I sometimes like to listen to audiobooks on my daily commute (which is typically 15-20 minutes each way), and I just finished “Too Big to Fail” by Andrew Ross Sorkin. This book is a gripping drama of the events that were unfolding for a while and that precipitated in Fall 2008 when some of the most iconic names of the US financial system either failed or missed failure by the smallest of margins. This effectively led the US Federal government to part-nationalize the six biggest US banks, in a move that can not be vehemently argued to be against the principles of capitalism and free market. Though, a lot has been written down on the financial excesses and the excessive leveraging that led to the bursting of the bubble in 2008, this book has a lot to offer.

So that’s what this means

First of all, it took me the longest time to clear up my confusion about the title of the book, as the events seemed to unfold to me exactly opposite to what I thought the title meant. I now realize that the title is meant to mean : “Too big to be allowed to fail”. On further investigation, this is actually a term of art in public policy!

Worth Noting

Several things appeared to me worthy of being noted down:

It was shocking to see how close some of the biggest banks were to failure — the book talks about companies not lasting the weekend and multi-billion dollar deals that had to be made overnight to save century old banks. It was indeed chilling to realize how close to the brink some of the most solid names in US financial industry were!

I also mentally noted how hard the folks in charge in the Govt (Henry Paulson, the then Treasury Secretary, Tim Geithner, the then President of the Fed and their teams) worked to try to get to grips with the problems that all seemed to precipitate simultaneously. The folks at the helm, and their team deserve at least some credit. The other day I happened to listen to an interview on NPR of Neel Kashkari, who oversaw the $700 Billion bail out plan (called TARP). Indeed, as Kashkari pointed out in the interview, those were the hardest working days of his life. (Kashkari, then all of 35 years old, was considered one the heroes of the Government bailout plan). NPR also ran a story on October 4, 2010, the day of expiry of the two year old TARP program.

It was also hard not to feel for Lehman Brothers, the historic bank that was founded in 1850 and employed more than 26000 people when it filed for Chapter 11 on September 15, 2008. It somehow got caught in between the indecisiveness of the Fed and the times when the market could have swung either way, collapsed. Luckily, the same fate was not meted out to other companies like AIG and Morgan Stanley.

Lastly, and most importantly, it is fascinating to see that the diagnosis of the problems in the financial system was that the “market was too free” — Adam Smith must be squirming in his grave!

Two years on

I am equally surprised at what I now see has happened in the two years since Fall 2008 when the Fed had to take the extraordinary step of effectively forcing the biggest private banks to be part-nationalized.

Firstly, not much has changed! The banks who were too big to fail in 2008 are still too big to fail, while folks of all kinds continue to debate the merits of various alternatives.

Secondly, the TARP program, much maligned and ridiculed by the lawmakers and armchair critics at the time, has actually been pretty good for the Government. As Wikipedia says, “Originally expected to cost the U.S. Government $356 billion, the most recent final net estimate of the cost, as of October 5, 2010, will be close to $30 billion, …”. In fact, judging from the fact that there has been no major economic disaster since, the program seems to have been a success.

Finally, it seems like this will not be the last major financial crisis to hit this generation. All said and done, several respected people claim that it is just a five or ten year cycle and that these crises are expected to occur! In fact, we seem to be in a “doom loop” because, despite the rhetoric, big banks know that they can get away with high risk, high reward gambles and that, despite everything, they will still be considered “too big to fail”.