Too Big to Fail

I wouldn’t have thought it possible to turn an account of the 2008 financial crisis into a story as compelling as a novel, but Andrew Ross Sorkin did it with his book Too Big to Fail. Sorkin gives an inside account of the actions of Wall Street executives and government officials that captures their panic, greed, loyalty, and in some cases patriotism.

One theme in the early part of the book is the power play that exists at the top of large corporations. In one example, an executive forcing another out of a company is just a routine “disposal of a potential rival.” In another example, one executive is pushed out but not a second because the second “appeared nonthreatening.” This is a peculiar world where competence is valued, but too much competence is threatening.

Another theme is executives making themselves rich at the expense of their own firms. Even when the market for Collateralized Debt Obligations (CDOs) “was perceptibly unraveling,” Merrill Lynch kept churning them out. “If they were worried, however, Merrill’s top executives didn’t show it, for they had a powerful incentive to stay the course. Huge bonuses were triggered by the $700 million in fees generated by creating and trading CDOs, despite the fact that not all of them were sold. (Accounting rules allowed banks to treat a securitization as a sale under certain conditions.)” So, executives made bonuses on CDOs that were causing Merrill to lose money.

A surprising part of this story to me was the degree to which discussions were conducted in face-to-face meetings. The participants spent a lot of time traveling to hastily called meetings. In one case, some Morgan Stanley executives stuck in traffic “found a break in the street divider and inched the car onto the bike lane, speeding down it.”

When Lehman Brothers finally went bankrupt, “the staff wasn’t just devastated, they were angry.” They erected a wall of shame that included photos of the CEO and president “with the caption ‘Dumb and Dumber.’”

An interesting characterization of the changes on Wall Street: In 1927, business was “defined by personal relationships and implicit trust, not leverage and ever more complicated financial engineering.” This world was “obliterated over the past decade as firms sought to go public and began using shareholder money to place what proved to be dangerously risky bets.”

Have the lessons of the financial crisis led to positive changes? “Goldman, like so many of the nation’s largest financial institutions, remains too big to fail.” Unless “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 rumormongers and the manipulation of stock and derivatives markets—there will continue to be firms that are too big to fail.”

It’s unlikely that someone with no interest at all in the financial crisis would like this book, but the inside account of the players and their motivations certainly helps to make it an interesting read for those who have some interest in the crisis.