Euripides on the Financial Crisis

As noted earlier, the first wave of books about the financial crisis of 2007-2008 are now out and I have assigned a bunch of them in my money and banking class. We just finished Sorkin, Too Big to Fail. The review in a word: Outstanding.

Sorkin is a journalist for the NY Times (but the book is good despite that fact). He seems to have interviewed everyone working on Wall Street, and this book is a blow-by-blow story of the back rooms of Wall Street throughout 2008 (from Bear Stearns to TARP). An absolutely riveting read.

Here are my quick conclusions:
1. The whole story of 2008 is exactly like a Greek tragedy. The CEOs at the top are so full of pride that they resemble the captain of a ship which is slowly sinking who refuses to acknowledge that there is a serious problem here. This was not a fast moving crisis at all--there were months, literally months, between Bear Stearns and Lehman Brothers, everyone knew the trouble, but nobody could just take the steps necessary, painful steps to be sure, to avert a crisis.

2. A big part of the problem was the government's staggering indecision in all of this. After bailing out Bear Stearns, the other troubled institutions kept waiting for the government to bail them out too. The government kept saying it wouldn't bail them out, but then it kept calling up everyone trying to arrange assorted deals. Because the government was constantly in the middle of the discussion, everyone kept waiting for the bail-out details. The government responded by continuing to say there wasn't going to be a bailout, but then they kept playing along. It was a grand game of Chicken, but the government's promise not to bail out anyone simply wasn't credible enough for anyone to take the government seriously. Then Lehman Brothers failed and the government did not bail them out. However, the next day, the government suddenly bailed out AIG. In other words, the government blinked.

But here was the fascinating part--when Lehman Brothers failed, everyone knew AIG was also going to fail within the week. There was no doubt about this in anyone's mind. So, the government could have decided to bail out both firms or neither firm, but instead they panicked in the middle of the inevitable chain of events.

This problem of the government panic was pretty serious all year long. It most certainly added to the problem.

3. TARP was a joke even before it passed. Between the time the legislation was proposed and the time it was voted on, the Treasury had decided it wasn't going to buy troubled assets after all; but rather than announce that they had no intention of doing what the legislation authorized them to do, they realized that the wording was broad enough that they could use the TARP funds for other purposes after the legislation had passed.

4. There is a large disconnect on Wall Street between what the senior management knows and what the guys in the trenches are doing.

5. Nobody comes out looking good in this book, but on the other hand, there are no real villains here either. It was an old-fashioned financial crisis.

Great book--I'd highly recommend it to anyone who likes a good story, well-told.