JEFFREY BROWN: And for a closer look at the fallout two years later, we return to two financial journalists who wrote books on the crisis. Andrew Ross Sorkin of “The New York Times” is the author of the book “Too Big to Fail,” which was recently updated and issued in paperback. And John Cassidy of “The New Yorker,” he’s the author of “How Markets Fail.”
Andrew Ross Sorkin, I’ll start with you. Two years later, what do we know now about events that led to Lehman’s collapse? What’s most interesting to you?
ANDREW ROSS SORKIN, “The New York Times”: Well, I think the most interesting part is actually this debate that you alluded to earlier in the piece around, could they have saved Lehman Brothers and what really took place? And I think the two lessons learned was, A, they didn’t actually have the tools, but, B, was the political climate in which all this pressure was on them at the exact same time.
So, I do think that Ben Bernanke is telling the truth when he says he didn’t have the tools, but the most important element of that is today, two years later, he does have the tools in that the financial regulatory bill that did pass has something called resolution authority, which means that the next time a Lehman Brothers gets in trouble, the next time an AIG gets in trouble, we won’t be held hostage by the banks. Instead, we can actually wind them down in a meaningful way, and that’s something I think he wished he had at that time.
JEFFREY BROWN: And John Cassidy, what strikes you? How much of this is still a mystery? How much do we know now?
JOHN CASSIDY, “The New Yorker”: Well, I still think there’s a mystery at the center of all this, and that is why did the government let Lehman Brothers go down? Yes, Bernanke said we didn’t have legal authority, but if you notice carefully what he said, he said we never actually even discussed whether we could save Lehman Brothers. That seems to me to be a remarkable statement.
Earlier in the year, after all, they had saved Bear Stearns. Why didn’t they save Lehman Brothers the same way they saved Bear Stearns? The decision to let Lehman go under, after all, turned out to be a catastrophic error, and we’re still suffering the consequences of it.
JEFFREY BROWN: And John, why does it matter, these two years later, what exactly happened? You heard what Andrew said. What do you think?
JOHN CASSIDY: Well, I think it matters as a matter of just historical record. I mean, you know, it was a terrible blunder in some ways. We still don’t know all the facts behind that decision.
Bernanke has given his version of events. Hank Paulson has given his version of events. Andrew has given a version of events in his book. But still, the central mystery remains.
Why didn’t anybody foresee that this would be a catastrophe and take steps to avoid it? I mean, we’ve had two years of global recession, some of which could have been avoided if Lehman Brothers had been rescued.
JEFFREY BROWN: Well, Andrew –
ANDREW ROSS SORKIN: The one other –
JEFFREY BROWN: Yes, go ahead.
ANDREW ROSS SORKIN: The one other point that I would make is, you know, Lehman’s failure was obviously a huge, huge problem and became the tipping point for the crisis. But in many ways, to me the mistake, as much as letting Lehman go, was actually in saving, oddly enough, Bear Stearns, because it was that decision which set the course for the rest of these decisions and, in fact, set up this issue of moral hazard that we often talk about, this idea of putting a safety net under people so that they actually think that they can take even more risk.
JEFFREY BROWN: Well, so, John Cassidy, now bring us up to date, what’s now happened in Basil. You have got these new rules. What jumps out to you as being important, particularly vis-a-vis thinking about what happened two years ago?
JOHN CASSIDY: Well, one of the things we learned two years ago is that banks are dangerous. They perform very useful functions in society. They redistribute money and resources. But if they go wrong, they can bring down the entire system with them. So we need to do everything we can to make banks safer. And one of the things we can do is make them hold more money in reserve for when they get into trouble.
A couple of years ago, most banks were holding only two or three cents on the dollar for every asset they held. So if the markets turned against them, they could get into trouble very quickly. What this new banking regulation is about, the one set up in Switzerland over the weekend, is forcing banks to hold more money against losses. And I think that’s a good idea. It’s an obvious thing to do but, you know, it was necessary.
JEFFREY BROWN: Andrew, what would you add to that?
ANDREW ROSS SORKIN: Well, I think the real question is, is it enough? You looked at how the bank stocks performed today, and they were all up. Why were they all up? Because people thought this wasn’t nearly as Draconian as they thought it might otherwise be. Simon Johnson, one of the economists out there, has talked about having capital requirements of 15 percent. So seven percent may not ultimately do it.
And then you think about the fact that you have until 2018 to do it, I worry. I hope that neither of us will have to right sequels to our books, but I worry that actually we may run into another problem between now and then.
JEFFREY BROWN: Well, and just staying with you, Andrew, I mean, this of course will play out for a couple of years, as you say. It has to go to each country. So do you expect the banks to fight it along the way? I mean, what happens over the coming years?
ANDREW ROSS SORKIN: I actually don’t expect too many of the banks — too many of the countries, rather, to fight it. The interesting element of all of this is, of course, the U.S. banks are actually pretty well capitalized. The reason bank stocks went up is most of them aren’t going to run into any trouble because of this. The ones that are hurting the most are actually most of the European banks, which actually truly are undercapitalized. And for them, this is going to be a real challenge, and it’s one of the reasons, by the way, we don’t have higher capital requirements today, because frankly the Europeans couldn’t afford it.
JEFFREY BROWN: John Cassidy, what questions about all this remain for you in terms of how tough it is, how it will be implemented?
JOHN CASSIDY: Well, in a way, you know, it reminds me of what happened during the Second World War when the sort of French generals got together to discuss what went wrong, how did the Germans get in? And they decided of course that the Maginot Line they had constructed didn’t work. What we had here was a Maginot Line, the so-called Basil II agreement, which failed. So they decided to build a bigger wall, in effect, Basil III, which is this new set of requirements.
But we know from history that banks and financial innovators are very good at getting around regulations and new capital requirements. So whatever it says on paper, there’s always a risk in the future that some clever guys on Wall Street or the city of London will find a way to circumvent these regulations. So, on top of just having regulations on paper, you also need very vigilant and very capable regulators to enforce them.
JEFFREY BROWN: Well, that’s where I wanted to go, John. You pick up on that. I mean, we’ve talked about this before, the various changes we’ve seen in this country to try to force or strengthen the hand of regulators. Two years later, where do we stand on that in terms of their ability to oversee whatever changes happen and implement them?
JOHN CASSIDY: Well, we’ve had the big financial regulation reform in the U.S. which, as Andrew says, has given the regulators a lot more tools than they had in the past. And it’s also given the Federal Reserve in particular a lot more power. In many ways, the Federal Reserve failed during the last credit boom to regulate the economy properly and regulate the financial markets, but it’s been rewarded. Failure has been rewarded, and now we’re relying on the Fed next time around to do a much better job. Well, we hope they’ll do a better job, but experience teaches us to be cautious. So we just have to wait and see.
None of these things will be tested for years to come because banks don’t get in trouble when the economy is doing pretty badly as it is at the moment. Banks tend to get in trouble when the economy is actually doing well, counterintuitively, because that’s when they lend too much money to people who don’t really deserve the money. So it won’t be until we have another boom that we test all these new fireguards.
JEFFREY BROWN: Well, Andrew, what do you think are the prospects? What do you see in terms of the ability, willingness of regulators to act differently next time there’s a potential Lehman?
ANDREW ROSS SORKIN: You know, John is exactly right. Memories are short. I think over the next couple years the regulators will do their jobs and the bankers will reduce their risks, and we’ll all look at things and think that everything is great. It’s five, 10 years from now that you have to start worrying.
And I think the other component of this is the lesson really around debt. You know, this whole conversation has been about Wall Street, and you talk about too big to fail in the context of financial institutions. But ultimately, where this is all going, to the extent we’re going to have another crisis, it’s probably not going to happen on Wall Street, but it’s going to be about countries. It’s going to be about Greece and Italy and Spain. It’s going to be states like California.
At some point, just like Lehman Brothers, just like banks who don’t want to trade with Lehman Brothers because they worried they weren’t going to pay the money back, that’s what’s going to happen on a much grander scale. And I think that’s really where this whole conversation is going to ultimately head.
JEFFREY BROWN: And just briefly, John, in the meantime, this investigation into Lehman and Dick Fold, the former leader, all that continues, right? We’re still trying to get to the bottom of what happened.
JOHN CASSIDY: Yes it does. Well, the Financial Crisis Inquiry Commission, which is a body set up by Congress, a bipartisan body, is due to produce another report about all this in December. They’ve been interviewing all the people concerned — Bernanke, Dick Fold, Hank Paulson. So there will be another version of events in December, and we’ll just have to wait to see what they come with. Perhaps they can solve the mystery of why Lehman was allowed to fail.
JEFFREY BROWN: All right. John Cassidy and Andrew Ross Sorkin, thanks.
ANDREW ROSS SORKIN: Thank you.
JOHN CASSIDY: Thank you.