Too Big To Fail
It’s a phenomenally difficult task to value an investment bank— a firm whose value largely derives from trust. When trust flows easily across all counter-parties, the system is efficient at moving capital from where it’s needed least to where it’s wanted most. When trust begins to dry up, the entire system implodes under the weight of broken commitments.
Sorkin’s book avoids causes in favor of documenting decisions. “This extraordinary time,” he writes, “has left us with a giant puzzle—a mystery, really—that still needs to be solved, so we can learn from our mistakes. This book is an effort to begin putting the pieces together”
While accounts like The Greatest Trade Ever focus in on a small microcosm of the financial world, Too Big Too Fail attempts to portray the entire, fluid, global financial landscape— the one that Henry Paulson, Tim Geithner, and Ben Bernanke had to make sense of.
The book is laden with facts and events—it seems that no one sleeps, and Sorkin suggests that key players like Paulson caught maybe an hour or two a day for an entire week. With no down time, the book is successfully confusing— it captures the uncertainty of the situation. Key players were reacting to information as it came in without time to digest it. As a result, there isn’t much time for editorializing on the crisis. In one passage Paulson is asked by President Bush, “How did this happen?” Sorkin could have used this as a spring board into the different theories of why, but he cuts it short:
“Paulson disregarded the question, knowing that the answer would be way too long and lay in a heady mix of nearly a decade of overly lax regulation—some of which he had pushed for himself—overzealous bankers, and home owners living beyond their means.”
Sorkin highlights the fluidity of the decision making. Did AIG need 20 billion, 40 billion, or 100 billion? Did they need it next week, or two hours ago? Over reacting could create an unnecessary level of panic that could cause conditions to further weaken. It was a problem with no easily definable answers. The best anyone could offer was their best guess. Their best guess.
Guesses which so far have turned out to be the correct ones. By taking quick, decisive action, Bernanke, Paulson, and Geithner put themselves out ahead of Euro-zone countries which are beginning to realize they too must take decisive action to rescue their systems. The dollar gaining strength against the Euro couldn’t come at a more perfect time—a stronger dollar accompanying economic expansion spells out recovery for not just the United States, but countries expecting to be repaid in dollars. Trust is trickling back into the system, in consequence, restoring confidence and catalyzing investment.