Book Review: Sorkin’s First Rate Wall Street Autopsy

By Coleman E. Shear

The strength of Andrew Ross Sorkin’s blow-by-blow account of the financial crisis as it unfolded from 2007 to 2009 is that it reads more like a fast paced novel than a textbook on the financial crisis. Sorkin benefits the average lay reader, who most likely has no experience understanding financial terms, by explaining complex financial instruments in a way that even the most financially illiterate can understand. Too Big to Fail brings the reader into the boardrooms of Wall Street’s biggest firms and into the halls of the Fed, enabling the reader to get inside the heads of Wall Street’s CEOS and major decision makers at the height of the crisis. Sorkin weaved this complex tapestry of interrelated events by interviewing over two hundred people and logging in over five hundred hours of interviews with those who were involved in the crisis. As such, Too Big to Fail is currently the definitive count of the financial crisis from the views of those in power who tried to contain it, and insofar as it worked, helped to prevent the destruction of the entire US financial system.

Understanding the crisis requires a basic knowledge of derivatives, and Sorkin spends a large amount of time exploring the development of two new derivatives in particular: collateralized debt obligations (CDOs) and credit default swaps (CDSs). He relates the advent of these new derivatives to the incentive problems that bringing about Wall Street’s current crisis. Using layman’s terms, he explains that CDOs are a collection of payoffs from mortgages put into a security (the CDO). This CDO is then split into various tranches based on levels of riskiness, the safest being those with “triple A” ratings. Before the advent of CDOs, the lenders participating in a mortgage often issued it with the expectation that they would be collecting the money paid by the holder of the mortgage. CDOs enabled the issuers of mortgages to simply sell off a mortgage after issuing it, thereby transferring away the entire risk of issuing a bad mortgage to some other lender or financial institution.  Now, the investment banks that underwrote the CDOs had an incentive to continue packaging mortgages into CDOs and selling them to other financial institutions, all of which held in trust the average American’s retirement savings. Bankers felt heavy pressure to continue underwriting these CDOs, fearing that they would fall behind if they didn’t. Compounding this malicious cycle of incentives was one more: bankers’ bonuses became increasingly dependent on issuing more CDOs.

The firms that went under in the financial crisis were those firms where the highly leveraged CDO issuance was extremely strong. Sorkin discusses in heavy and entertaining detail the corporate cultures at both Lehman Brothers and Merrill Lynch that created this mess. Both banks wanted to emulate Goldman Sachs’ example, and to do so how they leveraged themselves to the hilt, going so far as to lend 30 dollars for every dollar in reserve. Both banks began to develop a culture that rewarded risk, and Sorkin describes how Lehman and Merrill’s motivation to enter this new kind of derivative was driven by a sort of Goldman envy.

These banks had their confidence further buoyed by AIG, which helped the investment banks manage the risk of a default on their CDOs by selling them credit default swaps (CDSs). A CDS is a form of insurance where the buyer pays a premium protecting him from the risk of default on the asset that he holds; in this case, the underlying asset was a CDO. 

The problem, Sorkin makes clear, was not the derivatives themselves, but the underlying assets. Similarly to how Lehman and Merrill leveraged themselves to the hilt, AIG did not provide enough collateral to protect itself from impending defaults on these toxic assets. By the time major changes were made at the top levels at both Lehman and Merrill, the warnings given by AIG to get more collateral were largely too late. 

The reader sees a similar scramble throughout Wall Street when the banks were in the midst of the crisis to find greater liquidity.  Sorkin provides amusing anecdotes of Wall Street executives going as far as South Korea in pursuit of new investors to shore up their liquidity, and shares the story of how the US Treasury attempted to get Warren Buffett to endorse Lehman in order to give it more time to shore up its balance sheets.

The virtue of Too Big to Fail is its even-handed approach when looking at the titans of Wall Street. Sorkin — contra media trends — does not portray the banks’ CEOs and employees as greedy twenty-first century robber barons, but as men and women who have been given the responsibility to handle large amounts of risk and capital and who, by managing this risk, have created a better, more integrated worldwide economy. Sorkin enables the reader to marvel at the benefits of this new worldwide financial integration, but he also allows you to look back in horror at how this same integration enabled bankers in Iceland and sovereign wealth funds in the Emirates to bet on the US housing market, making this financial crisis’s consequences more global than any panic seen before.

Sorkin is not an economist, and his greatest contribution is not his financial analysis, but his complex psychoanalysis of the men in power on Wall Street. In addition to his examination of the problems of the corporate culture of excess, he explores the minds of several CEOs in particular — Richard Fuld of Lehman Brothers and Stanley O’Neal of Merrill Lynch — and shows how they became increasingly isolated from the day-to-day happenings of their companies. In his fair-minded way, Sorkin highlights these leaders’ character flaws even as he points out the attributes that brought them to the top. For all the nasty things that have been said about Richard Fuld, one comes away from Too Big to Fail with a real appreciation for Fuld’s tenacity and toughness. Sorkin’s biggest complaint about Fuld (and the one that sticks) is that as Fuld ascended Lehman’s ladder, he began to value loyalty over ability, surrounding himself with sycophants rather than Lehman’s most competent experts.

Sorkin’s thumbnail sketches of the government officials who tried to contain the crisis — Treasury Secretary Hank Paulson, then-head of the New York Fed Tim Geithner, and Federal Reserve chief Ben Bernanke — are also especially memorable. Sorkin’s book is full of admiration for Paulson, from his time at Goldman through to his tenure as Treasury Secretary. Sorkin’s portrayal of Paulson’s entrance into public service and his reluctance to take over the Treasury under Bush almost makes Paulson into a kind of Cincinnatus of finance, the exemplar banker. Lacking the ego and excess that many other CEOs are accused of, Paulson’s character is treated by Sorkin in an affectionate way, as he hands out anecdotes of Paulson’s college days at Dartmouth, where he sat in the SAE basement drinking non-alcoholic beverages. We also get a clip of Paulson’s odd social presence in Washington: when Paulson’s wife offers glasses of water to visitors from the Treasury Department, Paulson butts in that they don’t want anything to drink. Nevertheless, Paulson’s simple lifestyle — particularly in comparison to other CEOs — is constantly referenced as a positive quality.

Similarly to Paulson, JP Morgan’s Jamie Dimon is portrayed as a CEO that Americans should identify with. Dimon worked closely with Paulson to stave off the financial crisis, and Dimon emerged later as one of the first American CEOs to accept money from TARP, a move that was essential for making smaller banks throughout America accept relief from the federal government. 

If anything, Too Big to Fail is a story on leadership as much as it is an account of the collapse. Sorkin’s greatest ability is his knack for getting inside the heads of the leaders of these financial institutions. He analyzes them and understands their actions, looking at them from several points of view. Sorkin follows the rise and fall of each CEO, highlighting their abilities to rise from humble beginnings even as he shows how power and wealth corrupted many of them and shielded them from reality. 

In the reality-evasion department, nothing beats O’Neal’s private elevator at Merrill, which allowed him to avoid interacting with Merrill employees. Many CEOs are portrayed as living in particularly privileged ivory towers, unaware of the hell breaking loose underfoot. The takeaway of Too Big to Fail is that internal politics can destroy any great company, especially when leaders fail to allow themselves to be challenged.

But Sorkin also makes clear that there isn’t necessarily cause to storm Wall Street quite yet. While highlighting clear examples of corporate excess, Sorkin points to CEOs such as Jamie Dimon or Vikram Pandit who aren’t caught up in the culture of excess, and who genuinely seem more concerned in running their companies for the shareholders ahead of their own well being. 

What Too Big to Fail will be remembered most for is not it’s analysis of the financial crisis, but it’s ability to spin interlocking stories of these powerbrokers into one. Sorkin accomplishes this so well that by the end of Too Big to Fail, all of these stories — from the regulators to the CEOs — are intertwined into a giant, compelling, and nightmarish whole.