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Too Big to Fail by Andrew Ross SorkinBook Cover of Too Big to Fail by Andrew Ross Sorkin

Read by Tracy August 2011(OurBookClub book pick of the month for August 2011)

Tracy recommends as eye-opening

Too Big to Fail was shortlisted for the Samuel Johnson Prize 2010, but that wasn’t the reason I picked it up. I am interested about what actually happened to cause the Global Financial Crisis that impacted all of us, surely it couldn’t have been something so simple that could fit into one book. There must be something deeper, more fundamental. However, unbelievably this book felt like a Hollywood novel – bankers we trusted with everything turned against their own customers and the general public fundamentally believing that they were just too big to fail and ultimately not accountable for their actions expecting to be bailed out time and time again. Andrew Ross Sorkin isn’t an outsider, he worked for the New York Times covering the crisis so had an inside knowledge and was able to use his resources and sources to provide an extremely readable and exciting voyeuristic look into the psychie of the private banking system and how rivalry and greed brought Wall Street, the US Government and world markets to their knees.

As I read the book I became bewildered, I could see what was happening and I wasn’t a banker or had inside knowledge of trading systems, however, I wish I was being paid USD$1 million a month to be a consultant because I was crap at the job I was in and had to be shunted (pg 164). As usual there is a large percentage of blame that is directed to the large auditing firms, particularly PriceWaterhouseCoopers who represented some of the large banking and insurance firms to provide assistance in negotiating the value of assets which they valued differently for the different firms involved in transactions - surely is a clear dispute of auditing guidelines (pg 177). Then there is the stubbornness and stupidity of some of the executive management in the main firms involved. Richard S. Fuld Jnr (CEO) refused to sell Lehman for anything less than USD$10 per share which is what Bear Stearns got. Of course in the end he got nothing and so many people lost everything, he himself managed to keep a nice redundancy package.

The negotiations that were held to break up the companies and sell off what assets they could was particularly hard to digest. There was no thought for anyone or anything but themselves and their compensation packages and the amount of funds spent on consultants who did not add any perceivable value was baffling. In one case for the writing of a fairness opinion for Bank of America, both J. Christopher Flowers (chairman and founder of J.C. Flowers & Company) and Fox-Pitt Kelton (which Flowers firm also owned) were paid a combined USD$20million fee for a weeks work which was basically a rubber stamp. Where is there any value for the shareholders and the general public?

There is a lot of mention about Warren Buffet and I am sure some people would have expected him to play a large part in shoring up the banking industry, but he refused to be drawn into the negotiations as he fundamentally believed the underlying assets were toxic and if you aren’t convinced the investment is going to work or you don’t understand it, stay well away especially if it may jeopardize your company’s credit rating. Of course in the end there is always the good guy and Warren Buffet did eventually come to the party when he was offered an extraordinarily generous deal to provide Goldman Sachs with a desperately needed cash injection and who can blame Buffett, he himself runs an extremely successful investment firm and is ultimately responsible to his shareholders.

Even in the death throes of this manic period, many still believed it wasn’t their fault. When Morgan Stanley was on the brink of collapse, John J. Mack (Chairman and CEO) believed that his firm had done nothing wrong and instead it was the fault of rumour mongers within the market. At no point did anybody stand up and take responsibility for onselling increasing toxic market instruments and the rush to make even greater and greater funds for their companies. Eventually when the US Treasury officials went to see President Bush to advise that there was a problem with the financial markets and he asked “how did we get here”, the answer was that overly lax regulation which the now regulators had pushed for when they were employed for the private bankers. It just smacked of an old boys club and when combined with the banker’s overzealousness and home owners being encouraged to live beyond their means the economy became destabilized (pg 443).

One of the solutions that the Treasury Department came up with was to provide the individual banks with a cash infusion, whether they needed it or not, so that no bank was seen to be weaker or stronger than the others. Of course to get the money the banks had to agree to restrictions on compensation packages which currently rewarded for short term risk taking which was the main sticking point. The only bank that refused to sign was Wells Fargo who didn’t need the money and didn’t feel they should be penalised due to the other banks greediness and management ignorance. Finally one bank stands up amongst the others. Even more frustrating is that some of the banks have since paid the loans back just so they can continue to award ludicrously large bonuses that is totally out of proportion to the mainstream American that surely they must feel embarrassed. Barrack Obama puts it eloquently “the people on Wall Street still don’t get it. They’re still puzzled. Why are people still mad at the banks – well let’s see. You guys are drawing down ten, twenty million dollar bonuses after America went through the worst economic year that it’s gone through in decades and you guys caused the problem – why do you think people might be a little frustrated.” The almost instantaneous business as usual scenario that the financial industry quickly returned to has left an increasing disconnect between themselves and the public. With the US unemployment hovering at almost 10 percent for much of 2009, the banks announced huge profits and even huger bonuses – Goldman Sachs announced a record profit of USD$13.4 billion and paid out USD$16.2billion in bonuses (USD$148,000 per employee).

If this book was a movie it would be unbelievable but sadly it is true and things don’t look like they will change even with increasing government regulation in the financial sector. When the bankers are also the regulators and the auditors work for both there must surely be a conflict of interest that is insurmountable.

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