"Too Big to Fail" by Andrew Ross Sorkin

Above: "Too Big to Fail, The Inside Story of how Wall Street and Washington Fought to Save the Financial System - And Themselves" - Andrew Ross Sorkin - 562 Pages.

I completed reading this book today.

This book, first published in 2009, right after the end of the 2007/2008 financial crisis, was reissued in 2018 by publisher, Penguin. I saw the book at Barnes and Noble in Sugarhouse... and, bought it. This was my first read of the book.

Sorkin's narrative covers the period from September 2008 to February 2009. In the span of just a few months, the shape of Wall Street and the global financial system changed almost beyond recognition. Each of the former Big Five investment banks failed (Lehman Brothers), was sold, (Bear Stearns, Merrill Lynch) or was converted into a bank holding company (Goldman Sachs, Morgan Stanley). Two mortgage-lending giants (FNMA, FHLMC) and the world's largest insurer (AIG) were placed under government control. And, in early October, 2008, with a stroke of the president's pen, the Treasury - and, by extension, American taxpayers - became part owners in what were once the nation's proudest financial institutions, a rescue (TARP) that would have seemed unthinkable only months earlier.

"Too Big to Fail" is not an analysis of how and why the financial crisis occurred. Don't read it to find what a credit default swap is. Rather the book is a "fly on the wall" narrative of the encounters and exchanges between the major players from the government and the banks they regulate. We read of how real people in positions of power dealt with the mounting, day to day imminence of bank and financial institution failures and the threat of such failures to the integrity of the global financial system.

Former Goldman Sachs CEO Henry Paulson, Secretary of the Treasury, and, the chief government protagonist in the crisis, threw up into a waste basket on two occasions so much was he stressed by his "buck stops here" responsibility to prevent world financial catastrophe.

Dick Fuld, CEO of Lehman Brothers, seemed to be in an alternative universe of denial as his institution became the only large institution in the crisis allowed to fail.

Bob Willumstad, CEO of AIG, was philosophical, unstressed and accepting when government regulators determined he had to be fired in return for the government's shoring up the insurance giant's capital base with $80 billion of taxpayer funds.

Dick Kovacevich, CEO of Wells Fargo was livid for being forced to accept $25 billion of capital from the $700 billion TARP program. Maybe the other banks were troubled and needed the money, said Kovacevich in so many words, but not his bank. Kovacevich felt he was being forced to participate in a program where his weaker competitors were being given a leg up to compete with Wells.

Conversely, Vikram Pandit, CEO of the bigger, but weaker, Citi, called a colleague after the now famous nine CEO TARP meeting, and expressed his elation at getting $25 billion from the taxpayer. By the end of 2009, the government would own almost 40% of walking dead Citi.

In early 2008, Bank of America (B of A) purchased iconic, but troubled, retail investment bank Merrill Lynch. With the benefit of hindsight (?) Merrill was further gone than B of A CEO Lewis disclosed, yet B of A stuck with a price to Merrill that was (some hindsight here) a huge over payment. Was Lewis under pressure from government regulators in those troubled times to push forward...to save the financial system by "taking one for the team?" Just before the purchase was consummated, Merrill paid its top people huge bonuses!!!! Lewis later lost his job for this bad (heroic?) judgement call.

..... and so many more inside stories!

Bishop's interest in the page turning book was piqued by his direct familiarity with some of the players.

During the early 1980's, Bishop was a two down report to Wells CEO Dick Kovacevich when Dick ran the Overseas Consumer Banking Group for Citi. At the time, Bishop was Consumer Business Manager for Citi in Japan.

In 1995, Bishop was CEO of American Savings of Florida (ASF), a NYSE, publically traded thrift based in Miami, FL. To affect a 1995 sale of the bank, ASF's board hired Goldman Sachs who was represented by investment banker Chris Flowers.

At the time of the 2008/09 financial crisis, Chris ran a successful private equity firm that invested in financial assets. His role in the financial crisis as a potential investor, a company adviser (AIG, Merrill), an issuer of fairness opinions is chronicled throughout the book.

At ASF, Bishop had quite a few interchanges with Chris Flowers. The independent committee of ASF's board, much to Chris' (not to mention the supervising regulator's and principal shareholder Enstar bankruptcy trustee's) surprise, formally rejected the first offer for the bank by First Union corporation.

Chris came into my office after this "fail" to pick my brain as to what went wrong. "Your, a builder, not a seller, aren't you, Steve?" he asked. In fact, Chris was on to something. ASF management, working with the advisor to ASF's independent board committee, Bear Stearns, had built a competing internal growth plan that effectively "beat out" the price offered by First Union for the bank.

A week or so later, First Union upped its bid by 2% or 3%, and the deal was accepted by all directors. "Building" ASF was not to be.. but, at least assertive management initiative resulted in getting the price up, benefiting all shareholders, and, not just the bankruptcy trustee majority owner.

ASF purchaser First Union was later purchased by Wachovia, which, itself, troubled by 2009, was purchased by Wells Fargo... so ASF, albeit in disembodied corporate form, ultimately ended up at Wells... a bit of a coincidence considering Bishop's acquaintance with Wells CEO Dick Kovacevich when they were both with Citi in the mid '80's.

There is an interesting segment in the book about Chris Flowers' relationship with Treasury Secretary Henry Paulson when both were at Goldman.

Paulson hated Flowers, and the antipathy was mutual. They had been feuding for years, ever since Paulson, when CEO of Goldman Sachs, had passed over Flowers for the top job of running Goldman's investment banking division, back when the firm was planning to go public.

Flowers - who was given to telling his peers that Paulson was an "idiot" - quickly left the firm. Paulson told him that his decision to quit, coming as it did at the critical time of the IPO, was a "disgrace." Flowers was bought out of the partnership ahead of the offering, but when the IPO was canceled, he made overtures about trying to return to the firm. That conversation ended in a near-shouting match.

But, I digress.

For me, apart from the compelling narrative about the main actors interacting to stave off financial Armageddon, the principal insight coming from this book is the extent... the breath and depth... of the US government's involvement in the financial system.

In various guises of regulation, the US government sets rules for financial institutions to follow and has various statutory mechanisms to enforce those rules.

I know this first hand. In the early '90's American Savings of Florida, where I was CEO between 1991 and 1995, was under a near maximum statutory regimen overseen by federal banking regulators. During that troubled period, there were very few things I could do with the bank sans getting permission from regulatory authorities.

Communicate with the Feds.... and then communicate more... was the watch cry for my own ASF CEO stewardship. I got my way most of the time, but not without a lot of stroking and persuading... and, very occasionally, push back.

A troubled three billion dollar thrift like ASF is one thing...but, what happens when a crisis of such magnitude occurs that government regulatory officials, to prevent financial system collapse, are forced to take remedial steps that go beyond the statutory?

If five of the nation's ten largest financial institutions are close to becoming bankrupt... and if the other five are stressed to the point that their heading in the direction of bankruptcy, what do government regulators do? "To Big to Fail" answers that question for the 2008 financial crisis.

Basically, the regulators, in the case of the 2008 financial crisis, but for one bank, Lehman Brothers, bailed the rest of the financial institutions out. By March of 2009, over a trillion dollars of taxpayer funds had been set aside to deal with the financial crisis.

But, what are the implications of "too big to fail?" Won't a management end up taking more risk if they know that a government bail out safety net will be there to protect shareholders when they (management) err? Sorkin doesn't answer this question, but he does a great job in spelling out the dilemma for policy makers, regulators, bankers and tax payers.

If you're a believer in the free market system, recognize that what we have in our financial system today is not that. We have a quasi nationalized financial system where the largest amongst the financial institutions are increasingly accountable to government in return for government's protection when they err.

The little guys (small, regulated financial institutions) are out there on their own... having to adhere to the same onerous supervision and regulation as the bigs... but, not benefiting greatly, other than statutory deposit insurance for their depositors, from government largess when they err. Fair? Not so much.

Want to experience the excitement and tension of the financial crisis first hand? Read this book. Your right there on the speaker phone.. with Henry Paulson, Tim Geithner, Dick Fuld, Dick Kovacevich, Jamie Dimon, and Chris Flowers. Page turner.