72 pages • 2 hours read
Andrew Ross SorkinToo Big To Fail
Nonfiction | Book | Adult | Published in 2009A modern alternative to SparkNotes and CliffsNotes, SuperSummary offers high-quality Study Guides with detailed chapter summaries and analysis of major themes, characters, and more.
Epilogue-AfterwordChapter Summaries & Analyses
Epilogue Summary
In just a few months, the “shape of Wall Street and the global financial system changed almost beyond recognition” (533). However, even wiring “tens of billions of dollars from Washington to Wall Street” did not “immediately bring an end to the chaos in the markets” (533). The bailout did not restore confidence and, in fact, had “the opposite effect” (533). In addition, there was another kind of “fallout”: a “national debate emerged about what the tumult in the financial industry meant for the future of capitalism, and about the government’s role in the economy, and whether that role had changed permanently” (533). These concerns were still “very much in the forefront of the national conversation” (533) a year later. A Republican president had also found himself in the “unaccustomed position of having to defend a hands-on approach” (533).
Despite the bailout, from the “vantage point of consumers and small-business owners,” the “credit markets were still malfunctioning” (534). Even with the cash infusions, major banks “continued to falter” (534). And the Bank of America/Merrill Lynch merger “became the subject of national controversy” in early 2009 when “BofA announced that it needed a new $20 billion bailout” (535). It later came out that Merrill had paid its employers “billions of dollars in bonuses” before the deal closed, leading to “public outrage” (535). The most severe “public backlash” was against AIG, which had become an “even greater burden” (535), despite lavish spending and executive bonuses. In addition, much of the AIG bailout money went directly to global financial institutions that AIG owed money to, particularly Goldman Sachs, nicknamed “Government Sachs” (536). However, according to Sorkin, the true story was “more complex” (537) than what was typically presented in the media. Goldman had paid back the TARP infusion and was back to “business as usual” (537) by mid-2009.
The question was how regulators should “respond to continued risk taking—which generates enormous profits—when the government and taxpayers provide an implicit, if not explicit, guarantee of its business,” making these institutions “too big to fail” (537).
Sorkin asks: “Could the financial crisis have been avoided? That is the $1.1 trillion question—the price tag of the bailout thus far” (537). He suggest that “[p]erhaps,” but acknowledges that the “seeds of disaster had been planted” (537) long before Paulson became secretary of the Treasury in 2006: “Washington typically tends not to notice much until an actual crisis is at hand” (538). Another question, however, is whether the government’s response helped or made the situation worse. Federal officials certainly “contributed to the market turmoil through a series of inconsistent decisions” (538). Many argue that allowing Lehman to fail was the government’s biggest error. Lehman’s failure “clearly hastened” (539) the economy’s collapse. And there was “pandemonium” abroad when Lehman declared bankruptcy, with Washington “totally unprepared for these secondary effects” (540). Paulson also “managed to muddy the waters by periodically revising his reasons for not having saved Lehman” (540).
In reviewing the events, Sorkin proposes that “Washington now has a rare opportunity to examine and introduce reforms to the fundamental regulatory structure, but it appears there is a danger that this once-in-a-generation opportunity will be squandered” (542). Reform measures could include “stricter limits on leverage,” “curbs on pay structures that encourage irresponsible risks,” and a “crackdown on rumormongers and the manipulation of stock and derivative markets” (542). Otherwise, “there will continue to be firms that are too big to fail,” with risk being “reintroduced into the system” (542).
Ultimately, whether a firm is “too big to fail” depends on the “people that run these firms and those that regulate them” as much as it depends on any “policy or written rules” (542). It will be “left to history” (543) to decide whether the major players in this story succeeded or failed.
Afterword Summary
The election of Donald Trump in 2016 has been explained, in part, as a “rebuke of the ‘elites’ that the public had trusted to prevent such an economic calamity—and it was a rebuke of the same ‘elites’ that tried to help the country recover from it” (544). Trump “focused on denigrating the elites for not doing more for citizens in the Rust Belt and others outside major cities as a way to enrich themselves” (544). The United States, “once a symbol of open borders and trading, has become engaged in debates about imposing tariffs and building walls” (544).
Sorkin explains that “[p]erhaps the best example of the decline in trust in governments around the world was the creation of Bitcoin,” which is not “tied to any central banks” (544). Despite a perceived lack of trust or confidence in the government, the US economy “demonstrably did rebound” (544). President Obama’s “reticence” in explaining the depth of the problem “may have made it more difficult for people to appreciate the full extent of the recovery” (544).
In the past 10 years, “Wall Street has changed immeasurably” (544). In 2010, the Dodd-Frank Act forced banks “out of the game of trading for themselves” (544). It also included a provision giving the government the ability to “wind down a failing financial institution,” although this rule is “divisive,” and some are “trying to overturn it” (544). The act was criticized for creating a “moral hazard,” giving the FDIC “too much discretion in a crisis,” and promoting that “bankruptcy is better” (544). Geithner argues that there “will always be a need to bail out failing institutions” (544).
The most significant change to the financial system was “establishing minimum capital requirements for banks, which made it harder for them to increase leverage levels and therefore risk” (544). Although this led to a “recalibration of compensation,” a “significant move is still afoot to loosen the regulations responsible” (544) for these changes.
A lasting “public frustration” (544) is that no one was ever held responsible for the crisis. Few senior executives lost their jobs, and only one went to jail. Instead, many of the firms involved, even the ones that had worked directly with the government, ended up paying huge settlements to the government. As of June 2018, only one senior executive who “headed his firm during the crisis” (544) remained in his position: Jamie Dimon of JP Morgan. Sorkin reiterates a common misconception:
One of the great myths regarding the financial crisis is that the CEOs of the financial industry saw it coming—and still took on risk, confident that they would be bailed out because their firms were so large and important (544).
He explains that “[n]ot one person” interviewed for this book “ever described a meeting or conversation that even hinted at reliance on government intervention” (544). Furthermore, “CEOs who were perceived as all-knowing actually often had no idea what was taking place within their institutions” (544). Sorkin offers that a “more enlightened debate” might revolve around whether institutions are “Too Big to Manage” (544). This book also could have been called “Failure of Imagination, because for so many of the participants in this story, that’s exactly what was involved” (544). However, Sorkin maintains that there are more accountable parties. Despite the “anger directed at Wall Street, there was still a portion left over for the government” (544).
Current fears are less about “too big to fail” and more about the possibility of a mass “cyberattack” that could “threaten the entire global economy” (544). Governments themselves have now become “overleveraged,” and we may already be “overdue” (544) for another massive financial crisis.
Epilogue-Afterword Analysis
The Epilogue and Afterword put the events of 2008 into perspective and update the situation through July 2018. The Epilogue describes the fallout from the bailout, including the debate over the future of capitalism that continues to this day. The Epilogue also describes the point of view of consumers and small-business owners, who were still suffering the effects of a bad economy. In another illustration of the Main Street vs. Wall Street theme, the Epilogue describes the backlash against AIG and other companies that paid out bonuses even when they were faltering. The Afterword draws a line between the public frustration with “elites” and the election of Donald Trump in 2016.
The Epilogue also asks, rhetorically, whether the financial crisis could have been avoided. Ultimately, the book does not answer that question definitively, but it points to the seeds of the disaster that were planted long before 2008.
The Afterword also describes developments in financial regulation since 2008, such as the Dodd-Frank Act of 2010. It also describes the new minimum capital requirements for banks, designed to make it harder for them to take too much risk.
Sorkin concludes that, rather than debating whether institutions should be “too big to fail,” it might be better to ask whether institutions have become “too big to manage” (544). The book ends with Sorkin noting that current fears are less about companies being “too big to fail” and more about potential cyberterrorism and other global threats. Too Big to Fail cautions that we may be overdue for another financial crisis.
