Monday, June 27, 2011

TOO BIG TO FAIL - a book report

By Andrew Ross Sorkin

I am always astounded after reading a book like this. The research involved and the time consumed appear monumental to me. I purchased the book and read it during my plane rides to visit family and friends. The author describes in incredible detail the events and conversations of the principal participants during the financial crisis of the Fall of 2008 which led to Congress approving $700 Billion in aid to the major financial institutions in what was referred to as TARP (Trouble Asset Relief Program).
This is not a book highly recommended to read except for people like me who seem to enjoy delving into issues. It is 555 pages of financial topics way over my head. I cannot even conceive of the magnitude of dollars involved.
The Cast of Characters is located at the beginning. It takes eight pages to list them all, a who’s who of those at or near the top of the largest Corporations in the world. During the book the incredible sums of money are disclosed, again in amounts unimaginable to people like me.
The root cause was the irresponsible bundling together of mortgages, millions of which were given to people without the means to pay, many without a down payment of any kind. The underlining reason was the idea that housing would always increase in value. In my opinion this was idiotic. When values started dropping in 2006, people started walking away from their homes when the market value became less than the mortgage. Also during these years, good paying jobs were lost. Mortgage payments could not be made. As all of this started accelerating, the losses to the financial institutions built to unsustainable levels. Out of concern investors demanded the return of their capital. The value of bank stocks plummeted. Before the carnage was stopped by TARP, Lehman Brothers went bankrupt and was put out of business. Others like Bear Sterns, Wachovia and Merrill lynch were absorbed by larger firms. AIG was so far gone that it took $185 Billion to keep them from failing before it was all over.
“Hank” Paulson was Secretary of the Treasury; Tim Geithner was President of the Federal Reserve System. These were the two most important persons responsible for rescuing the banks. As the drama unfolded they tried to have the institutions themselves solve the problem by supporting their competitors. When it became obvious that this could not be accomplished then they pushed for government money, referred to by people like me as “bailout”. TARP was originally meant to be used to purchase toxic assets. In the end all the major companies agreed to accept government funds while granting stock as collateral. The following was not in the book, but from sources available to me all loans have been paid back with interest. That would seem to give credit to those involved. My concern is that nothing substantial has been done to lessen the threat of another crisis. Legislation put forth has been watered down to where meaningful safeguards have not been enacted. Senator Bernie Sanders of Vermont introduced a bill entitled “Too Big to Fail, Too Big to Exist”. Senators Maria Cantrell of Washington and John McCain of Arizona introduced a bill to re-instate Glass-Steagall. Neither passed based on the argument that we would be less competitive in the global marketplace. There just has to be a way to keep foreign banks from absorbing American owned, while still putting safeguards into the system.
The last sentence states “This generation of Wall Street CEOs could be the ones to forfeit America’s trust. When the history of the Great Depression is written, they can be singled out as the bonus babies who were so shortsighted that they put the economy at risk and contributed to the destruction of their own companies”.

Jack B. Walters
June 27, 2011

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