« How One Man Became a Global Warming Skeptic | Main | Thought for Today »

Book Review -- “Too Big To Fail”

A book review in The Freeman, published by the Foundation for Economic Education (FEE) caught my eye because I’m most of the way through 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.” The book was reviewed by Chidem Kurdas, an economist and financial journalist in New York.

Rather than provide an amateur’s review of Sorkin’s book, I’m sure Growls’ readers would much prefer a professional’s review. Kurdas’ begins her review this way:

“Books about the 2008 financial crisis keep coming, and New York Times reporter Andrew Ross Sorkin offers one of the better accounts of the meltdown. Using a large number of interviews, he reconstructs the words and acts of key people during the six months from the near-collapse of Bear Stearns in March to the bankruptcy of Lehman Brothers in September.

“The book is somewhat bloated, but the tale is compelling. It starts as Bear Stearns, the smallest of the five Wall Street investment houses, wobbles on the edge of bankruptcy. Treasury Secretary Henry Paulson and the Federal Reserve facilitate JP Morgan’s takeover of Bear, leaving Lehman the smallest of the remaining investment banks. Its stock drops precipitously.

“From a huge cast of characters, one man emerges as a tragic figure—Lehman chief executive Richard Fuld. He became obsessed with short sellers (traders who borrow and sell shares to profit from a future price decline), blaming them for spreading malicious rumors about Lehman instead of confronting the bank’s real weakness. That was one in a series of dreadful mistakes. With Fuld’s backing, Lehman president Joseph Gregory had pushed the bank into mortgages, commercial real estate, and leveraged loans. He put inexperienced managers in charge of those activities and got rid of specialists who warned of danger. Catastrophic losses from the real-estate slump were killing Lehman by 2008. Short selling the stock was a symptom rather than a cause of the disease.

“Sorkin recounts Lehman’s destruction, which occurred despite Fuld’s increasingly frantic efforts to raise capital or sell the company. Bank of America bought Merrill Lynch instead of Lehman, with the blessing of the Treasury and the Fed. A deal was worked out with Barclays Capital but scuttled at the last minute by British regulators, a debacle their American counterparts could almost certainly have prevented.”

Ms. Kurdas’ bottom line? It’s this:

“These events raise the question of why government agents can dispose of other people’s property. They certainly don’t seem to worry about preserving the value of businesses or reducing taxpayer liability.

“What’s the lesson in this? Unfortunately, Sorkin doesn’t make the big picture clear. The boom-and-bust happened because the Fed opened the floodgates to easy money. That’s what got everybody, from the second-mortgaged homeowner to Lehman Brothers, to leverage up. Our supposedly expert government players apparently never realized this: Their conceit that they know how to manage the economy is the root of our trouble.”

As Kurdas points out, “Books about the 2008 financial crisis keep coming.” But let me include an excerpt from page 186 of Sorkin’s book:

“But in 1999, under pressure from the Clinton administration, Fannie Mae 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 wouldn’t ordinarily qualify for them was an inherently risky business , as telegraphed by the New York Times the day the program was announced:

“In moving even tentatively, 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.”

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

Although Sorkin’s book has no reference to the notorious Community Reinvestment Act,  the above quote reinforces the bottom-line lesson that Ms. Kurdas makes.

Here's  the book's cover, and here's the the link to the book at the Barnes & Noble website.



TrackBack URL for this entry: