Looking Back on Too Big to Fail

From the new afterword to Andrew Ross Sorkin's classic tale of the financial crisis, recommended by several FP Global Thinkers: Have we learned anything from our failures?

Two years after the greatest financial crisis of modern times, are we any closer to solving the Too Big to Fail conundrum?

Yes — and no.

The new reform legislation that is expected to be passed goes a long way toward fixing the way certain parts of Wall Street are regulated. The government is planning to create a Consumer Financial Protection Agency to be a watchdog over how mortgages and other products are sold by banks. It is also putting together a systemic risk council made up of various agencies to better share information in hopes of being able to spot a potential crisis before it turns into a real one. In addition, the legislation will likely push derivative trading at big banks into better-capitalized subsidiaries. And the government will finally be given resolution authority so it can wind down a big investment bank or insurance company — think Lehman and AIG — without the risks associated with a bankruptcy that could cascade through the system.

But the legislation still doesn’t go far enough. It has no provisions to deal with Fannie Mae and Freddie Mac, which have cost taxpayers some $130 billion. Derivatives will still be allowed to live, at least partially, in an opaque world. And big banks will still be big banks and they are still as interconnected as ever.

Early in the process Senator Bernie Sanders of Vermont responded to the legislation’s shortcomings by introducing the “Too Big to Fail, Too Big to Exist Act,” giving the government power to break up systemically important institutions. Senators Maria Cantwell of Washington and John McCain of Arizona, meanwhile, introduced a bill to reinstate Glass-Steagall. Neither proposal gained much enthusiasm, in part, because of arguments made by the industry that it would make the United States less competitive in the global marketplace.

“The fact is that some businesses require size in order to make necessary investments, take extraordinary risks, and provide vital support globally,” Jamie Dimon of JPMorgan Chase said. “America’s largest companies operate around the world and employ millions. This includes companies that can make huge investments — as much as $10 billion to $20 billion a year — and compete in as many as fifty to one hundred countries to assure America’s long-term success.”

Perhaps the most disquieting development that has taken place during the past year hasn’t been on Wall Street or in Washington, but global. No longer is the phrase “too big to fail” being associated with banks alone. It is now being used to describe municipalities and countries that, like many home borrowers, have become overleveraged. Much recent concern has focused on Greece, but Spain, Italy, Portugal, and Ireland are all considered vulnerable. In the United States, worries persist about whether the state of California will ultimately meet its day of reckoning.


“We cannot control ourselves. You have to step in and control The Street.”

Morgan Stanley Chairman John Mack, standing next to his wife, Christie, made this remarkably candid and poignant comment about the need for regulation in the fall of 2009, just a month after Too Big to Fail was originally published. Mack had been sitting in the audience of a panel on the financial crisis on which I was appearing when he surprised the group by offering a viewpoint that was contrary to that of most of his peers, who had been lobbying against any serious reform.

Mack offered an anecdote about why Wall Street’s culture — and perhaps our global culture of risk taking — would make self-policing nearly impossible.

At the height of the economic boom, he recounted, he had turned down an opportunity to make a highly leveraged loan, which would have likely included enormous fees, out of fear that it would later blow up.

“I missed a piece of business,” he acknowledged. “I can live with that, but as soon as I hung up the phone someone else put up ten times leverage.”

It is the ultimate truism: In the race for profits on Wall Street and elsewhere — and perhaps more important, as a matter of personal pride — someone is always willing to stick his neck out just a little farther than the next guy.

While that sort of heedless risk-taking has led to lucrative returns for many financiers in recent decades, the vulnerabilities in the financial system that have been exposed by the crisis must at some point lead to an accounting — not only of the practices that have become common on Wall Street but of the principles that underlie them. As Harvard’s Elizabeth Warren, chair of the Congressional Oversight Panel, has observed, “This generation of Wall Street CEOs could be the ones to forfeit America’s trust. When the history of the Great Recession 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. Or they can acknowledge how Americans’ trust has been lost and take the first steps to earn it back.”

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