TERRY GROSS, host:

This is FRESH AIR. I'm Terry Gross. There were a lot of secret meetings and behind-the-scenes deals when America's financial system was on the brink of disaster last year. My guest, Andrew Ross Sorkin, reveals a lot of new information in his new book, "Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System and Themselves."

It covers the period when each of the former big five investment banks failed, was sold, or was converted into a bank holding company. At the center of the book is the collapse of Lehman Brothers, the financial services giant, which the government decided not to bail out. Lehman declared bankruptcy in September, 2008, sending shockwaves around the world.

As Sorkin writes: Last year's financial crisis and the bailout raised questions about the very nature of capitalism. Sorkin has spent the last decade covering Wall Street and deal-making for the New York Times and is the founder and editor of DealBook, a daily online financial report.

Andrew Ross Sorkin, welcome to FRESH AIR. One of the big questions about the financial collapse is why the government stepped in to prevent the failure of Bear Stearns and AIG and others but not Lehman Brothers. How do you think things might have been different if Lehman had been bailed out?

Mr. ANDREW ROSS SORKIN (Author): Well, that is the crucial question and arguably is probably the greatest mistake, if you will, in that that particular decision, the decision to allow it to go bankrupt, and I'm sure Paulson and others would argue that they didn't have a choice, and we can talk about that, but that decision unto itself led to the other collapses in the financial system and the difficulty we've had over the past year.

The problem, though, with saying that that was the pivotal mistake is that it's unclear had they saved Lehman Brothers what type of public outcry there would have been, for example, about whether they could have saved AIG, which was a much larger problem that was only 48 hours later, and so you might have saved Lehman and then not been able to save AIG. You might not have been able to do other things.

Lehman is probably a symptom more than a cause, but clearly represents a pivotal moment in this storyline.

GROSS: You write about a lot of almost deals that Lehman made.

Mr. SORKIN: Yeah, exactly.

GROSS: Tell us about one of the deals Lehman almost made to stay alive, that - a deal that is not widely known that you found out during the course of your reporting.

Mr. SORKIN: Well, the one that was the most remarkable, actually, given the timing, was that Hank Paulson actually tried to orchestrate a deal for Warren Buffett to invest in Lehman Brothers, and this was not, you know, in September, and it wasn't even over the summer.

It was actually in March, and the most remarkable part about these conversations were that there was actually a very good possibility that Warren Buffett would have done the deal if the terms were good enough, actually on what would have been better terms than the terms that he ended up making investment in Goldman Sachs. But when you think back on all of this and you realize that had Warren Buffett stepped up and his name been attached to Lehman Brothers, it might have instilled the type of confidence that frankly was instilled in Goldman in September after people thought that firm was going to go down.

GROSS: So you think Buffett - you think that if the CEO of Lehman had accepted Buffett's offer, that things might have been different?

Mr. SORKIN: It was a grand missed opportunity in that what you saw happen when Buffett put his money on the line with Goldman Sachs, not only did they get Buffett's money, but they were able to raise another five, 10 billion dollars from additional investors afterwards because people said, look, if Warren Buffett's in, I'm in, and that's what Lehman Brothers needed more than anything else.

And they didn't take that deal, and of course as the summer progressed there were a series of other deals, discussions with Bank of America, discussions with Barclays, and then a very fateful discussion that almost happened and didn't with the Koreans, the Korean Development Bank.

GROSS: Right. You write that Lehman was negotiating with this Korean bank for some kind of - what kind of deal?

Mr. SORKIN: Well, by the very end, I mean, there's a various number of different deals, but there's a number of scenes where they actually go to South Korea. Stories about this start leaking. There's another trip to Hong Kong, but there was a deal literally a month before the company went bankrupt where it was very possible that the Koreans were prepared to take over what would have been the entire firm. They would have spun off some of the other assets.

But now a lot of people at Lehman Brothers will tell you that they were never really that serious. So it's unclear, but they seemed to be prepared to do it.

GROSS: During the course of the reporting for your book, what did you learn about how Secretary of the Treasury Hank Paulson and head of the Federal Reserve Timothy Geithner responded when Lehman actually collapsed?

Mr. SORKIN: Well, some people would argue that Lehman Brothers, at the very, very end, was actually killed, and it's an interesting question, and when you do get into the room that Sunday, September 14th, and you're at the New York Fed, and you're sitting there with Hank, and you're sitting there with Tim, and you're sitting - Ben Bernanke's on the speaker phone from Washington as they're discussing what to do, you do see, for better or worse, a decision made that Lehman Brothers, by the way, isn't just going to collapse on its own but it has to go bankrupt that Sunday.

That is the decision. The company has to go bankrupt, and in fact the company is instructed to go bankrupt in what has to be the most remarkable situation I've seen in my experience reporting on any of this.

Christopher Cox, who was then the chairman of the SEC, actually calls up the board of Lehman Brothers during a board meeting on speaker phone and tells them that they must file for bankruptcy. The government was effectively putting a company into bankruptcy.

That's not to say that necessarily Lehman Brothers would have lasted, but it's fascinating to really watch the decision-making and the intervention efforts that the government went to.

GROSS: Why did they do that? Why did they force Lehman to collapse?

Mr. SORKIN: Well, when you got to Sunday morning, there was a deal that was almost in place with Barclays, if you recall. There were two deals simultaneously going on. Lehman was talking to Bank of America, and they were talking to Barclays.

Bank of America, as we all now know, switched gears and started negotiating to buy Merrill Lynch. So they were out, and the last great hope was Barclays, and you will see a series of, to me, fascinating phone calls back and forth between the British regulators and the U.S. regulators, and the British regulators effectively told the U.S. regulators that the chances were slim that they would be in a position to approve a deal, at least on a timeline where you'd actually have a deal in the next 12 hours.

And this was - you could see the frustration on the side of the British regulators with the U.S. regulators. They had previous relationships. They were upset with each other. There's a whole history to it all. But by noon, 1:00 that day, once the Barclays deal was off the table, I think there became a realization for Paulson and for Tim Geithner that there was no saving - there was no way to save the firm, at least at that moment.

They were not contemplating lending them money the way they had Bear Stearns, for example. They didn't think they had a vessel in the way they had with J.P. Morgan. If you recall, they lent money to J.P. Morgan to buy Bear Stearns. Once Barclays was off the table there was nobody for them to lend to, and by the way, it's not clear that they were ever really prepared to lend anyway.

But once that became clear, they decided that Lehman could not open for business on Monday morning without causing an even greater panic than they ended up creating, which is to say that the company needed to be in bankruptcy. There needed to be closure so that the market could at least have some semblance of - confidence isn't the word - but some closure on what was going to happen, had Lehman Brothers opened Monday morning and not been able to fulfill its trades, you know, whether that would have been worse.

And these were the questions that they were asking, and they're very tough questions, and frankly, the worst part about this, and this is the thing that amazed me as a reporter, is the conversation that we're having now was much longer than many of the conversations where the most pivotal decisions were being made that fateful Sunday.

GROSS: Why were those conversations so short?

Mr. SORKIN: Because they were taking place inside this vacuum, this marathon, this - it's not even a marathon, it's a sprint, really, where they really felt that they were against the wall.

All of this happened - I mean, they did not really start doing serious scenario planning until that weekend, and so, you know, this started on Friday night at 6, 7 p.m., and literally they were out of bidders for Lehman by noon on Sunday. And so, you know, there were these various phone calls, two minutes here with Alistair Darling, who is the treasury secretary in the U.K.; a call here with Ben Bernanke; a call here with this CEO, with that CEO. Everything is compacted into this very short timeframe, and they were desperately racing to try to save the system. Obviously in this case, at that point, they did not.

GROSS: After Lehman Brothers collapsed, there were fears that Morgan Stanley and Goldman Sachs would fail too. How close did they come?

Mr. SORKIN: Well, I would tell you that as I reported this out, that was actually probably one of the biggest shockers in that for many months I don't think we ever appreciated or understood how close to the brink Goldman and Morgan Stanley really were.

You know, they talked a very good game at the time about - and their job at the time in an odd way was to tell the public how confident they were in themselves so that confidence would be instilled back in them, but as I got into the reporting, it became very clear that by that Wednesday after Lehman had gone and AIG had been saved, Morgan Stanley was next in line, and had Morgan Stanley fallen, it was even clearer that Goldman Sachs was going to go, and frankly, if Goldman Sachs had gone, the next domino in line was not another bank but actually General Electric, one of the most iconic American companies in the world.

General Electric has a huge finance arm, and they were the ones who were going to get stung the most, and so you had this sort of domino effect that was about to take place and then a whole series of secret government intervention efforts that we never heard about at the time, both to try to merge Morgan Stanley with a variety of companies and to merge Goldman Sachs with a variety of companies. And perhaps the most surprising part to me was actually the role of Hank Paulson in all of this because, as you know, Hank Paulson, being the former CEO of Goldman Sachs, had signed an ethics letter when he first joined the Treasury saying that he was not going to get involved in any matters related to Goldman, not just for the year after he joined, which is the typical amount, but he actually voluntarily said he would do it that way for his entire term.

GROSS: And then there came a point when it was impossible for him, he thought, to deal - and his colleagues thought - to deal with this crisis without directly talking to Goldman.

Mr. SORKIN: Exactly. Exactly, and...

GROSS: So he signed a waiver of his ethics agreement. Tell us about the waiver that he signed and when that happened.

Mr. SORKIN: Well, that - I remember my eyes widening when I first heard about the waiver. Someone had mentioned to me on background: You've heard about the waiver, right? And I said, heard about the waiver? What are you talking about?

Yes, that Wednesday, September 17th, in the morning there was a decision made that there was going to be a conference call at about 3 p.m. between Bernanke and Geithner, and the topic of conversation was going to be how to save Goldman Sachs and Morgan Stanley.

This was a conversation that typically Hank Paulson would have not been allowed to participate in, and he said to his general counsel, a fellow named Bob Hoyt(ph), we need to get that waiver, and in fact the waiver was a surprise and was kept secret for two reasons, which one probably makes more sense than the other.

The first was there was a real question that if the waiver became public at that time, whether it would undermine the confidence that the public had in Hank Paulson himself and in the decisions he had been making related to Goldman, or related to Lehman, rather, and related to AIG.

The other thing was that if they had disclosed the waiver at the time, there was a real worry that all of a sudden there would become a run on Goldman Sachs. The moment the market would know or understood that Paulson felt it necessary to get involved, not only would it feed the conspiracy theories but it would feed the sense that really there must be a larger problem at Goldman than anybody knew, and in fact there was a larger problem than anybody knew, but their whole goal at that point was not letting the markets know that.

GROSS: Let's talk about what the predicament that Paulson was in says about conflict of interest between Wall Street and the government. You know, Paulson's hands were tied a little bit because he'd been the former CEO of Goldman Sachs and had signed this agreement that he wouldn't deal with them on major issues, and then he had to get a waiver of that agreement. And then as you alluded to, there were a lot of conspiracy theories that, okay, the government is saving Goldman, or the government's bailing out AIG, which is going to help Goldman, because Paulson - you know, because Goldman is like Paulson's company. It's a company he's from. He worked there a long time.

And you know, whether there's any truth to that or not, it's what you call the optics, it's how it looks. And to a lot of people it really didn't look good. So what's the larger lesson of that?

Mr. SORKIN: Well, so when I started this book, I have to tell you that I probably believed some of these conspiracy theories. I didn't like the way some of this looked either and was concerned as a citizen about what role Hank Paulson had in trying to save Goldman Sachs over some other firm.

I will say, having now done 500-plus hours of reporting around this, I don't think that he, in his mind, was trying to save Goldman Sachs over any other firm. I think that he, having come from Goldman Sachs, saw the world through the prism of Goldman Sachs. He had been there for 30 years, and so I think he saw the world through that lens, and when he saw Goldman Sachs in trouble, that definitely hit home. There is no question about that. But I think he really was trying his darnedest to save the financial system as a whole, and Goldman Sachs I think to him represented the last domino. If Goldman were to go, then the whole thing would go.

You know, he likes to say, you know, the fireman doesn't come put out a fire in the building just to save one person in one office, and I think that's probably pretty accurate. I think the building was on fire, and he was trying to save as many lives as he could. Goldman Sachs might have been in the penthouse of that building, if you will, and you know, if the fire had reached there, then the whole building would have gone.

GROSS: My guest is Andrew Ross Sorkin, author of the new book "Too Big to Fail." He covers Wall Street for the New York Times. We'll talk more after a break. This is FRESH AIR.

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GROSS: If you're just joining us, my guest is Andrew Ross Sorkin. He's a reporter and columnist for the New York Times, writing about business, and he has a blog called DealBook. He's the author of the new book "Too Big to Fail," about the financial collapse last year.

I think it's fair to say that President Bush is not a major character in your book, but…

Mr. SORKIN: That is true, surprisingly so, actually, for my mind.

GROSS: Do you have any idea if he comprehended what was going on, both what was at stake and what the solution that the - that his own regulators came up with was? Do you think he comprehended that level of…

Mr. SORKIN: I'm not sure that he appreciated how far gone the economy was, what some of the decisions that he even made during his administration that could have led to some of this and how close we were to the brink.

He really did leave so much of the authority over these issues to Hank Paulson, who did consult with him and tell him what was going on, but you know, there's a great scene - I will always remember it - when Paulson and Bernanke go over to see him to explain to him about AIG and what was going on there.

They were about to - three hours, I think, away from rescuing that company, and he says: How did this happen, question mark? And I think he meant that genuinely. I think he did not appreciate how this happened, and he was like so many other Americans that read the papers during those fateful weeks who said: How is this possible that out of nowhere all of these companies are spiraling out of control? And so - the only good news there is that I think he was self-aware enough to know that he didn't understand it, and he did leave it to some of the folks who probably, or at least hopefully, understood it slightly better.

GROSS: Rumors are very potent on Wall Street, because, you know, it's all speculation, trading. It's all...

Mr. SORKIN: Absolutely.

GROSS: So what are some of the rumors that you think fed the crisis?

Mr. SORKIN: Well, you know, when you think about Bear Stearns going under, you think about Lehman going under, these are what they call runs on the bank. This is a period where investors decide they're no longer willing to bet money with this firm.

Terry, it would be like me - it would be like you and me betting on the baseball game tomorrow, but then somehow decide - you know, for me deciding that you're no longer good for the money, and by the way, you had taken bets from me for the past two weeks, and you're going to no longer be good for that money either. And I might go tell a friend that Terry's no longer good for the money. So what am I going to do?

And I think what ends up happening is you get this confluence of rumors and speculation that take over the market. They sweep the marketplace and in this day and age even more so than before because we're not just talking about telephones. We're talking about people, you know, on email, and now they're twittering this stuff.

And so the force with which this information gets spread is so violent almost that in the last days of Lehman Brothers, by default what you have is a rumor mill that is undermining confidence in these firms to the point where they're calling up these firms saying get my money out of there right this second.

And so, you know, people can say: Do you blame the rumor? In a way you almost have to blame the rumor because the rumor is what undermines the confidence. Now, the rumor may be based on fact. There were people who did not have confidence in this firm, but of course these things spread and spread to the point so violently that these companies end up getting in so much trouble.

GROSS: How scared were you that weekend about what was going to happen to our country?

Mr. SORKIN: Well, I remember going home at 2:30 a.m. on what would have been I guess early Monday morning after Lehman Brothers had filed and Merrill Lynch had been sold to Bank of America, and that on its own seemed pretty bad to me. I still couldn't even fathom that.

But there was another piece of news which we had just broken in the paper about an hour earlier, which was that AIG was next, and that was something that was not on anybody's radar. I couldn't even believe - and AIG was humungous, so - and most of America did not appreciate the AIG situation at that time. So I think for me, I remember going home in the cab thinking this is going to be a very, very difficult, challenging - as a journalist fascinating week, if not longer, of my life. But yeah, I really felt we were about to go off a cliff.

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GROSS: What do you think prevented the collapse of Goldman Sachs and Morgan Stanley?

Mr. SORKIN: Well, there's no question that the decision to make them both bank holding companies, which is a monumental decision, clearly helped save them for a day or two. The larger piece that really helped both of those firms was an investment that was made by the Japanese in Morgan Stanley and an investment made two days later by Warren Buffett and Goldman Sachs. It was those investments that made the market scratch their heads and say, okay, maybe there's some smart money going into these firms. Maybe something's about to happen that's right here.

But in the larger picture, what really saved Goldman and Morgan and all of Wall Street was the decision made not in September, but in October to grant some of that TARP money to the banks. That's what stopped - you know, to the extent we were brought to the brink, that's what brought back from the brink.

GROSS: Okay. So let's talk about the TARP money.

Mr. SORKIN: Mm-hmm.

GROSS: The initial proposal that Paulson presented…

Mr. SORKIN: Right.

GROSS: …to Congress was - what was it, one page?

Mr. SORKIN: It was three pages - two and a half pages, almost three pages, which is not that many pages. In fact, there's a very funny scene I always find funny. There's two Treasury staffers who actually were talking that weekend about the three-page proposal, and one of them says to the other have you seen the proposal? And he says, oh, I've seen the talking points. And the other guy goes, no, that is the proposal. And so there definitely was a sense even within Treasury that this was not enough.

You know, Paulson will defend the decision to do three pages as sort of an outline, and he was hoping that Congress was going to fill in the details and he - in truth and in fairness, he had been criticized for putting up an earlier bill that was probably too detailed and didn't leave enough wiggle room, but this was, obviously, from a public perception point of a view, a very bad choice.

GROSS: You say in your book that Jim Wilkinson, who was Henry Paulson's chief of staff, gave him this advice when Paulson was putting together the plan for the TARP. This advice about how to approach Congress: This will only work if you scare the blank out of them.

Mr. SORKIN: Yeah.

GROSS: So do you think scaring the blank out of Congress was part of the plan?

Mr. SORKIN: It was a remarkable line that I remember in my reporting when I heard it. It's one of those times as a reporter where a light bulb goes off in your head. It's - I have a complicated answer for you, which is part of me feels like you never want to oversell the problem. But part of me also, now having done the reporting, recognizes that when you talk to many of the members of Congress at that time, they didn't necessarily see the writing on the wall. They didn't really see how bad it was.

You recall, by the way, they didn't even pass TARP the first time. It had to be passed - it went to them two times before it was passed, and only after the markets dove even more did they pass it. And so to the extent that Treasury saw something that the rest of the world didn't -and I think that is true. I think part of their job was to sell it to them. Now do I like the fact that they sold it to them that way? No. Obviously. But I do appreciate, given the severity of the situation at that time, at least the thought process behind it.

GROSS: Yeah. And among the things that Paulson said to Congress was, I don't want to think about what will happen if we don't do this. If it doesn't pass, then heaven help us all.

Mr. SORKIN: And you know what? I believe he meant that. And I believe he thought that. You know, it's funny, because I know a lot of people have very skeptical and sometimes cynical views of what Treasury did at the time, and there were a lot of mistakes made, and I don't want to be an apologist at all. But I do think when you really get into the details and the weeds, I do think that Treasury, for the most part, acted as -and Hank Paulson in particular - acted in good faith.

I don't think that they were ever trying to do something untoward. I really think they were trying to save the system. We can quarrel with how they did it. And, as I said, I think they did make a number of mistakes, but I think that in the end, they tried harder probably than just about anyone could imagine.

GROSS: One of the things we're dealing with now in trying to figure out what happened to all the money in the TARP is that the proposal, the legislation that passed had no accountability. The banks don't even have to tell us what they're spending the money on. So who know what's happened to the money?

Mr. SORKIN: What's happened to the money. That's the real problem. You know, when we look back now, a year later where you see compensation spiraling out of control again, you know, a lot of the TARP money has been given back, but many of these firms are still being subsidized in many ways by the Federal Reserve and the FDIC. You know, we don't know where all this is going. There was no accountability, and that…

GROSS: But why? I mean, what…

Mr. SORKIN: …really is a real problem.

GROSS: Is this because, like, Paulson didn't want that kind of accountability? Did he think it would be a problem to the banks?

Mr. SORKIN: I'll give you the explanation, but it's not satisfying. But when you get in the room, this is the explanation you will get, which is: We wanted them to take this money voluntarily, right? We couldn't force the money on them. And that is true. At the time, there was no ability to force the money on some of these firms. And we thought that if we had made - if we'd put restrictions on the money where we had put strict compensation guidelines, for example, or disclosure guidelines, for example, or all of the things that you and I as American citizens would really like, that many of these companies - which for better or worse are supposed to serve the shareholder - they wouldn't have accepted the money.

Now I don't know if that's true or not. I actually happen to believe that it's possible that some of these firms would not have touched the money. And because of that, would we have been in a worse place? And that's really the question. That's not to say it's a good answer.

GROSS: And we're in a real predicament now as a result of that decision.

Mr. SORKIN: There's no question. There is no question that a year later - in fact, the one thing that I find the saddest about this, you know, as I spent all this time interviewing many of the CEOs and the government leaders and everybody else who was involved in this, you would've thought that there would have been a sense of contrition and there would've been some lessons learned a year later. And, to me, the sad part is I'm not sure there were any.

A lot of the people who are still in business today think of themselves now as survivors, and they use the word survivors as if they're cancer survivors. And I'm not sure there's an appreciation that they were saved by the taxpayer and that they owe something back not only to the taxpayer, but to the community as a whole. And that's something that has been completely lost on these people. And, you know, there are not many heroes in this book.

You know, you could argue that some of them may, in fact, be villains. But it is something that bothers me to this day about how little self-awareness there still is about what they did to bring us to the brink and how they were saved and the responsibility they should have now.

GROSS: Let's give an example. I mean, Goldman just reported that its earnings for the third quarter were $3.19 billion. And they...

Mr. SORKIN: Unbelievable, right?

GROSS: Yeah, and they're giving out huge bonuses.

Mr. SORKIN: Unbelievable.

GROSS: And so, you know, for we the taxpayers, it's like when you think of all the people who lost their jobs, who lost their retirement funds, and as a result of losing their jobs, lost their health insurance…

Mr. SORKIN: Right.

GROSS: …and their homes, to think, you know, that they're getting these huge bonuses at places like Goldman Sachs just seems outrageous. How does Goldman Sachs even try to justify that?

Mr. SORKIN: Well, let me just go back for one second, which is to say to me, the most galling part about the bonuses is where the profits are coming from. The profits are not coming from lending. I think Americans would feel a lot better if banks were lending money to small business owners, to people who needed an auto loan, to people who needed a mortgage. If the banks were profiting doing that, I think we might actually all say maybe this is okay. The problem is that these profits are coming from trading, and that's what's got us in trouble the first time. That's what these banks were doing.

GROSS: Risky trading, you're talking about.

Mr. SORKIN: Risky trading.

GROSS: Yeah.

Mr. SORKIN: They're trading in a variety of assets. You know, they're betting. They're gambling. That's what the business is. And by the way, Goldman Sachs has done terrifically this quarter, but like any gambler, you know, you can roll the dice the wrong way. So at some point this could go wrong and we still have institutions that are too big to fail. And this is the real travesty, which is we haven't any government regulation or anything that's been proposed in the past year, and I'm not sure we're going to get there.

But to your question about how do they justify this, there is an issue. And it's a very complicated question, and I don't know what the answer is, which is that they are making these enormous profits, and the question is where should the profits go?

Typically, if you're a Procter & Gamble, you take the profits, you reinvest them in building a new factory. On Wall Street, they've -because there is no factory, they typically give a good portion of the profits or revenue to the employees. They are the factory. And there is this sense, and I think there's a bit of a groupthink about this -there's a sense these people are indispensable and that if you don't pay them, they're going to go off and do this themselves. And some may. But that is the issue, and that's the conundrum that they face about what to do.

They are making all this money. I'm not sure we are happy about it. I think many people are unhappy about it. I think we probably should be happy at some level that the firms are healthier than they are. But in terms of how they're making the money and how the incentive systems are being put in place so that people are being compensated still seems like no lesson has truly been learned just yet.

GROSS: I think a lot of people are having a hard time being happy that institutions like Goldman Sachs are healthy, because you wonder how healthy are they if they're building their profits on risky investments, not unlike the risky investments that led to the collapse last year. Is that really health, or is that just another bubble?

Mr. SORKIN: Well, and that's the question: Are we building another bubble? Arguably, the type of trading that many of these firms are doing today, in fairness to everybody, it is less risky and not as likely to create the exact same type of problem we had before. There really is less risk in the system. There's less debt. There's less - you know, there's no steroids in this. You know, people talk about leverage. The steroids are gone, so, you know, before, where you took a dollar and you borrowed 30, people aren't doing that anymore. So that's the good news. But the bad news is that we really have to come back to an American economy where people build things, and financial engineering is not the only place that, you know, the Harvard MBA's want to go.

GROSS: My guest is Andrew Ross Sorkin, author of the new book "Too Big To Fail." He covers Wall Street for The New York Times.

We'll talk more after a break.

This is FRESH AIR.

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GROSS: If you're just joining us, my guest is Andrew Ross Sorkin. He's a reporter and columnist for The New York Times, writing about business. And he has a blog called DealBook. He is the author of the new book "Too Big To Fail," about the financial collapse last year.

So one year after the financial collapse, do you know what Henry Paulson thinks of the plan that he helped come up with?

Mr. SORKIN: I do. And, you know, the most interesting piece about this is that I think he looks back on this period as thinking he did something quite remarkable. I think he accepts that he made mistakes throughout this period, I'm sure. But also that I think in his mind -and by the way, I think that over time history will show that we really were rescued, we really were taken back from the brink. Things could have been worse. I know it's sort of a counter-factual issue, but it is possible we could have gone over the cliff and we didn't.

And so that's a good thing. And I think he looks back proudly about that, you know. In an odd way, you know, now I think a lot of credit has been given to Tim Geithner and the Obama administration and Ben Bernanke. But much of what really happened and lay the groundwork for the recovery, if you will, that we're having now - and I know some people think it's a head fake and I have my own worries too - but to the extent we are having somewhat of a recovery, I do think that you have to credit what took place back in September and October to save the system, probably more than many people are giving them credit for.

GROSS: So Paulson and Geithner, you know, you could argue, did their best to save the system from collapsing. You could also argue that they presided over the problems that created the collapse. Paulson was the head of Goldman Sachs, while Goldman Sachs was taking on...

Mr. SORKIN: Absolutely.

GROSS: ...all the risk. Geithner was head of the Federal Reserve in New York and really could have seen this coming, you could argue. Also, Geithner was part of the Clinton administration when the Clinton administration - when President Clinton signed deregulation of these risky derivatives into law.

Mr. SORKIN: There is no question that while they may have brought us back from the brink, they played a huge role in bringing us to the brink, both in their roles as regulators previously, and by the way, as we said earlier, the regulators were not minding the store at all and that created a huge dilemma. There's a good argument to be made, by the way, that some of the decisions they made even during this period, from March through September, created even bigger problems in the economy and in the markets, in that they were saving Bear, they were taking over Fannie-Freddie.

There were these inconsistencies with Lehman Brothers, and that undermined confidence unto itself. So there is no question that you can look at some of these gentlemen and you can point the finger. I would not tell you that you shouldn't. But at the same time I would suggest this: By the time Hank Paulson actually joined Treasury in 2006, the seeds of this crisis were sown. Now, you could argue that he was at the scene of the crime while he was at Goldman as well. And a lot of what Goldman did, by the way, spurred others to take even more risk.

I mean, the great irony is that Goldman actually took the risk and seemed to do okay with it. It's the other firms that tried to play copycat that seemed to fail so miserably. But yeah, I wouldn't dissuade you from placing blame on the regulators throughout this period and frankly over the past decade, but I do think during this pivotal period, while there were mistakes made, I think it becomes a little bit more difficult to point the finger directly at them for these specific errors.

GROSS: What was the role of hedge funds in the collapse last year? Because when hedge funds - a lot of what the hedge funds - when they got wind of the weaknesses in some of…

Mr. SORKIN: Great question.

GROSS: …the big banking institutions, they - what did they do?

Mr. SORKIN: What hedge funds would do was - is really take advantage of the carnage, at least some of them would. And what they would do is two things. One is, they would short the stock, meaning they would make a bet against the stock, not that the stock would go up, but in this case that the stock was going to go down. And what they - some of them were doing at the same time, by the way, was taking their money out of these firms exactly at the same time. So it almost becomes a vicious circle. And then the third thing they were doing...

GROSS: And they had a lot of money to take out.

Mr. SORKIN: They had a lot of money, sometimes billions of dollars that they're taking out of these firms. So they're hurting the firm - I mean they're purposely hurting the firm. Some of them would argue that they were saving themselves at the time, but they're hurting the firm, they're shorting the stock, so they're going to make money off of this. And then further, they're buying something called CDS protection. You've heard of credit default swaps.

This is like insurance on these businesses, and so they're buying insurance so that if the firm goes down they make even more money. It would be like me taking out insurance on your house, Terry, and hoping that it burns down. And so there are some real fundamental issues about how the trading system works, whether you should be allowed to buy insurance on other people's houses, whether you should be able to short stocks in this manner. And you know, in fairness to the hedge funds who were doing this, some of them were doing this genuinely because they actually thought they were going to lose their shirts.

So they were taking the money out, or they thought they couldn't take all their money out, so they were buying insurance, which makes sense because they had some exposure. So it's not a clear-cut issue. You know, we always think there's a black and white. This one is a grey issue. But there is no question that the hedge funds were heavily involved in those last fateful days of Lehman Brothers' collapse.

GROSS: Now, you write in your book that the collapse of the financial system last year raises questions about the very nature of capitalism. What are some of the questions about the very nature of capitalism that you think last year's collapse raised?

Mr. SORKIN: Well, I think it's larger than Wall Street. It goes to this issue about what we're all doing as a society. Are we trying to help society, are we trying to help the community? Are we doing everything in the name of the shareholder to maximize profits? There are larger questions here, because when you have firms that are working to maximize profits - which makes sense in the context to trying to work for their shareholders - but when you're doing that and you're posing a risk to the system, so you're not just posing a risk to yourself or to your firm but you're posing a risk to other companies and frankly to individuals, because as you and I talked about earlier, so many individuals loss their homes, lost their jobs.

I mean this really trickled down. You talk about the trickle-down effect. This trickled down in a way that I don't think anybody appreciated. And so if we're going to allow companies to try to maximize profits for their shareholders, we need to make sure that they are not putting the rest of the system at risk.

But there's a larger question, which is what should the goal be? Should the goal be to simply maximize profits for shareholders? What about the rest of the community? We've spent so many years talking about, you know, profits on Wall Street and the stock market going up. But now all of a sudden we're sitting back and we are seeing what's happened to the world in part because of it. And I think it does raise really central questions about the nature of capitalism.

Are markets really efficient? Do we need regulation to make these markets work? And frankly, you know - and this was what the book was about, was really trying to understand the puzzle of what went wrong so hopefully we can try to find a way to fix it.

GROSS: Andrew Ross Sorkin, thank you so much for talking with us.

Mr. SORKIN: Thank you so much.

GROSS: Andrew Ross Sorkin is the author of the new book "Too Big To Fail." He's a financial reporter and columnist for the New York Times and he is the founder and editor of the daily online financial report DealBook. This is FRESH AIR.

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