am 10. Januar 2013
I recommend reading this book and comparing it with "Europa braucht den Euro nicht" - excellently researched and written by Thilo Sarrazin - and "Der Markt hat nicht immer Recht" by Wilfried Stadler, ex-CEO, industry insider, university professor - both books rated with 5 stars.
The most important milestones in "Too Big to Fail" are spread across approx. 40 pages - out of 618 pages. Therefore it is necessary to study this book carefully to get the "nuggets".
Here are some of the key points:
Wall Street firms had debt to capital ratios of 32 to 1.
There were, of course, Cassandras ... Professors Roubini and Shiller.
This book isn't so much about the theoretical as it is about real people, the reality behind the scenes.
Lehman Brothers was leveraged 30.7 to 1; Merrill Lynch was only slightly better, at 26.9 to 1.
The subprime market had mushroomed to $2 trillion, it was still just a fraction of the overall $14 trillion U.S. mortgage market. Securities were being amalgamated, sliced up, and reconfigured again, and soon became the underpinnings of new investment products marketed as collateralized debt obligations (CDOs).
The uptick rule: a regulation that had been introduced by the SEC in 1938 to prevent investors from continually shorting a stock that was falling. In other words, before a stock could be shorted, the price had to rise, indicating that there were active buyers for it in the market. But in 2007 the commission had abolished the rule. [Small change, big impact].
The beauty of AIG's insurance-for a short time-was that it enabled banks to step up their leverage without raising new money because they had insurance. With mortgage defaults rapidly mounting, AIG could soon be forced to pay out astronomical sums of money.
To the bankers, the finance executives at AIG were amateurs. Not a single one impressed them.
4th of July weekend - Fannie and Freddie were neck-deep in the subprime mess.
August 6th, 2008 - Paulson knew he couldn't do much for Lehman himself. Treasury itself did not have any powers to regulate Lehman, so it would be left to the other agencies to help manage a failure.
"The problem is that half their book is the U.K.," Macchiarolli said, explaining that many of Lehman's trades went through its unit in London. "And their counterparties are outside the United States, and we don't have jurisdiction over them."
September 9th, 2008 - If AIG went under, it could take the entire financial system along with it.
September 15th, 2008 - And then came the anticipated question: "Why did you agree to support the bailout of Bear Stearns but not Lehman?" Paulson paused to gather his thoughts carefully. "The situation in March and the situation and the facts around Bear Stearns were very, very different to the situation that we're looking at here in September, and I never once considered that it was appropriate to put taxpayer money on the line with ... in revolving Lehman Brothers."
Paulson and Bernanke, after finishing with the president [Bush] ran over to the Hill to brief key congressmen, who were none too pleased with the AIG bailout news. Paulson and Bernanke explained why they thought their decision had been a necessary one. "If we don't do this", Paulson told them, the impact of an AIG bankruptcy would "be felt across America and around the world."
"They [Government] are never going to get their money back" Lee [JP Morgan] told Dimon. "There is no way." "I guarantee you they'll get more than $50 billion of it back," Dimon shot back. Dimon and Lee placed a $10 bet on who would turn out to be right.
Bernanke, who was known never to exaggerate, began by saying gravely, "I spent my career as an academic studying great depressions. I can tell you from history that if we don't act in a big way, you can expect another great depression, and this time it is going to be far, far worse."
September 21st, 2008: at 9:30 p.m., the news hit the wires. Goldman Sachs and Morgan Stanley would become bank holding companies. It was a watershed event: The two biggest investment banks in the nation had essentially declared their business model dead to save themselves.
Paulsen had been discussing his shifting views with Bernanke, who had been a fan of capital injections from the start, and they were now in agreement. By Bernanke's estimation, announcing capital injections and a broad guarantee would be an effective enough economic cocktail to finally turn things around.
October 12th, 2008 - The guarantee would end up being perhaps the largest - though often overlooked - part of the program. It put the government on the hook for potentially hundreds of billions, if not more, in liabilities, providing the ultimate safety net for the banking system.
Nason and Paulson had been debating the guarantee issue all week. To Nason, it represented the "biggest policy shift in our history."
October 13th, 2008 - at 6.25 p.m. Wilkinson [Department of Treasury] triumphantly reported the final tally from his Black Berry: "We now have 9 out of 9." David Nason carried the signed papers down the hallway to Paulson. "We just crossed the Rubicon" he [Paulson] said.
Not in this book: December 11th, 2012: Treasury sells AIG stake for $22.7B profit. Dimon won his bet.