I just read the excerpt of Andrew Ross Sorkin’s new book Too Big to Fail in this month’s Vanity Fair. I can’t wait to read the entire book. Sorkin seems to have written one of the great works of investigative journalism. While reading, I had to keep reminding myself that this isn’t historical fiction and these events actually took place. It was fascinating to read the inside story of how giants such as Goldman Sachs and Morgan Stanley were led to the brink only to be pulled back primarily by government intervention.
The panic and potential domino effect that many believed was happening during the week following the collapse of Lehman Brothers was perfectly encapsulated by Sorkin. A perfect example of this fear is seen in a section about then Treasury Secretary Hank Paulson; “The entire economy, he said, was on the verge of collapsing. Paulson was no longer worried about just investment banks; he was worried about General Electric, the world’s largest company and an icon of American innovation. Jeffrey Immelt, G.E.’s C.E.O., had told him that the conglomerate’s commercial paper, used to fund its day-to-day operations, could stop rolling. Paulson had also heard murmurs that JPMorgan Chase had stopped lending to Citigroup; that Bank of America had stopped making loans to McDonald’s franchisees; that Treasury bills were trading for less than 1 percent interest, as if they were no better than cash, as if the full faith of the government had suddenly become meaningless.”
I was immediately drawn to this book because I am fascinated by the proposterous notion of “too big to fail” and I oppose the entire concept. As a capitalist, I believe companies should succeed (or fail) based on their own merits. Yet as a progressive, I understand the need for regulation to protect the entire society from a company either gaining a monopoly or becoming so expansive that their failure would cause irreparable harm to the entire society.
Ironically, the same people who demanded banking reform with little regulation were forced to ask for government handouts. Striking the balance between oversight and an independent private sector isn’t easy. Clearly, the balance got out of control in the last decade. Hopefully, we have not lost momentum on banking reform with the Dow hovering around 10,000 and over a year removed from the height of the crisis. We have to find a new balance, one where we encourage innovation and incentivize success, but we also demand oversight, transparency and protection from any one company becoming so large that their failure would begin a ripple effect that could bring down our entire economy.