Andrew Ross Sorkin tackles the future of financial regulation, the push-pull of policy and politics, and how John Mack could have easily suffered the same fate as Lehman’s CEO.
Question: How will current financial regulation proposals dealing with systemic risk change the business?
Andrew Ross Sorkin: I think it's very unclear what type of regulatory reform we're really going to see over the next 12 months. There's a couple of things that have to happen that could change the business materially. The first is actually a piece of legislation that will really prevent the next crisis, hopefully, which is this idea of resolution authority, this idea that we can actually unwind in an orderly way an investment banking insurance company, like an AIG or a hedge fund. And we've never had that ability. The bankruptcy process doesn't work very well to make that happen. But the larger reforms that have to happen -- things like bigger capital requirements, the idea of having a bigger safety net, a rainy day fund -- that could change the business materially, because it would mean that the banks would be safer and less risky; there would be less leverage and therefore debt in the system; and it would actually mean that the firms themselves would be less profitable. So to the extent there are profits, and they're being given out as bonuses, those bonuses would come back inside the firm, and you'd put it into the rainy day fund. So all of those things sound very good. The flip side of all that is that if you think banks aren't lending today, if you tell them they need to keep more money in the bank on any given day, they would argue to you that they will be lending even less tomorrow. And what does that mean for the economy? So it's a very complicated picture, and the solutions, while some seem very attractive -- and it's very easy to say increase capital requirements, and long-term that's probably what you need to do -- given the economy, it's unclear whether you want to do that tomorrow.
Question: How has GSE policy changed since the crisis?
Andrew Ross Sorkin: Well, the funny thing about the GSEs now is they're probably not as well capitalized as you'd want them to be, but it almost doesn't matter, because there is this implicit guarantee that the government is now -- it's not even implicit; it's explicit that there's a guarantee behind them. So whether they're capitalized properly or not is probably not the issue. Longer-term we're going to have to deal with that, because you would hope that the government is going to have to extricate itself from that relationship. And that itself is going to be a long-term challenge.
Question: What do you expect the government’s involvement in the housing sector to be in five or ten years?
Andrew Ross Sorkin: I imagine over the next five years it's going to be very difficult for the government to truly extricate itself from being in the business of supporting the mortgage market in some way or another. The goal longer-term has to be to get out. Can that be accomplished in 10 years, given the way the economy is today? I don't know. But I would imagine that the Fannie and Freddies of the world would end up getting broken up and privatized in some way, or at least that would be the goal.
Question: You chronicle several instances of chief executives (Dick Fuld included) willfully ignoring bad news. How did these executives justify such decisions?
Andrew Ross Sorkin: It seems so black and white, and yet it's so complicated. I think that some of the leaders of these firms had a very bad time hearing bad -- or some might have called unattractive -- information. And they had people in some cases who protected them from that information. And when they didn't want to hear the bad news, they effectively said don't tell me the bad news. To explain the psychology of why they did that is a more difficult question. I’d probably argue to you that this goes to this whole level of hubris and greed at some level, but more about power, and a sense of entitlement and a sense of infallibility, really -- that once many of these people got to the top, they thought they were king. And that in many ways -- not in many ways -- it turned out and is a very dangerous way to live.
Shareholders should have been more attentive throughout this period. But you know, in a bull market shareholders, for the most part, go along for the ride. They see the stock going up, and they rarely want to say anything. It's only when it goes down do they have a problem. And shareholders are sort of like cats; they get herded around, and they follow the leader. With the exception of a few activist shareholders, there are a very rare number of big, important, influential shareholders that like to step up and say there's a problem here, especially when they’re making money.
Question: How are firms you follow adjusting to improve their risk management processes?
Andrew Ross Sorkin: So the good news is that in the aftermath of the crisis there has been a deleveraging. While many of these firms are now taking on new risk -- and I think there's lots to be worried about with that -- they're doing it with less leverage. So the idea of a massive crisis on the scale that we just saw is probably less. They are all instituting all sorts of new risk policies and hiring all sorts of compliance people. And the SEC and the Federal Reserve are becoming much more active around these things. Having said that, these agencies were around the hoop the first time, and look where that got us. I think that some firms -- Morgan Stanley's a good example -- are taking a lot less risk. But then on the other side, you look at Goldman Sachs, and it appears that they're taking more risk. So it's a complicated picture.
Question: In “Too Big to Fail,” you stress the important of public relations in the Treasury’s considerations of how to deal with Lehman Brothers. Is policy ever separable from politics?
Andrew Ross Sorkin: Unfortunately, I think it's very difficult to separate policy from politics. In a perfect world, in some instances you probably would want to. In other instances you'd probably say that the political element is important because it should, in a perfect world, match what the stakeholders need or want, or what the public is after. In the case of the bailouts, the politics became difficult because you'll remember the public didn't want bailouts. And one of the most remarkable things about this entire experience -- when you look at Lehman -- we now all look at Lehman, the failure of Lehman, as a great mistake. But at the time -- you can go back; there's an editorial in The New York Times two days after Lehman goes bankrupt, heralding the decision by Hank Paulson to let them fail. And so it's a very -- it's very difficult to turn around and say, should policy and politics be separate? They probably should be, in some respects, on certain days; and on other days maybe not.
Question: Who was the fall man of this crisis?
Andrew Ross Sorkin: Well, it's interesting, because Dick Fuld, the former CEO of Lehman Brothers, has obviously been villainized and has become sort of the face of the crisis. And what's difficult about that, and perhaps unfair about that in some respects, is that most of the other CEOs who ran Wall Street firms would have been Dick Fulds had it not been for the government. So you can look at a John Mack, who actually, I think, did a very heroic thing by effectively saving Morgan Stanley. But it could have turned out very, very differently five hours later had Mitsubishi not come to save them, or had the government not made them a bank holding company. The same thing with Lloyd Blankfein. The same thing with the folks at AIG. The same things at Merrill Lynch. And so, you know, everybody wants a poster child, and it's very easy to wag the finger at one individual and one face, and that feels the most satisfying; but I imagine in this context it's probably the most unfair.
Recorded on December 3, 2009