New York Times columnist Andrew Ross Sorkin urged Fordham students on Feb. 8 to learn the lessons of the 2008 financial crisis.
The author Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System—and Themselves (Viking, 2009), Sorkin headlined the Gabelli School of Business’ International Business Week.
His talk, which preceded a lengthy question-and-answer session, dwelled on how he constructed a narrative for his book, which was recently issued in paperback and has been adapted into a film that will air in May on HBO.
The major question surrounding the federal bailout of the nation’s largest banks and the rescue of mortgage giants Fannie Mae and Freddie Mac in September 2008 has always been, “How bad was it really?” Sorkin said.
“I thought it was bad, but I didn’t know how bad it truly was. Frankly, I’m not sure that all of us appreciate how bad it was, either,” he said.
“Some of us wonder, ‘Did we need to spend all this [bailout]money? What did the other side of the cliff look like? Had we not taken all these actions and steps, would it have worked out?’”
After Lehman Brothers declared bankruptcy and A.I.G. accepted an $85 billion bailout from the federal government, Sorkin said, the government’s big concern was the stability of financial services giant Morgan Stanley, followed by the stability of global investment firm Goldman Sachs.
“The view was that if Morgan Stanley went and Goldman Sachs went, General Electric (GE) would file for bankruptcy that next Friday,” he said. “It’s a company that I would not have thought of for half a second.”
GE was vulnerable because, at the time, its fortunes were heavily tied up with its banking arm, GE Capital.
“When you think about a global company with hundreds of thousands of employees around the world going bankrupt, the implications are almost too big to imagine,” Sorkin said.
According to a model that a former Federal Reserve staffer passed to Sorkin after Too Big to Fail was published, some thought that national unemployment in the three years after the dissolution of these companies would be 24.6 percent.
In addition, Sorkin learned that one of the biggest owners of McDonald’s franchises nationwide was concerned that—because of Bank of America’s troubles—he might not be able to pay his 20,000 employees. So the danger was real.
One of the more disturbing aspects of the crisis was that although it seemed to happen suddenly, many people at big banks and regulatory agencies saw it coming and said nothing.
“There were a lot of people, very sadly, who saw this train barreling down the track, knew what was happening, and didn’t tell us,” he said.
Take the $700 billion Toxic Assets Relief Program (TARP), for instance, which was unveiled by then-Treasury Secretary Hank Paulson in the fall of 2008.
“It seemed like the bailout plan had been created in haste to rescue the system. But we found out later that TARP wasn’t written in September 2008. It was written months earlier and presented to [Federal Reserve Chairman] Ben Bernanke on April 15,” Sorkin said.
“If you look at the public statements that Bernanke and Paulson gave on April 16, 17, 18, 19 and 20 and through the summer, not only will you never hear about TARP, they were telling us the economy was great and that the problems were contained.”
The reason, he said, was that Bernanke, Paulson and Timothy Geithner—who was then president of the Federal Reserve Bank of New York—did not want to cause a crisis of confidence. Before Goldman Sachs and Morgan Stanley were allowed to transform into bank holding companies to save themselves, Sorkin noted, Geithner turned down similar requests from the CEOs of Lehman Brothers and A.I.G.
“The reason, oddly enough, was that Geithner believed making them bank holding companies would cause people to say, ‘Something is wrong with the system here,’” he said.
The one thing we learned from these events, Sorkin said, is that they stemmed from a crisis of confidence, and much of what happened was no different than a classic “bank run.”
His take on the future was grim. He noted that the United States has to create 11 million jobs to return to 2004 levels of productivity.
Banks that were considered “too big to fail” in 2008 are now “too big to fail, squared.” Indeed, the bonuses awarded to upper management are bigger than ever.
Of the recently passed Dodd– Frank Wall Street Reform and Consumer Protection Act, he said that the provision to ensure higher capital requirements was the lone bright spot.
“It’s actually the only thing that can truly save our economy from having another crisis,” he said. “For a period of time, the banks were keeping $1 for every $30 that they were gambling with. That was the problem. Ultimately, this book could have been one page. It’s about two things: debt and leverage.”