, the attendees should be chosen based on - you are going to laugh here - merit, not connections. And they should be transparently disclosed at the time.

3. How many other meetings like this were there? As Felix Salmon recalls, Andrew Ross Sorkin in his book "Too Big To Fail" revealed that Paulson met with the board of Goldman Sachs in June 2008 in Moscow -- a month before the meeting Bloomberg has revealed -- and discussed market conditions, and even contemplated that Lehman Brothers might fail.

Here's how Sorkin wrote about this:

For the nearly two years that Paulson had been Treasury secretary he had not met privately with the board of any company, except for briefly dropping by a cocktail party that Larry Fink's BlackRock was holding for its directors at the Emirates Palace Hotel in Abu Dhabi in June.

Anxious about the prospect of such a meeting, [Paulson Chief of Staff Jim] Wilkinson called to get approval from Treasury's general counsel. Bob Hoyt, who wasn't enamored of the "optics" of such a meeting, said that as long as it remained a "social event," it wouldn't run afoul of the ethics guidelines.

Still, Wilkinson had told Rogers, "Let's keep this quiet," as the two coordinated the details. They agreed that Goldman's directors would join him in his hotel suite following their dinner with Gorbachev. Paulson would not record the "social event" on his official calendar.

One possible defense for Paulson floating government conservatorship of Fannie and Freddie is that by the time of his July meeting with traders and executives, the market was widely anticipating the government would take that action. But what if the market only anticipated this because there were other, previous meetings between Treasury officials and well-connected investors in which such plans were floated?

4. What did this meeting do for the Treasury?

My sense of Paulson's approach - act first, act boldly, move on and dwell no more - is that his actions weren't well thought out at all.

But let's concede, arguendo, that Paulson and the Treasury held this meeting as part of a carefully thought-out strategy to prep the market for the Frannie conservatorship. What did that get the government? If anything, the prepping only would make the investors more likely to extrapolate and short or sell other financial stocks.

If preparation was indeed the rationale and justification, then Paulson and Treasury needed to have a contingency plan for investor reaction. Which they almost certainly didn't, since Lehman then failed and they were forced into a series of desperate actions. Over the next weeks, they scrambled to create the Troubled Asset Relief Program, or TARP, and then remake it into the preferred equity-buying program (rather than the toxic asset purchasing program).

Without a full and convincing accounting, we are left with a picture of a Treasury Secretary who took care of his buddies while allowing the system to blow up. This is the kind of thing that a crony capitalist system - and only such a corrupt system - would allow.

Photo: U.S. Treasury

Jesse Eisinger is a senior reporter at ProPublica, covering Wall Street and finance.  In April 2011, he and Jake Bernstein were awarded the Pulitzer Prize for National Reporting for a series of stories on questionable Wall Street practices that helped make the financial crisis the worst since the Great Depression.

ProPublica is an independent, non-profit newsroom that produces investigative journalism in the public interest.   This article is republished with permission under a Creative Commons license.

Widespread demonstrations in support of Occupy Wall Street have put the financial crisis back into the national spotlight lately.

So here’s a quick refresher on what’s happened to some of the main players, whose behavior, whether merely reckless or downright deliberate, helped cause or worsen the meltdown. This list isn’t exhaustive -- feel welcome to add to it.

.

.Mortgage originators

Mortgage lenders contributed to the financial crisis by issuing or underwriting loans to people who would have a difficult time paying them back, inflating a housing bubble that was bound to pop. Lax regulation allowed banks to stretch their mortgage lending standards and use aggressive tactics to rope borrowers into complex mortgages that were more expensive than they first appeared. Evidence has also surfaced that lenders were filing fraudulent documents to push some of these mortgages through, and, in some cases, had been doing so as early as the 1990s. A 2005 Los Angeles Times investigation of Ameriquest – then the nation’s largest subprime lender – found that “they forged documents, hyped customers' creditworthiness and ‘juiced’ mortgages with hidden rates and fees.” This behavior was reportedly typical for the subprime mortgage industry. A similar culture existed at Washington Mutual, which went under in 2008 in the biggest bank collapse in U.S. history.

Countrywide, once the nation’s largest mortgage lender, also pushed customers to sign on for complex and costly mortgages that boosted the company’s profits. Countrywide CEO Angelo Mozilo was accused of misleading investors about the company’s mortgage lending practices, a charge he denies.  Merrill Lynch and Deutsche Bank both purchased subprime mortgage lending outfits in 2006 to get in on the lucrative business. Deutsche Bank has also been accused of failing to adequately check on borrowers’ financial status before issuing loans backed by government insurance. A lawsuit filed by U.S. Attorney Preet Bharara claimed that, when employees at Deutsche Bank’s mortgage received audits on the quality of their mortgages from an outside firm, they stuffed them in a closet without reading them. A Deutsche Bank spokeswoman said the claims being made against the company are “unreasonable and unfair,” and that most of the problems occurred before the mortgage unit was bought by Deutsche Bank.

Where they are now: Few prosecutions have been brought against subprime mortgage lenders. Ameriquest went out of business in 2007, and Citigroup bought its mortgage lending unit. Washington Mutual was bought by JP Morgan in 2008. A Department of Justice investigation into alleged fraud at WaMu closed with no charges this summer. WaMu also recently settled a class action lawsuit brought by shareholders for $208.5 million. In an ongoing lawsuit, the FDIC is accusing former Washington Mutual executives Kerry Killinger, Stephen Rotella and David Schneider of going on a "lending spree, knowing that the real-estate market was in a 'bubble.'" They deny the allegations.

Bank of America purchased Countrywide in January of 2008, as delinquencies on the company’s mortgages soared and investors began pulling out. Mozilo left the company after the sale. Mozilo settled an SEC lawsuit for $67.5 million with no admission of wrongdoing, though he is now banned from serving as a top executive at a public company. A criminal investigation into his activities fizzled out earlier this year. Bank of America invited several senior Countrywide executives to stay on and run its mortgage unit. Bank of America Home Loans does not make subprime mortgage loans. Deutsche Bank is still under investigation by the Justice Department.

Mortgage securitizers

In the years before the crash, banks took subprime mortgages, bundled them together with prime mortgages and turned them into collateral for bonds or securities, helping to seed the bad mortgages throughout the financial system. Washington Mutual, Bank of America, Morgan Stanley and others were securitizing mortgages as well as originating them. Other companies, such as Bear Stearns, Lehman Brothers, and Goldman Sachs, bought mortgages straight from subprime lenders, bundled them into securities and sold them to investors including pension funds and insurance companies.

Where they are now: This spring, New York’s Attorney General launched a probe into mortgage securitization at Bank of America, JP Morgan, UBS, Deutsche Bank, Goldman Sachs and Morgan Stanley during the housing boom. Morgan Stanley settled with Nevada’s Attorney General last month following an investigation into problems with the securitization process.

As part of a proposed settlement with the 50 state attorneys general over foreclosure abuses, several big banks were offered immunity from charges related to improper mortgage origination and securitization. California and New York have withdrawn from those talks.

The people who created and dealt CDOs

Once mortgages had been bundled into mortgage-backed securities, other bankers took groups of them and bundled them together into new financial products called Collateralized Debt Obligations. CDOs are composed of tiers with different levels of risk. As we’ve reported, a hedge fund named Magnetar worked with banks to fill CDOs with the riskiest possible materials, then used credit default swaps to bet that they would fail. Magnetar says that the majority of its short positions were against CDOs it didn’t own. Magnetar also says it didn’t choose what went its own CDOs, though people involved in the deals who spoke to ProPublica contradict this account.

American International Group’s London-based financial products unit was among the entities that provided credit default swaps on CDOs. Though the business of insuring the risky securities made AIG large short-term profits, it eventually brought the company to the brink of collapse, prompting an $85 billion government bailout.

Merrill Lynch, Citigroup, UBS, Deutsche Bank, Lehman Brothers and JPMorgan all made CDO deals with Magnetar. The hedge fund invested in 30 CDOs from the spring of 2006 to the summer of 2007. The bankers who worked on these deals almost always reaped hefty bonuses. From our story:

Even today, bankers and managers speak with awe at the elegance of the Magnetar Trade. Others have become famous for betting big against the housing market. But they had taken enormous risks. Meanwhile, Magnetar had created a largely self-funding bet against the market.

When banks found CDOs hard to sell, some of them, notably Merrill Lynch and Citibank, bought each other’s CDOs, creating the illusion of true investors when there were almost none. That was one way they kept the market for CDOs going longer than it otherwise would have. Eventually CDOs began purchasing risky parts of other CDOs created by the same bank. Take a look at our comic strip explaining self-dealing, and our chart detailing which banks bought their own CDOs.

Goldman Sachs and Morgan Stanley also made similar deals in which they created, then bet against, risky CDOs. The hedge fund Paulson & Co helped decide which assets to put inside Goldman’s CDOs.

Where they are now: Overall, the banks and individuals involved in CDO deals haven’t been convicted on criminal charges. The civil suits against them have produced fines that aren’t very big compared to the profits they made in the leadup to the financial crisis. JP Morgan paid $153.6 million to settle an SEC suit alleging they hadn’t disclosed to investors that Magnetar was betting against Morgan’s CDO. Citigroup just agreed to pay a $285 million fine to the SEC for betting against one of its mortgage-related CDOs. The lawsuit doesn’t mention dozens of similar deals made by Citi.

Magnetar is still thriving (the deals they made weren’t illegal according to the rules at the time). In 2007, Magnetar’s founder took home $280 million, and the fund had $7.6 billion under management. The SEC is considering banning hedge funds and banks from betting against securities of their own creation. As of May 2010, federal prosecutors were investigating Morgan Stanley over their CDO deals, and Goldman Sachs paid $550 million last year to settle a lawsuit related to one of theirs. Only one Goldman employee, Fabrice Tourre, has been charged criminally in connection to the deals.

Though recorded phone calls suggest that former AIG CEO Joseph Cassano misled investors about the credit default swaps that contributed to his company’s troubles, the evidence wasn’t airtight, and federal probes against him fell apart in 2010. Cassano’s lawyers deny any wrongdoing.

The ratings agencies

Standard and Poor’s, Moody’s and Fitch gave their highest rating to investments based on risky mortgages in the years leading up to the financial crisis. A Senate investigations panel found that S&P and Moody’s continued doing so even as the housing market was collapsing. An SEC report also found failures at 10 credit rating agencies.

Where they are now: The SEC is considering suing Standard and Poor’s over one particular CDO deal linked to the hedge fund Magnetar. The agency had previously considered suing Moody’s, but instead issued a report criticizing all of the rating agencies generally. Dodd-Frank created a regulatory body to oversee the credit rating agencies, but its development has been stalled by budgetary constraints.

The regulators

The Financial Crisis Inquiry Commission [PDF] concluded that the Securities and Exchange Commission failed to crack down on risky lending practices at banks and make them keep more substantial capital reserves as a buffer against losses. They also found that the Federal Reserve failed to stop the housing bubble by setting prudent mortgage lending standards, though it was the one regulator that had the power to do so.

An internal SEC audit faulted the agency for missing warning signs about the poor financial health of some of the banks it monitored, particularly Bear Stearns. [PDF] Overall, SEC enforcement actions went down under the leadership of Christopher Cox, and a 2009 GAO report found that he increased barriers to launching probes and levying fines.

Cox wasn’t the only regulator who resisted using his power to rein in the financial industry. The former head of the Federal Reserve, Alan Greenspan, reportedly refused to heighten scrutiny of the subprime mortgage market. Greenspan later said before Congress that it was a mistake to presume that financial firms’ own rational self-interest would serve as an adequate regulator. He has also said he doubts the financial crisis could have been prevented.

The Office of Thrift Supervision, which was tasked with overseeing savings and loan banks, also helped to scale back their own regulatory powers in the years before the financial crisis. In 2003 James Gilleran and John Reich, then heads of the OTS and Federal Deposit Insurance Corporation respectively, brought a chainsaw to a press conference as an indication of how they planned to cut back on regulation. The OTS was known for being so friendly with the banks -- which it referred to as its “clients” -- that Countrywide reorganized its operations so it could be regulated by OTS. As we’ve reported, the regulator failed to recognize serious signs of trouble at AIG, and didn’t disclose key information about IndyMac’s finances in the years before the crisis. The Office of the Comptroller of the Currency, which oversaw the biggest commercial banks, also went easy on the banks.

Where they are now: Christopher Cox stepped down in 2009 under public pressure. The OTS was dissolved this summer and its duties assumed by the OCC. As we’ve noted, the head of the OCC has been advocating to weaken rules set out by the Dodd Frank financial reform law. The Dodd Frank law gives the SEC new regulatory powers, including the ability to bring lawsuits in administrative courts, where the rules are more favorable to them.

The politicians

Two bills supported by Phil Gramm and signed into law by Bill Clinton created many of the conditions for the financial crisis to take place. The Gramm-Leach-Bliley Act of 1999 repealed all the remaining parts of Glass-Steagall, allowing firms to participate in traditional banking, investment banking, and insurance at the same time. The Commodity Futures Modernization Act, passed the year after, deregulated over-the-counter derivatives – securities like CDOs and credit default swaps, that derive their value from underlying assets and are traded directly between two parties rather than through a stock exchange. Greenspan and Robert Rubin, Treasury Secretary from 1995 to 1999, had both opposed regulating derivatives. Lawrence Summers, who went on to succeed Rubin as Treasury Secretary, also testified before the Senate that derivatives shouldn’t be regulated.

It’s worth noting the substantial lobbying efforts that accompanied the deregulation process. According to the FCIC [PDF], between 1999 and 2008 the financial industry spent $2.7 billion lobbying the federal government, and donated more than $1 billion to political campaigns. While deregulation took place mainly under Clinton’s watch, George W. Bush is faulted for not doing more to catch the out-of-control housing market.

As president of the New York Fed from 2003 to 2009, Timothy Geithner also missed opportunities to prevent major financial firms from self-destructing. As we reported in 2009:

Although Geithner repeatedly raised concerns about the failure of banks to understand their risks, including those taken through derivatives, he and the Federal Reserve system did not act with enough force to blunt the troubles that ensued. That was largely because he and other regulators relied too much on assurances from senior banking executives that their firms were safe and sound.

Henry Paulson, Treasury Secretary from 2006 to 2009, has been criticized for being slow to respond to the crisis, and introducing greater uncertainty into the financial markets by letting Lehman Brothers fail. In a 2008 New York Times interview, Paulson said he had no choice.

Where they are now: Gramm has been a vice chairman at UBS since he left Congress in 2002. Greenspan is retired. Summers served as a top economic advisor to Barack Obama until November 2010; since then, he’s been teaching at Harvard. Geithner is currently serving as Treasury Secretary under the Obama administration.

Executives of big investment banks

Executives at the big banks also took actions that contributed to the destruction of their own firms. According to the Financial Crisis Inquiry Commission report [PDF], the executives of the country’s five major investment banks -- Bear Stearns, Goldman Sachs, Lehman Brothers, Merrill Lynch, and Morgan Stanley – kept such small cushions of capital at the banks that they were extremely vulnerable to losses. A report compiled by an outside examiner for Lehman Brothers found that the company was hiding its bad investments off the books, and Lehman’s former CEO Richard S. Fuld Jr. signed off on the false balance sheets. Fuld had testified before Congress two years before that the actions he took prior to Lehman Brothers’ collapse “were both prudent and appropriate” based on what he knew at the time. Other banks also kept billions in potential liabilities off their balance sheets, including Citigroup, headed by Vikram Pandit.

In 2010, we detailed how a group of Merrill Lynch executives helped blow up their own company by retaining supposedly safe – but actually extremely risky –  portions of the CDOs they created, paying a unit within the firm to buy them when almost no one else would.

The New York Times’ Gretchen Morgenson described how the administrative decisions of some top Merrill executives helped put the company in a precarious position, based on interviews with former employees.

Where they are now: In 2009, two Bear Stearns hedge fund managers were cleared of fraud charges over allegedly lying to investors. A probe of Lehman Brothers stalled this spring. Merrill Lynch was sold to Bank of America in the fall of 2008. As for the executives who helped crash the firm, as we reported in 2010, “they walked away with millions. Some still hold senior positions at prominent financial firms.” Dick Fuld is still working on Wall Street, at an investment banking firm. Vikram Pandit remains the CEO of Citigroup.

Fannie Mae and Freddie Mac

The government-sponsored mortgage financing companies Fannie Mae and Freddie Mac bought risky mortgages and guaranteed them. In 2007, 28 percent of Fannie Mae’s loans were bought from Countrywide. The FCIC found [PDF] that Fannie and Freddie entered the subprime game too late and on too limited a scale to have caused the financial crisis. Non-agency-securitized loans had an increased share of the market in the years immediately preceding the crisis.

Many believe that The Community Reinvestment Act, a government policy promoting homeownership for low-income people, was responsible for the growth of the subprime mortgage industry. This idea has largely been discredited, since most subprime loans were made by companies that weren’t subject to the act.

Still, Fannie and Freddie engaged in reckless behavior and sustained heavy losses as a result. The SEC slammed Fannie Mae for improper accounting under the leadership of Frank Raines in the years preceding the financial crisis. A report by the Office of Federal Housing Enterprise Oversight found that Fannie and Freddie didn’t accurately disclose the risks they were taking and “deliberately and intentionally manipulat[ed] accounting to hit earnings targets.” [PDF]

Richard Syron and Daniel Mudd were at the helm of Freddie and Fannie, respectively, when they began to buy large numbers of subprime loans. Current and former Freddie Mac employees have accused Syron of ignoring warnings about the health of the loans the company was buying. Syron and Mudd maintain they could not have foreseen the rapid decline in the housing market.

Where they are now: As borrowers defaulted on mortgages they’d insured, Fannie and Freddie received a nearly $200 billion federal government bailout, and the government took over their operations. They are close to a settlement in an SEC lawsuit, and will neither admit nor deny that they failed to inform investors about risks of exposure to subprime mortgages. The Dodd Frank financial reform law stated that serious reforms of Fannie and Freddie are needed, but didn’t address how they should be carried out. A report from Treasury Secretary Geithner called for the government to “ultimately wind down” the two mortgage giants. [PDF] In the meantime, taxpayers have been shouldering their legal fees. Former Freddie and Fannie executives Richard Syron and Daniel Mudd received Wells notices this spring, a sign that the SEC is considering legal action against them.

Photo: David Shankbone via Wikimedia Commons

ProPublica is an independent, non-profit newsroom that produces investigative journalism in the public interest.   This article is republished with permission under a Creative Commons license.

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 49^th 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.