Too Big to Fail
ANDREW ROSS SORKIN
Reviewed by Todd
I remember the morning of September 15, 2008, when I picked up The Wall Street Journal and read the headline, “AIG, Lehman Shock Hits World Markets.” Everyone already knew of the bankruptcy of Lehman Brothers, but the next day, we’d find out the U.S. Federal Reserve had bailed out AIG with an $85 billion infusion of cash in exchange for almost eighty percent of its stock.
The news was confusing. Six months earlier, the Federal Reserve of New York engineered and underwrote the purchase of struggling Bear Stearns by JP Morgan. Why let Lehman fail now, and not AIG? The news would confuse the markets for many months. Too Big to Fail reveals the answer. Through Sorkin’s account, we get a wonderful inside view into the craze, confusion, and frenetic deal-making that kept the financial system from total collapse.
Without a strong background in the makeup of the American financial system, a reader starts out a little overwhelmed. The cast of characters that opens the book is 160 people long, spread out over forty public and private organizations. Their relationships are complicated: past colleagues working for competitors, private sector leaders becoming public sector officials, past rivals becoming even more determined current rivals. Sorkin lays out much of this in the opening chapters with profiles of the key players: Treasury Secretary Hank Paulson, New York Federal Reserve President Timothy Geithner, Federal Reserve Chairman Ben Bernanke.
The narrative, though, revolves around Lehman Brothers and its CEO Dick Fuld. The collapse of Bear Stearns and the similar bailout of hedge fund Long Term Capital Management in 2000 hang over Lehman’s struggles in April 2008. The financial markets start to see the real estate market weakening and the enormous number of mortgages originated in the prior five years. Traders start shorting financial institutions with the largest exposures, making big bets that homeowners will start to default and stock prices will fall. Banks like Washington Mutual and Wachovia become the first targets of Wall Street, but the mortgages no longer exist as singular entities of debt. Borrowing ideas from the corporate bond traders in the 1990s, investment bankers like Lehman Brothers have been bundling mortgages and slicing them into smaller saleable pieces. While this theoretically spreads the risk across a wider number of players, the financial engineering creates a system where no one really knows who holds the risk for troubled mortgages, leading financiers to take insurance against one another to hedge the unknown risk.
“Hank Paulson believed he was fighting the good fight, a critical fight to save the economic system, but for his efforts he was being branded as little less than an enemy of the people, if not an enemy to the American way of life.”
Too Big to Fail never gets more technical than that. Outside of a short epilogue, the book never attempts to unwind and pass judgment on the systemic failures that led to the collapse. Sorkin’s approach is to present as best as possible the conversations and conflicts between all of these parties over the course of those eventful six months. This 539-page account is a journalistic feat. The account feels personal, with the passing of birthdays and anniversaries during the negotiations of bankruptcies and buyouts. We see CEOs and U.S. Cabinet Secretaries struggle under the weight of decisions with historical consequences. The best reasons to read this book are to see the true gravity of the situation and to get a glimpse at our “flawless” leaders appearing more human than we often admit or allow. TS
Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System—and Themselves, Penguin, Paperback 2010, 9780143118244
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EVEN MORE: The
Big Short by Michael Lewis;
All the Devils Are Here by Bethany McLean and Joe Nocera; Lords of Finance by
Liaquat Ahamed