The bestselling author of Too Big to Fail reveals the most shocking moments in the economic crisis, responds to critics and looks to our financial fate.
Editor’s Note: Andrew Ross Sorkin is a New York Times financial columnist, the editor of Dealbook, a popular financial blog, and most recently, the author of Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System – And Themselves. The book, which details the fall of Lehman Brothers and the subsequent government bailouts, debuted at No. 4 on the New York Times bestseller list. Click here to listen to the audio interview in its entirety.
LESLEY: Andrew, let me ask you straightaway about what you learned in writing this impressive book. You interviewed virtually every major player on Wall Street and in the government crisis. How big of a mistake was it that Washington let Lehman Brothers fail?
ANDREW: I think it was a huge mistake. Not a mistake in that Lehman somehow deserved to be saved; rather, that they needed to be saved simply to save the rest of us – meaning the rest of the system. I think that mistake of letting them go did exacerbate and almost create, in some way, this sort of cataclysmic crisis that we had in September of 2008 that led to all of these bailouts.
LESLEY: Well, who should we blame? Should we blame Henry Paulson, who was the Treasury Secretary, but who – and I learned this from your book – did not play all the cards he had? Or Dick Fuld, the head of Lehman, who, as you portray him, almost became delusional as this crisis and the pressure built?
ANDREW: I think there’s a lot of blame to go around, and both of those gentlemen obviously made some very bad decisions, especially as things got to that fateful weekend in September. Clearly, a lot of blame has to be pointed at Lehman Brothers; a lot. These guys bet and spent money and invested in real estate. It’s not something you’d think a bank would do, and they were taking on risks that they never should have taken. At the same time, there are the regulators who were supposed to be minding the store. Hank Paulson and others in power were trying to save Lehman in their own way. But as you get to that moment where things go very, very wrong in September, I think there’s almost an element of frustration, where they’re almost throwing their hands up in the air, thinking, “We’ve tried and tried to push Fuld and the company to do a deal.” And then you get to this moment where I think they just say, “You know what? Enough is enough.”
LESLEY: Well, I’m going to ask you a little more about the moment when they threw up their hands. But first, tell us about your lead character. I know my husband doesn’t agree with me, so your book is read in different ways — but for me, Henry Paulson comes off as a real hero.
ANDREW: Well, that’s interesting … go ahead.
LESLEY: I say that because there were cascading crises. There was Bear Stearns, then Lehman Brothers, then AIG, and Citi, and even Goldman Sachs. And this guy is so earnest. He just keeps trying to solve it. And I felt he was doing the right thing — at least the way you portray it.
ANDREW: I think that’s right in that I do think Paulson is always trying to do the right thing. I don’t think he’s trying to do anything untoward. You said you have one perspective and your husband has another. That’s actually a perfect answer for me. I’ve had people come up to me on the street and say, “Dick Fuld is a villain. I got very angry and frustrated and upset with him.” And then I had a woman come up to me who said, “You know, there’s a scene after Lehman goes bankrupt where Dick Fuld goes home and he’s crying with his wife, and I cried with him, and I felt so bad for him,” and I thought, “Ah. Perfect.”
LESLEY: Well, you were gentler on Dick Fuld than authors of other books who’ve tried to tackle the subject. But go back for a minute to Paulson. Do you now see him as a hero?
ANDREW: You know, hero’s a tough word. I’m not going to necessarily call him the hero. I think that history may look more fondly upon him than we have thus far. After Lehman Brothers, I sort of divide the world in two. I think there’s an element to which all of the regulators and Wall Street brought us to the brink, and it’s very hard not to point the finger in that direction. But at the same time, I think some of these people also probably brought us from the brink. And so to me, it’s a much more mixed picture.
LESLEY: Paulson is fascinating, in reading your book; much more than I would have thought.
ANDREW: By the way, same for me. When I started this project, I thought that he was going to be this very two-dimensional guy. I didn’t know if I’d be able to really bring him to life. I knew he was going to essentially have to be one of the protagonists by default, but I was worried that he would not be a sustainable character that would keep you, as the reader, invested. And the more reporting I did, the more I thought, “Wow, there’s something a little bit more layered and interesting about him.”
LESLEY: Very layered. Well first of all, he’s a Christian Scientist, he went to Dartmouth, he drives a Prius. He’s a big environmentalist. He’s loaded, but he barely spends his money. And his wife, as you tell us, couldn’t stand the president, George W. Bush, who Paulson’s working for.
ANDREW: She’s a total battle-ax. She’s the penny-pincher of the family. In fact there’s a great scene where he goes and buys himself a cashmere coat at Bergdorf’s and comes back with it and she says to him, “Why are you buying this coat, you already have one.” And he says, “I’m replacing my coat. I’ve had it for ten years.” And literally the next day he goes back and returns it. I thought that for a guy worth $500 million, that was such a terrific little anecdote.
LESLEY: All the way through the book, you have little nuggets like that. Tell us about Paulson’s relationship with President Bush, whom his wife couldn’t stand. Did Paulson have contempt for him? Did he respect him? Did he ignore him?
ANDREW: I don’t think he had contempt for him at all. I think he had respect for him. You know, their relationship was so different than that of so many White House aides in that Bush, for better or worse, truly did delegate this responsibility to Paulson. It was not a situation where someone who’s running a department would bring options to the president and he would choose from a menu. It was literally Paulson — almost the unelected de facto president on certain days.
LESLEY: Exactly. Exactly.
ANDREW: Part of me thinks maybe the president was aware that he didn’t understand what was going on, because he thought, “I should just hand over the reins.” Maybe it was he felt that comfortable with Paulson.
LESLEY: At one point in the book, you describe a scene where the president is about to give a speech in which he says, “I’m against bailouts.” And Paulson had to tell him he had to take it out. Were you trying to tell us that the president didn’t get it?
ANDREW: No, I think there were two parts to that story. One was that Bush didn’t want to have the bailout. That was, to me, one of those things that demonstrated the pressures on the government at that point about how to deal with bailouts. And two, clearly Paulson knew more than the president on some of these issues. There’s a scene later in the book where Bernanke and Paulson go see the president at the White House, and at the end of the meeting Bush looks up at them and says, “How did this happen?” It’s a question that so many of us as Americans and citizens were asking. But it’s one of those questions you almost don’t even want to hear the president ask.
LESLEY: So let’s go back to the crisis – the Lehman Brothers part of the crisis. How much did personal likes and dislikes play a role? I know that Dick Fuld was unraveling, as we say, under the pressure, and you get a sense that Paulson didn’t like him.
done very, very little.
ANDREW: Well, I think they have a very complicated relationship. When Paulson joins the administration, he’s been the CEO of Goldman Sachs, and he’s been there for 30 years. He sort of sees the world through the prism of Goldman, and they never looked very fondly upon anyone at Lehman. But as the Treasury Secretary, he has to establish relationships with everybody. And now, in this very awkward and odd way, he’s actually befriending Dick Fuld. It’s essentially a pretty good relationship for about a year and a half. But once Bear Stearns is sold to JP Morgan and is effectively saved, there’s a feeling that Lehman Brothers is next and that Dick is in trouble. And so for the first month or two, Paulson really tries to get Lehman a deal. But as the summer progresses, and nothing seems to be working, I think that Paulson get frustrated and feels that Fuld is unwilling to sell the firm. But that’s not to say that somehow he let Lehman Brothers fail because he didn’t like Dick Fuld. I do think there was this element of “we tried everything we could.” I still think there might have been other cards to play. But in his mind, he was out of cards.
LESLEY: What one really gets out of your book is what a closed little fraternity those guys at the top were.
ANDREW: It’s remarkable. It’s really 10, 20, 30 people who were involved in all of this. I mean … 30 people running the world, and they are all mostly men, with very few exceptions.
LESLEY: And even though they had competed, it’s almost as if they were on a football team together, or something. They’re in close with each other. They can pick up the phone and call each other at home. They can get in a car and go to each other’s houses. I had no idea.
ANDREW: I have to tell you, I found the intimacy among them very surprising. The idea that they were going to each other’s homes and calling each other every ten seconds, and that they all had past histories and relationships.
LESLEY: Yes. And we’re talking about the country’s money here. I mean, it’s a movie the way you’ve done it. Here’s something that intrigues me. There was an attitude, as we’ve already discussed, about letting Lehman Brothers fail. The feeling was that if they were rescued, the signal would go out to the other banks that they could do whatever they wanted, because they’d be bailed out too – in other words, too big to fail. But here’s the great irony: Lehman Brothers fails, and that’s exactly what happened. All these other banks now know that they will be bailed out. That they ARE too big to fail.
ANDREW: I think you’re absolutely right. One of the things that I always go back to is that many people consider Lehman failing to be a mistake. But there was an editorial in The New York Times — literally that Tuesday, a day and a half later — that praised Paulson for letting them fail. That was the popular view. It was “let them fail, that’s what capitalism is about.” And it wasn’t until AIG went under — or almost went under until we put all that money behind them — that people realized the system was on the brink in a way that we had not anticipated. Even as a reporter at that time, I didn’t realize that the dominoes were lined up: Morgan Stanley was going to be next, Goldman Sachs was literally after that. And — I almost fell out of my chair when I heard this — the next domino was General Electric. And, you know, that’s a conglomerate. We think of them as having light bulbs and refrigerators. But this was really going to affect the rest of America, and the rest of the economy.
LESLEY: The enormity of the crisis, and the fact that we were pulled from the brink is the drama — not only of your book, but of what we lived through. But let’s take a break and talk a little bit about you. So first off, tell us how old you are.
ANDREW: Thirty-two years old.
LESLEY: Wow. Young to write a book like this. This is a big book. Married?
ANDREW: I am married.
ANDREW: No kids yet. That’s the next project. One at a time.
LESLEY: Well, this was like giving birth.
ANDREW: It felt like that. My wife probably won’t ever let me do it again, but yes, it was.
LESLEY: Did you enjoy writing the book?
ANDREW: You know, I did it under such a time pressure; the whole process was about ten-and-a-half months. So it was painful at some level.
LESLEY: That’s all? That’s quite extraordinary to put out a book like that.
ANDREW: It was a pretty miserable experience on a day-to-day. But trying to get at the emotions and the interconnectedness of these people was a terrific reporting experience. And I had some researchers who were helping me. I used to do my writing typically from midnight to about 6:30 in the morning, like I was back in college. I used to go to the corner store near my apartment, I’d buy a two-liter bottle of diet Coke and a bag of Stacy’s chips from the same guy. He’d laugh at me every time.
LESLEY: And you kept working at your day job, for The New York Times, at the same time?
ANDREW: Yes. Yes, I did.
LESLEY: Pretty crazy. But you yourself have become kind of a controversial character, as evidenced by an article that came out in New York magazine last week. It said that some of your colleagues at The New York Times have been saying that you’ve become too cozy with your Wall Street sources, and that you sometimes pull your punches to maintain that access. What’s the answer?
ANDREW: I think it’s inaccurate. There were a number of anonymous sources in that piece, and I don’t think that view is widely shared, given that [New York Times executive editor] Bill Keller and my editors took a very different view. Also, to me it’s a hard argument to make – you’re too close to the source – when the goal of the project was to get close enough to actually tell the story.
LESLEY: Well, to be fair, the article said that you had many admirers at the Times who say that you do nothing but break stories, one after the next. But there are others who have complained, I think, in regard to the so-called Paulson Waiver. First, tell us what the Paulson Waiver is, or was. And I gather there’s some dispute as to who first broke that story.
ANDREW: Right. The Paulson Waiver gave Hank Paulson permission, if you will, from the White House to speak with Goldman Sachs in the days following the Lehman Brothers collapse. And what seems to have gone unreported is that Paulson publicly disclosed that he had gotten this waiver on national television in July, which was when I was just finishing up the book. So I think that for those who actually paid attention to the timeline, there wasn’t any real dispute about it.
LESLEY: Well let me ask, given the story that came out and whoever’s been complaining: What’s it like for you to go into the Times? Is it tense? Is it difficult?
ANDREW: It actually hasn’t been. I imagine there’s always going to be petty people with petty complaints, and there’s probably a couple of those people out there. But nobody’s come up and made this complaint to me personally. So it hasn’t actually been a problem.
LESLEY: OK. Well let’s move on, because I haven’t asked you about what’s actually happening now. It’s a year and a half after the fall of Lehman, and a year after the big bailouts. So I guess the inevitable question is, what’s really changed? And one gets the impression that the answer is nothing. Am I right?
ANDREW: I’m afraid to say you are, Lesley.
LESLEY: Nothing’s changed. Isn’t that appalling. I mean, you want to laugh, but it’s awful.
ANDREW: No, it is. And I think, having now reported this out over a year, I guess I had imagined at some point in the spring we would have seen some type of effort to restructure and change Wall Street. And I have been baffled, as I suspect most of the country has been, that a year after the crisis, we have done very, very little. Now, I think there are a number of proposals that we’re going to start seeing. But one of the things that worries me most about the restructuring effort is that, to the extent the economy seems to be getting better, it’s going to become harder and harder to enact real regulation.
LESLEY: I saw a story just a couple of days ago that said these bankers are creating new exotic instruments. Maybe not as toxic as derivatives, but some of the very same stuff that got us into the mess in the first place. How can that be?
ANDREW: You know, Wall Street has the shortest memory of all memories. It is a sad and depressing reality.
LESLEY: Well it feels almost criminal. It doesn’t feel sad, you know.
ANDREW: It’s both sad and criminal in some respects. And I think it goes to the heart of the problem and the disconnect in America, which is to have a regulatory system with very few rules — or at least, none of the right rules. You have bankers who will go up to the very edge, if not go over the line. And just to fix that, you really need to put some bright lines down — and at some level, radically change the culture and ethos on Wall Street so that the goal isn’t how close or how far over the line can we get.
LESLEY: I think that in your book, you suggest that what really got us into this mess is that the smartest kids in the class decided to go into finance — and they’re too smart, they’re just too clever.
ANDREW: The best and brightest, right?
LESLEY: That syndrome, yes.
ANDREW: I think that there’s something to be said about that. There is an element to these financial products that nobody seems to understand; they all have fancy names that, until about a year or two ago, most Americans were not paying attention to. But the fundamental issue — and it’s been the issue every time we’ve had a real problem on Wall Street — is debt. It’s always about over-leveraging – whether it be the consumer or businesses, companies, the banks.
LESLEY: Why don’t we learn?
ANDREW: Well, I think that unfortunately, Wall Street has these very powerful lobbyists. And you can see that today, even on some of the regulation that seems to make the most sense, there’s already a pushback.
LESLEY: Here’s my bugaboo about this: First with Paulson, and then with Geithner, his successor, there was never any quid pro quo. No one ever said, “Here’s the TARP money, and in return you have to lend.”
ANDREW: Right. You’re absolutely correct.
LESLEY: I know. It drives me crazy. How did that happen?
ANDREW: The view at the time was, “We need to recapitalize the banking system and we need to do it on a ‘voluntary’ basis.” There was this worry that if they tried to force this money on these institutions, and attached all these strings, that somehow the banks wouldn’t play along with them. In a way, they almost overdid it; they over-thought it. I actually think that these banks needed the money, and needed it more than the government even appreciated. Because funnily enough, when they gave that money, there was an expectation inside Treasury and the Fed that there was going to be a big fight, that the banks might not even want the money. But the bankers took the money literally in an hour, literally.
LESLEY: Well, some said they didn’t want it.
ANDREW: To this day Goldman Sachs will say they didn’t want it. JP Morgan will say they didn’t want it, and there are a number of other institutions that will say they didn’t want, didn’t need it and were doing it just for show. And, you know, I think for certain institutions that may be true. I’m not sure about all of them.
LESLEY: But it was still a mistake not to get anything in return.
ANDREW: It was the ultimate mistake, because when you look at the fact that, today, we have no real leverage with these banks, that you’re still seeing these bonuses go out the door, that corporate governance hasn’t changed – it seems that if someone had attached at least a couple of strings, we might have all been better off.
LESLEY: Yes. That, to me, is the shocking part of it. And if you’re an unemployed American, and you’re looking at what these guys got …
ANDREW: I think that when you see the disconnect in America, you see the public outrage, which is now manifesting itself in so many different ways. How is it possible that these banks are making enormous profits, handing out these enormous bonuses, and yet your neighbor can’t get a job? It goes back to this whole idea of rewarding failure. And I think that’s part of the problem. In an odd way, we have effectively institutionalized the rewarding of failure.
LESLEY: Wow. Too big to fail — ergo your title.
LESLEY: So that gets us back to the final question: What are the chances that what we saw could just happen all over again, almost exactly the same way?
ANDREW: I don’t think it will happen the same way. But I do imagine that we will have a problem ahead. There are still so many structural problems on Wall Street, so many structural problems in our economy, that to think we’re going to get through the next five or ten years without a crisis of some sort seems implausible. So will it repeat itself this exact way? I doubt it. Will we have problems with inflation, or the dollar, or will there be foreign policy issues with China? Sure. I don’t think we’re going to have the major bank blowups in the same way we’re having them today. But that’s not to say we don’t need to make some significant structural changes on Wall Street. And by the way, that’s most likely going to have to come from Washington.
LESLEY: In other words, they have to pass new regulations?
ANDREW: I think there’s no other way to do it. I mean, if you put a piece of meat on a plate, the dog is going to try to eat the piece of meat. The question is, where are you putting the fence? And you have to put up the fence.
LESLEY: And so far they haven’t put up the fence.
ANDREW: You know, bankers want to eat the steak. That’s what they’re going to do, and that’s the instinct. And you need to put up a fence, and you need to change the culture so that they’re not so blood hungry for the piece of meat.