Reprinted from neweconomicperspectives.org by William Black
By William K. Black
February 12, 2017 Bloomington, MN
I am watching the film Too Big to Fail based on Andrew Ross Sorkin's book of the same name. It led me to check out the price of the used book, which has fallen to $1.02, which is low enough that I am willing to buy a copy of the book, particularly since not a penny will go to Andrew Ross Sorkin. The financial analytics displayed in the movie and the book are so poor and dishonest that I need to have a copy by my keyboard as an inspiration to keep trying to cut through the calculated dishonesty about Wall Street pumped out nearly every day in the pages of the New York Times.
The movie starts with the imminent failure of Lehman. It is an astonishingly sympathetic portrait of Wall Street, Hank Paulson, Tim Geithner, and Ben Bernanke. The movie invents a scene in which the Treasury leadership explains "in English" the causes of the crisis to the Treasury PR person. There is not a word about the three fraud epidemics that hyper-inflated the bubble, drove the crisis, and produced the Great Recession. As one expects of a Sorkin tale, it is all about personalities and "great men." (Women are rare and powerless, even FDIC Chair Sheila Bair.) The movie and book have a patina of financial jargon that Sorkin thinks constitutes analytics, and a nearly total failure to probe the Wall Street BS about the crisis.
One odd aspect of the book and movie is that they almost (in the case of the book) totally ignore the largest financial run in history -- the $300 billion run on money market mutual funds. That run was enormously important in its own right -- and only staunched by the temporary provision of federal deposit insurance to the formerly uninsured industry. The run also freaked every senior financial regulator in the world. The movie ignores the run even though it caused Paulson's fears to spike. The book's treatment of the run is cursory and devoid of analysis.
Sorkin's attempt to make Paulson the flawed hero and Geithner the most effective hero of the financial crisis is the primary theme of the book and movie. Sorkin presents Bernanke as a kindly grandfather. This indicates that Geithner was Sorkin's primary source and that Paulson was a major source. Sorkin's account suggests that Paulson had one tragic flaw and one PR flaw. The tragic flaw is incompetence. Sorkin does not directly charge Paulson with this flaw, but even the weakest factual account of the crisis displays Paulson's incompetence. In Sorkin's account, Paulson recurrently fails to anticipate the information he will need to make key decisions and is therefore constantly surprised by developments and unprepared to respond. Paulson, the former head of Goldman Sachs, should be a caution to everyone that believes we can only staff key government finance positions with Wall Street elites because of their unparalleled expertise.
In Sorkin's presentation, Paulson's PR problem stems from his obtuseness about humans. Paulson repeatedly proposes massive bailouts for the most elite banksters while providing no relief to the banksters' victims. Similarly, he drafts a three-page bailout plan (TARP). The TARP draft exemplifies both of Paulson's flaws. It is incompetent because it requires Treasury to make massive purchases of bad assets from the most fraudulent banksters. Putting aside, as Sorkin largely does, why this is terrible policy, Treasury cannot do it in the time required. Paulson should have known that from experience. He does not, and he does not have his staff work out the mechanics, which would have revealed that the plan would fail.
The movie does a poor job of explaining why the three-page plan revealed Paulson's obtuseness. The movie shows him as believing that simple and short is good, and mystified by the congressional hostility to the plan. (I believe the portrayal is false and that Paulson's design of his plan was not obtuse but, unsuccessfully, devious and malign.) The movie lost both reality and power by offering a bland summary of the plan rather than quoting its key passage that was brief -- and chilling.
Sec. 8. Review.
Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.
Paulson's plan was neither simple nor concise. Indeed, the Treasury "plan" had no plan. It simply said that Paulson got a blank check for $700 billion in federal funds that he could use in any fashion he wanted -- and that he was exempt from the normal rules of law. It was an astonishing power grab by Paulson to be used to convey massive amounts of money to the banksters and other cronies without any of the reviews we have historically found essential to prevent abuse.
Sorkin's emphasis on the personalities of elite bankers rather than analysis leads to a generally sympathetic treatment of the Nation's worst banksters and an "out of history" failure to supply context essential to analytics. It is as if a problem arose in mid-2008, and Treasury was shocked that it arose. The reality is far different.
- First, Paulson led Goldman Sachs so heavily into purchasing toxic mortgage product that he endangered its survival.
Paulson had considerable experience with the fraudulent origination by lenders, the fraudulent resale of those loans by lenders in the secondary market, and the fraudulent sale of derivatives supposedly collateralized by those toxic loans in the tertiary market. The industry called (behind closed doors) the loans and the derivatives "toxic" because they were pervasively fraudulent.
- Second, Goldman purchased large amounts of credit default swaps (CDS) from AIG as "protection" for its collateralized debt obligations (CDOs).
Toxic mortgages were the (supposed) primary underlying "collateral" for most CDOs. Paulson was uniquely well-placed to prevent the crisis. Paulson was unusual in knowing that Goldman and other banks had such large claims against AIG's CDS that AIG was insolvent.