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BW Businessworld

The Crisis And The Morning After

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Alan Greenspan had taken pride in his mathematical prowess, but admitted that the business of collateralised debt obligations (CDOs) had quite stumped him. It is not surprising that the subprime crisis became a financial crisis. And investment banks, hedge funds, banks, regulators and the media took the centre stage as rescue operations were conducted with mixed success to save institutions and the credibility of the system. Too Big to Fail does not go too much into how the crisis took place, but succinctly summarises its genesis. It deals with the manoeuvres involved in sorting out the mess, and is in a different genre.

Andrew Ross Sorkin's book reads like a novel, and the reader can sense déjà vu. The narrative is of the Robert Ludlum variety, where there is no Jason Bourne, but frantic CEOs and CFOs jet setting to make deals to save organisations, or rather themselves. A layman could pass this off as finance pulp fiction, but as Sorkin says in the beginning, it is based on 500 hours of interviews with over 200 people involved in the crisis, including Wall Street CEOs, government officials, investors, lawyers and accountants.

By the third page, Sorkin tells us what the next 500-odd pages are going to be, as Jamie Dimon of JP Morgan, who is the pivot in this saga says, "We need to prepare right now for Lehman Brothers filing… and for Merrill Lynch filing… and for AIG filing… and for Morgan Stanley filing… and potentially for Goldman Sachs filing." This sums up the crisis, though the central theme is Lehman, with the others thrown in to make the picture complete. Dick Fuld, Lehman's CEO, is the protagonist who tries to save the institution. Lehman tries everything possible to survive,   as its glamorous CFO, Erin Callan, juggles $6-billion exposure to CDOs with a provision of $200 million convincingly.

Hank Paulson, then US treasury secretary, is in the midst, and given his links with the investment banking fraternity, is their ally. They all work hard to bail out Lehman, which otherwise seemed too big to fail. They also seriously consider converting it to a bank so that it would have access to the discount window. Negotiations go on to sell it to Bank of America, while KDB (Korea Development Bank), with a modicum of intrigue, becomes a potential partner.

Meanwhile, John Thain of Merrill Lynch wants to sell 9.9 per cent stake to Bank of America, which insists on 100 per cent. The 16th floor of AIG is the next venue for the drama that unfolds with a bailout being discussed; with the Federal Reserve finally taking 79.9 per cent stake and providing a line of credit of $85 billion after convincing President George W. Bush.

Morgan Stanley is linked with financial services firm Wachovia. Once rumors of its exposure to AIG surface, shorting results. The drama heightens when Deutsche Bank sends feelers that it is a solid counterparty. This gradually leads the way to Mitsubishi paying up $9 billion for its stake, after Dimon refused assistance on grounds of it jeopardising J.P. Morgan's future. Goldman Sachs quietly converts itself to a bank. So does Morgan Stanley.

Sorkin adeptly steers across organisations, going into details of the problems and behind- the-scene activities. Timothy Geithener of the Fed is a strong character who tries to orchestrate mergers for Goldman Sachs and Morgan Stanley. Ben Bernanke has to act against the shadow of the Depression, when it was felt that the Fed did not do much. Then there is ubiquitous short seller David Einhorn, a hedge fund manager who shorted Lehman's shares and publicly questioned  its accounting. Interestingly, the crisis converted business hostility into camaraderie, as 11 institutions get together to create an extra $100 billion for them, as the inevitability of Lehman sinks in.

In all, the story is illuminating as it highlights the strong links between the financial sector, the Fed and the US treasury department. We invariably find that those working with the government or regulators had once been frontrunners heading these big financial institutions. Is this why they are better able to appreciate the crisis, or is there an incestuous relationship between these two? The reader has to decide on this. They all got relief through the government's troubled asset relief programme eventually. We also get to see the murkier side of how firms present results with clever masquerades that disguise the facts until the crisis unfolds.

Andrew Ross SorkinFor film buffs, Gordon Gekko provided the intrigue in the movie Wall Street in 1987, which was also famous for Black Monday. We now see the potential of this real drama translate to celluloid in Hollywood once again in the upcoming Wall Street II.

Author Details:
Andrew Ross Sorkin
is The New York Times's chief mergers-and-acquisitions reporter and a columnist. He is also the editor of DealBook, an online daily financial report he started in 2001. A bachelor in science from Cornell University, he has broken news of major M&As such as Chase's acquisition of J.P. Morgan and HP's acquisition of Compaq.

Madan Sabnavis is chief economist with agri-commodity exchange NCDEX