Andrew Ross Sorkin's "Too Big to Fail"

This post from Arnold Kling over at Econlog prompted me to pick up the book "Too Big to Fail" by NY Times journalist Andrew Ross Sorkin. The book is a riveting, hour-by-hour account of last Fall's financial crisis.

I am about 80% of the way through the book, and so far have the following takeaways:

1) The Fed and Treasury organized bailout of Bear Stearns (where JP Morgan purchased Bear Stearns at $2/share while the Fed guaranteed up to $30 billion in potentially bad debt) caused all kinds of confusion and false expectations about the role the government would play as other banks got into trouble. For example, once it was obvious Lehman was in trouble, many potential buyers seemed to take a wait and see approach, in part because they wanted to see if the government was going to arrange yet another "sweetheart" deal. Sorkin tells one story where a potential Lehman buyer gets off the phone with Hank Paulson and says to himself “I want the Jamie Dimon (the JP Morgan/Bear Stearns) deal”.

Then it got to the point where the Lehman buyers were not even negotiating with Lehman, but instead were negotiating directly with Treasury and the Fed. In one incredible scene, the CEO of Barclays calls Tim Geithner to express interest in buying Lehman, and to his credit, Geithner says, “Why are you calling me?” The Barclays CEO insisted that he wanted to negotiate with the government and not with Lehman.

2) Hank Paulson, Secretary of the Treasury, is incredibly smart and well intentioned, but he seemed to be way too involved in every aspect of the crisis. Arnold Kling aptly describes him as a control freak. Plus, he had this rather striking and unwavering belief that the future of the country was at stake when it came to the survival of these investment banks. Not good.

3) The book portrays Chris Cox, the SEC chairman, as clueless and incompetent, but I found his hands off approach refreshing. There is a scene where Paulson wants Cox to call the Lehman board to tell them to file bankruptcy, but Cox is reluctant to do so because he thinks that it would be completely inappropriate for a government regulator to force a company into bankruptcy. Some of us might find his position completely reasonable, but Paulson was furious and other bankers mocked him as being stupid.

I think a little more Chris Cox and lot less Hank Paulson might have been a good thing for the entire situation. Who knows, had Chris Cox been in charge, maybe his cluelessness would have left the other Wall Street firms no choice but to take action, devise a plan to save themselves, and leave the taxpayers out of it.