Last week, Judith Miller and Nicole Gelinas started a dialogue on how accurately Hollywood has explained the financial crisis. This is the second and final part.
Judith Miller: In the financial world, one man's hero is another's villain. That's particularly the case in the two films about the 2008 financial crisis that we're discussing—Too Big to Fail, a docudrama based on Andrew Ross Sorkin's book, and Inside Job, Charles Ferguson's documentary. Because it's been many years since I covered the Chrysler bailout as a cub financial reporter in Washington, I decided to ask some of my favorite financial gurus whom they considered heroes and villains in the crisis. Almost none of them wanted to be quoted by name. But after I promised not to identify them, they sent me their extremely strong, often salty views.
Most agreed with HBO's depiction of Paulson and Bernanke as heroic officials who had prevented our economy, and hence the world's economy, from experiencing a financial Katrina and unemployment rates of 15 to 20 percent. I'm not sure I agree: where were they, after all, when this crisis was building? Sorkin views them and the other regulators who struggled to prevent a financial meltdown rather charitably; Gretchen Morgenson, the New York Times reporter who has coauthored a new book with Joshua Rosner about the financial crisis, Reckless Endangerment, has a much harsher take. In a recent interview, she told Kai Ryssdal of NPR's Marketplace that the system suffered from "regulatory capture": regulators were so close to the entities they were supposed to oversee that they had the same mind-set.
But most of my Wall Street friends still admire Paulson and Bernanke's efforts. Yes, they told me, the regulators were slow to act, particularly Bernanke. But once they recognized the magnitude of the problem, they acted decisively in the face of great risk. Without TARP, the economy would have been much weaker and the financial markets a catastrophe, they said. The U.S. government will probably wind up making a little money on TARP, even if you include the auto bailout and mortgage relief.
That being said, it's hard to deny that a failure to enforce proper rules was at the heart of the financial crisis. And here, several of my finance pals singled out Alan Greenspan, who served from 1987 to 2006 as chairman of the Federal Reserve Board. Greenspan specialized in opaque testimony on Capitol Hill that said nothing and counseled doing nothing. Market forces would be enough to keep excess in check, he believed—until one day they weren't. Several of the gurus highlighted the lack of basic regulation for, say, those dastardly credit-default swaps. They also scored government overseers for failing to curb subprime lending or impose capital requirements on broker-dealers.
Politicians, however, share much of the blame. Who encouraged Fannie Mae and Freddie Mac (may they not rest in peace) to make loans to folks who clearly could not afford the mortgages they were assuming? Who thought that repealing the Glass-Steagall Act, and thereby breaking down the wall between investment and commercial banking, was a nifty idea? Who, time and time again, sent signals to the SEC, whose chairman is savagely mocked as a bureaucratic wimp in the HBO movie, and the other toothless financial regulators that tight controls were not in the interest of the market? Who failed to question whether the ratings agencies were smoking something in awarding triple-A ratings to junk-laden debt securities? Republicans and Democrats alike, as both films show.
Nicole, you asked about how the Lehman collapse is seen in retrospect. Was it wisdom or folly? Hindsight may make it easy to identify mistakes, but most of my gurus considered the decision to let Lehman fail a colossal mistake, just as the Christine Lagarde character in Too Big to Fail asserts. (It would have been nice to see a bit more of her in the HBO film—and more of any women in either film, for that matter.) Paulson et al. claimed that they lacked authority to bail out Lehman, and watching Lehman chief Dick Fuld (played by James Woods) bully his way across the screen makes one distinctly unsympathetic to him and his firm's plight. Plus, since the Street seemed convinced that Lehman had to go, there would have been a huge political backlash if the government had tried to save it. But in the end, no one seemed well served by letting Lehman go under.
Both movies poignantly raise questions about the stability of the financial system today. And I left them feeling queasy about whether we have really solved any of the underlying problems that triggered the crisis in the first place, or just created even bigger, more concentrated financial institutions that now really are too big to fail.
Earlier this year, in thanking the Academy for his Inside Job Oscar, Ferguson noted that not a single person had yet gone to jail because of misconduct in the financial crisis. All too true, until this past April, when a jury in Alexandria, Virginia, convicted Lee Farkas, the former chairman of Taylor, Bean & Whitaker Mortgage Corporation, on all 14 charges arising from a fraud scheme that led to the collapse of his firm and of Colonial Bank. But Farkas is hardly a household name, and President Obama hasn't exactly been lining up financial wrongdoers to punish for the mortgage bust. The HBO movie ends with Paulson's telling himself that the banks will, of course, use their infusion of federal cash to resume lending. But they haven't, as most recent data show.
One gets the sense that Hollywood thinks that nationalizing the banks and credit institutions is the answer. Watch Congress in action for a while and see if you agree.
Nicole Gelinas: Thanks, Judy, for these thoughtful comments. To keep things interesting for our readers, I must disagree with you on Lehman. My dissent colors my thinking, too, on how well these movies capture the causes of the crisis and on who, if anyone, the heroes and villains were. You note that your gurus consider "the decision to let Lehman fail a colossal mistake, just as the Christine Lagarde character in Too Big to Fail asserts." This consensus has indeed congealed, and another consensus is forming as well: the idea that the much-reviled $185 billion AIG bailout was a success because it will make money for the taxpayer.
I'd argue, though, that Lehman's failure was actually a success, in that it showed the world that the financial industry's business model was itself an abject failure that, absent trillions of dollars' worth of explicit taxpayer guarantees, posed an unacceptable risk to the global economy. What if Washington had saved Lehman, as it did six months earlier with Bear Stearns? That would have led to one of two outcomes. It could have moved the ultimate failure to another company, probably AIG, delaying the inevitable panic for days or weeks. Alternatively, if all the following rescues of other companies, including AIG and Citigroup, had succeeded, too, and removed the need for TARP—doubtful, but just for the sake of argument—then those "successes" would have kept the public from understanding the scope of government support of the too-big-to-fail financial industry. Such an outcome would not have been good for the country.
Why? Here is where I think both movies fall short. Neither makes the point clearly enough that "too big to fail" did not spring from the current financial crisis. Rather, "too big to fail" is a concept that governed the financial industry for a quarter-century leading up to the crisis and helped cause the crisis when nobody was paying attention.
This history is where Inside Job confuses cause and effect, creating villains where there are really only oblivious hostages to government subsidy. Ferguson's rough thesis is that starting in the eighties, Wall Street suddenly got really, really big. Big financial firms threw so much money around that it corrupted government and academia. These sectors' support made Wall Street even bigger, and around and around it went.
But why did finance get so big in the first place, giving it the money to afford five lobbyists for every member of Congress, as Ferguson notes? He misses a key event: the Reagan administration's fateful 1984 decision to mint the nation's first "too big to fail" bank. That year, Continental Illinois, then the eighth-largest bank in the country, teetered on the verge of failure. Rather than risk a financial crisis, the White House, FDIC, and Federal Reserve decided to protect all the bondholders and lenders from loss, rather than just small depositors.
It's hard to overstate this watershed in American financial history (which is why I talk about it a lot!). It may have seemed prudent at the time in avoiding a credit crunch and recession (sound familiar?). Henceforth, though, lenders and bondholders to other financial institutions knew that if those institutions were big and complex enough, the government would step in and provide them—the lenders and bondholders, that is—with protection in a crisis. Lenders and bondholders, correctly believing themselves immune from risk, provided financial firms with too much borrowed money. Where did both outsized Wall Street bonuses and an unsustainable consumer-debt burden come from? Too much financial industry debt, created by implicit government subsidy of that debt.
Why doesn't Ferguson mention Continental Illinois and its precedent? He does take care to identify Reagan Treasury secretary Don Regan, a former Merrill Lynch CEO, as a villainous character who helped intertwine Wall Street and Washington. What he doesn't mention is that Regan was the only Reagan official who warned against the Continental bailout, saying that it would exact a terrible future cost. The future is here, and Regan was right.
Ferguson's a smart guy. But it may make him uncomfortable to demonstrate fully that what caused the crisis wasn't Wall Street's cleverness, greed, and corruption infecting Washington and Cambridge, but rather Washington's changed policy toward Wall Street. Washington removed the free-market fear of failure that would have helped control cleverness, greed, and corruption, which are ever-present. Doing that—and allowing the creation of unregulated derivatives that would make the possibility of failure even riskier—was a recipe for disaster.
What does all this have to do with the fall of 2008 and its heroes, villains, and victims? As we agree, Too Big to Fail portrays Paulson and Bernanke, as well as New York Fed chief Tim Geithner, as heroes. But the movie leaves room for the audience to interpret these characters as tragically flawed. Each man clearly understands that TARP and other rescues may do more harm than good over the coming decades, if all they do is intertwine Wall Street even more closely with Washington at the expense of Main Street.
Indeed, Too Big to Fail may perform its most valuable public service in exposing how irrelevant free markets already were to the financial world by the fall of 2008. We see Paulson visiting Beijing for the Summer Olympics in August of that year. A top Chinese official, in securing the Treasury secretary's commitment that mortgage giants Fannie Mae and Freddie Mac—private companies, remember—won't fail, wryly observes that "the relationship between the government and private industry isn't so simple" in America. Throughout the movie, Paulson struggles unsuccessfully to avoid baldly telling the CEOs of nominally private firms what to do. In trying to bully other financial firms to purchase Lehman Brothers, for example, Paulson gruffly says that "we will remember anyone who is not helpful." That's the U.S. government trying to threaten nominally private industry, something that should give viewers pause.
And when it comes to TARP and other rescues, Paulson, Bernanke, and Geithner know that the long-term consequence is to have made the large firms even larger, and thus more impervious to the healthy workings of free markets. To me, the movie's scariest scene is when Geithner, after Lehman's failure, writes the names of the nation's largest commercial and investment banks on index cards. He proceeds to push the cards together, trying to effect emergency mergers in his head before half-threatening, half-cajoling CEOs into consummating them. Citi and Goldman? Utterly insane, and the viewer breathes a sigh of relief at the bullet dodged. But then you remember the bullets not dodged. How about Bank of America and Merrill Lynch? Equally crazy—but that one happened.
"It was the right thing, absolutely," Paulson says after securing the TARP bailout deal in Too Big to Fail. He's trying to convince himself. Indeed, Too Big to Fail's characters are peering into an unknowable future. Inside Job, depicting the same characters downplaying risks in the years leading up to the crisis, reminds us that we can't trust their judgment.
What has happened since then? Sure, as you note, TARP and the AIG bailouts may make money for the taxpayer. But that's not a mitigating factor, it's an exacerbating one. What price will these "profits" exact in the future because TARP allows Wall Street, its lenders confident of future rescues, to dominate the economy? As financier Carl Icahn warned on CNBC last week, "I really find it amazing that we're almost back to where it was, where there is so much leverage"—borrowed money—"going on . . . just, way too much leverage, way too much risk-taking with other people's money."
What the country needs—more than trying to throw some prominent villains in prison, in my opinion—is financial rules that allow firms to fail in the future, thus reducing TARP's harm. On financial regulations, though he's fuzzy on the details, Ferguson is clear that the Obama White House has failed just as its predecessors did.
You say forthrightly that you left the movies "feeling queasy about whether we have really solved any of the underlying problems that triggered the crisis in the first place, or just created even bigger, more concentrated financial institutions that now really are too big to fail." On that point, we're left with this takeaway. In Too Big to Fail, Paulson says skeptically of Geithner's plan to merge big firms, "You want to make them bigger?" Geithner answers, "It'll stabilize them. The downside is, yeah, they'll be really fucking big."
There you go.
Nicole Gelinas, a City Journal contributing editor and the Searle Freedom Trust Fellow at the Manhattan Institute, is a Chartered Financial Analyst and the author of After the Fall: Saving Capitalism from Wall Street—and Washington. Judith Miller is a contributing editor of City Journal, an adjunct fellow at the Manhattan Institute, and a FOX News contributor.