A raving review from The Atlantic Monthly on the flap jacket of “Too Big To Fail” states: “Andrew Ross Sorkin pens what may be the definitive history of the banking crisis.” The adulation is not undeserved as Sorkin describes the tumultuous global financial crisis in adept detail and succinctness. The business lexicon of “too big to fail” may appear anachronistic to readers, but Sorkin makes it accessible. Too big to fail refers to the practice of governments deeming certain financial institutions to be of systematic importance and whose continued ineptitude would have adverse effects on the economy. “Too Big To Fail” is a harrowing account of the demise of the Second Gilded Age exemplified by the largest scale government intervention in modern history at the expense of the American taxpayer.
Andrew Ross Sorkin at the offset does not profess to be an economics professor. Sorkin provides a sociological examination of Wall Street executives and government bureaucrats. He devotes a portion of each chapter encapsulating the biographical details and related factoids of key figures in the book. The narrative of “Too Big To Fail” is driven by jarring interviews conducted by the author and loosely construed anecdotes. Readers have to assert their own judgment in evaluating the truthfulness and validity of Sorkin’s claims.
Sorkin depicts an insulated world where sordid type A individuals inhabit. One bemusing anecdote involves the President of the Federal Reserve Bank of New York Timothy Geithner. Geithner’s meticulous personality is tested by a driver who fails to show up in a prompt manner. Sorkin states: “Geithner, arguably the second most powerful central banker in the nation after Bernanke, stepped into the twenty-person deep taxi line. Panting his pockets, he looked sheepishly at Mitchell. “Do you have cash on you?” (60). Geithner can be noted for his bargaining efforts and strong-arming in orchestrating proposed mergers for Goldman Sachs and Morgan Stanley respectively.
“Too Big To Fail” progresses in a linear fashion from the initial murmurs of Lehman Brothers’ insolvency to the roundtable of the “Big 9” Wall Street firms accepting TARP (Trouble Asset Relief Program) funds. Sorkin in a NYMag interview describes how his work mirrors that of the film Crash: “And of course as the story progresses, they cataclysmically come together and you start seeing the connections between things” (Sorkin). A further parallel can be drawn in the conflicted and morally bankrupt nature of the characters in Crash to that of Wall Street executives.
“Too Big To Fail” operates to a certain extent as a self reflective meditative work. Sorkin provides instances in which the key figures of the book absolve or eradicate prior missteps and erroneous misjudgments. The interplay of characters and events is a recurring theme in the book. One poignant example involves the ouster of Jamie Dimon (current CEO and Chairman of JP Morgan) from Citigroup. Sorkin states: “The untenable situation finally came to head a few days after the new Citigroup reported a disappointing third quarter, the result of a summer of turmoil as Russia defaulted and the hedge fund LTCM nearly collapsed” (75). The ouster motivated Dimon to build JP Morgan as an efficient business model and revered financial institution. Dimon gutted unnecessary expenditures and minimized risk, while employing less leverage to boost returns in the financial balance sheet.
Sorkin surmises that the endearing pretense of being ‘top dog’ was galvanized upon by most Wall Street firms. The gold standard or titan in the investment banking industry is Goldman Sachs. Goldman Sachs’ practice of over leveraging its assets led to Bear Stearns, Lehman Brothers, Merrill Lynch and Morgan Stanley following suit. Leveraging is a financial ratio measuring a company’s debt to assets. While overleveraging may result in greater returns and maximization of gains, the unintended consequence is costlier rates of borrowing and riskier bets incurred by the company. Sorkin notes the trend with the following: “Lehman was leveraged 30:7 to 1; Merrill Lynch was only slightly better, at 26.9 to 1. Paulson knew that Merrill, like Lehman, was awash in bad assets” (72). The notion that Merrill Lynch operated in the short term in relying on firm rather than client money served as a red herring to the firm’s insolvency in the subsequent months.
Sorkin noting the sequence of events that transpired in the latter months of 2008 states: “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” (529). One can easily vilify the greed and hubris that typifies Wall Street. The only figure that Sorkin ascribes a degree of humility to is Treasury Sec. Paulson. Paulson in his brief tenure was assailed by the ‘left’ and ‘right’ of the political spectrum for his decision making and bore the media purported moniker of ‘Mr. Bailout.’
Paulson was an unlikely candidate for the position of Treasury Secretary. He had served in Goldman Sachs for 32 years, accumulating a personal net worth of an estimated $700 million in the process. The opportunity to shape history amidst the worst financial crisis since the Great Depression outweighed the contentious nature of the Treasury Secretary position in a lame duck Administration. Sorkin on Paulson foreseeing the impending fiasco states: “The sub prime mortgage mess, which had already begun to have repercussions. Bear Stearns and others were deeply involved in this business, and he needed to find a way to obtain “wind down authority” (49). Paulson had a vested interest in extending the ‘wind authority’ to Goldman Sachs and other investment banks as the aforementioned institutions lacked expansive failsafe preventative measures.
The unprecedented government intervention to temper the precipitous decline in the financial markets resulted in Paulson assuming the role of a scapegoat. The Treasury Sec. was adamant in his decision of forcing Lehman Brothers towards a path of insolvency, while providing a direct taxpayer funded financial pipeline to AIG. It is disparaging to note that AIG received $60 billion in TARP funds tabulating to an 80% ownership stakes by the American taxpayer. Goldman Sachs in a roundabout manner received $12.9 billion from the AIG bailout. This poses an incriminating conflict of interest on the part of former Goldman Sachs CEO turned Treasury Sec. Paulson’s role in guiding the AIG bailout.
“Too Big To Fail” will prove a compelling read to business aficionados and more importantly the American public. The $700 bailout has been described among commentators as both a necessary evil and corporate welfare. If you are looking to arrive at your own opinion, Sorkin’s book is a great place to start.
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