Review of Books on the Bailout and Financial Collapse

Written by Ezra Rosser

A cute cuddly image for the bear market and the financial collapse

This summer I decided to read up on the bailout and the origins of the economic crisis because, while I was aware of the broad strokes, I thought the near collapse of our financial sector was a topic that could have sufficiently lasting impact that it was worth learning more.  I read (in order): Lawrence MacDonald & Patrick Robinson, A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers (2009); Michael Lewis, The Big Short: Inside the Doomsday Machine (2010); and Roger Lowenstein, The End of Wall Street (2010).

I decided to read A Colossal Failure of Common Sense because I liked the cover, which features a great photo of the Wall St. bull.  But the common advice about buying a book for its cover held true in this case.  It is billed as an inside account, but the insider is not sufficiently powerful to have played much of a role and too often fails to recognize the larger problems at Lehman and similar banks.  The mortgage department is subject to scorn and hindsight-aided insults, while the successful trades of the author are celebrated for whole chapters.  What is missing is recognition that the gains in non-mortgage arms of Lehman and the gains and eventual losses in the mortgage and real estate arm were driven by the same tool: tremendous leverage.  The authors attribute the failure of Lehman largely to a distant CEO – Fuld – and while you leave the book convinced that a change in leadership would have helped pull Lehman back from real estate, I did not get the sense that that change alone would reduce the bank’s exposure to the next bubble.  Mortgage brokers are described as flashy with fancy cars and big muscles, but the authors seem unaware of the irony of spending so much time describing the fancy meals and presents that Lehman executives lavished on well performing mid-level employees.  The culture of mortgage lenders at the height of the bubble described in the book could have been, but was not, a way for the primary author and Wall St. to look in the mirror.

If I left A Colossal Failure of Common Sense happy just to be done, I left The Big Short wanting to read more work by Lewis and promptly bought Liar’s Poker (which I can’t read yet because my father-in-law had the same reaction after he read my copy of The Big Short).  Focusing on the winners of the collapse, those who bet against real estate and mortgage backed securities, it is a great book, somewhat like beach reading, but with enough by way of explanation of complex financial products that I at least thought I could count it as work… in other words, if you are like me and want to say you are ‘working’ a certain amount of the time, it was perfect!  The main contribution to the big picture the book offers is an understanding of how deeply the financial sector failed to do a good job managing risk and the isolated place that naysayers found themselves in before finally being vindicated.  Before it crashed, the market kept rising as people piled in hoping to capitalize on the housing bubble.  Although short-sellers were demonized at the time, The Big Short makes you root for them.

Lowenstein’s The End of Wall Street was worth reading but, perhaps because it was my third such book, is a let down compared to the brilliance of Lowenstein’s earlier When Genius Failed: The Rise and Fall of Long Term Capital Management (2000).  Lowenstein’s focus is broader and the book includes a bigger cast of characters — officials at AIG, the Fed, Treasury, and the major banks all are present and described in sufficient detail to move the plot.  And it is a plot driven story: the near collapse of the financial system, the government’s ad hoc responses, and the ever present role of Goldman Sachs.  Many of the names are still in the news today as Obama’s economic team — or at least what was his team until the current round of cleaning house on his team — has pretty much the same players as were in place during the Bush administration.  (And arguably the same players who caused the problems or failed to see the dangers, but that is an impolitic observation!)  Although at points Lowenstein backs away from the accusation, the book still makes the importance of Goldman loyalty among former employees at Goldman (even former employees who worked there a long time ago) who go onto work for other banks or the government an side-plot of note.

To get more material for this post, I went to the New York Times’ Goldman Sachs Topic page, where you can quickly get a sense of both the crisis, the bailout, and the power of our country’s “too big to fail” banks.  I gathered a couple of links below in case you want to pursue this more:

Incidentally, I’ve been told I should read Andrew Ross Sorkin’s Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System — And Themselves (2010), but I’m tired of all the same basic story and have moved on to a better page turner.

Poverty Law BlogThis is my last post as a guest blogger this month… thanks to the organizers for inviting me and please visit my Poverty Law Blog,