Inside The Minds Of Wall Street Execs

Guest host Robert Smith talks to New York Times reporter Andrew Ross Sorkin, author of "Too Big to Fail," about the second anniversary of the U.S. financial meltdown. Sorkin looks back on the causes for the meltdown and his worries about the next big crisis.

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ROBERT SMITH, host:

Whatever you think about how the economy's doing these days, there is always this sunny thought: Its not as bad as it was two years ago this week. Mid-September 2008 will be remembered for the collapse of the investment firm Lehman Brothers, a worldwide credit panic, and the very real prospect that the world economy might seize up entirely.

Andrew Ross Sorkin is a reporter and a columnist with the New York Times. He's the author of the book "Too Big to Fail," which took us inside the minds of the men who ran Wall Street during the crisis. And he joins us now from our New York bureau.

Thanks for being with us.

Mr. ANDREW ROSS SORKIN: (Author, "Too Big to Fail"): Thank you for having me.

SMITH: Your book has just been released in paperback with a new afterword, sort of bringing us up to date. So we wanted to talk to you about the reverberations of that week in September. But first of all, you need to take us back, because we almost forget how scary it was two years ago.

Mr. SORKIN: To give you a flavor of it, there were a couple things that happened that week that I think actually went underreported, one being that Morgan Stanley almost went out of business; the next being that Goldman Sachs was the domino after that; the next being that actually, there was worries inside the Treasury Department that General Electric was going to have to go bankrupt.

SMITH: General Electric? I hadn't heard that.

Mr. SORKIN: No. That was real. And there were projections that the Federal Reserve was making, that we could be headed for 25 percent unemployment in this country. So you know, we talk about 10 percent - hovering around 10 percent today. And the last piece was, there was a rumor that McDonald's franchisees weren't going to be able to make payroll the next Tuesday because Bank of America, which financed McDonald's and effectively rolled their paper, quote-unquote, was going to stop rolling their paper. So all of a sudden, the kid on the corner who is flipping burgers was being impacted by the guy on pinstripes on Wall Street.

SMITH: You know, in 12-step programs, they talk about hitting bottom before you can truly change yourself. Youre in contact with a lot of these CEOs, a lot of these executives at the firms. Did they hit bottom? Did they, at the time, say, we're going to completely change the way we do business?

Mr. SORKIN: Well, I would tell you that the saddest part about the book project, of spending 500-plus hours with over 200 of these individuals, was actually how few of them really felt that they had hit bottom, and how few of them felt that they needed to really change themselves materially. So many of them think of themselves today as survivors, with a lack of appreciation - and almost depressingly so, from my perspective - that they were rescued by the taxpayers.

SMITH: You know, I was thinking about this, and I wanted to check it with you.

Mr. SORKIN: Mm-hmm.

SMITH: Has any major executive gone to jail for what happened two years ago?

Mr. SORKIN: No major executive has gone to jail. And I think that the American public is waiting; they're desperately waiting. I would tell you, in fairness, when Enron went bankrupt, Ken Lay was not arrested for at least another two and a half years. So I think that there are still officials that are continuing investigations, and I wouldnt rule out the possibility that there could be some type of criminal situation. However, I think in this case, it may be different. I definitely see much more civil - many more civil cases coming down the pike. But this is one of those crises that has so many fathers that I think it makes it very, very difficult to find criminality, especially because most of these people - I dont think - actually intended to do something wrong.

SMITH: Now, in your book, you talk about one of the big problems that created the crisis was that all these financial firms were so closely interlinked.

Mr. SORKIN: Mm-hmm.

SMITH: Has that changed in the last two years?

Mr. SORKIN: Absolutely not. Today, they're as interconnected as ever. They're as big as ever. I call some of them too big to fail squared, now, because...

(Soundbite of laughter)

Mr. SORKIN: ...we've had so many mergers between the two firms. The only good news I can tell you about all of this is that there's less debt in the system. And you know, a lot of people say, how did the crisis happen? And they talk about housing policies and lax regulation and bankers gone wild. But to me in the end, it all redounds to the same word - debt, debt, debt - over and over and over, and it's the issue of over-leverage. It's the idea that people were putting one dollar down, and they were borrowing another $29 from somebody else. And so the good news is that the leverage, the overall leverage in the system, has come down.

SMITH: Well, it's been a few months since the Obama administration's financial reform package has passed. Do we have a clearer picture of how this financial reform law will affect Wall Street?

Mr. SORKIN: There's only two pieces of the law that I would suggest to you are actually significant. The first, of course, is the Consumer Protection Agency, which I think really will actually give voice to the consumer for the first time - and will prevent, hopefully, the type of lending practices that put us, in large part, in this place.

And the second - and this piece goes completely under-reported, in my mind - is this idea of resolution authority. There's a component of the legislation that actually now gives the government the tools to take over a failing institution like a Lehman Brothers, like an AIG, so that we, the taxpayers, aren't going to be held hostage in the future by these banks, and continuing to have to throw money at them.

SMITH: Are there any big mysteries surrounding the collapse of Lehman Brothers, or the financial crisis, that haven't been solved yet? I mean, do you have any big, unanswered questions?

Mr. SORKIN: No, I think the big, unanswered question I have today has less to do with the Lehman weekend, and more to do with why people didnt see it. You know, a lot of Cassandras have come out since the crisis and said, I saw it, I saw it, it was so obvious. And it's not a mystery so much as I just question why so many of these people who we all consider to be so smart, really did miss it.

SMITH: Well, I'll give you a chance to be one of those Cassandras who could be famous in two years. Whats the next crisis?

Mr. SORKIN: I think about this all the time, and I dont want to ever have to write a sequel to this book. But what I worry about, actually, is not Wall Street - but what worries me now is that too big to fail is now being applied to countries and states, like California and Greece and Italy and Portugal. And the same problem that Lehman Brothers had, this idea that other banks weren't going to trade with them because all of a sudden they weren't confident enough that they were going to be able to pay back the money, that that's what's going to happen to a state like California; that's what's going to happen to this country, that in the future, countries are going to have this problem, that people are just going to decide, you know what? We dont trust these guys, we're not confident that they're ever going to be able to pay us back. And that's what worries me the most.

SMITH: Andrew Ross Sorkin is the author of the book "Too Big to Fail." He's also a columnist, and edits the DealBook site at the New York Times.

Thank so much.

Mr. SORKIN: Thank you for having me.

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