Lurking behind the financial crisis: the Fed puppeteer and the trader

I WANTED it to be like that Quentin Tarantino movie: every person should come away with a different picture. I wanted to almost do it with no judgment.”

Andrew Ross Sorkin is in London for the Samuel L Johnson literary awards after Too Big To Fail, his best-selling account of the financial crisis, was short-listed for the prize. But before heading off to a string of other engagements, he finds time for a leisurely iced tea with City A.M., to talk all things Wall Street.

His desire to write the book “without judgment” is hardly surprising coming from the star finance reporter of the New York Times, a paper that regards itself as a keeper of historical records.

But Sorkin has a further reason to write this particular story “without judgment”: his aim was to complicate the conventional narrative about “greedy bankers” bringing down the economy. “Part of the goal of the project was to put the reader in the room with them. When you get inside the room, your field of vision changes,” he says. His tactic is to take readers so close to the main characters of his story – characters that include former US Treasury secretary Hank Paulson and former Lehman Brothers CEO Dick Fuld – that we can see the dandruff on their collars. At this magnification, a simple reading of who is to blame for what becomes easily confused.

And he applies this nuanced narrative about blame and hindsight to his views on the need for regulatory changes prompted by the financial crisis. “It’s about the politics of the regulation – somebody has to be the policeman,” he says. But on the other hand: “You can’t prevent the next crisis. The only thing you can do is create parameters to limit the damage and give regulators tools to mitigate the crisis.”


As a man who has spent years getting as close as possible to the behemoths of Wall Street and their Treasury counterparts (since they are often the same people), Sorkin seems vaguely resigned to the imperfections and contradictions of regulation. After all, a man who chronicled the making of Paulson’s bailout plan (see box bottom right) could hardly maintain faith in the cool effectiveness of centrally planned regulation.

TRADER’S PHILOSOPHY

And more broadly, he does not believe that rules can prevent financial misdirection. As he says: “The desire for power and pride is something you can’t legislate.” This might sound like typical banker-bashing, but there is a subtle difference between Sorkin’s view and the usual “Wall Street versus Main Street” lament. Asked why “greed” was supposedly allowed to trump self-interest in the pursuit of excessive risks, he disputes the premise: “To me, Wall Street is less about greed than it is about power and pride – it wasn’t greed that made Dick Fuld ride his $1bn in stock down to something like $56,000.”

Instead, Sorkin blames Fuld’s overwhelming desire to win and, when everything went pear-shaped, not to lose face for driving Lehman off a cliff. In his book, Sorkin is at pains to convey the fierce culture that made beating rivals the be-all and end-all for Wall Street’s CEOs: money is important, undoubtedly, but above a certain level of wealth, it serves more as a measure of one’s prowess and superiority than as a measure of buying power. And as Sorkin chronicles the thrill of deal-making and the cut and thrust of the trading floor, it becomes clear that this is a story being told by a man who cannot help but empathise with Wall Street’s culture. As he comments of his book: “To write it, you have to want to live with the characters for a year.”

This makes Too Big To Fail as much a psychological study as it is a historical narrative. Because, to Sorkin’s mind, although the banking system was flawed in its interconnectedness and systemic importance, it was not merely the banks that were “too big to fail”; it was the men running them.

“All this stems from a trader’s philosophy,” he explains. “There’s always another trade, a way out or another card to play. Dick Fuld always thought he had one more card in his back pocket.” The book portrays this society of “masters of the universe”, many of them self-made, who thrived by pursuing their goals relentlessly in the face of setbacks and losses. These were CEOs who, until the dying days of their empires, were unable to really comprehend the idea of final, total failure. In Sorkin’s words: “There was a collective failure to imagine how bad it could be.”

PLAYING THE LAST CARD

And as it turned out, many of them – with the exception of Dick Fuld – were vindicated in their denial. A forced merger in unfavourable conditions is hardly a good outcome, but it is a far cry from bankruptcy and defaulting on creditor loans. In that sense, that one card in the back pocket turned up trumps, in the form of a government bailout – and numerous state-brokered deals. So deeply involved was the Treasury that, during bankruptcy court proceedings, the judge deemed Lehman a “victim” whose “real tragedy” was to have been the only firm not included in the government’s rescue package.

In fact, for a financial collapse so often blamed on the untamed forces of capitalism, what is striking about Sorkin’s book is how central a role the government takes in backroom deal-making from the very beginning. As Sorkin wrote after the sale of Bear Stearns: “Adam Smith’s invisible hand has a puppeteer: the Federal Reserve”. It was not until later he discovered the full extent of it: “Really, I don’t think I ever appreciated how active a role the US government was playing behind the scenes,” he tells me.

Active, of course, does not mean competent and Sorkin does not gloss over the Treasury’s chaotic interventions. He just doesn’t see a better option.

The problem is that Sorkin’s thinking brings him to a dead-end. He readily admits the incentive problem created by government bail-outs, but his suggested solutions – a resolution authority, higher capital ratio requirements, a bank-funded “rainy day fund” for bailouts and a return to banking by private partnerships – carry an air of compromise, the echo of a shrug about the how and when: “What’s depressing is you have to do it on a global basis,” he says. “And if you’re a bank not lending now, you won’t be lending under Basel III.”

It is clear that Sorkin’s instincts push him towards regulating the actions of the hubristic characters he covers on Wall Street. But his tendency is tempered by an awareness of the practical pitfalls of lawmaking: do it wrong, he says, “and you have yourself a sequel!”
And even with the acclaim his first book has brought, not even Sorkin wants that.

CV | ANDREW ROSS SORKIN

Age: 33

Education: Cornell University

Career: After stints writing for the New York Times as an intern during university, Sorkin joined the paper in 1999 and lived in London covering mergers and acquisitions (M&A). In 2000 he moved to New York where he also covers M&A on Wall Street.

Biggest moment: The 2008 financial crisis and the publication of his book. “It was a very terrible thing for most of the world and I’ve been an odd beneficiary in a way. The book allowed me to use all I’d learned over the past decade covering Wall Street. As a journalist, you’re almost sitting, waiting for this moment,” he says.


EXTRACT | HOW THE BAILOUT WAS COSTED

“What about $1 trillion?” Kashkari said.

“We'll get killed,” Paulson said grimly.
“No way,” Fromer said, incredulous at the sum. “Not going to happen. Impossible.”
“Okay,” Kashkari said. “How about $700 billion?”

“I don't know,” Fromer said. “That's better than $1 trillion.”

The numbers were at best, guestimates, and all three men knew it. The relevant figure would ultimately be the one that represented the most they could possibly ask from Congress without raising too many questions. Whatever the sum turned out to be, they knew they could count on Kashkari to perform some sort of mathematical voodoo to justify it… As he plucked numbers from thin air even Kashkari laughed at the absurdity of it all.

Too Big to Fail: Inside the Battle to Save Wall Street by Andrew Ross Sorkin is published by Penguin Books for £12.99.


The book is shortlisted for the 2010 FT/Goldman Sachs Business Book of the Year Award.