Too Big To Fail
I watched an interesting movie on HBO last night titled Too Big To Fail. It was a docudrama about the financial collapse that took place in 2008. It was based on a book by Andrew Ross Sorkin. I always find investing related movies fascinating because the financial sector is one that I am so interested in. In the past, I thought that Wall Street and Boiler Room were two pretty good works of fiction.
Too Big To Fail is different in that the majority of the movie is supposed to be non fiction. I found the movie to be riveting as it unfolded because it was like reliving the entire financial crisis all over again. I remember the fear that investors had. There were worries about major banks failing and having to become nationalized by the Federal government. It wasn’t that long ago that you could have taken $20 and purchased a share of Citigroup, Bank of America, Wells Fargo, AIG, and General Electric. You still would have had a $1 left over after buying all of those companies.
I also remember how the credit markets were frozen. I remember calling TD Ameritrade and a few other brokers to get a price on bonds and could not. Trying to sell a corporate bond was virtually impossible because the credit markets were locked down. No one was buying. I can only imagine the trouble that the larger financial institutions had accessing capital.
The best part about the movie is that it gives you a glimpse into some of the conversations that took place between some of Wall Street’s heavy hitters. Treasury Secretary Henry Paulson was doing everything he could to arrange marriages between the country’s financial institution. The best figures in the movie are Henry Paulson, Lehman CEO Dick Fuld, and Federal Reserve Chairman Ben Bernanke. There is even a scene where Ed Asner portrays Warren Buffett taking a desperation phone call from Goldman Sachs.
The entire movie is centered around the last days of Lehman Brothers. The investment bank and its CEO were expecting a government bailout and instead were sent into bankruptcy. The Lehman bankruptcy devastated the market and had a ripple effect that was felt throughout the economy. The result was the establishment of the Troubled Asset Relief Program (TARP) to buy the bad assets from banks and hold them until the markets recovered.
The TARP program never happened and the government instead injected money directly into the big banks. I remain convinced that regardless of what they say that Bank of America, Citigroup, Wells Fargo, Goldman Sachs, Morgan Stanley, and even JP Morgan Chase all would have failed without the excess capital. The extra capital restored confidence at a time when consumer confidence in financial institutions was incredibly low. Big banks like Washington Mutual and Wachovia were dropping like flies. Investors were even losing confidence in money market funds as many of them were breaking the buck.
Whatever you think of the government’s actions from 2008 to 2009, you have to admit that it worked. The economy did not collapse and the majority of the big banks are still around. The irony is that they are larger than they have ever been with the mergers and acquisitions. You just have to hope that they learned their lesson from the crisis of 2008.
Tags: too big to fail