Too Big To Fail by Andrew Ross Sorkin

Too Big To Fail by Andrew Ross Sorkin was the inside story of the months leading up to the 2008 recession, marked by the filing of Chapter 11 bankruptcy by Lehman Brothers in September 2008. This was published a year after the recession, in 2009. It outlines the deals made to try to mitigate this crisis and the roles of government agencies, Wall Street banks, and companies, and various other power players. Interestingly, just months before total collapse, at an economic roundtable it was asked if the credit crisis would be a chapter of a footnote in our history books. Everyone agreed it would probably be a footnote (p304).

Since the 1990s, there was broad deregulation of financial institutions, such as repeal of the Glass-Steagall Act of 1933. As the push for homeownership grew, these institutions developed mechanisms to theoretically “de risk” their loans and investments, providing more homeownership opportunities to Americans, even those who could not afford it. The result was a more interconnected and risky financial system than any one person realized. The risky loans were packaged neatly alongside safe loans and mortgages (p152). As a result, some firms didn’t even know they were vulnerable to the losses which were later incurred. Firms that insured mortgages did not even originate them. They issued long term mortgages and financed them with short term paper; every time the mortgage lost value, which happened daily during the crisis, the firms lost money. Those who needed to pull their money from banks for their personal reasons were tied up with these illiquid mortgages that were, effectively, on paper but not real (p452). As people who could never afford their homes defaulted on their loans, it rippled across financial institutions to Wall Street and the world. 
 
The collapse came as a series of banks and companies one by one. Jamie Dimon, on a conference call on September 13, 2008 said “we need to prepare right now for Lehman Brothers filing…and for Merrill Lynch filing…and for AIG…Morgan Stanley…and potentially Goldman Sachs” (p26). Nearly all did. The collapse began and continued due to irresponsible lending practices, but economic sentiment played a tremendous role as well (p86); the lifeblood of the financial industry was, in large part, confidence. Some of the most difficult parts about mitigating the financial crisis were 1) not fully understanding how connected all of the institutions were 2) politically explaining how these insolvencies would impact Americans. In the end, each of the former Big Five investment banks failed, was sold, or was converted into a bank holding company. Two mortgage-lending giants and the world’s largest insurer were placed under government control. American tax payers became part owners in Wall Street. While the taxpayers “made” $4B in profit, $250B was given out via TARP and many Americans still couldn’t obtain a mortgage or a line of credit (p695). 

While the book discusses chronology and deals, it does not review the financial systems that led to this, impact to every day Americans, nor the macroeconomic ideas to justify the government response. I also would have appreciated a greater explanation of the short stock brokers. David Einhorn was quoted heavily in the book and, on Lehman, said “this is crazy accounting- the day before you go bankrupt is the most profitable day in the history of your company, because you’ll say all the debt was worthless. You get to call it revenue…and pay bonuses” (p153). I would've like to read more about that. 

Overall, I liked this book and the storytelling. I would like to read a book more focused on homeowners who lost their homes as a result of this crisis, as well as one explaining more of the lead up to the crisis. 

I actually finished this book and wrote the blog over a week ago, I just forgot to post. Oops!