“We often forget…what the other side of the cliff looked like [in 2008],” said financial journalist Andrew Ross Sorkin to a packed Cubberley Auditorium on Saturday afternoon. “[We forget] how bad it was…and how far we were about to fall.”
Sorkin, who authored the bestselling book Too Big to Fail and who currently serves as a financial columnist at The New York Times and as a co-anchor of CNBC’s Squawk Box, addressed the origins, events and legacy of the 2008 financial crisis in his speech, focusing in particular on the broader lessons available.
His account started at 2:30 a.m. on Sept. 15, 2008 — shortly after Lehman Brothers declared bankruptcy and Bank of America agreed to purchase Merrill Lynch and just before the U.S. government took control of AIG.
“That was the most crucial time in my entire career,” Sorkin said. “I had never lived through a weekend like that.”
Sorkin emphasized the potentially catastrophic — and, at the time, underappreciated — risk of Morgan Stanley entering bankruptcy shortly after AIG and inducing a domino effect that may have brought down Goldman Sachs and potentially even General Electric.
He recounted receiving a call from an employee of the New York Federal Reserve shortly after the release of Too Big to Fail, who subsequently shared with Sorkin a model estimating unemployment levels in the absence of counter-cyclical fiscal and monetary measures.
“If you looked at the spreadsheet, 12 months out, the number on the right column that they were estimating [for unemployment] was 24.6 percent,” Sorkin said.
Sorkin also emphasized the interconnected nature of the crisis, as instability on Wall Street impacted smaller businesses through lending contractions and other mechanisms — and the government’s failure to better explain the potential severity of the situation to the broader public.
“If we had actually told the public what we actually knew at the time, we wouldn’t have made the situation better,” Sorkin said. “We would have made it worse…our economy is based on nothing more than confidence. When we believe, it works. When we don’t believe, it doesn’t.”
Turning briefly to the process of writing Too Big to Fail, Sorkin acknowledged the challenges of sourcing content from a mix of willing interviewees, interviewees who sought to spin the narrative for their own ends and interviewees who only opened up to Sorkin once he had obtained extensive input from other sources.
“I’ve learned…that’s apparently how it happens,” he said. “It requires some luck…in getting some people, early on, to play ball.”
Returning to legislative measures taken during and after the crisis, Sorkin downplayed their impact, noting that legislation like Dodd-Frank has served only to prevent a direct recurrence while elevating the implicit risk in vehicles like hedge funds.
“It effectively has done one thing,” Sorkin emphasized. “It has moved that risk we had in the system off of Wall Street and into the shadow banking system.”
Measures like elevated capital requirements for banks, meanwhile, may have offered mixed benefits, according to Sorkin, by increasing stability but also by limiting credit available to spur growth.
Sorkin also framed efforts to adjust compensation structures for financiers as inadequate given the prior accumulation of wealth common among top bankers.
“[For leaders] it’s not about money at all,” he said. “It’s about pride and it’s about power.”
Sorkin suggested that massive government intervention in the economy — in the form of the Troubled Asset Relief Program (TARP) — had been necessary to preventing further damage.
“[TARP] was one of the great masterstrokes of our time,” he said. “It’s very hard to argue that we didn’t get to a better place.”
He acknowledged, however, that preventative measures only have so much impact.
“Crisis is always a function of leverage and debt in the system,” he said. “You can have all the bad actors you want on the stage — credit agencies, regulators, greedy bankers — but if there’s not enough leverage and debt in the system [to prompt a crisis], it doesn’t matter.”
Towards the end of his speech, Sorkin acknowledged that the idealized “American Dream” — or at least the version that represented a natural progression between milestones, as opposed to a singular and spontaneous moment of innovation — has suffered in recent years largely due to globalization.
I’m not sure it was ever a reality…but that dream is the challenged dream today,” he said, adding later that “for us to get back to where we want to be…it’s going to require us to do some things that are very unpopular.
Questions from the audience focused on ways that the 2008 crisis may have been averted, as well as how future incidents might be prevented.
Referring back to 2008, Sorkin emphasized the value of establishing a clear, confident message for the markets.
“I’m a believer [that] we should have saved Lehman Brothers…not because Lehman deserved to be saved, but because of the collateral damage,” he said.
Citing the recent $16 billion purchase of WhatsApp by Facebook, Sorkin noted that another bubble might already have formed.
“It’s one thing to say there’s a bubble,” he acknowledged. “It’s another to have it pop.”
The event was sponsored by the Stanford Speakers Bureau.
Please find a separate interview with Andrew Ross Sorkin here.
Please contact Marshall Watkins at mtwatkins “at” stanford “dot” edu.