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Summary

  • This is one of my favorite investing books.
  • In this article, I interviewed author Andrew Ross Sorkin.
  • I also discuss what has been most applicable for me at Rangeley Capital.

Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System -- and Themselves

This note is one of a series about the books that have informed and inspired my life and work. Click Here for the previous book, the Dhando Investor.

By this point, I think that I have read all of the books about the recent financial crisis. This one is the best. Sorkin is a world-class interviewer; he clearly got people to talk for this book. While writing with flair, the author inserted himself and his view into his work less than most journalists would do.

This is the fast-paced story of the couple of months in 2008 in which each of the largest American investment banks collapsed, sold, or morphed into a bank holding company. Further disintegration of our financial system was stopped only by a massive government bailout.

When I get a chance to ask authors questions about their work, I am always interested in what has changed since their writing and what they see as takeaways for investors.

Conversation with Andrew Ross Sorkin on Too Big To Fail

I asked the author whether there was anything that he would add (or subtract) if it were published today.

Happily, there's not much I change in the book. That was always one of my biggest worries - that I'd find out something new later that changed the narrative of the book. If anything, I might add some new details for the book but nothing that would change the storyline. The kind of things I would add probably would be details from the Federal Reserve Board's minutes and perhaps some e-mails that emerged from civil lawsuits. Really, most of it would be just to add more color and texture to the book.

What would he do differently, as an investor, as a result of this book?

Well, the big investment lesson is to do your research and be skeptical of what you hear from the governments and frankly from the banks. If you based all your decisions on the press releases that the government and banks issued, you'd be very poor. The other big lesson is in realizing that confidence doesn't evaporate in weeks and months, it evaporates in minutes and hours. So we always have to be ready for that.

What were my key takeaways?

This book is excellent on the plot of the financial crisis, but the final takeaway from this contemporary history has still yet to be determined and the ultimate applicability remains unclear. Here is what I learned and what I have taken away thus far: In the middle of the crisis, political and financial incumbents improvised an effective defense of key institutions and stabilized the financial system for a while. However, in doing so, they left a financial marketplace more concentrated and perhaps even more vulnerable than it was before the crisis.

At the same time, we have subtly moved away from the rule of law. The winners and losers from the series of massive bailouts were not picked based on any transparent, pre-existing law or policy. Instead, the process was quite like private-sector M&A - fluid and predicated on institutional and personal relationships. Ironically, nominal supporters of free enterprise may have done it great damage by running the government in a businesslike or, at least, Wall Street fashion. This may have gotten us past the initial crisis, but does not allow for an environment where the marketplace can function as it should.

The private sector is capable of providing bailouts, too, just not at prices that the incumbents would like. Allowing unaffected markets to clear could, in the short term, lead to a period of chaos. However, markets clear. In this process, incumbents are liquidated, irresponsibility is punished, and new equity is allowed to emerge from reorganized firms, leaving a far less vulnerable market.

The squabbles that emerged in the months following the bailouts were a result of secondary problems created by the government intervention. Bank of America (NYSE:BAC) was pressured by the Federal Reserve Board and the Treasury Department to close its ill-fated acquisition of Merrill Lynch. When Merrill paid out extravagant bonuses, this became the stuff of scandal. A liquidated Merrill would not have been able to act as they did. In the American International Group (NYSE:AIG) bailout, the minutiae of executive perquisites was parsed by a public that would have little interest had these executives owned the downside as well as the upside associated with their firm's decisions.

None of this is to say that the government should have stepped aside and allowed a total financial collapse. It simply could have had a more transparent, rule-based pattern for its behavior so that market participants would know the rules of the game ahead of time. Bear Stearns was rescued by JP Morgan (NYSE:JPM). Fannie Mae and Freddie Mac saw their common and preferred shares wiped out but debt rescued. Lehman Brothers failed. AIG was saved. So how do future market participants behave, given the arbitrariness of public policy during such crises? The reaction to this crisis could distort the marketplace in ways that have lasting, perverse consequences.

Publisher's Description

In one of the most gripping financial narratives in decades, Andrew Ross Sorkin-a New York Times columnist and one of the country's most respected financial reporters-delivers the first definitive blow- by-blow account of the epochal economic crisis that brought the world to the brink. Through unprecedented access to the players involved, he re-creates all the drama and turmoil of these turbulent days, revealing never-before-disclosed details and recounting how, motivated as often by ego and greed as by fear and self-preservation, the most powerful men and women in finance and politics decided the fate of the world's economy.

Too Big to Fail was also made into a movie that is worth watching, too.

Source: Too Big To Fail: The Inside Story Of How Wall Street And Washington Fought To Save The Financial System -- And Themselves