"Too Big To Fail"

I recently read Andrew Ross Sorkin's book "Too Big To Fail". "Too Big To Fail" is "The inside story of how Wall Street and Washington fought to the save the financial system-and themselves". The book provides the details the events that occurred during the most intense period of the recent financial crisis from the failure of Bear Stearns in March 2008 through the agreement of nine major financial companies to take TARP funds from the US government in October 2008 in order to stabilize the US, and the world's, financial system. I recommend that anyone that is interested in this topic read "Too Big To Fail". Andrew Ross Sorkin has done all of us a favor with the detailed research and extensive writing that were required to tell the story in a very detailed, informative and entertaining manner.

Many people, including myself, watched the US government, the Federal Reserve and all the companies involved deal with the crisis in real time during 2008 and subsequently. I am sure most of us have asked ourselves if the people involved in making the decisions, including President Bush, the Congress, Hank Paulson - Secretary of the Treasury, Ben Bernanke - Chairman of the Federal Reserve, and Tim Geithner - President, Federal Reserve Bank of New York, made the best decisions that could be made under the circumstances. After reading "Too Big To Fail" and having previously read David Wessel's book, "In Fed We Trust" (see separate article on www.thepurplemuse.com), I have concluded that the decision-makers made the best decisions they were capable of making under the circumstances that existed at that time. When one looks at the background of the decision-makers, the information they had available to make decisions and the intensity of the pressure placed on them to deal with the circumstances, we could not have expected any better outcome than what took place. The reality is that the financial crisis was contained by their actions. Even though there were further issues that had to be addressed and the most optimum results were not immediately achieved, one has to acknowledge that a reasonable outcome has been obtained from the financial system chaos that was in play at the time.

One of the most interesting sections of the book is the Epilogue. Andrew Ross Sorkin looks back at the entire period of the crisis including the events of late 2008 and early 2009 and reflects on what has occurred. I believe he is very fair in his judgements concerning what went right and wrong about the entire process and the decisions that were made during the most intense period of the crisis. The Epilogue concludes with a recounting of a communication from Jamie Dimon, Chairman and CEO of JP Morgan Chase, to Hank Paulson during the post-bailout debate. Dimon sent a note to Paulson with a quote from a speech delivered by President Theodore Roosevelt in April 1910. The quote includes the following phrase, "It is not the critic who counts: not man the man who points out how the strong man stumbles or where the doer of deeds could have done better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood, who strives valiantly, ... if he fails, at least he fails while daring greatly, so that his place shall never be with those cold and timid souls who knew neither victory nor defeat." Paulson, Geithner, Bernanke and many others were in "the arena" during this turbulent period. I fully appreciate the reference to Roosevelt's speech having been in "the arena" myself during my business career. It is very difficult for people that have never attempted to accomplish extremely difficult tasks in a highly visible environment to appreciate the challenge of delivering an optimal outcome while performing in "the arena".

After reading "Too Big To Fail", "In Fed We Trust" and extensive amounts of commentary on the financial crisis I have a few thoughts of my own that are summarized below:

Lehman Brothers deserved to go bankrupt due to the failures of its inept management team. It is unfortunate that many employees lost their jobs and their Lehman stock became worthless, but the company made extremely bad decisions and fully merited its ultimate outcome.

Where was Tim Geithner and the NY Federal Reserve Bank team during the development of the real estate bubble? It appears Geithner failed to execute his job effectively and his failure directly impacted the intensity of the crisis. How could he possibly been rewarded with his position as Secretary of the Treasury in the Obama administration? Geithner was clearly an essential player in the rescue of the financial system after the crisis was fully engaged, but he failed to execute his job during the development of the crisis.

Any economic losses that were incurred by employees or investors in major financial companies were fully deserved due to the failure of the financial community to learn from its mistakes in the late 1990s and early 2000s. The debt leverage incorporated into the business strategy of many financial companies was beyond rational thinking. It appears that very few of the big firms learned their lessons from the Internet bubble and were able to apply those lessons to the consumer and commercial real estate markets. The senior level risk managers that were hired after the Internet bubble either failed to do their jobs or were ignored by the most senior executives on Wall Street. The big firms were willing to ignore the huge risks they were taking in pursuit of profits from marginal business activity. Wall Street demonstrated that extremely smart people can be blinded by personal weaknesses and greed.

The bond ratings firms that make judgements on the viability of various forms of debt are not credible businesses. It is clear they can't make effective judgements on complex financial instruments. Their motivations are more alligned with the sellers than the buyers preventing them from honestly appraising true investment risk.

US government agencies can't regulate Wall Street effectively. Wall Street is simply too complex and moves too fast for the government to halt the momentum of major trends. The 2010 FinReg bill that recently was enacted will do very little to address the majority of big issues that created the financial crisis. Congress and the Obama administration has not fully addressed the "Too Big To Fail" issue. This is another example of how our government talks a good game but fails to deliver appropriate legislation when needed.

The financial crisis ended with fewer large financial institutions then at then existed at the start of the crisis. The problem of "Too Big To Fail" has simply gotten worse, not better, as our financial industry has significantly consolidated during the past two and one half years. In order for systemic risk of the financial industry to be reduced, the existing giant financial companies must be broken up into smaller institutions that are not interconnected through shared risk. Will Wall Street soon forget this crisis and create another financial bubble in the next few years that will put the system at risk again?

"Too Big To Fail" is a book everyone that cares about their own personal assets should read. No one is working for the benefit of the individual investor. Wall Street wants your money from fees of all types and will sell investors garbage securities if they can get a fee for selling them. Wall Street has allowed its greed to overwhelm its judgement. The Federal government doesn't really care about financial responsibility as evidenced by its willingness to run massive fiscal deficits, build up a gigantic federal debt, and inability to perform its obligations under existing laws. We don't need any more laws and regulations. We need to effectively enforce the laws and regulations that currently exist.