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Looking Back at Wall Street’s Behavior in 2009

December 28, 2009 at 12:00 AM EDT
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Jeffrey Brown speaks with Andrew Ross Sorkin of The New York Times and John Cassidy of The New Yorker about the fallout from the financial crisis, the big bailouts and Wall Street's mentality.
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MARGARET WARNER: And finally tonight: a year-end look at the fallout from the financial crisis, the big bailouts, and Wall Street’s behavior.

Jeffrey Brown has our conversation. His discussion was recorded before our program’s recent redesign.

JEFFREY BROWN: A year ago, the daily news and the daily fears were all about the financial crisis then continuing to unfold. A year later, the so-called great recession may or may not be over, but the debate over the reasons for the collapse and how to prevent another one continues.

Two reporters we have turned to during this last year have just come out with books that take different approaches to explore the issues. Andrew Ross Sorkin’s “Too Big to Fail” is a behind-the-scenes look at the actions of major players on Wall Street and Washington. John Cassidy’s “How Markets Fail” seeks the roots of the crisis in the history of economic theory. The two authors join me now, Andrew Ross Sorkin of The New York Times and John Cassidy of The New Yorker.

Well, maybe the place to start is why you each chose your particular approach to the subject. Andrew, you first. Why the insider approach? What were you after?

ANDREW ROSS SORKIN, The New York Times: You know, I thought of this as a great mystery. As someone who was there on the front lines trying to write this story day by day, I felt that there was so much more that was going on behind the scenes that I didn’t know, that I didn’t think the public knew. And I thought, if we could just get in there, we could maybe understand what really happened. Why did Lehman Brothers — why were they allowed to go and why was AIG rescued? What were the decisions and the relationships between all of these characters and how did that influence the ultimate outcome? And I think that, actually, by taking that approach, I was able to hopefully get at the human drama of this, to get at the fallibility of the people. When you get into a scene, you actually — there is a scene where Hank Paulson literally is vomiting because of the sort of emotional turmoil this is all taking. And you really do get to see the ad hoc nature with which this whole crisis was enveloping and how they were trying to rescue the system.

JEFFREY BROWN: Well, John Cassidy, you — you chose to go back, and, as you write — quote — “explore the underlying economics of the crisis.”

JOHN CASSIDY, The New Yorker: Yes.

JEFFREY BROWN: Why that?

JOHN CASSIDY: Well, partly because I’m an economic journalist and also partly because I knew a lot of people, Andrew included, would be providing riveting narratives of what happened. I like to think that Andrew provides the fly-on-the-wall view, and I provide the view from the orbiting satellite. What I am trying to do is explain how the different bits of the story fit together, explain why it happened, and what we need to do to prevent a similar outcome in the future.

JEFFREY BROWN: And, John, what — was there a key insight that you bring to this or came from all of this?

JOHN CASSIDY: Yes, well, my argument is that, ultimately, this was a case of misapplied ideas. Some good, sensible ideas about how free market economies work were taken and then applied to areas where they don’t work properly, particularly the financial markets. So, ultimately, I see this as an intellectual failure of policy-makers, of people on Wall Street, and of investors.

JEFFREY BROWN: And, Andrew, what is the key insight that you got from your reporting?

ANDREW ROSS SORKIN: Right.

JEFFREY BROWN: I, mean you are talking about these moments, these dramatic moments.

ANDREW ROSS SORKIN: Well, I see — I look at it — you know, you talk about institutions that are too big to fail. I sort of look at it the opposite way. I think about this as people who think that they are too big to fail and really a story about hubris and greed and power, and what all of that meant in terms of the decision-makings, in terms of the failure of imagination to really appreciate the crisis that ended up taking place.

JEFFREY BROWN: Well, John, you know, I mean, this is almost a philosophical question here now between these two approaches…

JOHN CASSIDY: Yes.

JEFFREY BROWN: … I mean, between individuals and institutions and theories.

JOHN CASSIDY: Right.

JEFFREY BROWN: So, expand that a little bit more for us.

JOHN CASSIDY: Well, I think, actually, our two books complement each other pretty well. I mean, if you want to know what happened and how the people felt who were involved, Andrew’s provides an excellence summary of that, and provides a lot of new information. I really don’t go down that route. What I try and do is explain how the different actors fit together, from the people at the bottom of the chain, who were buying the mortgages, these sub — buying houses, taking out subprime mortgages, up through the mortgage lenders, up to the Wall Street people who were securitizing these loans, and the investors who were buying them, and the regulators and supervisors who were supposedly overseeing them. I try to explain how all that fit together and how we ended up in the situation we’re in now.

JEFFREY BROWN: And you do, John, use examples, though, I mean, with players making decisions, sometimes…

JOHN CASSIDY: Sure.

JEFFREY BROWN: … like the subprime, for example, subprime market…

JOHN CASSIDY: Sure.

JEFFREY BROWN: … an example where some players made decisions that were even against their better judgment.

JOHN CASSIDY: Right. I mean, I used the example of Chuck Prince, the chairman of Citigroup. My argument is, this was — sure, there was greed involved, but there is always greed on Wall Street. What were the other forces which were at work? And it seems to me it was a problem not ultimately of individuals, like Chuck Prince, but of the incentives that they faced in the market. Chuck Prince, for example, the chairman of Citigroup — for several years, Citigroup didn’t get involved in subprime securities. But then, at the start of 2005 and the end of — sorry — the end of 2005, the board came to him and said, look, we’re falling behind our competitors. They’re making a lot of money in this business. Why aren’t we in it? We need to increase our risk profile. Chuck Prince then had the choice of saying, well, I think Citigroup is too — you know, too great a company to be involved in this risky business, which had sort of been his previous attitude. But he would have probably got fired if he would have done that. He faced this — these bad incentives. Everybody was looking for short-term gain. I call it rational irrationality. It suddenly became rational to take what ultimately proved irrational decisions, like making big bets in the mortgage market. Citigroup did that, and they ended up losing tens of billions of dollars.

JEFFREY BROWN: Well, so, if we now come forward to our own present moment here and think about what you guys have learned and where we are now, Andrew, for example when you look at Wall Street, you are talking to all these people.

ANDREW ROSS SORKIN: Yes.

JEFFREY BROWN: You have been talking to all — for a year. Where are we now? I mean, have lessons been learned? What are they telling you now?

ANDREW ROSS SORKIN: So, here is the sad news. Having now lived with may be of these people for a year at the very, very top in the corner office, I’m not sure much has changed at all. The culture has not changed. The whole ethos, the “greed is good” mentality, seems to still be alive and well. And, frankly, there hasn’t been much reform out of Washington. When you talk to CEOs on Wall Street, they now think of themselves, oddly enough, as survivors. That is the word they use, like a cancer survivor. And I’m not sure they appreciate that they have been rescued. I did have an encounter with John Mack, who is the CEO of Morgan Stanley, who actually was probably the most self-aware of the CEOs, who said recently that, actually, Wall Street people can’t control themselves. It was a remarkable statement. And he said, we need to be controlled, almost like he was an addict, and you needed to take the crack pipe away. And I thought that was remarkable. But I will tell you, most other people on Wall Street, not only do they not have that view. They are pushing back on any view that would put real reform in place.

JEFFREY BROWN: Well, John Cassidy, what would you add to that? Start with a view of Wall Street and Washington. I want to ask you about changes in economic — among economists later, but start with what Andrew was just talking about.

JOHN CASSIDY: Well, I think Andrew hit the nail on the head there when he talked about John Mack saying, we can’t do this by ourselves. Given the incentives these guys face who run these Wall Street firms, the way they make money is by lending to people and taking risks and competing against each other. They are always going to lend more and take more risks. If somebody from the outside doesn’t come in and say to these guys, there are limits on what you can do, we’re going to inevitably get back to where we began. The only person — nobody on Wall Street can do that by themselves. We need the government to step in and set rules and regulations for the firms. I think that is what John Mack was driving at. He said, you know, we need help. We can’t do it by ourselves. Now, the Obama administration has gone some way in that direction, proposing various limits on what these banks can do, raising capital requirements, a variety of other restrictions on their activities, but none of it has been passed yet. As Andrew says, 16 months after the collapse of Lehman Brothers, we don’t have any new regulations on the book and no clear timetable of when they are going to be put on the book.

JEFFREY BROWN: Right, but why? I mean, why are we in that limbo?

JOHN CASSIDY: Well…

JEFFREY BROWN: We have talked about that on the program here as we look at the various proposals.

JOHN CASSIDY: Right.

JEFFREY BROWN: So, why has nothing happened yet?

JOHN CASSIDY: Well, I think, you know, two things. Number one, I think the government did a pretty good job of preventing a complete financial catastrophe. They took all these emergency measures, the Fed pumping money into the economy, lending to banks that needed it, the Obama administration introducing a stimulus package. All those measures combined managed to prevent a return to the 1930s, which, if we had been gathering this time last year, some people would have been worrying about. But the authorities, I think, were so busy concentrating on averting the immediate crisis, they didn’t take any long-term measures. And now what we have found, as the economy has recovered, these big banks have got lobbying power again in Washington. The political agenda has moved on. It’s all focused on health care. And the sort of Wall Street reform movement has been stymied. And, you know, it is not clear to me at all that we’re going to get any significant changes.

JEFFREY BROWN: Andrew, what do you see?

ANDREW ROSS SORKIN: You know…

JEFFREY BROWN: I mean, is there a possibility for change? And what should happen?

ANDREW ROSS SORKIN: You know, John’s absolutely right. I think we are going to get change, but it is going to be only on the margins. And John again is right when he says that, you know, the farther we get away from this crisis, the more we focus on other issues — and rightly — there are other important issues like health care, but the farther we get away, and the more the economy seems like it’s stabilized, the harder it really is to get reform with teeth. And the memories on Wall Street, unfortunately, and, frankly, in Washington are so short, that there seems to be a real conundrum, which is, can we really change the undergirding, the underpinning of Wall Street? And, frankly, we haven’t and I’m not sure we’re going to.

JEFFREY BROWN: Well, John…

JOHN CASSIDY: And could I just say…

JEFFREY BROWN: Yes, go ahead.

JOHN CASSIDY: Sorry. Could I just say one more thing on that, Jeff?

JEFFREY BROWN: Mm-hmm. Go ahead.

JOHN CASSIDY: I mean, ultimately, I think, as I say, as I try and argue in the book, it is an intellectual argument. It seems to me, this time last year, we sort of accepted the idea that markets fail sometimes that — now need regulating. They need adult supervision. As the markets have recovered, as the economy have recovered, people have reverted to their previous positions on that argument and have sort of forgotten the lesson that we thought we had learned a year ago. I think — that is why I say, ultimately, I think it is a sort of intellectual argument. We have to forget these ideas that markets can regulate themselves, that banks won’t take risks because they don’t want to harm themselves. That was basically the Greenspan argument of why Wall Street doesn’t need regulating. You know, we tried that for 10 years, and we ended up with the worst recession since the 1930s and hundreds and billions and trillions of dollars of taxpayers’ money poured into the financial system. So, as I say, I think, you know, we need to remember the lessons we learned this time last year, and not go back to our old ways.

JEFFREY BROWN: All right, we will leave it there. John Cassidy’s book is “How Markets Fail.” Andrew Ross Sorkin’s book “Too Big to Fail.” Thank you both very much.

ANDREW ROSS SORKIN: Thank you.

JOHN CASSIDY: Thank you.