Too Big to Fail

by Andrew Ross Sorkin

  The financial industry had always been intended to be something of an unseen backroom support for the broader economy, helping new businesses get off the ground and mature companies adapt and expand. Yet in the years leading up to the crisis, the finance sector itself became the front room. The goal on Wall Street became to generate fees for themselves as opposed to for their clients. As this book went to press, the handful of proposals that have been introduced to put the financial system back in its right place and rein in risk have seemed tepid and half hearted, at best. Relieved that the worst is supposedly behind us, the Obama administration seems to have moved on to other priorities.

  Meanwhile, Wall Street, bent but not broken, rumbles on in search of new profits. Risk is being reintroduced into the system. Vulture investing is back in vogue again, with everyone raising money in anticipation of the collapse of commercial real estate and the once-in-a-lifetime bargains that might be available as a result. Perhaps most disturbing of all, ego is still very much a central part of the Wall Street machine. While the financial crisis destroyed careers and reputations, and left many more bruised and battered, it also left the survivors with a genuine sense of invulnerability at having made it back from the brink. Still missing in the current environment is a genuine sense of humility.

  As this behind-the-scenes tale has, I hope, illustrated, in the end, whether an institution—or the entire system—is too big too fail has as much to do with the people that run these firms and those that regulate them as it does any policy or written rules. What happened during this period will be studied for years to come, perhaps even by a new generation of bankers and regulators facing similar challenges.

  When the post-bailout debate was still at its highest pitch, Jamie Dimon sent Hank Paulson a note with a quote from a speech that President Theodore Roosevelt delivered at the Sorbonne in April 1910 entitled “Citizenship in a Republic.” It reads:

  It is not the critic who counts: not the man who points out how the strong man stumbles or where the doer of deeds could have done better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood, who strives valiantly, who errs and comes up short again and again, because there is no effort without error or shortcoming, but who knows the great enthusiasms, the great devotions, who spends himself for a worthy cause; who, at the best, knows, in the end, the triumph of high achievement, and who, at the worst, if he fails, at least he fails while daring greatly, so that his place shall never be with those cold and timid souls who knew neither victory nor defeat.

  It was a remarkable quote for Dimon to have chosen. While Roosevelt’s words described a hero, they were deeply ambiguous about whether that hero succeeded or failed. And so it is with Paulson, Geithner, Bernanke, and the dozens of public- and private-sector figures who populate this drama. It will be left to history to judge how they fared during their own time “in the arena.”

  ACKNOWLEDGMENTS

  This book had its origins in the wee hours of the morning of Monday, September 15, 2008. I had just gotten home at about 2:30 a.m. after working flat out for days with my colleagues at the New York Times as we sought to report all of the details of what has become perhaps the most storied weekend in our economic history. When I walked in the door I was still in shock, having just finished writing the paper’s lead article that morning: Lehman Brothers had officially filed for bankruptcy protection, Merrill Lynch was sold to Bank of America, and American International Group was teetering.

  Desperate to talk to someone about what had just happened, I woke up my wife, Pilar Queen, to share the news with her. “You’re not going to believe this,” I said, as I recounted all of the dramatic details. “It’s like a movie!”

  Pilar looked at me for a split second, and before pulling the sheets back around herself and going back to sleep, she said, “No, it’s like a book.”

  For the entire week after that conversation I resisted even considering the idea of writing a book. I was overwhelmed with my reporting for the paper, and the thought of ever writing more than a few thousand words at once frankly scared me. But Pilar was persistent, nudging me gently but firmly, and ultimately persuading me to take on the task, believing that I was capable of doing so even when I didn’t. For virtually the next 365 days she encouraged me through the completion of this project—one that often felt like trying to sprint for the duration of an entire marathon.

  I also owe a special thank-you to my parents, Joan and Larry Sorkin, and to my sister, Suzie. Whatever success I’ve had in my life has been a direct result of their love and support. When I was in high school they would all anxiously hover over me as I struggled to write my term papers; to them—and to me—the very idea that I would end up writing a book is more than a little inconceivable.

  There is one important family member I need to mention who didn’t get to read this book—or witness the climax of the financial crisis. Up until the Friday of “Lehman Weekend”—September 12, 2008—I was fortunate enough to have all four of my grandparents. But that Friday my grandfather Sidney Sorkin passed away at ninety-one years old. He had always been a voracious a reader, and I felt that he would have urged me to continue to cover the events of that weekend as I grieved his death.

  I have been encouraged throughout my life by my three other grandparents, Chester and Barbara Ross and Lilly Sorkin—all proudly over the age of ninety—who have also been tremendous sources of support over the past year.

  Writing a book can be an isolating experience, but I was helped through it by so many dear friends at various points in the process that I never felt alone. I owe a special debt of gratitude to Jeff Cane, my former longtime editor at the Times, who has an encyclopedic knowledge of Wall Street and offered his assistance from the very beginning. My pal Jim Impoco, another of my favorite former editors at the Times, offered keen suggestions throughout, as did Hugo Lindgren, a brilliant editor at New York magazine (and another former Timesman). Michelle Memran, researcher and fact-checker extraordinaire, tracked down the most obscure details and made the most meticulous timelines imaginable, helping me keep track of a very complicated plot. In the final weeks of the project, Pam Newton, another researcher, tirelessly located people on various continents. These friends worked at all hours, often sacrificing time with their families, to help me see this project through.

  One of the reasons I wrote this book at all was that I was lucky enough to have as my editor Viking’s Rick Kot, who edited my favorite business book of all time, Barbarians at the Gate. Rick was a good friend before this project, and he’s an even better friend now. He hustled to make this book work under enormous time pressure, and his deft editing improved every page. His assistant, Laura Tisdel, was also remarkable, simultaneously juggling a dozen moving parts at the same time. Clare Ferraro, Viking’s president, believed in the vision of this project from the moment I walked in the door to pitch it. I am also indebted to the rest of the Viking team, who worked around the clock to make this book happen: Rachel Burd, Carla Bolte, Pat Lyons, Fabiana Van Arsdell, Paul Buckley, Jennifer Wang, Carolyn Coleburn, Yen Cheong, Louise Braverman, Linda Cowen, Alex Gigante, Melanie Belkin, Jane Cavolina, Norina Frabotta, Susan Johnson, John Jusino, Michael Burke, Martha Cameron, Beth Caspar, Hilary Roberts, Jackie Véissid, Christina Caruccio, and Noirin Lucas.

  My agent, David McCormick, did everything a good agent should do—only better. I’m also grateful to P. J. Mark, who handled the international sales of this project, and Leslie Falk. I must also thank Matthew Snyder, my film agent at Creative Artists Agency, who has been with me since 2001.

  I would be remiss if I did not acknowledge my extraordinary colleagues at the Times, many of whom generously offered their editorial guidance—and, more important, emotional support—whenever I was on the verge of mental and physical exhaustion, which was more often than I’d like to admit. I’m especially grateful to Jenny Anderson, Liz Alderman, Alex Berenson, Adam Bryant, Eric Dash, Charles Duhigg, Geraldine Fabr
ikant, Mark Getzfred, David Gillen, Diana Henriques, David Joachim, P. J. Joshi, Kevin McKenna, Dan Niemi, Joseph Nocera, Floyd Norris, Winnie O’Kelley, Cass Peterson, Tim Race, and Louise Story. I’d also like to single out a special group of people at the Times who have become a very important part of my life: the team behind DealBook, an online financial report I started in 2001. My good friends and trusted partners, Peter Edmonston, Michael J. de la Merced, and Liza Klaussmann, are largely responsible for much of our early success. As our team has grown, it has also been a pleasure to work with Zachery Kouwe, Steven M. Davidoff, Jack Lynch, Cyrus Sanati, and Chris V. Nicholson.

  I’d also like to acknowledge my friends at CNBC, especially the Squawk Box team and the old Kudlow & Cramer crew, which put me on television when I was twenty-five years old and had no business being in front of a camera.

  A handful of friends from various parts of my life who supported this project and my career also deserve thanks: David Berenson, Dan Bigman, Graydon Carter, Cynthia Colonna, Alan Cowell, David Faber, David Goodman, Warren Hoge, Mark Hoffman, Ben Hordell, Joe Kernen, the Malman family, the Queen family, Carl Quintanilla, Anita Raghavan, Dan Richenthal, Becky Quick, Charlie Rose, Seth and Shari Saideman, the Schneiderman family, Alixandra Smith, Doug Stumpf, Matt and Melissa Sussberg, Jonathan Wald, the Weinberg family, Josh and Lauren Wolfe, and Michael Wolff. I’m sure I have inadvertently left out more than one person on this list, for which I apologize in advance. (I have purposely not included anyone who could possibly be confused as a source for this book.)

  Perhaps my biggest thank you goes to my employer, the New York Times. I first started at the paper when I was eighteen years old, back in the spring of 1995, pretty much by accident. Stuart Elliott, the paper’s advertising columnist, whom I read religiously, was crazy enough to let me in the building. An editor, Felicity Barringer—unaware of my age—took a gamble and assigned me a story. Glenn Kramon, the business editor, was trusting enough to let me stay, and later to hire me when I graduated from college and send me to London. Larry Ingrassia, the current business editor, not only kept me around, but gave me a column—always going above and beyond to support me. And Bill Keller, the paper’s executive editor (and Joe Lelyveld before him, when I originally joined the paper) allowed—even encouraged—all of this to happen. I owe my career to these people.

  I am especially thankful to Larry and Bill—as well as to managing editors John Geddes and Jill Abramson—for generously giving me the time to write this book. I must also thank two people on the other side of the “wall”: Arthur Sulzberger Jr., the paper’s publisher, and Martin Nisenholtz, senior vice president of digital operations. Both of them have not only encouraged my career in journalism but have also supported my entrepreneurial efforts to help the paper.

  Finally, this book would not have been possible without the hundreds of people on Wall Street, in Washington, and elsewhere who generously sacrificed their time to share their insider account to help me tell this important story. As I promised them, I have identified none of them by name here, but they know who they are. And they know how truly grateful I am.

  NOTES AND SOURCES

  When I first began this project I could have never imagined the twists and turns the reporting process would take. Relying on the many relationships I had developed on Wall Street and in Washington over the past decade as a reporter at the New York Times, I set about trying to reconstruct the record, pressing my sources to re-create hundreds of meetings and phone calls. Some participants were generous with their time; others were more reluctant, as the economic crisis remained an open wound.

  But happily hundreds of participants did agree to speak with me, some for as long as ten hours. One CEO, whom I have known for several years, arrived at our first meeting with meticulous handwritten notes from the big weekend at the Fed, and had even drawn an illustration of where all the participants sat around the table. “I’m giving you them for the same reason I took them,” he explained. “This was history in the making.” Another source provided videotape recordings of several internal meetings, while others, often after some cajoling, allowed me to view their calendars or e-mail archives. The greatest challenge I faced, oddly enough, was dealing with what often felt like too much information. In trying to reconcile five different versions of a meeting, for instance—from people who were in a sleepless haze at the time—I often found myself repeatedly going back to the same sources to confirm even the tiniest details.

  To aid in my reporting, I tried to rely as often as possible on the written record, and I was lucky to have found sources who often took incredible notes or provided access to internal documents, e-mails, presentations, scripts, etc. I also relied upon government documents that I obtained through Freedom of Information Act requests. Both Henry Paulson’s and Tim Geithner’s calendars helped provide key dates and times. However, it is worth noting that both of those calendars—like diaries I was provided by others—often contained errors about dates or specific meetings.

  It was clear from the very beginning of this project that no matter how eager I was to interview these participants on the record, I was not going to get very far if I truly wanted to capture the personal, behind-the-scenes machinations of this dramatic period. As I indicated in the author’s note at the beginning of this volume, the majority of subjects interviewed took part only on the condition that they not be revealed as a source, though I was free to capture their contemporaneous words and feelings in the text as they remembered them.

  Even in conversations that appear to be between only two people, it is remarkable how many others may have been privy to them. For example, many of the calls conducted by CEOs and government officials took place on speakerphone, sometimes with a dozen people listening in. Other times, a detailed description of a conversation might have been sent by e-mail immediately afterward by one of the participants to a colleague, and forwarded to others.

  It is worth noting that much of the dialogue that appears in this book came from the best recollections of participants. As a result, it should be said that the dialogue cannot be considered to be the same as an exact transcript. I have sought out as many sources as possible for confirmation, especially for particularly memorable remarks, but the dialogue is only as good as the memories of those who recalled it.

  I have also relied on a treasure trove of reporting by my peers in the business press, who, it must be said, did a remarkable job covering these events in real time, and I have sought to credit them in the notes that follow. Even in instances where I have confirmed the information independently, I have still tried to identify the news article that reported the information first, though I am sure I have inadvertently overlooked some publication or article that may have broken a piece of news or detail that is included in this volume.

  Some of the best reporting that took place during this period, I am proud to say, came from my colleagues at the New York Times. But I must also acknowledge the excellent reporting by the Associated Press, Bloomberg, BusinessWeek, CBS’s 60 Minutes, CNBC, Forbes, Fortune, Institutional Investor, Reuters, the Washington Post, and the Wall Street Journal. Among others, I’d like to single out two remarkable reporters at the Wall Street Journal who I found myself citing frequently: Susanne Craig, who led that paper’s coverage of Lehman’s collapse, and Deborah Solomon, whose Washington coverage was first rate.

  Finally, any fact or piece of dialogue not cited in the notes below came from one or more of my confidential sources or documentary evidence that was provided to me.

  PROLOGUE

  “Lehman Races Clock”: Susanne Craig, Deborah Solomon, Carrie Mollenkamp, and Matthew ‘Karnitschnig, “Lehman Races Clock; Crisis Spreads,” Wall Street Journal, September 13, 2008.

  Blankfein, alone took home $68 million: In addition to his salary, Blankfein earned a $67.9 million bonus in 2007—“the biggest ever for a top Wall Street executive.” Christine Harper, “Wall Street Bonuses Hit Record $39 Billion for 2007,” Bloomberg, January 17, 20
08; Susanne Craig, Kate Kelly, and Deborah Solomon, “Goldman Sets Plan to Escape U.S. Grip,” Wall Street Journal, April 14, 2009.

  Goldman Sachs, ranked at the top of the five leading brokerages: Harper, “Wall Street Bonuses Hit Record,” Bloomberg.

  “The whole world is moving”: Louis Uchitelle, “The Richest of the Rich, Proud of a New Gilded Age,” New York Times, July 15, 2007.

  “ate their own cooking”: As Emanuel Derman, of hedge fund Prisma Capital Partners, noted: “These guys ate their own cooking; they didn’t just pass it on to clients.” Paul Barrett, “What Brought Down Wall Street?” BusinessWeek, September 19, 2008.

  “The sudden failure or abrupt withdrawal”: Charles A. Bowsher, comptroller general of the United States, said this on May 18, 1994, before the Senate Committee on Banking, Housing, and Urban Affairs. http://www.gao.gov/products/GGD-94-133.

  “The impact on the broader economy”: “Chairman Bernanke Testifies Before Joint Economic Committee,” U.S. Fed News, March 28, 2007.

  Bear Stearns’ hedge funds failing: In July 2007, the High-Grade Structured Credit Strategies Fund and the High-Grade Structured Credit Strategies Enhanced Leverage Fund caved in. Kate Kelly, “Barclays Sues Bear Over Failed Funds,” Wall Street Journal, December 20, 2007.

  BNP Paribas: “BNP Paribas Freezes Funds Amid Subprime Concern,” Bloomberg, August 10, 2007.

  CHAPTER ONE

  the twelve-acre estate: His Greenwich property, worth an estimated $11 million, has a home with twenty rooms, eight bedrooms, a tennis court, a squash court, and a pool house. It’s one of five Richard Fuld owns. Steve Fishman, “Burning Down His House,” New York, December 8, 2008.