On the Brink, In Fed We Trust, Too Big to Fail, and How Markets Fail
The Lehman Brothers conference call for investors on the morning of Sept. 10, 2008, wasn鈥檛 an ordinary unveiling of quarterly earnings. It was a bid for survival, and both Lehman鈥檚 top executives and those dialing in knew it.
Beneath a veneer of calm, chief executive Richard Fuld was fighting to persuade clients and investors that his firm was still solvent.
鈥淲hat last statement can you say,鈥� one stock analyst pleaded near the end of the call, 鈥渢o give comfort that there aren鈥檛 major additional [problems] in the commercial real estate [portfolio]?鈥�
Fuld tried to provide an encouraging response, but the reservoir of trust on which Lehman鈥檚 borrowing and business ties depended was evaporating. In five days this icon of Wall Street would be forced to file for bankruptcy. More important, the US economy would be disrupted in ways that are still being felt today.
As a news reporter, I was listening in on the call and wondering the same things as the investors: Is this firm going to make it? What鈥檚 that real estate really worth?
Lehman鈥檚 collapse became a pivot point in the financial crisis, the moment when the economy tanked and federal rescue efforts ramped up to historic proportions.
Now, several books are offering useful in-depth accounts of how this crisis sneaked up on America and what was done to contain it. No single book can tell the whole story. But the four discussed here each offer valuable insights. Any one is worth a read individually, and as a group they form a fairly comprehensive picture.
The most recent is Henry M. Paulson鈥檚 On the Brink. It鈥檚 the first account written by one of the principal officials for the US government during the storm of 2008.
The title, of course, refers to the fact that Paulson was Treasury secretary as the nation went to the very brink of economic catastrophe.
Paulson delivers a narrative that鈥檚 never dull or overtechnical. It鈥檚 his own story, so you鈥檒l learn about his rural Midwestern childhood and his religious faith.
(Disclosure: Paulson is aligned with the 海角大神 Science Church, whose publishing arm produces this weekly. And his daughter is a colleague of mine on the Monitor鈥檚 staff.) Long before his rise to the top of investment firm Goldman Sachs, Paulson says he learned to run toward problems when he saw them.
His Treasury job gave him more opportunity to do that kind of running than he could have imagined. The book reproduces a log of his schedule on one frantic day, during which he was making or receiving a phone call practically every five or 10 minutes from sunup to bedtime.
The efforts by Paulson and other officials to save Lehman feature prominently. The failure of those efforts sets the stage for the book鈥檚 finale 鈥� the rush to set up a wider safety net for virtually the whole financial industry. The $700 billion Troubled Asset Relief Program (TARP) proved deeply unpopular with the public, but provided a crucial backstop that averted a deeper economic meltdown.
Two other books cover much the same crisis terrain as Paulson鈥檚, but from different vantages. In Fed We Trust is Wall Street Journal columnist David Wessel鈥檚 narrative of the crisis, centered mainly around the actions of the nation鈥檚 central bank, the Federal Reserve. Andrew Ross Sorkin鈥檚 Too Big to Fail chronicles the crisis from the author鈥檚 perch as a Wall Street reporter.
While the strength of Paulson鈥檚 book is in hearing him speak from his own unique vantage, Sorkin鈥檚 book brings readers through the same cataclysmic months from a kind of omniscient observer viewpoint. It weaves information from more than 500 interviews with key players into a seamless narrative with concise and compelling vignettes.
In one scene, hundreds of bankers from Goldman Sachs and other Wall Street firms have gathered on the 16th floor of insurance firm American International Group. The company is seen as the next giant poised to fall after Lehman, and the teams of bankers are trying to see if there鈥檚 a way to extend an emergency loan. As they scramble to figure out how big a hole needs to be filled, no one in the room seems to have key numbers on the company. 鈥� 鈥業s there anyone who works for AIG in this room?鈥� a voice shouted out,鈥� as Sorkin relates. 鈥淲hen no one raised a hand a wave of nervous laughter swept the room.鈥�
If you want a blow-by-blow account, with a cast of characters longer than that found in Tolstoy鈥檚 鈥淲ar and Peace,鈥� 鈥淭oo Big to Fail鈥� is your book.
鈥淚n Fed We Trust,鈥� in a different way, may offer the best overview of the crisis. It鈥檚 shorter, more analytical, and more explanatory. You won鈥檛 get so much of who said what on a key phone call, but Wessel walks the lay reader through the essential features of the crisis, the historical role of the Fed, and how officials adapted to shifting circumstances. Although focused on the central bank, the book also wraps in the Paulson Treasury.
Wessel鈥檚 recurring theme is that Fed Chairman Ben Bernanke, who focused his academic research on the 1930s, decided he must do 鈥渨hatever it takes鈥� (with assists from Paulson and the Fed鈥檚 Timothy Geithner) to stave off a repeat of the Great Depression.
Economic historians will surely continue to debate what different courses of action might have been more effective. But it鈥檚 not clear that a better path 鈥� to stave off a devastating collapse of the economy 鈥� was available legally or politically. Moreover, other people who might have been tapped to serve in key Fed or Treasury posts might have done much worse than Bernanke, Paulson, & Co.
The final book reviewed here is a different animal 鈥� a chronicle of economic ideas more than of the crisis itself. John Cassidy of The New Yorker, in How Markets Fail, argues that a rising faith in the 鈥渆fficiency鈥� of free markets ended up endangering those very markets. Free enterprise can achieve much that central planning can鈥檛, but sometimes individuals acting in what they believe are rational ways produce irrational outcomes for society.
Readers may feel that Cassidy oversimplifies things in focusing on this 鈥渞ational irrationality鈥� factor as a root of the credit boom and bust, but his ideas are worth pondering as society grapples with a vital lingering question: how to avoid such crises in the future.
Mark Trumbull is a Monitor staff writer.
