Too Big to Fail: the Inside Story of How Wall Street and Washington Fought to Save the Financial System– and Themselves

In Too Big to Fail, an extensive book about the Great Recession, Andrew Ross Sorkin uses over 500 hours of interviews with the key people involved to share the intricate details of how the 2008 crisis unfolded.

Perhaps the most interesting aspect of the U.S. financial system that comes to light in this book is how concentrated and interconnected the positions of high finance and federal government are. Upon starting this book, the reader is immediately exposed to just how close the leaders of the Treasury and the Federal Reserve work with top executives on Wall Street in the presence of market turmoil.

For traders and investors, this book offers incredible insight. Understanding how Treasury and Federal Reserve officials focus on market stability and helping large financial institutions allows traders to conduct a more accurate analysis of the debt and equity securities of these companies.

Precedents Set in the Economic Crisis of 2008

An important topic that arises in this book is how the actions of Treasury and Federal Reserve officials set critical precedents for future credit contractions and crises. The sheer effort by the former Secretary of the Treasury, Hank Paulson, to attain temporary power to infuse capital (using taxpayer money) is just one example of this.

Bear Stearns Controversy

Yet another precedent set during this time period was the Treasury's involvement and role as "matchmaker" between the insolvent banks needing help and the better-capitalized banks. As Sorkin describes in the first half of this book, Secretary Paulson played a central role in negotiating the $2/share takeover of Bear Stearns by JP Morgan. Interestingly, JP Morgan's CEO, Jamie Dimon, wanted to offer Bear shareholders $10/share because he wanted to make sure the deal was approved. While the Treasury department is not supposed to engage in Wall Street takeover negotiations, Paulson pressured Dimon to keep the offer at $2/share so that it would not look like Bear shareholders were being bailed out by the U.S. taxpayers. In the end, Bear shareholders ended up getting $10/share. Concurrently, the Federal Reserve, under leadership of Ben Bernanke (Chairman) and Tim Geithner (President of New York Fed) bought $29 billion of Bear's toxic assets to make the deal more attractive for Jamie Dimon.

bear stearns $2
A $2 bill supposedly taped on a window at Bear Stearns' headquarters to represent the initial takeover price.

Lehman Brothers Next in Line

After detailing the shotgun marriage of Bear Stearns to JP Morgan, Sorkin moves on to describe how Lehman Brothers was facing increasing pressure to deleverage. Dick Fuld, Lehman Brothers' CEO, spent months attempting to raise additional capital and sell off some of Lehman's assets. Fuld managed to raise some capital, albeit not enough, but he failed in the endeavor to make any deals to sell a portion of Lehman's assets.

lehman brothers dick fuld congress
Lehman Brothers' CEO, Dick Fuld, testifying before congress in 2010 about the bank's collapse.

For those familiar with accounting rules, there is a great lesson to learn from Lehman Brothers. The company used an accounting rule, known as Repo 105, to artificially lower liabilities on its balance sheet before earnings announcements. For more information on Repo 105, read this Harvard Blog Post.

As we all know, Lehman Brothers was the first of the "Big 5" investment banks that was allowed to fail. However, there is great insight to be ascertained by reading Sorkin's account of the firm's collapse.

AIG Insured Billions of CDO's

One of the last, largest dominoes to fall in the crisis was American International Group, one of the largest insurance companies in the world. As Sorkin points out, AIG executives thought the firm was invulnerable to the meltdown due to the fact that the company stopped writing insurance on CDO's containing pieces to sub-prime tranches.

Joseph Cassano, the former head of AIG's Financial Products division, was the primary leader who got AIG involved in the business of insuring collateralized debt obligations. Cassano was subsequently promoted to chief operating officer (COO). In August 2007, when the credit markets began contracting, Cassano told investors:

"It is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing $1 in any of those transactions."

joseph cassano aig
Joseph Cassano, former head of AIG's Financial Products Division, made $300 million from putting AIG in the position which required a $180 billion bailout of AIG.

Alas, AIG would go on to lose billions of dollars from these transactions and ended up needing intervention by the federal government to maintain its business as a going-concern.

This book offers the most detailed story of the actions that lead to the largest financial crisis since the Great Depression. While the specific events that took place in this time period are unlikely to repeat themselves, the manner in which central bankers and government officials interact with Wall Street during times of uncertainty still prevails today.

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Eric Bruin

Eric Bruin

Founder. Kelley School of Business ’17. Write about stocks and business news. Contact for business inquiries or to write articles for The Stock Trader Blog.

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