Too Big Too Fail

Even though the weather has been terrible in Florida, my reading has slipped a little. Here is my latest:


Andrew Ross Sorkin, “Too Big To Fail: (The inside story of how Wall Street and Washington fought to save the financial system—and themselves), Viking, 2009, 544 Pages

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 (Fannie & Freddie) and the world’s largest insurer (AIG) were placed under government control. And in early October 2008, American taxpayers became part owners in the nation’s largest financial institutions; shortly after came General Motors and Chrysler.

This book covers all the action of these turbulent months. Even though the book is over 500 pages, the coverage just provides an overview. If you want a more in depth view of any of the failures, you must get a book devoted to just that financial institution. I have read quite of few of books devoted to single institutions, so I found this book quite useful as a summary of all that material.

My Notes:
Pg. 534: Could the $1.1 trillion bailout have been avoided? The author states: “perhaps”. But the preemptive strike would probably have had to come long before Henry Paulson was sworn in as secretary of the Treasury in the spring of 2006. The seeds of disaster had been planted years earlier with such measures as: the deregulation of the banks in the late 1990s; the push to increase home ownership, which encouraged lax mortgage standards; historically low interest rates, which created a liquidity bubble; and the system of Wall Street compensation that rewarded short-term risk taking. Finally, in 2007, the uptick rule was done away with. They all came together to create the perfect storm.

Pg. 538: It now appears that the political will to introduce needed regulatory change is waning. Relieved that the worst is supposedly behind us, the Obama administration seems to have moved on to other priorities. Unless those regulations are changed radically—to include such measures as stricter limits on leverage at large 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.

Pg. 3: In 2007, at the peak of the economic bubble, the financial services sector had become a wealth-creation machine, ballooning to more than 40 percent of total corporate profits in the U.S. Financial products—including a new array of securities so complex that even many CEOs and boards of directors did not understand them—were an ever greater driving force of the nation’s economy. The mortgage industry was an especially important component of this system, providing loans that served as the raw material for Wall Street’s elaborate creations, repackaging and then reselling them around the globe.

Pg. 4: The Wall Street juggernaut that emerged from the collapse of the dot-com bubble and the post 9/11 downturn was in large part the product of cheap money. The savings glut in Asia, combined with unusually low U.S. interest rates under Greenspan (which had been intended to stimulate growth following the 2001 recession), began to flood the world with money.

Pg. 103: An accounting maneuver emerged, especially at Lehman’s, that enabled it to record revenue when the value of its own debt fell, arguing that theoretically it could buy that debt back at a lower price and pocket the difference. This added “revenue” was incorporated into the amounts that bonuses were calculated from.

Pg. 184: In 1999, under pressure from the Clinton administration, Fannie and Freddie began underwriting subprime mortgages. The move was presented in the press as a way to put homes within the reach of countless Americans, but providing loans to people who would not ordinarily qualify for them was an inherently risky business, as telegraphed by the New York Times the day the program was announced:
“In moving into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980s.