" Too Big to Fail" - Wall Street demystified

This is my book review of  “ Too Big to Fail “ from Andrew Ross Sorkin, a financial journalist for the New York Times,  which exposes the cryptic link between Bush Adminstration (US govt in 2008) ,Wall Street Investment Banks & Market Regulators  by  providing  a moment-by-moment account of the worst calamity to ever affect the U.S. financial markets since the Great Depression which finally turns into a Global Economic mess  .It became a tsunami that triggered financial collapse in the world markets as well. It also demystifies  the secret nexus between US federal govt & Wall Street firms which targets to profit and benefit the top-rung elites of the society and making the common man suffer the most arising from their financial miseries at the height of this economic catastrophe.

Sorkin builds a story of how the financial collapse of Wall Street in the fall of 2008 actually started much earlier - in the spring of 2008. Wall Street and Washington were intricately tied together in the collapse and Sorkin details the level and depth of these ties. At the first of the book, he lists his cast of characters. They include the management of all the major investment banks like Goldman Sachs and Morgan Stanley, along with AIG, Bank of America, Fannie Mae and Freddie Mac, as well as overseas organizations from countries like China and Korea.

The cast of characters also includes a whole raft of attorneys, individuals from Great Britian, as well as from the U.S. Congress, the Department of the Treasury, the Federal Reserve, the White House, and the FDIC. This is not an exhaustive list.

Because of the author's position at the New York Times, he had unprecedented access to this cast of characters and was able to write a book with all the detail supporting the drama of what led up to the collapse of Wall Street and our financial system in 2008. It is meticulously researched, drawing on interviews with more than 200 of those who participated directly in the events it covers, including their handwritten notes and tape-recordings of critical meetings. 

The result is a compelling reconstruction of the drama surrounding the government seizure of Fannie Mae and Freddie Mac, Lehman’s collapse, the rescue of American International Group (AIG), the subsequent market pandemonium and the shoring-up of big banks’ capital with public funds.

The major players on Wall Street knew that the dominoes were going to fall as early as the spring of 2008 as Lehman Brothers started to fail. Sorkin discusses the events leading from that time to the collapse.

At the centre of the action stands Mr Paulson,Treasury Secretary of  Bush Adminstration  (he had  beg  before congressional leaders to support his bail-out), flanked by the fresh-faced but hard-nosed Tim Geithner, who in 2009 took over as treasury secretary, and the professorial, unflappable Ben Bernanke, chairman of the Federal Reserve. He was prone to give in when under pressure, and despite being horribly sleep-deprived, Mr Paulson acts decisively, if not always wisely, as he responds to what he calls “an economic 9/11”. 

This untimely improvisation was evident across Wall Street, too. Pushed to think creatively, a desperate AIG uses bundles of dusty stock certificates from its vaults as collateral for a $14 billion loan from the Federal Reserve. With Morgan Stanley desperate for an investment from Mitsubishi, but markets closed for a holiday, the Japanese firm issues a $9 billion cheque to seal its commitment.

Just as remarkable is the combination of  excessive pride and ineptitude of those running the most troubled firms. Lehman’s boss, Dick Fuld, sacked or sidelined those who gave warning about its dizzying debt levels and dangerous exposure to commercial property. He concocted  a life-saving deal with the South Koreans by barging clumsily into negotiations being run by a key lieutenant, which were delicately poised. AIG’s executives did not know how big the insurer’s balance-sheet hole was, and sometimes did not seem to care.

One of the best sections comes after Lehman’s bankruptcy and AIG’s takeover, as other firms struggle for survival. The remaining standalone investment banks, Morgan Stanley and Goldman Sachs, haemorrhaging cash as clients run for the exit, engage in an increasingly surreal series of  happenings  with various commercial banks, before finding temporary salvation by turning themselves into bank holding companies. The book makes clear how close Goldman came to death: if Morgan Stanley went under, its arch-rival was “30 seconds behind”, reckoned its boss, Lloyd Blankfein.

Faced with extinction, these firms tried to change the very rules under which they had thrived for so long. They lobbied successfully for a ban on short-selling. Morgan Stanley’s John Mack hypocritically branded the practice—which his firm had long financed as a prime broker—“immoral if not illegal”. For all the fear, Mr Mack seems to have been exhilarated by the experience of battling to save his firm.

The $700 billion figure for the Troubled Asset Relief Programme was plucked from the air, the roughest of guesstimates. Regulators would back a merger one minute, only to cool on it the next for reasons that baffled bankers. The level of government intervention was deeply distasteful to the Republican Mr Paulson. But, as Mr Bernanke tells him: “There are no atheists in foxholes and no ideologues in financial crises.”

Too Big To Fail rips along at such a pace that even the reader is hard-pressed to stop and ask the what ifs. While no one can be happy that the tale ends with taxpayers paying hundreds of billions of dollars to prop up failed banks and fallible bankers, there are few signposts to better outcomes.

The book has flaws. It sometimes gets carried away with detail. Do we need to know that AIG’s boss was standing in a hallway in boxer shorts when he received an important e-mail? Mr Ross Sorkin is too quick to redundantly self-serving recollections, such as the sympathy Mr Geithner feels for office workers packed into the Manhattan ferries whom he spots while jogging one morning. The verdict on Mr Fuld, Lehmann Brothers CEO that he was driven not by greed but by “an overpowering desire to preserve the firm he loved”, seems too gentle. 

One of the interesting aspects of the book is the degree to which government officials pushed to “marry” commercial banks and investment banks during the height of the crisis in September. The story closes on the chilling day last October when Paulson ,Treasury Secretary of Bush Adminstration seated the leaders of nine banks -- including Jamie Dimon of JPMorgan Chase, Vikram Pandit of Citigroup Inc. and Richard Kovacevich of Wells Fargo & Co. -- around a 24-foot-long mahogany table and effectively ordered them to take billions of dollars in government cash injections in exchange for preferred shares with a view to restore market confidence by expansion of   private lending and increase liquidity within the banking & financial system .

 It seems like every possible permutation was considered, to the point where Mr. Geithner was referred to mockingly as “E Harmony” in a reference to the online dating site.  At the same time, many in government blame the 1999 repeal of the Glass-Steagall Act, which prohibited the union of commercial and investment banks, for precipitating the crisis.

While the idea of giving investment banks access to stable deposits through commercial banks had a great deal of merit during the crisis, such mergers also created ever larger institutions, many of which are considered “too big to fail”.  It seems that society must decide which is the lesser of two evils:  Government regulations that seek to keep financial institutions small such that none can become “too big to fail” or heavy handed regulations that properly govern mammoth institutions that are obviously “Too  Big to Fail”.