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Monday, April 12, 2010

BOOK REVIEW: Too Big To Fail

Too Big To Fail -- Andrew Ross Sorkin -- 539 pages (600 with notes and index)

Too Big To Fail is one of many books written by financial journalists in the aftermath of the series of financial crises that hit world markets in 2008. Andrew Ross Sorkin, a daytime reporter for The New York Times, begins his book with an "Author's Note" explaining that much of the content comes from interviews with over 200 direct participants in the events. He further notes that most of the participants refused to allow direct attribution of their comments due to the blizzard of outstanding civil and criminal investigations impacting many of the participants and firms. That's a nice way to put it.

With virtually zero written documents for reference, Sorkin doesn't help matters much with his writing style. Like Bob Woodward, he relies on needlessly detailed expositions of people's inner thoughts and motivations, such as this opener to Chapter 11:

Robert Wilhumstad could feel the perspiration begin to soak through his undershirt as he strode along Pearl Street at 9:15 a.m. on Tuesday, July 29 in Manhattan's financial district. Although the humidity was oppressive that summer morning, he was anxious about his upcoming appointment with Tim Geithner at the Federal Reserve Bank of New York.

These types of "inside the head" narrative details might make it easier to humanize some of the characters and tie the narrative together but seem inappropriate at best when regurgitating weeks of daily print stories into a full length book. Of course, a more detailed analysis of the real numbers and deal terms would have taken much more work.

Much of the book reads like a long, disjointed hodgepodge of Post-Its notes randomly taken from people's day planners, Wikipedia biographies, and a few chapters of Ulysses. The effect upon the reader is somewhat akin to

Lorem ipsum dolor sit amet, Dimon consectetuer adipiscing elit. Phasellus non erat eu dui old friend from Dartmouth dignissim dictum. Integer iaculis napping in the back of his Gulfstream nulla at nisl. Proin ut enim non ipsum varius former banker at Goldman Sachs laoreet. Integer feugiat, ante fringilla blandit convallis, leo sapien egestas (F-bomb) velit, non condimentum nulla sem vitae risus. Mauris aliquam planning to borrow $5 million for the $6.4 million space auctor quam. Sed ac enim. Donec mattis dui id ligula. Integer vel sem eget ante cursus tristique. Nullam vel orci vitae Lehman Brothers sem interdum placerat. In eget lectus. Donec blandit. Quisque lacus urna, malesuada vel, Sullivan & Cromwell mollis sit amet, rutrum nec, est. Proin blandit ornare nibh. Duis et felis. Lorem ipsum dolor sit amet, consectetuer adipiscing elit. Phasellus non order to appear at the New York Fed erat eu dui dignissim dictum. Integer iaculis nulla at nisl. Proin ut enim non ipsum varius laoreet. Integer feugiat, ante fringilla How about $700 billion? blandit convallis, leo sapien egestas velit, non condimentum nulla sem vitae risus. Mauris aliquam Flowers and Fox-Pitt would earn a combined $20 million in fees auctor quam. Sed ac enim. Donec mattis dui id ligula. Integer vel sem What kind of protections can you give us on changes in compensation policy? eget ante cursus tristique. Nullam vel orci vitae sem interdum placerat. In eget lectus. Donec blandit. Quisque We're screwed lacus urna, malesuada vel, mollis sit amet, rutrum nec, est. Proin blandit ornare nibh. Duis et felis.

So what -- if anything -- does come from a read of Too Big to Fail?

After following the flurry of references to emergency meetings, private jet flights of CEOs to Fed offices, frantic calls between regulatory agency heads, and profanity laced diatribes from CEOs about press stories triggering panics in the market, one common theme begins to emerge from the chapters.

No one --- ABSOLUTELY NO ONE -- involved with the firms that collapsed, the firms forced at gunpoint to hide the collapse of the failing firms, the regulators attempting to right the ship or the politicians signing away billions of taxpayer dollars had a clue what was really happening, why it was happening, and how severe the problems were or might become. Once that reality sinks in, a more important point becomes evident. The odds of the multiple $50 billion dollar shotgun marriages and $700 billion dollar TARP infusions mitigating or curing any underlying problem with the financial system are nil. They may have deferred the reckoning but cured nothing.

How haphazard was the thinking during the heart of the financial crisis? It's an interesting exercise to skim Too Big To Fail and jot down the date and time of each not-so-subtle matchmaking attempt or outright frantic plea from government players to a major bank to buy up some other failing bank. It takes some doing due to Sorkin's unwillingness to provide any exact calendar date reference for PAGES at a time but here's the picture that emerges:


7/21/2008 -- private meeting between Lehman CEO Fuld and BoA CEO Lewis at NY Fed arranged by Paulson and Geithner (page 204)

9/8/2008 -- three calls from Treasury assistant Ken Wilson to Dick Fuld encouraging talks with BofA (page 240)

9/10/2008 --- Geithner calls Bob Diamond of Barclays to encourage him to call Fuld of Lehman (page 261)

9/17/2008 -- Kevin Warsh of Fed calls CEO Steele of Wachovia encouraging him to call CEO Mack of Morgan Stanley to arrange a deal

9/20/2008 -- Geithner calls CEO Blankfein of Goldman demanding he call CEO Pandit of Citigroup regarding a Goldman purchase of Citigroup (page 457)

9/20/2008 -- Warsh of the Fed calls CEO Steele of Wachovia suggesting he call CEO Blankfein of Goldman regarding a merger (page 459)

9/20/2008 -- Geithner calls CEO Dimon of JPMorgan directly suggesting JPMorgan purchase Morgan Stanley and also calls CEO Mack of Morgan Stanley encouraging him to take the call (page 461)

9/20/2008 -- after no success with Goldman + Citigroup or JPMorgan + Morgan Stanley, Geithner encourages Morgan Stanley + Citigroup (page 462)

9/21/2008 -- Paulson calls Wachovia board member Joseph Neubauer during a Wachovia board meeting to encourage the board to take a Goldman merger deal (page 475)

9/21/2008 -- after the collapse of current deal talks on Goldman + Wachovia, Paulson calls CEO Dimon pushing a JPMorgan + Morgan Stanley deal to save MS. (page 478)

9/21/2008 -- Paulson, Geithner and Bernanke JOINTLY call CEO Mack urging him to close a deal with JPMorgan before markets open on Monday 9/22. (page 480)

9/21/2008 -- in the span of seven minutes, Geithner, then Paulson, then Geithner again call CEO Mack to push a JPMorgan deal while he's in the middle of negotiations with Mitsubishi to obtain a $9 billion dollar infusion which eventually was approved that evening, saving the firm (page 482)


The blue ribbon in the This! No THAT! No STOP! No HURRY! insanity sweepstakes has to be the deal struck under the watchful eye of the Fed, Treasury and the FDIC allowing Citigroup to gobble up Wachovia. Actually, they didn’t so much as "allow" Citigroup to gobble up Wachovia, they demanded Citigroup absorb Wachovia and its first $42 billion in losses for $1.00 per share. FDIC Chair Sheila Bair actually called Wachovia CEO Bob Steel at 4:00am September 29, 2008 to personally inform him of the sale. By 9:00pm the same day, after watching the first TARP proposal go down in Congress like the Hindenburg, a panicked Treasury and Fed changed their minds and allowed Wells Fargo to submit a new bid for Wachovia and instantly granted approval to the new deal, despite Citigroup committing $4.9 billion to its soon-to-never-be new affiliate in the form of emergency liquidity loans. Bair wound up calling Citigroup CEO Pandit at 1:00am on 9/30 to wake him up and tell him the government had just allowed a competitor to steal the lunch literally off his plate.

Of course, one other theme emerges if you haven't fallen asleep from the litanies of meetings, CEOs, lawyers and "deal guys." Potential conflicts of interest abounded throughout the entire fiasco.

* Treasury hired Morgan Stanley as adviser in handling the Fannie / Freddie meltdowns (page 210)

* Legal work for the takeover of Fannie and Freddie was farmed out by Treasury to the law firm Wachtell, Lipton, Rosen & Katz which had previously assisted JPMorgan in the March 2008 takeover of Bear Stearns. (page 223)

* Law firm Sullivan & Cromwell was hired by AIG for M&A consulting. The firm's own website indicates its client list includes BofA, Barclays, Goldman Sachs, JPMorgan Chase, Morgan Stanley and UBS.

* The Federal Reserve hired Morgan Stanley to provide opinions on AIG bailout terms (page 387)

* After Lehman provides a confidential brief to Treasury on 9/9 that they would lose $3.9 billion, a call from Goldman Sachs is made to Treasury is made in less than one hour offering to "help" (page 237)

Sorkin spends virtually zero time analyzing any such potential conflicts. However, one of his "inside the head" narratives on page 413 implies that Hank Paulson only grasped the true systemic risk at hand after the Lehman BK and BoA deal for Merrill Lynch. Within a day, the market had moved on to panic over AIG defaults, putting pressure on both Morgan Stanley and his beloved Goldman Sachs. The implication being that "if GOLDMAN is in trouble, well, harrumph, this IS different and we can no longer be high and mighty about moral hazard -- we must ACT boldly and decisively."

After completing the entire book, one can't help but go back and re-read the author's introductory note. In doing so, the real story becomes clear. Namely, that virtually nothing is understood by any of the players about:

* the exact inter-relationships between the blizzard of complex financial contracts between megabanks
* the exact dollar values of failures the system could and could not survive
* what sequence of unwinding transactions could provide any reduction in systemic risk
* which remedial actions helped, which actions hurt and which had no effect whatsoever
* who will eventually emerge as hero and goat from the entire period

The result is that none of the players yet want to risk burning any bridges by providing dirt on anyone who still might emerge as a hero and no one wanted to accidently add any information confirming their own potential role as goat.

Maybe the books on Financial Meltdown Round II will be more entertaining. It's already clear the actual plot will be identical.