Too Big To Fail

“The battle between bankers and traders is the closest thing to class warfare on Wall Street.” 

Sorkin describes the personalities involved in the crisis in detail, and one piece of relevant information is whether each person comes from a banking or trading background. As described, investment banking is considered more of an art, whereas trading is akin to a sport.

“An exasperated Fuld thought Lauer’s question was just another example of the popular media’s tendency to frame complex financial issues in terms of class warfare, pitting Wall Street—and Paulson, Goldman’s former CEO—against the nation’s soccer moms, the Today show’s audience.” 

This was in connection with Lauer’s question to Treasury Secretary Paulson about how the Fed dealt with the Bear Stearns situation, saying that it has people asking, “Does the Fed react more strongly to what’s happening on Wall Street than they do to what’s happening to people in pain across the country, the so-called people who live on Main Street?” (32).

“Like most conservatives, he still honored the principle of ‘the invisible hand’—that widely held, neoclassical economic notion that official intervention was at best a last resort.” 

This was the mindset of Treasury Secretary Paulson. The events described in this book turned traditional Republican notions of the free market on their head, however, with Paulson championing government intervention in the market on a major scale.

“He and the other Treasury officials had come to recognize that Wall Street’s broker-dealer model—in which banks could count on ever-dependable overnight financing by other investors—was by definition a tinderbox.” 

David Nason, Assistant Secretary for Financial Institutions, believed that this was the case. The concept implies that the model was inherently flawed and would eventually erupt in figurative flames.

“To Bernanke what was happening was obvious: It was a panic. Banks and investors, fearful of being contaminated by these toxic assets, were hoarding cash and refusing to make loans of almost any kind. It wasn’t clear which banks had the most subprime exposure, so banks were assumed guilty until proven innocent. It had all the hallmarks of the early 1930s—confidence in the global financial system was rapidly eroding, and liquidity was evaporating.” 

This description relates to the events of August 2007 involving mortgage-related assets. The financial system quietly proved unstable, and those in the know panicked at the possibility of total failure.

“To criticize the firm’s direction was to be branded a traitor and tossed out the door.” 

This was the culture at Lehman. In that context, multiple warning signs were ignored leading up to the financial crisis. Those who tried to speak out or “blow the whistle” on what was happening found themselves facing termination and gag-orders.

“In a way, ironically enough, FP’s compensation package better aligned the interests of the employers with shareholders than most traders on Wall Street, who were paid based on the performance of their own book rather than on the profits of the entire firm.” 

This was about AIG’s FP employees being paid a percentage of profits so that they wouldn’t be paid at all while the firm had losses. As a result, they were eventually paid bonuses so that they would not all leave the firm, which created a public-relations nightmare.

“The success of the two companies in both the financial and political arena inevitably fostered a culture of arrogance.” 

This is the description of what happened internally at Fannie Mae and Freddie Mac as a result of their early success, tying in Sorkin’s concept of “too big to fail.”

“On this day the bankers assembled at the Fed had their own historic battle to wage, with stakes that were in some ways just as high: They were trying to save themselves from their own worst excesses, and, in the process, save Western capitalism from financial catastrophe.” 

This was about a meeting at the Fed of all the major bank CEOs, comparing them to a statue of young Sophocles, a symbol of victory after a battle that had saved Greece and possibly Western Civilization.

“Wall Street’s most elite firms were effectively about to go shopping in the equivalent of a government-sponsored Turkish bazaar.” 

This was the characterization of the meeting at the Fed with all the bank CEOs on Wall Street and Lehman’s representatives. Companies were shopping for investors, i.e., bailouts.

“This is what it is all about, he thought to himself, the people who rise at dawn to get in to their jobs, all of whom rely to some extent on the financial industry to help power the economy. Never mind the staggering numbers. Never mind the ruthless complexity of structured finance and derivatives, nor the million-dollar bonuses of those who made bad bets. This is what saving the financial industry is really about, he reminded himself, protecting ordinary people with ordinary jobs.” 

These were Tim Geithner’s thoughts after closing the deal to bail out AIG. He believed that deal was in the public interest. At its core, this reflects the idea of “the greater good,” with Geithner justifying the means as long as he believes the outcome will be the best for the people.

“I’m in favor of free markets—and I’m in favor of free streets too, but when you have people walking down the streets with bats, maybe it’s time for a curfew.” 

Gary Lynch, Morgan Stanley’s chief legal officer and a former enforcement chief at the SEC, said this to John Mack of Morgan Stanley in connection with the idea of lobbying the head of the New York Stock Exchange to put an end to short-selling.

“There are no atheists in foxholes and no ideologues in financial crises.” 

Ben Bernanke used this analogy when arguing that intervention into the economy was necessary to respond to the financial crisis. The implication is that, just as even a man who does not believe in god will pray when in a dire situation, one cannot remain inflexible when faced with economic collapse.

“Paulson disregarded the question, knowing that the answer would be way too long and lay in a heady mix of nearly a decade of overly lax regulation—some of which he had pushed for himself—overzealous bankers, and home owners living beyond their means.” 

This was Paulson’s reaction when President Bush asked how we got into a situation in which the financial system was collapsing and the government had to act. Because there was not short answer, Paulson dodged the question, which at that time was moot, regardless.

“Lehman Brothers became a victim. In effect, the only true icon to fall in the tsunami that has befallen the credit markets. And it saddens me. I feel that I have a responsibility to all the creditors, to all of the employees, to all of the customers and to all of you.” 

These were the remarks of bankruptcy judge James Peck upon approving Lehman’s sale to Barclays. Many in the room were moved to tears.

“It was a telling paradox in the debate about executive compensation: Fuld was a CEO with most of his wealth directly tied to the firm on a long-term basis, and still he took extraordinary risks.” 

This was about Dick Fuld of Lehman Brothers, whose shares of Lehman, which constituted most of his net worth, went from over $1 billion to $65,486.72 during the course of the crisis.

“To encourage wide participation, the program is designed to provide an attractive source of capital, on identical terms, to all qualifying financial institutions. We plan to announce the program tomorrow—and that you nine firms will be the initial participants. We will state clearly that you are healthy institutions, participating in order to support the US economy.” 

This was Paulson’s talking point on the capital injections that the government expected healthy banks to accept as part of the TARP program.

“In the span of just a few months, the shape of Wall Street and the global financial system changed almost beyond recognition. Each of the former Big Five investment banks failed, was sold, or was converted into a bank holding company. Two mortgage-lending giants and the world’s largest insurer were placed under government control. And in early October, with the stroke of the president’s pen, the Treasury—and, by extension, American taxpayers—became part owners in what were once the nation’s proudest financial institutions, a rescue that would have seemed unthinkable only months earlier.”

This is Sorkin’s summary of what transpired as described in the entire book. He elaborately details how the Big Five failed, which led to the government bailouts and subsequently, the American taxpayers covering for the defected banks.

“In the days and weeks that followed the first payouts under the bailout bill, a national debate emerged about what the tumult in the financial industry meant for the future of capitalism, and about the government’s role in the economy, and whether that role had changed permanently.” 

This is Sorkin’s description of the fallout from the bailout. In the wake of the financial crisis and the government’s eventual recourse, the question of how the relationship between the American economy and government has now changed comes to the forefront.

“Bush’s statement seemed to sum up the paradox of the bailout, in which his administration and the one that followed decided that the free market needed to be a little less free—at least temporarily.” 

This quotation refers to Bush’s statement that the “government intervention” was not a “government takeover” and that its purpose was to “preserve the free market,” not to “weaken” it (533).

“How should regulators respond to continued risk taking—which generates enormous profits—when the government and taxpayers provide an implicit, if not explicit, guarantee of its business?” 

If these firms’ risky trades did not pay off, the taxpayers would be left footing the bill, meaning that they remain “too big to fail” (537). Because the economy is intertwined with the banks, the country fundamentally can’t allow them to “fail.”

“Washington was totally unprepared for these secondary effects, as policy makers had seemingly neglected to consider the international impact of their actions—an oversight that offers a strong argument for more effective global coordination of financial regulations.” 

This passage describes the international fallout from Lehman’s bankruptcy. The financial crisis and bailouts had a rippling effect, one that the government didn’t foresee.

“Meanwhile, Wall Street, bent but not broken, rumbles on in search of new profits. Risk is being reintroduced into the system. Vulture investing is back in vogue again, with everyone raising money in anticipation of the collapse of commercial real estate and the once-in-a-lifetime bargains that might be available as a result.”

This is Sorkin’s description of the situation post-bailout. Although there should have been many lessons learned, as is the nature of the beast, Wall Street continues its “predatory” behavior.