Sunday, June 26, 2011

A Nightmare from Wall Street

I didn't sleep well last night. I woke up from a bad dream around 12:30 and couldn't get back to sleep till around 6. We now have HBO. Even though we have seemingly a zillion channels on the satellite, most of the programming appears repetitive or dim witted. One might take that as a good thing (an incentive to read a book, for example). But we like our guilty pleasures too. So yesterday I was channel surfing and stumbled onto TooBig to Fail, an HBO original movie, from the book by Andrew Ross Sorkin.
It's what caused the bad dreams, of that I have no doubt, though it may very well be me, not the movie itself.

Here are a few different thoughts that occurred to me watching the film. First, most of the film concerns the events leading up to to the Lehman Brothers bankruptcy after the rescue of Bear Stearns. I was struck by how recent that was. It's not yet three years since Lehman failed. In how burdensome the Great Recession seems, it feels as if its been a decade, or more. Of course the events leading up to that bank run were some time in the making. But the debacle itself wasn't that long ago.

Next, in movie terms it is a pretty traditional drama. The hero is Henry Paulson, the Treasury Secretary, played by William Hurt in a way to draw empathy to the character. The villian is Dick Fuld, head of Lehman Brothers, played by James Woods who is very good in being completely unsympathetic and totally arrogant. Throughout the movie I kept asking myself, do they really want Paulson to come off as a good guy? Maybe he was a good guy measured by his intent. But he was a ditz in pursuing his goals, which I'll get to in the next point. (Possibly this is a way to interpret President Bush as well.) This review says as much.

Third, even if the financial world as we know it seemed to be coming to an end, Paulson (and Bernanke and Geitner) acted as if they were constrained in what they could do. Bear Stearns had been bought out in a "firesale" by JP Morgan Chase, with government assurances about losses. Lehman needed a similar arrangement, but Paulson was adamant about no government assurances. Had the contagion been limited to Lehman and Merrill Lynch, the next bank in line, that might have been the right call. But Paulson completely didn't anticipate AIG failing while the Lehman arrangement was being worked on. Had he anticipated the AIG failure, he couldn't possibly have acted in such an inconsistent manner.

Fourth, as complex as the deals looked to be to put them in place, it was very odd to see Paulson's decision making as sequential rather than doing things in parallel. The potential buyers of Lehman (after Dick Fulk completely screwed it up with a Korean consortium) were Bank of America and Barclays Bank. Perhaps he couldn't talk directly to their management, but Barclays had British regulators. Paulson didn't talk to them. Ultimately, they came to him to tell him they were blocking the deal.

If you look at Paulson's Wikipedia entry, it is pretty damning. So one wonders whether the movie was being ironical in its depiction of Paulson. But I didn't get other movie-type clues that they were doing that.

Fifth, even as the system seemed to be falling apart the heads of the other investment banks were very reluctant to help out a rival for the good of the system. Eventually they agree to chip in $1 billion dollars per to help out Lehman, only to find that the British regulators were going to block the deal.

The movie ends by noting in text that the industry is more concentrated now and none of the real problems have been addressed. It is a nightmare from which the economy as a whole has not awakened.

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