Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System and Themselves
By Andrew Ross Sorkin
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The Most important risk is systematic: if this dynamic continues unabated, the result would be a greater probability of widespread insolvencies, severe and protracted damage to the financial system and, ultimately, to the economy as a whole” -- Timothy Geithner
The quotation above by Timothy Geithner, then head of the New York branch of the Federal Reserve in 2008, strikes at the heart of the finical crisis of 2008 and the severe consequences it posed for our nation’s economy. The economic recession that struck the global financial system was a historic and unparalleled crisis that challenged the bedrock of modern finance. It was a global recession that hit not only the United States but also every country that was exposed to the global banking system, a now essential and interconnected element of every developed economic nation. Dubbed by Ben Bernanke, Chairman of the United States Federal Reserve, as the worst economy since the great depression, the economic downturn in 2008 had far reaching and lasting effects that resulted in stunning losses not only on Wall Street, but Main Street as well. As an academic, and student of the Great Depression of the 1930’s, Bernanke was well aware of the stunning similarities between the then current declining situation and the era that crumpled the country for a decade. The turmoil of 2008 facilitated marked changes across the financial as well as governmental systems that would forever alter the business landscape within America.
Sorkin’s “Too Big to Fail” is an expertly written chronicle of the 2008 financial crisis: in particular the institutions and individuals who had leading roles in both its downfall as well as salvation. The book is above all a chronicle of human folly and the incredible mistakes made not only within this short window of 2008, but throughout the past 30 years of American business. The first and most essential aspect of understanding this book; and an element which Sorkin does well to point out; is how the crisis was not created or caused by events in 2008, but was the culmination and synthesis of a myriad of different factors that had been created for the better part of three decades. If one can learn anything form this book it is that there is no one element, no one smoking-gunthat can be attributed to the crisis of 2008; but a combination of complex and interconnected factors. The unprecedented growth or boomof the US economic system during the 80’s & 90’s laid the foundation for much of the 2008 recession. The US economy was on the rise, credit was flowing and mortgage industry was seeing incredible growth. With governmental pressure to promote homeownership and relaxed lending standards, the home mortgage industry was steering itself into a massive hole. No where was this rise to profitability more prevalent than within the financial services industry, by 2008 it has ballooned to more than 40% of corporate profits in the United States. (Sorkin, p. 3) It was a Wealth-creation machine known for large salaries and even larger risks. This rise is what marks the beginning of the many interrelated themes Sorkin highlights within the book.
The key characteristic of Sorkin’s book, a compilation of interviews and research, is that is flows chronologically; starting with the collapse and eventual sale of Bear Stearns to JP Morgan in March of 2008 all the way to the enactment of the government’s TARP (Troubled Assets Relief Program) in October. Although it was difficult at times to understand the multitude of events occurring so quickly and simultaneously; this calculated decision by Sorkin was critical to demonstrating the overwhelming nature of the period. The individuals facing these challenges were met with an ever-shifting landscape that would change daily if not hourly; their decisions were imperfect, but how could they not be -- they were simply doing the best they could during a terrible situation. As for the content of the book; it explains the rise and then fall of the interconnected banking system though the eyes of the people living through the crisis. The book highlights the complex financial instruments, risky lending practices, risk consolidation, leverage, asymmetric information as well as the many other factors that lead to the crash; however, Sorkin goes beyond simple description and does his best to distinguish to broader stokes of the crisis by placing it within the larger context of human decision making. Such terms as moral hazard and irrational exuberance are used to describe the key drivers of human error that lead to economy astray. (p. 33) For in the end, it was not financial products or lending standards that lead to the crisis of 2008, its was individual’s misguided decision making to use these complex instruments or sign off on a risky loan that truly lies at the heart of the crisis. The economy was not an autonomous decision maker; it was individuals who shepherded it into failure. The most important dynamic explored within Too Big to Fail, was the role of the government within these uncertain times, and its responsibility to protect the financial system. Never before in history had the government’s regulatory agencies played such an important and active role within the American economy. The fundamental characteristics of capitalism and a free market economy were severely challenged; some financial institutions had become so large and so integral to the rest of the system that letting them fail was simply not an option. What had started on Wall Street had become an epidemic of confidence all across the economy. This loss of confidence within the financial system is one of the few week points in the book; Sorkin does not fully explain the paralyzing consequences that a loss of confidence had on the system. The economy is not simply a machine that runs on tangible assets, it’s a larger symbiotic organism that relies on the hypothetical and theoretical relationships created by a collective trust in the system. Perception became the reality, and the economy stumbled. This relationship between Wall Street and Washington; and the interplay between the parties has forever shaped our nation. While many books have been written about the crisis, its origins and its ramifications; no other book offers such substantive insight into this brief period of time that will continue to guide the US economic system. Sorkin recreated the twelve months of 2008 that will most likely shape the economies path for the next twenty years. The crisis shook free many of the false realities our nation had about wealth creation and forced us to take a harsh self-evaluation of who we are as a country and what choices we are making. It pushed us to face the uncomfortable reality that we have serious challenges ahead of us, and that we can no longer afford to live blissfully unaware to the consequences of our actions. Our nations’ fanatical drive towards material wealth must come to an end; the 2008 crisis is evidence of that.
Too Big To Fail, is a delightful read that presents the details of the crisis in a manageable and tangible manner. But by far its strongest quality was its ability to truly create the individuals who had to face these epic challenges and make decisions that would impact not only the United States, but also the world at large. It truly is an illumination of human discourse, reasoning, ineptitude and brilliance; and how the leaders of the financial system coped with the potential destruction of our economy and how they lead their companies and the nation to a more stable place. The book constructed a window into the past for us to understand how the decisions were made and where adversities arose. I became intimately connected to the characters and the firms; griped by the books consistent flow and steady stream of relevant information. Sorkin does a wonderful job of constructing the larger contextual framework in which these decisions were made. It presents the reader with meaningful questions and timely opportunities to evaluate what they have read and what it means to them within everyday life. Well written and gripping, I would recommend this book to anyone interested in finance, as well as to anyone engrossed with the future of our nation and our economic system. Sorkin does not harp upon financial instruments or paint a morbid picture of egotistical bankers running wild; but fairly presents the crisis in a context that is significant to any reader, i.e. ‘where do we go from here’?
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Editorial Staff
