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Review: Too Big to Fail
By Rolf Dobelli, Chairman, getAbstract
The ever-growing pile of books about the Great Recession holds two kinds of tomes: those that pontificate about what went wrong and what should change, and those that detail the minute-by-minute action in the boardrooms of Wall Street and Washington. This book is the second kind. New York Times reporter Andrew Ross Sorkin, who gained access to many high-level financial players, provides an ambitious, remarkably detailed account of the collapse and bailouts of 2008.
He accomplishes two noteworthy feats: He digs up information that wasn't widely known, and he writes a page-turning yarn. getAbstract recommends his book to investors, policy makers and businesspeople who seek a clear-eyed observer's perspective on Wall Street's meltdown.
Lehman teeters and puts all of Wall Street on the brink
In September 2008, Wall Street and the U.S. economy faced a calamitous collapse. Only a year before, the markets had celebrated eye-popping profits fueled by mortgage innovations. Those in the finance industry rewarded themselves well, garnering "an astounding $53 billion in compensation in 2007." Goldman Sachs CEO Lloyd C. Blankfein made $68 million. Then the inflated real estate market collapsed, and Wall Street began to teeter. Its debt-to-capital ratio was 32 to 1, a level of risk that guaranteed profits in boom times but proved ruinous in a bad market.
On March 17, 2008, JPMorgan Chase said it would rescue Bear Stearns in a fire-sale deal. Meanwhile, Lehman Brothers, another investment bank, was on the brink of failure. Its derivatives trading partners were skittish and its investors were leery, sending its once-solid stock swinging wildly; shares plunged as much as 48% in an hour of trading.
Although Lehman CEO Richard S. Fuld Jr. was responsible for the firm's risky approach, in some ways it didn't fit his usual style. Even as he had ramped up risk, Fuld had occasionally reminded his people that his approach had pitfalls. Then tough times came harder and faster than he'd expected. Nicknamed "The Gorilla" for his aggressive, intimidating style, Fuld had seen his share of tumult, including the Asian contagion of the 1990s and the September 11, 2001, terrorist attacks. Spurred by the success of Goldman Sachs, Fuld had pushed Lehman's leverage far beyond its conservative roots.
The strategy had paid off handsomely during the mortgage bubble, when Fuld's Lehman shares lifted his net worth to $1 billion. But, after Bear's panic sale, when investors and TV talking heads looked for the next victim of the mortgage meltdown, all signs pointed to Lehman. Even those who saw Lehman's potential failure as just an example of capitalism at work knew it could be disastrous to the financial markets that held the savings of millions of people and paid tens of thousands of workers who, unlike Fuld, didn't collect $40 million annual compensation deals.
If Lehman failed, Citigroup, Merrill Lynch and others were in danger. The task of saving financial markets fell primarily to President George W. Bush's Treasury secretary, Henry "Hank" Paulson, the former leader of Goldman Sachs; Timothy Geithner, head of the NY Federal Reserve (later the Obama administration's Treasury secretary); Jamie Dimon, CEO of JPMorgan Chase; and Ben Bernanke, Federal Reserve chair. When Paulson and Dimon had worked on Bear's rescue, Paulson had urged Dimon to offer $2 a share. Dimon went to $10 so shareholders would not reject it. Paulson thought that was better than Bear deserved.
As Lehman's shares and liquidity fell, Fuld approached Warren Buffett for a cash infusion. Buffett said no; he thought the business was too risky...
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Posted by: Garak | June 1, 2010 7:01 PM
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