Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System from Crisis — and Themselves

by Andrew Ross Sorkin

It was a bailout in the literal sense of bailing water out of a sinking boat, not a handout.

On Wall Street, there are two kinds of bankers: the silky smooth salesmen who succeed based on wits and charm, and those who persist with bulldog tenacity.

Here was an obvious red flag, for Buffett had a simple rule: He couldn’t invest in a firm about which he had so many questions, even if there were purported answers.

If you can't understand it, that doesn't mean you're dumb, it means it's more complicated then it needs to be.

By the summer of 2007, however, America’s second Gilded Age had come shockingly to an end, and Greenspan’s reputation lay in tatters. His faith that the market was self-correcting suddenly seemed fatally shortsighted; his cryptic remarks were judged in hindsight as the confused ramblings of a misguided ideologue.

The eternal fallacy that because business knows what's best for its bottom line, it knows what's best for everyone.

“He understands Berkshire far better than any investment banker with whom we have talked and—it hurts me to say this—earns his fee,” Buffett wrote in Berkshire Hathaway’s 2003 annual report. For Buffett, there is no more lavish praise.

The two biggest investment banks in the nation had essentially declared their business model dead to save themselves. The New York Times described it as “a move that fundamentally reshapes an era of high finance that defined the modern Gilded Age” and “a blunt acknowledgment that their model of finance and investing had become too risky.”

Democrats charged that it was a way for Paulson to line the pockets of his friends on Wall Street, while Republicans denounced it as just another example of government intervention run amok.

“They claim to be free market advocates, when it’s really an anything-goes mentality,” she said of the Bush administration. “No regulation, no supervision, no discipline. And if you fail, you will have a golden parachute, and the taxpayer will bail you out. . . . The party is over in that respect. Democrats believe in a free market. We know that it can create jobs, it can create wealth, it can create many good things in our economy. But in this case, in its unbridled form, as encouraged, supported, by the Republicans—some in the Republican Party, not all—it has created not jobs, not capital; it has created chaos.”

Nakajima opened an envelope and presented Kindler with a check. There it was: “Pay Against this Check to the Order of Morgan Stanley. $9,000,000,000.00.” Kindler held it in his hands, somewhat in disbelief, clutching what had to be the largest amount of money a single individual had ever physically touched.

I'd be terrified.

Investors’ emotions and imaginations—the forces that John Maynard Keynes famously described as “animal spirits”—ran wild.

The sad reality is that Washington typically tends not to notice much until an actual crisis is at hand.

Yup.

It will likely be endlessly debated whether Paulson’s decisiveness throughout the crisis was a benefit or a detriment, but the argument can also be made that any other individual in Paulson’s position—in a lame-duck administration with low and dwindling popular support—might have simply frozen and done nothing. It is impossible to argue he didn’t work hard enough.

“The problem in politics is this: You don’t get any credit for disaster averted,” he said. “Going to the voters and saying, ‘Boy, things really suck, but you know what? If it wasn’t for me, they would suck worse.’ That is not a platform on which anybody has ever gotten elected in the history of the world.”

The financial industry had always been intended to be something of an unseen backroom support for the broader economy, helping new businesses get off the ground and mature companies adapt and expand. Yet in the years leading up to the crisis, the finance sector itself became the front room.

When there’s a delusion, a mass delusion, you can say everybody is to blame. I mean, you can say I should have spotted it, you can say the Feds should have spotted it, you can say the mortgage brokers should have, Wall Street should have spotted it and blown the whistle. I’m not sure if they had blown the whistle how much good it would have done. People were having so much fun.

Warren Buffett on Cinderella at the ball.

Perhaps the single most important new rule in Dodd-Frank, though, was a provision known as the “Orderly Liquidation Authority,” which provided that the government could wind down a failing financial institution. The provision might as well have been named after Lehman Brothers, because it ostensibly would have allowed the FDIC to take Lehman over to prevent it from going bankrupt. Hank Paulson has praised the rule, arguing that it would have changed the trajectory of the crisis. “We would have loved to have something like this for Lehman Brothers. There’s no doubt about it.”

Does it still exist?

“Can you design a system ever that allows you to be indifferent to the failure of any institution, in any state of the world?” he asked. “You can design a system, and I think we have, that allows you to be indifferent in most states of the world: the five-year flood, the fifteen-year flood, the thirty-year flood, maybe even the fifty-year flood. But there are constellations of storms, of panics, of fires that are so bad that it’s very hard to imagine that you could be indifferent to the failure of the financial system.”

“It’s very strange to say, at the end of the transaction, that if the other guy is smarter than you, that you have been defrauded. It seems to me that that’s what they are saying.”

One of the great lessons of the crisis was that CEOs who were perceived as all-knowing actually often had no idea what was taking place within their institutions only one floor below them,

The sheer size of such companies raises many questions, far beyond the question of being too big to fail. A more enlightened debate should concern the problem of Too Big to Manage.

It’s a little bit like Cinderella at the ball. People may have some feeling that at midnight it’s going to turn to pumpkin and mice, but it’s so darn much fun, you know, when the wine is flowing and the guys get better looking all the time and the music sounds better and you think you’ll leave at five of twelve and all of a sudden you look up and you see there are no clocks on the wall and—bingo, you know? It does turn to pumpkins and mice. It’s hard to blame the band. It’s hard to blame the guy you’re dancing with. There’s plenty of blame to go around. There’s no villain.

Buffett again.

No longer is the phrase “too big to fail” being associated with banks alone. It is now being used to describe cities, municipalities, states, and countries that, like many home borrowers, have become overleveraged.