I’ve been on the road the past two weeks, and my one trusty companion I had with me (besides my laptop, if a laptop could ever be considered a companion), was my copy of Andrew Ross Sorkin’s book, “Too Big To Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System – And Themselves.”
Unlike Larry McDonald’s book, “A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers,” which I reviewed and wrote about on my wife’s blog, this wasn’t just the story of Lehman. It was the story of the US financial system after the government-directed take-under of Bear Stearns by JP Morgan Chase. There was also the difference in my perspective. With Lehman, I really didn’t know anyone who was there.
It’s different when you see some of main characters at the Uptown YMCA or at the Mimosa Grill in Charlotte.
As far as the narrative goes, it’s well-written. It’s pretty fast paced overall, but for me, it bogged down in places because I didn’t need as much background information as Sorkin gave. But that’s just me. Another thing that struck me as I read this book was the title.
From my perch, it could have been called “Too Little Too Late.” Because the government’s response to these events were just that. They were constantly behind in terms of thinking through what was happening and what actually needed to happen. Sorkin gives ample evidence of this in the way Paulson, Geithner, Bernanke, et. al. chose to deal with these situations. In my mind, that haphazard decision making started with Bear. To some it was obvious from the start that letting JP Morgan Chase buy them was a bad idea. But it served the purpose that our government officials wanted it to serve: no bankruptcy filing over the weekend to send Tokyo, Hong Kong, and Shanghai exchanges plummeting lower.
Oops… that didn’t quite turn out the way they thought now, didn’t it?
But that was the whole premise of their actions. “Clean it up” over the weekend, by hook or by crook.
The problem is, this problem has been over a decade in the making. You don’t clean this up over a weekend.
Or a week.
Or a month.
Or even a year.
Because cures always take more time to work than the time it takes diseases to show their symptoms.
But you get some great insights into some of these men through this book. And unlike what some other folks have said, I think some of these men come out in a very positive light in their own ways. Jamie Dimon, Jimmy Lee, Steve Black, and the rest of the JP Morgan Chase team in the book come out looking like the smartest – and the toughest – guys in any room they set foot in. I don’t ever want to find myself on the other side of a negotiation with them. John Mack? An inspirational leader. I talked about that in this post. The Goldman guys? Very smart, but highly paranoid. Yet it was completely reasonable for them to be this way. They understood that no matter what they were going to do, people would look at it with suspicion. To quote Kurt Cobain “just because you’re paranoid doesn’t mean they aren’t after you.” The Goldman team seemed to know this quite well.
Some folks that didn’t come off well in this story? Obviously Dick Fuld, Joe Gregory and their gang at Lehman don’t. But really, the folks who come out looking worst, in my view, are our government officials. Whether it was Sheila Bair and her mismanagement of Wachovia’s failure, or Tim Geithner, looking at times like an emperor pompous in his own self-importance and being consumed by panic in others (in some passages I could almost feel his indecisiveness), or Hank Paulson who lead the charge for deals to get made, regardless of whether or not the rationale for market acceptance – the one true litmus test that must be passed in any combination – existed or not. Paulson, I think, comes off quite badly in this book. He grossly miscalculated in assessing what the market’s reaction was going to be at every turn, and he, along with his other government counterparts, egregiously overestimated the odds of a true Armageddon happening. He, along with the other government officials in this book operated under one mantra:
Close them down Friday, open them up Monday. Consequences and mechanics be damned.
But what would you expect of a man who served in the Nixon White House under Halderman and Erlichman? Paranoid to the point of being scared of their own shadows, these are not the people you want to lead through a crisis. You get a sense of that paranoia in a little passage on Paulson where it mentions an “Inspector Gadget-like device” he had installed while he was at Goldman in the form of a glass security door that is opened by a secret button under the CEO’s desk. I know as a CEO you have to be concerned about security, but this seems like making sure you have suspenders to hold up your pants which you already have a belt looped through.
But it also shows you that some of the greatest insights take very little explanation.
The important question to ask is why. Why was it so important to do this? With these banks? I can only think the specter of Joseph Schumpeter had them scared to death, white-knuckling as they held on to anything they could get their hands on as the forces of creative destruction swallowed up the financial sector en masse. I recalled an episode of “Fast Money” where Dylan Ratigan said it best:
“We don’t need these big banks in this country, we just need banks.”
And so I go back to the title of the book, and what I thought the title of the book could have been.
If we had developed rules that allowed custodial business to be funded out of bankruptcies of these companies and harmonized those rules with other countries, you might be able to avoid having client-facing businesses get caught in the maelstrom of a bankruptcy filing. In AIG’s case, it’s more problematic because their wrap/guarantee business they ran for 401(K)s doesn’t fit as either a broker-based business or deposit-based business. But it’s custodial in nature nonetheless.
If you had more frequent market marking in the CDS space, the mark-to-market/migration risk that really did in AIG wouldn’t have happened. The collateral calls that AIG had to post did them in. It didn’t help that AIG probably used their balance sheet to get favorable treatment in margin posting years ago, which only exacerbated the size of future margin calls as their counterparties sought to play catch-up in re-margining the trades. One way to avoid these situations would be to standardize the contracts and settlement procedures by putting them on an exchange.
It would also help if we really realized what the central bank’s true role is: preservation of the value of the currency (i.e. inflation fighting) because as I’ve pointed out before, the biggest and truest threat to a fiat currency regime is not hyperinflation, it’s resorting to barter.
The regulators needed to sound off on the practice of using alternative mortgage products with people who couldn’t afford to pay the loans back, and whose only recourse was to roll the debt over or sell the house/property for more than they paid for it.
But try getting these rules put into law in the political climate of 2005. Nobody wanted to believe real estate would fall, anything that could have been perceived as stifling financial services product development would have been shot down by politicians and regulators, and the rest? Well, that would’ve taken a back-burner to the pressing question of the day: Iraq. So when looked through that lens, the government’s response was destined to fail in the spring/summer in 2008. The real signs of the system’s failings were surfacing earlier.
But would anyone have believed it? We already know the answer to that question…
The truth is, the real estate and credit boom we experienced is a stark reminder of one of the enduring truths of human history, so richly depicted in Charles Mackay’s masterpiece. There is no grand conspiracy. There are no bad actors to single out, no matter how much people want to throw bankers, quants, regulators, politicians, naive home buyers, and hedge fund managers under the bus. Systemic risks exhibit themselves when the system itself fails. So all of us are to blame. But that’s inconvenient for us to hear, and almost impossible to accept. Because it’s too difficult for us to come to grips with moving parts, nonlinear processes, and seemingly random episodic events that were really just slowly building over time once you take a step back and analyze their genesis.
All of these books have provided great context and insight into the stories of 2008, and they captured a moment. It takes more to capture the entire era, and maybe somebody will attempt to do that. Or maybe someone will attempt to sift through the wreckage and detritus of this era and see how we can fix things for our sake and our kids’ sake.
Who knows? Maybe I should write a book…