Summary for Too Big to Fail Essay
Andrew Sorkin wrote a book titled Too Big To Fail. This book focus on the collapse of the investment bank Lehman Brothers, Merrill Lynch was sold by Bank of American, Freddie Mac and Fannie Mae was nationalized, and the government took 80 percent of AIG that took place on the weekend of September, 15, 2012. Significantly, he examined the financial markets reactions to the bankruptcy of Lehman Brothers. It starts with the failure of Bear Stern, one of the biggest banks in American. Bear Stern found the bank having too many toxic assets and could not cover its liabilities.
The United States implement their own economy in the history of the largest and deepest government intervention. In May of 2008, the Federal Reserve did sale support to the fail Bear Stern to JP Morgan. Something similar happened to Lehman Brothers in September 2008, Lehman was one of the American five original investment banks. The author discusses that because of bad investment in the subprime mortgage market, insolvency, and shattered investor confidence led to the inevitable downfall of Lehman.
At the beginning, Lehman was looking for 30 to 50 billion dollars in financial support by Warren Buffett.
Moreover, Lehman tried to seek the financial assistance of the Korea Development Bank. The bank also wanted the government to provide financial assistance. But the results have failed. On September 12, 2008, many different banks including bank of America, JP Morgan, Goldman Sachs, Merrill Lynch, and Barclays met at the Federal Reserve in New York to try to come up with a way to save Lehman. Bank of America was the first bank to show interest in buying Lehman, however, bank of America had misgiving. First, they wanted to buy Lehman’s stock, but they did not want to buy the toxic assets which Lehman was carrying on its balance sheet.
Second, the Federal Reserve would not provide sale support and financial guarantees of Lehman’s toxic assets therefore; bank of America withdrew their offer to buy Lehman. Bank of America gave up taking over Lehman, and the market value has fallen by 94 percent, it forcing Lehman filing for bankruptcy protection. Lehman declared bankruptcy in September 2008, a total debt of $613 billion. However, Bank of America did not leave that weekend empty handed. They changed the targets to Merrill Lynch. Merrill Lynch was the nation’s largest CDOs (Collateralized debt obligations) distributors.
However, by August 2006, CDOs portfolio value has shrunk dramatically, the company appeared heavy losses. Merrill Lynch realized that because of its solvency issues, they could be the next bank to fail. After realizing this, the CEO of Merrill Lynch contacted Bank of America and negotiated the sales of Merrill Lynch that was disclosed to the public on September 15, 2008. Bank of America and Merrill Lynch held a press conference to announce the sale. More remarkable, some of people working to save Lehman stumbled upon a much larger problem. AIG is one of the world’s largest financial companies.
The company was holds about $40 billion of disposable cash, with total assets of over one trillion U. S. dollars. People thought that AIG’s huge size makes it too big to fail. AIG provided CDS (credit default swap) insurance services to the bondholders, if issue bonds closed down, AIG have to provide compensation to the CDS investors. The biggest mistake is AIG did not put these has closed down the risk of securities though buying other securities to balance out. Thus, AIG did not enough money to pay compensation when the failure of wind from the company. Therefore, AIG credit derivatives assets value has shrunk and a loss of $ 7. billion in May of 2008. If AIG collapse, the company holding of bonds exposed on the risk. Then those bonds are not worth, which means AIG have financial problems, or even have to follow the collapse of a chain reaction. Finally, the U. S. government had to rescue AIG; it must to pay compensation to investors. In August 2008, the financial market was collapse. Freddie Mac and Fannie Mae stock price were down 17% and 16%, the index fell to the lowest point since 1992. By the U. S. subprime mortgage crisis, two companies caught in a loss of $70 billion predicament.
In September 7, 2008, the U. S. government announced to take over the troubled two major U. S. housing mortgage finance agencies. Treasury will provided $200 billion financial support to two companies, and acquisition of the related preferred stock. The failure of Lehman sent ripples through a financial community. Investor confidence was completely shattered when news of the insolvency of Goldman Sachs, JP Morgan, Citigroup, Fannies Mae, Feddie Mac, and AIG hit the public. JP Morgan and Goldman Sachs intentionally changed themselves into a bank holding company to increase their solvency.
The government deemed firms such as Fannie Mae, Feddie Mac, AIG and Citigroup “Too big to fail”. The federal government wanted to ensure these firms did not fail. So they created TARP (Trouble Assets Relief Program). Through this program, the government gave close to 200 billion dollars in a form of bailout failing firm such as AIG. Towards the end, Paulson was well aware of the possibility of Lehman Brothers falling. With this fact being known he was able to develop a plan to save the other banks to keep the domino effect from happening.
Merrill Lynch was bought by B of A and Goldman was even aided with the help of Warren Buffet. This scuffle was not the end of it though. The government needed to end the reactions of the public and help the banks with their liquidity. This was something that Paulson feared but now something needed to be done. They decided to get all of the banks CEOs in one room and hash it out. In the end the government decided to make a payout to the entire major banks $700,000,000 dollars total. This was to become the biggest bailout in American history.
They not only gave them the money. The banks were forced to use it to speed up the economy. They government could not allow the banks to stop giving out loans to the everyday American. The author explains in detail to major campiness’ fate during the financial crisis. “Too Big to Fail” gives an extremely comprehensive account of the events that begin with the collapse of Bear Sterns, and end around the time TARP is passed. Through this book you see Wall Street and the government’s inner workings and the fact that they can do almost anything with the system they have now.
The ability of the banks to get so large by using irresponsible means to get there is obvious. This in my opinion is something that needs to be changed. America was created as a free market, but sometimes there must be regulation. This is why we have laws in our community. People must be able to trust the actions of the companies and people that they are invested in. The big question for us now is what is there to stop them from doing this again? They now know that some of them are already “too big to fail”.