In 2008, the US economy was on the brink of collapse, and huge banks, which seemed firm and stable, began to crumble. Two of the big five US investment banks Bear Sterns and Lehman Brothers declared themselves bankrupt (Erdem, 2020). Two mortgage giants Freddy Mac and Fanny Mae were urgently rescued by the state, as well as the country’s largest insurance company, American International Group. All this led to massive falls of smaller banks, total devastation in the economy, and mass hysteria of bankers (Larres & Wittlinger, 2019). The documentary thriller, written by the New York Times resident Andrew Ross Sorkin, allows one to look behind the scenes of the worst economic crisis since the Great Depression. It gives answers to many questions and helps readers understand what has happened to banks that were “too big to fail”.
Looking at the title, one might think that this is non-fiction, but this book is quite a work of fiction. The double meaning in the title conveys the main message in the best possible way. The collapse of some corporations in the world economy seemed impossible in the eyes of both investors and economists since they were too huge, too reliable, and too stable (Erdem, 2020). Therefore, investors and ordinary people were keeping their money in those banks, and economists just hoped that these giants would survive (Larres & Wittlinger, 2019). Directors found themselves in a unique position: whatever they did, whatever mistakes they made, they were sure that authorities would help them in any case.
Too Big to Fail is an ironic name that means that if someone has more than $ 600 billion in assets, it is impossible to go broke. This is a detailed and scrupulous attempt by journalist Andrew Ross Sorkin to recreate the chronology of those events. The events of the book start twelve years ago: back in 2008, the entire world economy was shocked by the global financial crisis. The largest investment banks filed for bankruptcy, and gradually the AIG, the insurance company that had thousands of insurance policies for ordinary Americans, residents of the country, and large banks, started to sink (Chen et al., 2019). Sorkin talked to a huge number of people and, getting insider information, began to write a book about how the American wealthy people from Wall Street have ruined themselves.
The whole action in the book resembles the reconstruction of a plane crash. At first, everyone is calm, then something starts to go wrong, but hope remains, and at the end, hope leaves, and despair sets in. It is worth making a digression about why it all happened. The development of public relations has gone so far in the field of finance that the cynical actions of the players led to collapse and bankruptcy (Erdem, 2020). Few people cared about it, while it all worked and everyone received money, but when something went wrong, no one, accordingly, could figure out how to fix the situation.
There are more than thirty characters in the book, and at first, they can only be distinguished by their first and last names. It is difficult to remember everyone, but for this purpose, the author has added a who-is-who list at the beginning of the book (Sorkin, 2010). However, one can easily get confused, which is not surprising when two different banks are called JP Morgan and Morgan Stanley, and the director of the first one has the same name as the director of British Barclays (Sorkin, 2010). Each of the characters makes important but wrong decisions which lead to collapse. The author gives every character brief biographical information and sketches a model of behavior, but does not study their inner world or give their portrait description. They are faceless, depicted as a crowd of empty suits, but this book is not about people, but about the US financial system, and people here are just its part (Sorkin, 2010). The focus is not on the characters, their fates, and inner world, but rather on their interaction, behavior, and the consequences of made decisions.
A New York Times columnist Andrew Ross Sorkin describes in detail what was happening in the offices and conference rooms of Wall Street and Washington. The author, who secured an audience with leading financial market participants, compiled an amazing detailed chronicle of the 2008 crisis and the implementation of the rescue plan. This is a professional step-by-step study of Paulson’s, Geithner’s, Daimon’s, and Fuld’s actions during the 2008 crisis (Sorkin, 2010). In September 2008, Wall Street and the American economy were on the brink of disaster. Only a year before, the markets were recording eye-popping profits that were growing thanks to various mortgage innovations. Top managers of financial institutions rewarded themselves well, having received $ 53 billion in compensation in 2007 (Sorkin, 2010). Then the real estate market began to crumble and Wall Street reeled. The debt-to-equity ratio was 32 to 1, and this level of risk made it possible to make good money during a boom but was disastrous in a market fall.
The main idea of the book is that in 2008 the investment bank Lehman Brothers was on the brink of ruin. Executive Director Richard Fuld put all the blame for the fall in the bank’s share price on the market participants. Refusing to acknowledge that the bank is in dire straits, he turned to Warren Buffett for financial support and also negotiated a merger with Barclays and Bank of America (Sorkin, 2010). US Treasury Secretary Henry Paulson refused to use taxpayer money to save Lehman Brothers. That is why in September 2008, the bank filed for bankruptcy. The next day, Paulson provided $ 85 billion in financial aid to the American International Group (Sorkin, 2010). Investors were surprised by this move since it turned out that Lehman Brothers was allowed to fall while AIG was saved.
It took less than a year and a half to move from the era of highest profits to the epoch-making collapse of Wall Street. On March 17, 2008, JPMorgan Chase officials said they would save Bear Stearns by buying it (Sorkin, 2010). Meanwhile, Lehman Brothers was on the verge of collapse as the price of its once reliable stock fluctuated wildly – it fell 48% in one hour of trading (Sorkin, 2010). Lehman Brothers’ risky strategy was inspired by its CEO Richard Fuld Jr., but this strategy ran counter even to his style of work. With every increase in risk, Fuld admitted to his employees that his approach was flawed (Sorkin, 2010). When the bank has fallen on hard times, the collapse happened faster, and the consequences were worse than Fuld expected.
The author writes that Wall Street, like the entire global financial system, has changed almost beyond recognition. Fuld swapped Lehman Brothers’ conservative policies for a more risky one. This strategy was well worth it, and the rise in Lehman Brothers’ stock price drove Fuld’s net worth to $ 1 billion (Padot, 2018). However, after the urgent sale of Bear, as investors looked for another victim of the mortgage market collapse, everything pointed to Lehman Brothers. Even those who saw the eventual failure of an investment bank as an example of capitalism in action realized that it could be a disaster for the financial markets (Padot, 2018). They housed the savings of millions of people and employed tens of thousands of professionals.
Insurance giant American International Group staggered after Lehman Brothers fell. AIG executives tried to convince themselves that they were doing well. They had 40 billion in cash, a trillion in assets, and lucrative underwriting of debt-backed bonds. AIG was “too big to fail,” but with the mortgage market plummeting, things began to change dramatically. AIG’s insurance portfolio of subprime mortgages was over $ 500 billion (Sorkin, 2010). Following another revaluation of credit default swaps by managers, the company reported its loss of $ 7.8 billion in the first quarter of 2008 (Sorkin, 2010). These were the biggest losses in the history of the company. Treasury Secretary Henry Paulson, Timothy Geithner, Jamie Dimon, and Ben Bernanke were challenged to prevent financial markets from collapsing.
The book shows the stages of dealing with the development of the crisis and the stages of development of Paulson’s plan, during which the Treasury Department has tried to prevent collapse. Paulson and Geithner have brought together executives from leading Wall Street financial institutions to discuss a private equity bailout plan for Lehman Brothers (Sorkin, 2010). However, even the US Treasury Department has not agreed to buy out the bank’s assets since certain segments of it had a toxic reputation. As a result, the collapse of Lehman Brothers has contributed to the collapse of the whole mortgage market, which entailed new credit risks.
Attempts to unite the country’s commercial and investment banks were not successful since were not willing to take risks, but negotiations of the largest financial structures continued. Henry Paulson understood that the crisis threatened the country’s economy as a whole. The existence of the American insurance company was in jeopardy. Paulson understood that along with the collapse of AIG and the default on all insurance payments, the American and global financial industry would collapse (Larres & Wittlinger, 2019). To prevent this, he ordered the Treasury Department to allocate funds for emergency assistance to the corporation. He prepared an $ 85 billion bailout plan for the company (Sorkin, 2010). The rescue of the company took place literally a day after Lehman Brothers was declared bankrupt. This inconsistent government behavior embarrassed investors and irritated the markets.
Therefore, to calm the markets, Paulson prepared a $ 500 billion government buyout plan for troubled assets. He aimed to stabilize markets through the Troubled Asset Relief Program (TARP) (Sorkin, 2010). However, Congress rejected Paulson’s offer, and he had to reconsider his plan to buy shares in banks and force top managers of the largest financial institutions to agree to it. Paulson brought together the heads of Wells Fargo, JPMorgan Chase, Goldman Sachs, and six other major banks for a confidential meeting with regulators. He announced that the government was going to use the funds allocated for the TARP program to buy preferred shares in the country’s leading banks for $ 250 billion (Sorkin, 2010). Those who would refuse capital would face a thorough examination. Realizing the gravity of the current financial situation and intimidated by Paulson’s threats, all the bankers agreed with him. In the end, all nine representatives of the country’s largest banks agreed with Paulson’s plan. Thus, the implementation of the troubled assets buyback program stabilized the situation on Wall Street.
To stop the development of the crisis, the US Treasury Department injected capital into banks by purchasing non-voting shares. This obliged them to issue loans in the future; however, despite all the efforts of the ministry, the requirements of banks for issuing loans began to be tightened. This led to massive deprivation of rights to foreclosures on mortgages and increased unemployment. At the same time, a lengthy process of bank consolidation began, resulting in 77% of US banking assets being under the control of ten financial institutions (Padot, 2018). Accordingly, this association was then considered “too big to fail”.
The book is based on real events and reveals the causes of the crisis. In the case of a journalistic book on economic history, the readers may expect to see a collection of columns embodied in it. However, this book is the result of over 500 hours of interviews with over 200 people who were directly involved in the events of the 2008 financial crisis (Sorkin, 2010). Wall Street CEOs, board members, management teams, as well as current and former officials were interviewed to get as much reliable information as possible. US and foreign government officials, bankers, lawyers, accountants, and consultants contributed to the book as well (Sorkin, 2010). Among the main characters, in addition to the heads of leading banks, there were high-ranking officials, up to George Walker Bush, the 43rd President of the United States.
Working as a documentary filmmaker in collecting material, Sorkin chose an almost fictional form for his book. This is probably the easiest and most interesting book on finance that could be recommended to an uninformed but interested person. It is more like a detective story, where financial companies and bankers are fighting for survival. The indicator of their success and failure is the value of shares on the stock exchange, which changes by more than 40% per day (Sorkin, 2019). It is interesting to read about the professional actions of Henry Paulson and his attempts to save the country from a new Great Depression. Both novice financiers and everyone who has long been interested in this topic will like the book. The author’s text adequately reaches the intended audience. The book keeps the reader’s attention in good shape because the fate of the world’s largest economy is being decided.
The author enthusiastically describes the life of those who make up the top of the financial market. He depicts communication on BlackBerry phones, meetings with the President of the United States, details of concluding and signing multibillion-dollar deals, and career transitions (Sorkin, 2010). He also describes constant flights, purchases of the most expensive houses on the prestigious Park Avenue, and so on. This narrative, almost admired in its meticulousness, is superimposed on the chronicle of business meetings dedicated to attempts to save Lehman Brothers, Merrill Lynch, AIG, Morgan Stanley, and Goldman Sachs from possible bankruptcy (Sorkin, 2010). Between the dialogues, letters, and meetings, there are biographical digressions dedicated to the path of formation of a particular banker, a story about his household chores, children, and private purchases.
The only question that Andrew Ross Sorkin’s manner of presentation with dialogues and large eventful sketches raises is how reliable the book is. Of course, there are all reasons to trust a high-level journalist. All the years of the crisis, Sorkin was writing about the collapse of investment giants and attempts to save the financial system, attended government briefings, and talked with top officials of financial companies and regulators (Sorkin, 2010). However, there are reasons not to trust his sources: bankers, excellent negotiators, and brilliant strategists are hardly sincere and frank in dealing with journalists. They will hardly tell even a word of unfavorable truth for them about how the closed discussions at the meetings took place.
From the relative disadvantages, the book is quite demanding of its reader. Ordinary people will need some additional knowledge in the world of finance to understand all the described processes. The book is a bit difficult since the reader will have to google the chronology of events, various terms, and constantly check who is who in a long list. However, the effort is worth it, and if there is a desire to understand how and why a market collapse has occurred, then Sorkin’s work will be interesting.
The author has used a logical appeal and perfectly demonstrated that a crisis is a systemic phenomenon. No one had the desire or special intention to bring down the global economy. When the US housing market fell and the financial sector serving this market began to suffer, few expected that the consequences would affect the entire world economy so quickly and so strongly. In 2008, it was already clear that the crisis was global, although politicians in many developing countries and countries with transition economies remained under the illusion that these problems would not affect them (Chen et al., 2019). Finally, after the fall in world prices for basic resources, including oil and metals, in the summer of 2008 and after the bankruptcy of Lehman Brothers in September 2008, the crisis directly affected emerging markets (Chen et al., 2019). The economic policies of individual countries and international organizations were forced to quickly respond to these new challenges.
To sum up, the book Too Big to Fail by Andrew Ross Sorkin is an insider story of how Wall Street and Washington tried to save the financial system from the crisis. The book is distinguished by the use of little-known information and an exciting style of storytelling. It will be of interest to investors, politicians, as well as businessmen who are interested in an impartial outsider view of the Wall Street crash. Sorkin has written a chronicle of the events of 2008 based on various interviews and firsthand conversations with those bankers and government officials who have played an important role in the crisis. Having provided numerous data and reliable information, the author gives the readers the right to draw political, economic, and moral conclusions themselves.
References
Chen, M. W., Mrkaic, M. M., & Nabar, M. M. S. (2019). The global economic recovery 10 years after the 2008 financial crisis. International Monetary Fund.
Erdem, O. (2020). The 2008 Crisis. In After the Crash (pp. 23-52). Palgrave Macmillan, Cham.
Larres, K., & Wittlinger, R. (Eds.). (2019).Understanding Global Politics: Actors and Themes in International Affairs. New York, NY: Routledge.
Sorkin, A. R. (2010). Too big to fail: The inside story of how Wall Street and Washington fought to save the financial system—and themselves (2nd ed.). New York, NY: Penguin Books.
Padot, R. H. (2018). The Great Recession inside the Beltway: Evidence from interviews with business leaders. Research Journal of Business and Management, 5(2), 121-129.