72 pages • 2 hours read
Andrew Ross SorkinToo Big To Fail
Nonfiction | Book | Adult | Published in 2009A modern alternative to SparkNotes and CliffsNotes, SuperSummary offers high-quality Study Guides with detailed chapter summaries and analysis of major themes, characters, and more.
Prologue-Chapter 1Chapter Summaries & Analyses
Prologue Summary
In the Prologue, Sorkin introduces readers to the central event of the book’s narrative, explaining that he interviewed more than 200 people connected to the 2007-2008 financial crisis in America:
[T]his book […] is about real people, the reality behind the scenes, in New York, Washington, and overseas—in the offices, homes, and minds of the handful of people who controlled the economy’s fate—during the critical months after Monday, March 17, 2008, when JP Morgan agreed to absorb Bear Stearns and when United States government officials eventually determined that it was necessary to undertake the largest public intervention in the nation’s economic history (6).
To Sorkin, this book is a “chronicle of failure—a failure that brought the world to its knees and raised questions about the very nature of capitalism” (7). Ultimately, it is a human drama about the “fallibility of people who thought they themselves were too big to fail” (7).
Sorkin begins by describing the increasing panic felt by Jamie Dimon, the chief executive of JP Morgan Chase, on September 13, 2008. The previous evening, he and a dozen other Wall Street CEOs were tasked with developing a plan to save Lehman Brothers, the fourth-largest investment bank in the United States. Dimon was also aware that Merrill Lynch, the American International Group (AIG), and others were in trouble, and he didn’t expect the government to bail them out. The previous year, the “financial services sector had become a wealth-creation machine,” and industry leaders believed they had “invented a new financial model that could be exported successfully around the globe” (3). However, they were “bolstering their bets with enormous quantities of debt” (4).
Cheap money following the collapse of the dot-com bubble led to “liquidity run amok” (4), especially in the subprime mortgage market. Wall Street had “securitized” (5) mortgages, breaking them into pieces that they sold to investors, including the investment banks themselves. And because they each owned slices of these financial instruments, there was a new “ultra-interconnectedness among the nation’s financial institutions that posed the biggest risk of all” (5). Some warned of doomsday scenarios, but even in 2007, many argued that “subprime loans posed little risk to anyone beyond a few mortgage firms” (5). The subprime market had collapsed by August of that year, however, “unleashing a global contagion” (5). The complexity of these securities made it difficult to price them, and without a price, “the market was paralyzed” (5).
Bear Stearns was the first to fall, but “no one felt safe” (5). Instead of “giving birth to a brave new world of riskless investments, the banks actually created a risk to the entire financial system” (6).
Chapter 1 Summary
On March 17, 2008, Richard S. Fuld, the CEO of Lehman Brothers, rushed back from India when he heard that Bear Stearns was going under. He was surprised to hear that Jamie Dimon was purchasing it for $2/share and that the Federal Reserve was taking on up to $30 billion in losses to get the deal done. He started to question his own business model. Meanwhile, “short-sellers […] were pouncing on every sign of weakness, like Visigoths tearing down the walls of ancient Rome” (10). Fuld knew Lehman was “next on the firing line” (11), as the smallest of the remaining Big Four investment banks. He thought, “this is going to be a real shit-show” (11). He did believe Lehman would be fine because it would be reporting solid earnings in a couple of days, but its stock continued to plummet. There was even a rumor that hedge fund managers had taken down Bear Stearns by pulling their accounts, buying insurance against the bank, and then shorting its stock.
Fuld believed in having enough cash to “ride out the storm” and in killing rumors before they become “self-fulfilling prophecies” (15). To that end, Lehman executives agreed to several interviews, stressing that the firm had liquidity. They then worked to get hedge funds to continue to trade with Lehman. They managed to reverse some of their losses, and they thought the upward trend would continue when they released their earnings report the next morning. Sure enough, the market responded well to the earnings report. However, people outside of Lehman were doubting the numbers, concluding that Lehman was a “house of cards” (35).
Meanwhile, Treasury Secretary Henry Paulson appeared on CNBC and said that he had “great confidence in our markets” as “resilient” and “flexible” (31). He was asked if the government would be bailing out financial institutions that get in trouble from now on, and he denied that Bear Stearns had been “bailed out” and said that the focus was on “what’s best for the American people and how to minimize the impact of the disruption in the capital markets” (33).
Prologue-Chapter 1 Analysis
In the Prologue, Sorkin sets the scene for the details that unfold in later chapters by explaining that the book is a “chronicle of failure” that “raised questions about the very nature of capitalism” (7). The date that is acknowledged as the beginning of the 2008 financial crisis is March 17, when JP Morgan agreed to absorb Bear Stearns and when government officials determined that it was necessary to undertake the “largest public intervention in the nation’s economic history” (6). The Prologue jumps ahead to one of the last dates covered in the main chapters of the book, September 13, in describing how Wall Street CEOs, including Jamie Dimon of JP Morgan Chase, were tasked with developing a plan to save Lehman Brothers. The Prologue also explains how the securitization of subprime mortgages made the financial markets even more interconnected and contributed to the “global contagion” (5) unleashed on the world in August 2007.
Because the focal point of most of the book is the demise of Lehman Brothers and the government’s refusal to bail it out, Chapter 1 focuses on Richard Fuld’s mindset on March 17 when he heard that Dimon was purchasing Bear Stearns for $2/share, with government assistance in the form of the Federal Reserve absorbing losses of $30 billion. This made him nervous because Lehman would potentially be the next target if it showed any signs of weakness. At that stage, he was still confident because he knew Lehman’s next earnings report would be positive. This chapter also introduces the idea that Bear Stearns became vulnerable, in part, because hedge fund managers shorted its stock. This theme runs throughout the book, with many of the key players railing against the detrimental effects of short-sellers on the market.
Another theme that is introduced in Chapter 1 that carries throughout the book is the effect of rumors, whether accurate or not, on the markets. In this chapter, Fuld and other Lehman executives agree to several media interviews so that rumors will not become “self-fulfilling prophecies” (15).
