That was the view from Andrew Ross Sorkin, top mergers and acquisitions reporter at the New York Times, when he spoke in Santa Barbara on May 5. Sorkin’s talk, titled “How To Fix the Financial System,” opened the annual UC Santa Barbara economic forecast.
“Financial crises are ultimately about one thing. They’re about debt. They’re about leverage,” Sorkin said.
They’re also about confidence — or lack thereof. When a financial system as complex as that of the U.S. starts to unravel, a crisis of confidence can happen almost overnight, as skittish investors and institutions start selling, stop trading, start making short sales and cash in their credit default swaps.
Founder and editor of the New York Times’ influential DealBook blog, Sorkin had spent more than a decade building a base of Wall Street titans as his sources before writing his 2009 hit book “Too Big To Fail.”
With a cast of characters including Treasury Secretary Hank Paulson, former Lehman Brothers CEO Dick Fuld, Federal Reserve Chairman Ben Bernanke and Goldman Sachs CEO Lloyd Blankfein, the book chronicles the moments leading up to the 2008 collapse of the U.S. financial system.
“I wanted to tell you — the public — what actually happened in those rooms so you could decide for yourself,” Sorkin told the audience in Santa Barbara. “I wanted to put you in the room with the decision. When you get in the room, your field of vision changes. It’s not black and white. It becomes grey.”
For example, he said, the New York Federal Reserve was tasked to model what unemployment would have looked like if the government had stepped aside and let the financial collapse play itself out. The projected result: 24.6 percent unemployment.
“If you think about what the other side of the cliff looked like, I would stipulate that we would have looked like a world with 25 percent unemployment,” Sorkin said.
Fixing the system
Rather than offer a quick and simple solution to a financial collapse, Sorkin raised a number of issues.
First, while Dodd-Frank regulatory reform made progress — “we’ve tried, hopefully, to separate the casino from the bank,” Sorkin said — it only gets at the issues at the margins. Investment banks are still too large too fail, credit rating agencies weren’t held accountable for over-inflated assessments of bad assets, and the Federal Reserve didn’t have a tight enough handle on Wall Street. “When was the last time you heard Ben Bernanke say anything hard, harsh or stern about investment banks?” Sorkin said.
The government-sponsored subprime mortgage giants are still around. “How do we get off the drugs called Fannie [Mae] and Freddie [Mac] and create a private market?” Sorkin said.
Financial tools such as credit default swaps, which allow investors to essentially bet against an asset they believe will fail, need to be examined too, Sorkin said. “The idea that I can take insurance out against your home and then my only object in life is burning your house down — that doesn’t make much sense.”
And incentives have to change too, he said. “We have to think long and hard about what motivates people,” he said. For many of the heavy-hitters on Wall Street, that’s not necessarily money, he said, pointing to Fuld, who rode his $1 billion of Lehman Brothers stock down to $56,000. For many of the big Wall Street players, it was more about power than money and about competing at the top of a high-stakes game.
Americans, as a society, will have to decide how much regulation they want to live with and what the consequences are of potentially making the nation’s banks less competitive in the global financial system.
They’ll also have to decide how much truth and transparency they demand from the regulators in charge of policing the system, Sorkin said.
The Troubled Asset Relief Program, or bank bailout, is commonly thought to have originated in September 2008, as the nation’s largest banks were staring into the abyss. But TARP was drafted in March, Sorkin said, even as top government officials were reassuring the public that the economy was perfectly healthy. “That week, Ben Bernanke and Hank Paulson would have told you, ‘The economy is fine, and growing,’ ” he said.