About the Author
Andrew Ross Sorkin is the award-winning chief mergers and acquisitions reporter for The New York Times, a columnist, and assistant editor of business and finance news. He is also the editor and founder of DealBook, an online daily financial report. He has won a Gerald Loeb Award, the highest honor in business journalism, and a Society of American Business Editors and Writers Award. In 2007, the World Economic Forum named him a Young Global Leader. From The Washington Post
From The Washington Post's Book World/washingtonpost.com At 6:30 a.m. on June 6, 1944, U.S. forces began their assault on Omaha Beach as part of the Normandy landings. Casualties among the first wave were horrendous as infantry struggled out of their landing crafts, known as Higgins boats, under intense fire. Incredible acts of individual heroism and great leadership on the spur of the moment eventually saved the day, but not before chaos and death swept the sand. Combat historian S.L.A Marshall described Omaha Beach as "an epic human tragedy which in the early hours bordered on total disaster." At 11 a.m. on Sept. 15, 2008, Lloyd Blankfein pulled up in front of a Manhattan office building to continue working on a way to save his firm, Goldman Sachs. "I don't think I can take another day of this," one of his employees remarked. Blankfein shot back, "You're getting out of a Mercedes to go to the New York Federal Reserve. You're not getting out of a Higgins boat on Omaha Beach." Blankfein was right: Being a Wall Street banker in 2008 was nothing like being a soldier during the Normandy invasion. The financial crisis may have been a once-in-a-lifetime struggle for a group of very well-paid banking executives, but the hardships they endured were long hours, uncomfortable phone calls, and mediocre takeout food. The only thing that JPMorgan Chase and Goldman Sachs had in common with the U.S. forces was that, ultimately, they won: The Wall Street executives kept their jobs, their bonuses and their pensions; they benefited from unprecedented rule changes and unlimited monetary and fiscal support; and their firms became even bigger and more dangerous to the economic health of society. Stephen Ambrose retold the human dimensions of World War II in convincing and excruciating detail. Andrew Ross Sorkin is the Stephen Ambrose for our financial crisis, with the blow-by-blow story of how rich bankers fought to save the Wall Street they knew and loved. The details in "Too Big To Fail" will turn your stomach. The arrogance, lack of self-awareness, and overweening pride are astonishing. Sorkin puts you there -- you see events unfold moment by moment, you hear the conversations, you can sense the hubris. The executives of our largest banks ran their firms into the ground, taking excessive risks that even now they fail to understand fully. But, as these individuals saw it, unless they personally were saved on incredibly generous terms, the world's economy would grind to a halt. This is as compelling as it is appalling. Jamie Dimon, the astute, well-connected and ultimately victorious head of JPMorgan Chase -- a character whose development is revealed meticulously in Duff McDonald's "Last Man Standing" -- told his shareholders' meeting earlier this year that 2008 was probably the company's "finest year ever." He was talking about what you and I call the worst financial crisis since the Great Depression. Sorkin in his general narrative and McDonald in his biography are sympathetic to their protagonists, but the portraits that emerge are not encouraging. Perhaps for this reason, both shy away somewhat from a key point: You can blame the bankers all you want, but it is the government's job to prevent the financial sector (and anyone else) from holding or exercising this kind of power over us. Where was the government? By 2008, our executive and legislative branches had long been deep in bipartisan slumber, allowing vulnerabilities to build up in the form of overspending, rising consumer debt levels and lax (or nonexistent) protection for consumers against outrageous practices by the financial sector. This bigger picture is missing from Sorkin's and McDonald's blow-by-blow accounts, but it is a recurrent theme in "Past Due," by journalist Peter S. Goodman. We can quibble about the relative importance of some details -- such as the role of China's high savings rate in lowering global interest rates and feeding the American credit boom -- in Goodman's highly informative account. But there is no question that politicians either believed that crazy "financial engineering" created a sound basis for sustainable growth or just loved what the financial system could do for them at election time. And, as Sorkin relates, it is hard to escape the conclusion that the rhetoric regarding our supposedly free markets without government intervention just masks the reality -- that there is a revolving door between Wall Street and Washington, and powerful people bend the rules to help each other out. In an illustration of Wall Street clubbiness, Sorkin documents a meeting in Moscow between Hank Paulson, secretary of the treasury (and former head of Goldman Sachs), and the board of Goldman Sachs. As the storm clouds gathered at the end of June 2008, Paulson spent an evening talking substance with the board -- while agreeing not to record this "social" meeting in his official calendar. We do not know the content of the conversation, but the appearance of this kind of exclusive interaction shows how little our top officials care about public perceptions of favoritism. In saner times, this would constitute a major scandal. At moments of deep crisis, understanding what influences policymakers and having access to them can help a firm survive on advantageous terms. Goldman Sachs was saved, in large part, by suddenly being allowed to become a bank holding company on Sept. 21, 2008. Our most senior government officials determined that the United States must allow Goldman to keep its risky portfolio of assets, while offering it essentially unfettered access to cheap credit from the Federal Reserve. In rescuing a crippled investment bank, the Treasury created the world's largest government-backed hedge fund. In the face of these developments, Andrew Haldane, head of financial stability at the Bank of England, has become blunt about the way our banking system interacts with (and rips off) taxpayers. In a recent paper that represents the straightest talk heard from the official sector in a long while, Haldane puts it this way: The government may say "never again" to bailouts, but when faced with the choice to either "rescue big banks or allow the world economy to collapse," it will reasonably choose the route of rescue. But, knowing this, the people running our biggest banks have an incentive to take more risk -- if things go well, bank executives get the upside, and if there's a problem, the taxpayer will pick up the check. If a financial sector boss wants greater assurance of a bailout, he or she should make bigger and potentially more dangerous bets -- so the government simply cannot afford to let that bank fail. This, Haldane argues, is our "doom loop" -- big banks know they can get away with the same behavior (and more) again, and we are doomed to repeat the same boom-bust-bailout cycle. A long time ago, President Andrew Jackson's private secretary, Nicholas Trist, described the Second Bank of the United States, the last financial institution to seriously challenge the power of the president, thus: "Independently of its misdeeds, the mere power, -- the bare existence of such a power -- is a thing irreconcilable with the nature and spirit of our institutions." Unless and until we break the political power of our largest banks, the middle class will be hammered down. Whose taxes do you think will be raised to reflect the costs of repeated financial shenanigans? The financial sector will become even richer and more powerful. If you didn't like where inequality in the United States was already heading, wait until you see the effects of this recession. The most significant result of the financial crisis is the emergence of six large banks that are undoubtedly too big to fail and therefore enjoy a strengthened government guarantee; Goldman, JPMorgan, Citigroup, Bank of America, Wells Fargo and Morgan Stanley are the beneficiaries of the doom loop. The most significant non-result is the fact that no comprehensive legislation has yet been passed to reform the financial sector. Without really serious reform, we have every reason to start counting down to the next financial crisis, and to the next fleet of Mercedes lining up before the New York Fed.
Copyright 2009, The Washington Post. All Rights Reserved.
Excerpt. © Reprinted by permission. All rights reserved.
PROLOGUEStanding in the kitchen of his Park Avenue apartment, Jamie Dimon poured himself a cup of coffee, hoping it might ease his headache. He was recovering from a slight hangover, but his head really hurt for a different reason: He knew too much.
It was just past 7:00 a.m. on the morning of Saturday, September 13, 2008. Dimon, the chief executive of JP Morgan Chase, the nation’s third largest bank, had spent part of the prior evening at an emergency, all-hands-on-deck meeting at the Federal Reserve Bank of New York with a dozen of his rival Wall Street CEOs. Their assignment was to come up with a plan to save Lehman Brothers, the nation’s fourth-largest investment bank—or risk the collateral damage that might ensue in the markets.
To Dimon it was a terrifying predicament that caused his mind to spin as he rushed home afterward. He was already more than two hours late for a dinner party that his wife, Judy, was hosting. He was embarrassed by his delay because the dinner was for the parents of their daughter’s boyfriend, whom he was meeting for the fi rst time.
“Honestly, I’m never this late,” he offered, hoping to elicit some sympathy.
Trying to avoid saying more than he should, still he dropped some hints about what had happened at the meeting. “You know, I am not lying about how serious this situation is,” Dimon told his slightly alarmed guests as he mixed himself a martini. “You’re going to read about it tomorrow in the papers.”
As he promised, Saturday’s papers prominently featured the dramatic news to which he had alluded. Leaning against the kitchen counter, Dimon opened the Wall Street Journal and read the headline of its lead story: “Lehman Races Clock; Crisis Spreads.”
Dimon knew that Lehman Brothers might not make it through the weekend. JP Morgan had examined its books earlier that week as a potential lender and had been unimpressed. He also had decided to request some extra collateral from the firm out of fear it might fall. In the next twenty four hours, Dimon knew, Lehman would either be rescued or ruined.
Knowing what he did, however, Dimon was concerned about more than just Lehman Brothers. He was aware that Merrill Lynch, another icon of Wall Street, was in trouble, too, and he had just asked his staff to make sure JP Morgan had enough collateral from that firm as well. And he was also acutely aware of new dangers developing at the global insurance giant American International Group (AIG) that so far had gone relatively unnoticed by the public—it was his firm’s client, and they were scrambling to raise additional capital to save it. By his estimation AIG had only about a week to find a solution, or it, too, could falter.
Of the handful of principals involved in the dialogue about the enveloping crisis—the government included—Dimon was in an especially unusual position. He had the closest thing to perfect, real-time information. That “deal flow” enabled him to identify the fraying threads in the fabric of the financial system, even in the safety nets that others assumed would save the day.
Dimon began contemplating a worst-case scenario, and at 7:30 a.m. he went into his home library and dialed into a conference call with two dozen members of his management team.
“You are about to experience the most unbelievable week in America ever, and we have to prepare for the absolutely worst case,” Dimon told his staff. “We have to protect the firm. This is about our survival.”
His staff listened intently, but no one was quite certain what Dimon was trying to say.
Like most people on Wall Street—including Richard S. Fuld Jr., Lehman’s CEO, who enjoyed one of the longest reigns of any of its leaders—many of those listening to the call assumed that the government would intervene and prevent its failure. Dimon hastened to disabuse them of the notion.
“That’s wishful thinking. There is no way, in my opinion, that Washington is going to bail out an investment bank. Nor should they,” he said decisively. “I want you all to know that this is a matter of life and death.
I’m serious.”
Then he dropped his bombshell, one that he had been contemplating for the entire morning. It was his ultimate doomsday scenario.
“Here’s the drill,” he continued. “We need to prepare right now for Lehman Brothers fi ling.” Then he paused. “And for Merrill Lynch filing.” He paused again. “And for AIG fi ling.” Another pause. “And for Morgan Stanley filing.” And after a final, even longer pause he added: “And potentially for Goldman Sachs filing.”
There was a collective gasp on the phone.
As Dimon had presciently warned in his conference call, the following days would bring a near collapse of the financial system, forcing a government rescue effort with no precedent in modern history. In a period of less than eighteen months, Wall Street had gone from celebrating its most profitable age to finding itself on the brink of an epochal devastation.
Trillions of dollars in wealth had vanished, and the financial landscape was entirely reconfigured. The calamity would definitively shatter some of the most cherished principles of capitalism. The idea that financial wizards had conjured up a new era of low-risk profits, and that American-style financial engineering was the global gold standard, was officially dead.
Reprinted by arrangement with Viking, a member of Penguin Group (USA) Inc., from Too Big to Fail by Andrew Ross Sorkin. Copyright © 2009 by Andrew Ross Sorkin.
