Andrew Ross Sorkin on Lehman, the Crisis and How Pride Led to the Fall
"It felt like the world was on fire," recalls financial writer Andrew Ross Sorkin, whose book Too Big To Fail covers the crisis at its peak. Yet, he agrees, the financial world as we know it, isn't really that different now.
It's a truism that surprised Sorkin, but it's actually fortuitous for him: The paperback edition is just out, and the events he describes remain the most dramatic and significant. In fact, for the new paperback edition, the book needed little updating, and the afterword is only 10 pages, he says.
Sorkin doesn't think the lack of change is good for the world's financial security. In a recent interview, he discussed the aftermath of the crisis, the quest for power on Wall Street and why more regulation is needed.
DailyFinance: In the introduction to Too Big To Fail, you refer to these events as a "giant puzzle -- a mystery, really -- that still needs to be solved." Are events around the financial crisis still a mystery to you, two years later?
Sorkin: Two years later it's less of a mystery. At the time that I was reporting and writing the book, I think there was a lot we didn't know about what took place both prior to and following the infamous Sept. 14 weekend. Especially now, I'm not sure people appreciate how bad things really were. No one knew Goldman and other huge firms were near bankruptcy. This country still has problems, but when you go back to those harrowing days, on a relative basis, we actually are doing quite well.
In the book and your coverage in The New York Times since, it's clear you think Lehman should have been bailed out.
Yes, but it's unclear to me that it could have been saved -- that's one of the enduring mysteries of the book. Did regulators have legal authority at that point to bail out Lehman? Would it have required so much money that it was politically untenable? More information has come out lately that politics played a role in regulators' decision not to bail out Lehman.
Even if impossible, how would events have played out differently if Lehman hadn't gone bankrupt that weekend?
What that would have done is provided time. When you read the book, you see that one thing none of these people making decisions had enough of was time. Some would argue they had lots of time to realize the crisis was coming. But once they got to that moment, had they been able to squeeze out another week, they probably would have been able to find a way to merge Lehman with Barclays.
And then, what would have happened to everything else? AIG would probably still have been the next domino, and Merrill Lynch, Morgan Stanley (MS), Citigroup (C) would still have all faced huge problems. But we might have been able to avoid utter panic.
One thing I was surprised to see in your book is that there are no heroes or villains. But it seems the financial crisis was rife with villainous behavior.
One of my goals for the book was to bring a reader inside the room where the crisis was raging and decisions were being made. That way, they can see what the participants saw. Once people have the same field of vision as the regulators, bankers and lawyers in the room, nothing looks black and white, everything looks gray.
You realize that there really aren't heroes and villains -- just people struggling to make decisions in the midst of a fast-moving crisis. Some people made some good decisions, and some people made some bad ones. That's what life is really like.
Were you surprised how quickly banks recovered?
I thought Wall Street was going to be a very different place. I thought there would be a lot of new regulations, a whole different world. Of course, a year came, and went there wasn't that much new that happened.
One of the things you worry about when you write a book like this, very quickly, almost in real time, is whether there is another shoe to drop. But luckily, everything that has come out since only goes on to confirm or offer another illustration of the key issues and events I covered in the book.
There was no new epilogue to write. Even for the paperback edition, two years later, there weren't a lot of updates to make. There isn't a long afterword – it's only 10 pages. The world hasn't changed that much. I am surprised.
What are the updates you made for the paperback edition?
There is some new reporting in there. I added a couple of scenes around Repo 105, which was a Lehman accounting gimmick. There are a few updates, more for completeness or history's sake.
Two years later, it seems clear that TARP (Troubled Asset Relief Program) actually worked.
As unpopular as it was, it would be hard to argue that TARP didn't work. It helped restore confidence in the financial system. But it didn't work way it was sold or advertised. It was oversold as a way to get money back in the hands of consumers, businesses. We were told it would help grease the economy. It didn't result in more loans and mortgages.
Do you think a financial crisis like this could happen again? Are our financial institutions still too big to fail?
To the extent the phrase still applies, it's more for countries and states. We've seen crisis this year in Greece, Ireland. If there is a sequel to book, and I hope there isn't, I imagine it will be around the debt of countries.
It's the same problem -- entire states are overextended. That to me is the ultimate issue. Until we're really willing to regulate how people use debt and how much debt they can use, I'm not sure we're ever going to break the back of this crisis.
If you could see one piece of regulation passed, what would it be?
What worries me most is that capital requirements for banks won't be high enough. There is nothing in current legislation that addresses at all. It's being left to the Federal Reserve to negotiate as part of Basel III with all European and Asian banks. Our banks are decently capitalized, but most European banks not nearly as well capitalized. The tension you have is European finance officials can't reach the same numbers one would want our banks to have.
What about compensation reform? Do you think the incentive pay structures of the CEOs and bankers needs to be restricted in any way?
Compensation is something I think about all the time, particularly in context of Dick Fuld, Lehman's CEO. He is someone who had over $1 billion of stock in Lehman. He had more skin in the game than just about anyone else. Arguably, he was incentivized to always do the right thing for Lehman. Yet not only did company collapse, he rode his stock all the way to $56,000.
What does that say about incentives?
I'm less convinced that Wall Street is about greed. It's not about greed at all anymore. It's about power. The dollars, the money, is a scorecard for the power. One of the things I tried to get across in the book is that it wasn't just the institutions that were "too big to fail," it was also the individuals who saw themselves as too big to fail. In the end for Dick Fuld, this was about pride, not about money. I don't know how you regulate pride.
For people at these senior levels, stock options are just the cherry on top in their life. By the time they've reached CEO suite, they've made tens if not hundreds of millions in cash that they've already been able to take home. They have a remarkable cushion. Clawbacks might be the answer -- where they really have something riding on their company's results. Or Wall Street could go back to the partnership model. Then, if the partnership failed, partners lost all their money, too.
In the afterword of your book, you talk about whether banks can regain America's trust. It doesn't seem like they've made much progress.
Banks need to return to doing what they are supposed to be doing -- making loans, financing businesses, being the backroom engine of economy. They got very far afield of that in the years leading up to the crisis. Until they get back to that role, they will have a real trust problem.
But memories are short. After the savings and loan crisis of the 1980s, people thought banks and bankers were horrible. Then they became superheroes again. How long are our memories going to last this time?