For business scribes, Blomkvist’s celebrity is especially satisfying. Business journalists are the high school nerds of the newsroom, lacking the dangerous glamour of the war correspondents, the proximity to fame of the sports and entertainment writers, and the alpha-dog swagger of the political press corps. Blomkvist offers the business press hipness by association. His investigations take him beyond the ascetic world of balance sheets and offshore bank accounts to showdowns with former K.G.B. sadists. Better yet, although he is the divorced father of an adult daughter, and a smoker who runs mostly to keep his paunch in check, he is catnip to women. If James Bond were reincarnated as a crusading Swedish feminist, he would be Mikael Blomkvist.
There’s just one catch: Blomkvist despises the mainstream business press almost as much as he loathes the corrupt businessmen who are his chief targets. Blomkvist, who writes for an independent magazine he helped found, accuses establishment business journalists of getting too close to the magnates they cover. They have access, he complains, but they fail to do the “real” work of uncovering corporate malfeasance.
Larsson, himself an investigative journalist, died in 2004, before the financial crisis. But if he were reviewing the books inspired by the meltdown, he would surely reiterate his protagonist’s dyspeptic critique of business reporting. The best writing on the crisis has been from the inside out, starting with Andrew Ross Sorkin’s “Too Big to Fail” — a vivid, nearly instantaneous account of Wall Street in 2008 that stands as that pivotal year’s first draft of history.
Michael Lewis does something even smarter and more original in “The Big Short,” recounting the crash from the perspective of a small tribe of investors who had the insight and the audacity to foresee the crisis and profit from it. But while Lewis writes about iconoclastic outsiders, he profiles their lives and trades very much from the inside. “I’ve found it impossible to write a decent nonfiction narrative without unusually deep cooperation from my subjects,” Lewis explains in his acknowledgments, thanking his traders for allowing him “to enter their lives.”
Lewis is “eternally grateful” to his subjects for their cooperation. Sorkin, a reporter and columnist for The New York Times, is “truly grateful” to his. One can imagine Blomkvist sputtering with rage, but you don’t have to be a fictional Scandinavian social democrat to wish that business journalism in the United States was more about afflicting the comfortable and less about cozying up to them. In the spring, the high priests of American journalism at the Columbia Journalism Review published a tough critique of Sorkin by Dean Starkman, who argued that “Too Big to Fail” was on one side — the wrong side — in the “mini-struggle” between “deal journalism and the work of accountability-oriented reporters.”
That article rightly highlighted the important investigative work done by reporters with a “more confrontational approach,” like Gretchen Morgenson and Don Van Natta Jr., both of The Times, and Mark Pittman of Bloomberg News, who wrote a 2007 series predicting the collapse of the banking sector. But the bigger, more complicated truth about the financial crisis is that it wasn’t caused by evil businessmen. The overarching story is one of systemic failure, not individual wrongdoing. It wasn’t the Bernie Madoffs who plunged the world into recession. It was low capital requirements, weak limits on leverage, over-the-counter traded derivatives, soft rules on mortgage lending and global financial imbalances.
If your attention wandered as you read that list of abstract terms, you are not alone. A growing body of cognitive research is demonstrating something schoolteachers and entertainers have known for a long time: Most of us respond better to personal stories than to impersonal numbers and ideas. That cognitive bias is so pronounced that Deborah Small, a professor of marketing at the Wharton School, has found that charitable giving actually goes down if too many statistics are included in individual tales of need (and if we get only statistics and don’t learn any personal stories, giving is even lower). Forget “just the facts, ma’am.” Actually, forget the facts altogether.
For readers, that same bias means we are drawn to stories about people, not systems. When it comes to the financial crisis, we want heroes and villains and what-he-had-for-breakfast narratives; we are less enthralled by analytical accounts of the global financial system and the cycle of boom and bust. The Columbia Journalism Review — and Blomkvist — juxtapose the approaches of “access” and “investigative” journalists. But the real divide may be between storytellers and system analysts. (This is one of many reasons that anyone interested in the financial crisis and its causes should venture farther down the best-seller list and dip into “This Time Is Different,” a lucid and unapologetically dense study of eight centuries of financial crises by the economists Carmen M. Reinhart and Kenneth S. Rogoff.)
This dichotomy goes beyond writers and newspaper front pages to our legislatures and even the campaign trail. Financial reform legislation didn’t become sexy until the Securities and Exchange Commission unveiled its case against Goldman Sachs. The “fabulous Fab,” as Fabrice Tourre, the Goldman trader who bet against subprime mortgages, called himself, and his colorful e-mails were a story right out of Small’s research. It packed such a viscerally powerful punch that almost no one, apart from the great vampire squid’s P.R. team, bothered to note that because of the firm’s fine culture of risk management, Goldman was probably less culpable in the 2008 crisis than any other investment bank.
Fabulous Fab’s shenanigans (and great name!) not only helped pass the financial reform bill, they cost Goldman $550 million, the biggest settlement ever paid to the S.E.C. Score one for the storytellers. But that is likely to be a temporary triumph, and not only because Goldman now prohibits its employees from using vulgar language in e-mails, presumably to ensure that the next documents the bank is forced to disgorge aren’t quite so vivid.
We are living in the age of number-crunchers, not narrators. On Wall Street, in Silicon Valley, in Bangalore and in Shanghai, the new technologies and the capital flows that are reshaping our world are dominated by the people who master data dumps. This split — more than geography, more than gender, more than what your parents did for a living — may be the real class divide of our time.
Even Larsson, who created Blomkvist at least partly in his own image, knew this. That’s why the more eye-catching partner in his crime-busting duo is the quasi-autistic number-cruncher extraordinaire Lisbeth Salander. Female readers may be dubious of the 20-something Salander’s not-totally-requited passion for Blomkvist, but what really rings false in their relationship is the idea that Blomkvist would be Salander’s boss, and not vice versa. There have been reports that Larsson once told a friend that the fourth novel in the series, left unfinished at the time of his death, would follow the pair to a remote island town in Canada’s Northwest Territories. But a more plausible plot would involve Salander’s move to Palo Alto and the start-up of her global data mining and security firm.
Most outside observers had difficulty keeping up with the momentous events of the weekend of September 14-15, 2008 with all of the twists and turns that finally led to Lehman Brothers’ historic bankruptcy filing, Bank of America’s purchase of Merrill Lynch, and AIG’s bailout only a few days later. Ever since that tumultuous period, there has been a need for a comprehensive book covering the behind the scenes events. Andrew Ross Sorkin’s Too Big To Fail has succeeded in delivering exactly what is needed to gain a better understanding of these historic events.
If newspapers are the “first draft of history”, Andrew Ross Sorkin played a major role with his New York Times coverage of the financial crisis in 2008. Although Mr. Sorkin is only 32 years old, he has obviously been able to build up a massive network of contacts on Wall Street and in Washington. Mr. Sorkin’s coverage spans the timeframe from the failure of Bear Stearns up to the passage of the TARP legislation, but the narrative really shines when it comes to the events of a September weekend when the financial system came much closer to total collapse than anyone on the outside could have realized at the time.
Mr. Sorkin’s book has received a great deal of media attention and book reviews, but there is also a need to step back and think about the lessons that must be learned if future crises are to be avoided. The inability of Washington to come to any agreements on financial system reform was a significant failure in 2009, but one that received little attention outside the financial press. With each passing week of relative “calm”, chances grow greater than another crisis may be required to prompt reforms.
Greed and Fear
The old adage that a balance between greed and fear creates equilibrium on Wall Street seems hopelessly out of date in light of the revelations in this book. In the “text book world”, investors and other players in a market system need to be driven by the profit motive (“greed”) but decisions are tempered by a desire for safety (“fear”). For many decades on Wall Street, the partnership model in investment banking seemed to keep the level of risk aversion high enough to prevent overreaching (for a great book on the old model at Goldman Sachs, for example, see Charles D. Ellis’ The Partnership).
One can argue that many leading Wall Street players lost huge sums of money in the 2008 crash, so the absence of more “fear” in the system cannot be explained merely by a change in the ownership models of the investment banks. Indeed, an absence of adequate levels of risk aversion extended to Main Street and Washington as well. Rep. Barney Frank’s famous declaration in favor of “rolling the dice” with softer underwriting standards for mortgage lending as well as the reckless disregard of financial prudence by many subprime borrowers cannot be ignored.
False Illusions and Egos
From the outside looking in, Wall Street and Washington are populated by highly confident, assertive, and competent individuals who seem equipped to carry out their responsibilities in a capable manner. While there are many individuals who fit this description well, some of whom appear in Mr. Sorkin’s book, many others appear to suffer from the human defects that affect everyone else. At several points in the book, we can see cases where ego prevented otherwise intelligent actions from being taken.
For example, why did Lehman Brothers’ CEO Dick Fuld, shocking even his own team, attempt to abruptly change the terms of a nearly sealed deal with Korea Development Bank in early August that would have valued Lehman at a premium and likely saved the firm? Was it a matter of seeking better terms for his shareholders, a question of ego, or confidence that a government bailout would be a backstop if all else failed?
There are countless other situations in the book where the reader, with the benefit of hindsight, asks: Why?
Government players hardly come out of the story looking like heroes either, with the possible exception of Treasury Secretary Hank Paulson who had the unenviable task of coming up with solutions for the crisis without appearing to favor a bailout of his former colleagues at Goldman Sachs. Throughout Mr. Sorkin’s account of the events, it becomes quite apparent that helping Goldman was probably the last thing on Mr. Paulson’s mind.
Timothy Geithner, the current Treasury Secretary, was President of the Federal Reserve Bank of New York during the crisis. Mr. Geithner comes across as the main deal maker for the Fed while Chairman Ben Bernanke takes a much lower profile role. While there is no doubt that Mr. Geithner played a critical role, he often comes across as authoritarian in terms of his tactics. For example, at several points, he makes threats or orders bank CEOs to take action during meetings and simply leaves the room asking to be notified when a solution is in place. Whether this was necessary or not during these remarkable times is an open question, but this is not how we should want government officials to behave in normal times.
President Bush hardly appears in the narrative and seems quite detached in the few occasions where he is being briefed on the crisis. For all practical purposes, Secretary Paulson was calling the shots for the Executive branch of the Federal Government throughout this process. Sen. Barack Obama made a few appearances in the book (as well as on Secretary Paulson’s calendar) but Sen. John McCain hardly appears at all which is surprising given that he famously suspended his campaign in order to return to Washington and work on a solution for the crisis.
Financial Regulatory Reform
One of the interesting aspects of the book is the degree to which government officials pushed to “marry” commercial banks and investment banks during the height of the crisis in September. It seems like every possible permutation was considered, to the point where Mr. Geithner was referred to mockingly as “E Harmony” in a reference to the online dating site. At the same time, many in government blame the 1999 repeal of the Glass-Steagall Act, which prohibited the union of commercial and investment banks, for precipitating the crisis.
While the idea of giving investment banks access to stable deposits through commercial banks had a great deal of merit during the crisis, such mergers also created ever larger institutions, many of which are considered “too big to fail”. It seems that society must decide which is the lesser of two evils: Government regulations that seek to keep financial institutions small such that none can become “too big to fail” or heavy handed regulations that properly govern mammoth institutions that are obviously “too big to fail”.
Wall Street: Pick Your Regulatory “Poison”
Wall Street cannot have it both ways: If regulations are repealed that then allow financial institutions to grow so large that a failure would have systemic impacts, then regulations governing the conduct of these institutions is essential to avoid future crises from developing. On the other hand, if we accept regulations that prohibit mergers that will result in massive institutions, Wall Street firms should have more flexibility to conduct their ongoing affairs without as much regulatory scrutiny since the failure of any one institution will not be systemically important.
It seems preferable to have “blocking” regulations such as Glass-Steagall rather than “operational” regulations required to govern massive financial institutions that are of systemic importance. A “blocking” regulation is not as intrusive into the day to day operation of firms and is less likely to throw sand in the gears of capitalism. In contrast, the regulatory regime required to monitor massive systemically important institutions will, of necessity, be intrusive and bureaucratic.
“Too Big To Fail: The Sequel”?
There are many potential solutions that should lead to a more stable financial system going forward, but each passing week makes it less likely that reforms will be made. As the economy recovers and “business as usual” returns to Wall Street, the seeds are now being planted for the next crisis. While no doubt capable of the task, we should hope that Mr. Sorkin does not have the opportunity to write a sequel to Too Big To Fail. The consequences could be even more severe.
Tagged on: Financial Regulation Goldman Sachs Hank Paulson Lehman Brothers Timothy Geithner Too Big To Fail
The Rational WalkEconomics, Investing, Lehman Brothers, Politics, Reviews