Review by Choice Review
Recent events in the financial markets have generated a variety of books written by participants and financial journalists. Some cover specific individuals (e.g., Erin Arvedlund's Too Good to Be True, CH, Feb'10, 47-3272, devoted to Bernie Madoff), while others cover specific firms (e.g., J. P. Morgan in Gillian Tett's Fool's Gold, CH, Mar'10, 47-3932) or specific securities (credit-default swaps and collateralized debt obligations in Karen Ho's Liquidated, CH, Feb'10, 47-3259). In Too Big to Fail, Sorkin, a New York Times columnist, offers a broad overview that encompasses firms such as Merrill Lynch, Bear Stearns, Lehmann Brothers, and AIG; their managers; and the efforts by Washington to stave off the developing financial crisis. As in the previously mentioned books, Sorkin relies on personal interviews and published materials to weave a story of human greed, ego, and arrogance combined with risk taking and regulatory failure. The amount of factual information is massive, but analysis of the causes of the crisis is minimal. Readers interested in the facts and personalities associated with the financial crisis will find this book fascinating, but those wanting to better understand the causes of the financial meltdown will be disappointed. Summing Up: Recommended. General readers. H. Mayo The College of New Jersey
Copyright American Library Association, used with permission.
Review by New York Times Review
TWO leading Financial journalists have made worthy additions to the increasingly crowded shelf of books on our recent economic failure. In very different ways, John Cassidy and Andrew Ross Sorkin address the critical question of what exactly happened on Wall Street. Until we settle on at least a rough answer, we won't have a prayer of preventing the next crisis. Sorkin, a reporter and business columnist for The New York Times, has written what his publisher calls "a true-life financial and political thriller": 600 pages of dramatic scene play and salty dialogue in which powerful bankers and government regulators clash on the precipice of global depression. Since the broad outlines of these events are well known by now, "Too Big to Fail" can't deliver on the thriller billing. But Sorkin's prodigious reporting and lively writing put the reader in the room for some of the biggest-dollar conference calls in history. It's an entertaining, brisk book. Although Sorkin doesn't attempt much deep analysis, he does concisely summarize what he thinks all the maneuvering and sweaty panic add up to: "The calamity would definitively shatter some of the most cherished principles of capitalism," he writes. "The idea that financial wizards had conjured up a new era of low-risk profits, and that American-style financial engineering was the global gold standard, was officially dead." Cassidy's much shorter "How Markets Fail" offers a brilliant intellectual framework for Sorkin's narrative. In the process, Cassidy, a writer for The New Yorker, also sheds skeptical light on Sorkin's conclusions. The calamity of 2008 didn't shatter principles of capitalism; there isn't a static set of capitalist principles to destroy. Capitalism has meant different things to different thinkers and economic players. The recent debacle demonstrated the foolishness of one theory of capitalism: a Utopian version of free-market theology that happens to have dominated American economic thinking for two generations. Sadly, the financial wizards Sorkin portrays so colorfully are still very much with us, and their simplistic mythology is far from "officially dead." Cassidy traces ideas about capitalism from Adam Smith's 18th-century "invisible hand" through Alan Greenspan's hands-off philosophy toward regulating banks as chairman of the Federal Reserve from 1987 to 2006. The theory that Greenspan inherited from Milton Friedman, high priest of the Chicago School, "says simply: self-interest plus competition equals nirvana," Cassidy writes. Greenspan applied this idea in various contexts, perhaps most notably when he opposed government oversight of an increasingly manic Wall Street casino culture based on his faith that rival financiers would police one another and not take potentially self-destructive risks. The blind faith that Greenspan exemplified turned out to be flat wrong. "For him to claim that the market economy is innately stable wasn't merely contentious," Cassidy writes; "it was an absurdity." Greenspan, as Cassidy recounts, credited Adam Smith, the bookish Scotsman, as a pivotal influence. "Our ideas about the efficacy of market competition have remained essentially unchanged since the 18th-century Enlightenment, when they first emerged, to a remarkable extent, largely from the mind of one man, Adam Smith," Greenspan asserted in his 2007 memoir, "The Age of Turbulence." But how carefully, Cassidy asks, did Greenspan and his ilk read what their hero actually wrote? Smith did observe that butchers and brewers pursuing individual enrichment tend to produce societal advantages. When it came to financial institutions, though, Smith advocated government restrictions - for example, preventing banks from issuing too many promissory notes to unworthy borrowers. "Such regulations may, no doubt, be considered as in some respects a violation of natural liberty," Smith wrote. "But these exertions of the natural liberty of a few individuals, which might endanger the security of the whole society, are, and ought to be, restrained by the laws of all governments." Cassidy writes: "Alan Greenspan and other self-proclaimed descendants of Smith rarely mention his skeptical views of the banking system. . . . The notion of financial markets as rational and self-correcting mechanisms is an invention of the last 40 years." Not coincidentally, Greenspanism serves the interests of two important institutions: the virulently antigovernment "movement conservatism" that became a political force in the United States beginning in the 1960s and the Wall Street titans that gained startling influence in an American economy marked by the closure of plants making cars, clothes, electronics and steel. Big banks are different from ordinary companies. When a factory or a trucking firm or a chain of retail stores goes bankrupt, groups of employees and shareholders may suffer terribly. But the damage is contained. When major financial institutions simultaneously make reckless bets with borrowed money, and then approach collapse, the entire economy can freeze up. Credit disappears. Businesses can't borrow for payroll. Layoffs ensue. Consumers stop spending. Stocks plummet. Without careful oversight, financial markets tend naturally toward excess and crisis. The easy-lending housing bubble was preceded by the dot-com stock craze of the 1990s, and before that by the savings-and-loan fiasco of the 1980s, and so on back through time. Many sensible economists and business leaders - advocates of capitalism, all have acknowledged the perilous aspects of self-interested financial enterprise without suggesting a switch to Soviet-style central planning or preindustrial feudalism. Cassidy's favorite is the redoubtable Hyman Minsky, who taught at Washington University in St. Louis and served for years as a director of the charmingly named Mark Twain Bank in that heartland city. No radical, Minsky studied how to create conditions in which businesses can thrive. "From the early 1960s until shortly before his death in 1996," Cassidy writes, "Minsky advanced the view that free-market capitalism is inherently unstable and that the primary source of this instability is the irresponsible actions of bankers, traders and other financial types. Should the government fail to regulate the financial sector effectively, Minsky warned, it would be subject to periodic blowups, some of which could plunge the entire economy into lengthy recessions." Sound familiar? With the pithiness of atalented journalist, Cassidy translates Minsky's scholarship into the helpful theory of "rational irrationality." The individual, short-term actions of a bond trader or subprime lender may make sense in that they will yield a quick profit, but taken together and unchecked by stern rules and a public-spirited overseer, the behavior of the herd can destabilize the entire system in a manner that, in retrospect, seems pretty crazy. It's rational for a mortgage company to loan $500,000 to a borrower who can't pay back the money if the lender can immediately sell the loan to a Wall Street investment bank. It's also rational for the investment bank to bundle a bunch of risky home loans and resell them - for a tidy profit, of course - to hedge funds as a bond. Such bonds, known as mortgage-backed securities, were attractive to hedge funds and other investors because they paid relatively high interest. Sure, the bonds were risky (remember that the home buyers never really should have qualified as borrowers in the first place), but many investors bought a form of insurance against the bonds' defaulting. The sellers of this insurance, called credit default swaps, assumed they'd be able to collect premiums and never have to pay out very much because real estate prices would keep rising forever - so those original dubious borrowers would be able to refinance their unrealistic loans. Everyone felt especially rational about all of this because prestigious credit-rating agencies issued triple-A stamps of approval for the exotic, high-interest securities. Never mind that the rating agencies were paid - i.e., bought off - by the very investment banks peddling the mortgage-backed securities. In "Too Big to Fail," Sorkin skillfully captures the raucous enthusiasm and riotous greed that fueled this rational irrationality. The brokers and bankers and traders he brings to life couldn't resist doing one more insanely hazardous deal because, well, everyone else was doing it, and the profits were too alluring. The only event likely to disrupt the party was if real estate went bust all across the country. And then, that's exactly what happened. The most sobering aspect of Cassidy's fine work is that "American-style financial engineering," as Sorkin calls it, isn't dead at all. Some of the most headstrong captains of Wall Street have been sidelined earlier than they expected, with egos bruised and fortunes reduced. But Congress and the Obama administration are proposing regulatory reforms that tinker with the current system rather than overhaul it. Wall Street, having never really atoned for its latest destructive frenzy, is now winning concessions that weaken the modest proposed reform initiatives with loopholes. "Evidently, the White House has swallowed the Wall Street line" on reining in exotic financial products, Cassidy writes. He fails to add that the big banks are spending millions on lobbyists to push their line in Washington. Legislation to provide oversight of credit default swaps and other derivatives would allow so many exemptions that it may turn out to have little meaning. Neither the Federal Reserve nor the Securities and Exchange Commission appears to have the mettle to impose strict limits on the kind of gambling with borrowed money that drove storied investment banks out of business or into the hands of taxpayer-backed rescuers. And no one in a position of authority has had the temerity even to suggest that we ought to revisit the deregulatory moves of the 1990s - backed by Greenspan and executed by the Clinton administration - that allowed the creation of unmanageable financial monstrosities like Citigroup, which would have disintegrated absent a huge amount of federal aid. These goliaths are now considered, in the words of Sorkin's title, "too big to fail." Protected by an implied taxpayer safety net, they have a built-in motivation to start taking absurd risks again, as memories of the trauma of 2008 begin to fade. Greenspan, to his credit, admitted in Congressional testimony in October 2008 that his assumption about self-correcting financial markets had flaws. But he's gone from the public stage, and the rest of the country's power elite seem to have forgotten his striking apology. We need a newgeneration Hyman Minsky to teach us to fear rational irrationality - and this time, we need to act before things come apart. The notion of financial markets as self-correcting 'is an invention of the last 40 years.' Paul M. Barrett, a frequent contributor to the Book Review, is an assistant managing editor at BusinessWeek.
Copyright (c) The New York Times Company [December 14, 2009]
Review by Library Journal Review
This blow-by-blow narrative centers on the near implosion of Wall Street in September 2008. Sorkin, chief mergers and acquisitions reporter at the New York Times, concentrates his story on Lehman Brothers, AIG, and Merrill Lynch. With these and other financial firms at risk, Treasury Secretary Henry Paulson, other government officials, and hundreds of bankers scrambled to avoid what they thought could be financial Armageddon. From hundreds of interviews and other sources, Sorkin constructs a detailed account of the meetings, phone calls, and even the thoughts of the participants, depicting scenes of bankers and government officials under extreme stress as Lehman went bankrupt, Merrill merged with Bank of America, and AIG became essentially a ward of the government. Sorkin's analysis ends with Paulson's forcing Troubled Asset Relief Program funds on the nine largest banks in October 2008. Verdict The level of detail and the multiple typos in the published edition will test many readers' patience. General readers may not find this the introduction and explanation that they were looking for, but Sorkin's historical account of this critical time is highly recommended for motivated readers already in the know. [See Prepub Alert, LJ 6/15/09.]-Lawrence Maxted, Gannon Univ. Lib., Erie, PA (c) Copyright 2010. Library Journals LLC, a wholly owned subsidiary of Media Source, Inc. No redistribution permitted.
(c) Copyright Library Journals LLC, a wholly owned subsidiary of Media Source, Inc. No redistribution permitted.
