By Loyd Eskildson

At one point in 2008 it looked like Lehman Brothers, Merrill Lynch, AIG, Morgan Stanley, and Goldman Sachs would all file for bankruptcy. In less than 18 months, Wall Street went from its most profitable age (the financial services sector created over 40% of total 2007 U.S. corporate profits) to the brink of devastation. During this downward ride, Goldman, Sachs (the biggest profit-maker) employees took home more than $661,000 each, and Wall Street firms had debt/capital ratios of 32 to 1 - believing their new 'securitized' mortgages that had been sliced and diced removed the risk. Even Federal Reserve Chairman Bernanke saw little reason for concern over the $2 trillion sub-prime market. Sorkin believes Wall Street became undone by its own smarts - the complexity of these securities meant almost nobody could figure out how to price them in a declining market, and Wall Street found itself unable to function.
 
In the space of just a few months, Wall Street changed almost beyond recognition. Each of the former Big Five investment banks (Bear Stearns, Goldman Sachs, Lehman Brothers, Merrill Lynch, and Morgan Stanley) failed, was sold, or converted into a bank holding company. Two mortgage lending giants and the world's largest insurer were placed under government control. And American taxpayers became part owners in some of our proudest financial institutions. (Citibank, then the world's largest, that had spearheaded a push towards deregulation, was not 36% owned by taxpayers.  Documenting all this in Too Big To Fail, author Sorkin tells us it took over 500 hours of interviews with over 200 direct participants in the events surrounding the 2008 banking crisis to complete the book.
 
Controversies remain over bonuses, and the linkage of Secretary Paulson to Goldman, Sachs possibly playing favoritism vs. Lehman Brothers. Sorkin, however, believes that the real remaining question is "How should regulators respond to continued risk taking when government provides an implicit (if not explicit) guarantee of these financial businesses?" Risk-taking has increased, per Sorkin - for example, Goldman's value-at-risk (VaR) in the second-quarter of 2009 was $254 million, up from $184 million a year prior. (Worse yet, the remaining financial institutions are now bigger than ever.)
 
Could the crisis have been avoided? Sorkin poses this as the $1.1 trillion question. ($1.1 trillion = the cost, so far, of the bailout.) Sorkin answers "Perhaps, but it was probably too late by the time Secretary Paulson came into office." Paulson was further hindered by association with an unpopular lame-duck president. Thus, Sorkin leaves it to history to judge Paulson, Bernanke, Geithner, etc.

Andrew Ross Sorkin, author of Too Big To Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System and Themselves (Penguin Group/ 2009), is the award-winning chief mergers and acquisitions reporter for The New York Times, a columnist, and assistant editor of business and finance news. He is also the editor and founder of DealBook, an online daily financial report. He has won a Gerald Loeb Award, the highest honor in business journalism, and a Society of American Business Editors and Writers Award. In 2007, the World Economic Forum named him a Young Global Leader.

Loyd Eskildson is retired from a life of computer programming, teaching economics and finance, education and health care administration, and cross-country truck driving.  He's now a reviewer for Basil & Spice.

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