Too Big to Fail: Inside the Battle to Save Wall Street
By Andrew Ross Sorkin
Everything glitters but nothing is gold in this colourful account of the collapse of Lehman Brothers
On Friday 11 April 2008, his bank's credibility teetering, the chief executive of Lehman Brothers, Dick Fuld, met US Treasury Secretary Hank Paulson at a dinner for the world financial elite. Paulson, wearing a suit "one size too big", congratulated Fuld on raising new capital for the bank. At 9.52pm, Fuld blackberried an underling: "We have huge brand with treasury . . . they want to kill the bad [hedge funds] + heavily regulate the rest . . . all in all worthwhile."
But the hedge funds were already circling. They did not believe the bank's financial statements, and within weeks one of them went public to say so. David Einhorn of Greenlight Capital told investors he hoped that Paulson would "guide Lehman towards recapitalisation and recognition of its losses . . . before federal taxpayer assistance is required".
He didn't, and the rest is history. Andrew Ross Sorkin's Too Big to Fail is a major contribution to that history. It draws on interviews with leading participants, many of whom spoke on condition of anonymity. The deep detail, drawn from multiple accounts and documents, is exemplified in the episode covered above. But so is the book's central flaw. We know the colour of Paulson's too-big suit and that Fuld "strode" up the steps of the treasury, but we don't know the truth about the Paulson-Fuld conversation. Nor do we know what Sorkin thinks really happened. We get copious detail, but no sustained analysis or judgement.
Sorkin's book, with its expletive-laden anecdotes of how the rich and powerful behave under conditions of extreme stress, has fascinated the American public. It is written like a thriller, but, shorn of serious analysis, it remains a text without a subtext - and as all thriller writers know, if you do not write the subtext it writes itself. The subtext I took away from this story of uncontrolled power is that the power is illusory. The "decision-makers" are only puppets, their strings pulled by wider social forces they do not understand. But this conclusion is at odds with the way Sorkin treats his subjects' evidence, which is always at face value.
As Sorkin's story unfolds, we come to see that the official channels through which finance bosses are supposed to deal with each other, and with politicians and regulators, are merely for show. The really significant dealings are conducted through unofficial channels, and the key principle, especially for politicians, seems to be to keep the public uninformed. So, when a US treasury official phones the Barclays boss Bob Diamond to suggest the bank consider buying Lehman, it helps that the caller is "his friend Bob Steel". It helps, too, that this is "not official business", but "brainstorming". You could argue that this left the Barclays boss with market-sensitive information about a rival bank (Diamond later picked up Lehman's investment arm for a song). It is just one of hundreds of examples Sorkin provides of the way business between supposedly "public" companies is really done.
The Anglo-Saxon model of capitalism is supposed to be based on transparency, the level playing field and the rule of law. Too Big to Fail shows that much of this is an illusion. If Sorkin's account is accurate, secrecy and personal networks ran all the way through the worlds of politics, regulation, finance and financial journalism right up until the crisis hit. Once we understand this, we are able to see the mistakes and miscalculations of a man like Fuld not simply as personal failings, but as the product of a world where everything glitters but, by mid-2008, almost nothing is actually gold.
In a world based on friendship and networks of personal obligation, the real shock came when the backslapping turned to backstabbing. Sorkin's book is superb in the way it presents the critical moments of a modern financial crisis as points at which networks of influence fell apart. As real-world economic forces intrude into Fuld's personal universe, you can feel the confusion spread across the network, to politicians, regulators and stock-picking TV journalists.
When Alistair Darling nixes a last-minute Barclays takeover of Lehman, a Lehman lawyer called Rodgin Cohen announces to Paulson: "I know a lever we can pull with the UK government. I have a friend I can call." The friend turns out to be Callum McCarthy, boss of the Financial Services Authority, who's just stonewalled a call from the US regulator along the same lines and who now gives Cohen admirably short shrift. As they ponder whether to try to get President Bush to phone Gordon Brown, the US policymakers realise that they have been, as Paulson puts it, "grin-fucked" by the British.
That memorable phrase could be used to describe what every bank on Wall Street then does to its rivals: Bank of America pulls out of saving Lehman and saves Merrill Lynch instead; within days the traders of Goldman Sachs, Morgan Stanley and JPMorgan are knifing each other in the back even as the top bosses instruct them to desist "for the good of the financial system and the country".
In the end, everybody grin-fucked everybody else, and the state had to bail out free-market finance. Sorkin describes how there had been a contingency plan to do exactly this, commissioned by Paulson as early as April 2008. The final part of the book tells the story of how that plan was thrown out by Congress, unleashing the systemic global banking crisis of early October 2008.
Sorkin's attention to detail is sometimes overzealous. Too often, we are told which button of some great decision-maker's collar was loose at the crucial moment, or that the gravel in the drive of Fuld's vast mansion "crackles" as he steps into his chauffer-driven limo. We are made privy to people's thoughts. But what we are never allowed to know is whether the author believes the thoughts and reminiscences those people have confided to him are accurate. He seldom allows himself to make any kind of synthetic judgement of his subjects.
This, plus the book's scant analytical conclusions on the crisis as a whole, constitutes a substantial weakness, and encourages the idea that powerful men make history and seems to endorse its subjects' perpetual surprise that they have to operate in circumstances not of their own choosing. The deep, systemic problems stacked up by US banks in the 15 years of loose money that preceded the crisis are summarised in the first chapter, occasionally referred to, but almost never treated as relevant to the narrative Sorkin unfolds. Because of this, his characters themselves refuse to become three-dimensional: they exist like epic warriors on an Assyrian bas-relief, marching towards doom. And by the end of the story, when all the stabbing is over, the tributes paid and the prisoners either spared or executed, it is hard to care about the human beings depicted.
Sorkin's book is a monumental piece of work and, thus far, the definitive account of the economic crisis from a Wall Street perspective. As a sourcebook illustrating the hubris, secrecy and psychosis that drive high finance, it is frightening. But as Sorkin's judgements on both the people and the system are so scant, we are left to make our own.
Too Big to Fail: Inside the Battle to Save Wall Street
Andrew Ross Sorkin
Allen Lane, 624pp, £14.99
Paul Mason is economics editor of BBC2's "Newsnight". His most recent book is "Meltdown: the End of the Age of Greed"