Andrew Ross Sorkin’s non-fiction book Too Big to Fail was turned into an HBO film that chronicles the 2008 financial meltdown and how the (then) U.S. Treasury Secretary Henry Paulson (William Hurt) and his staff try to contain the avalanche of financial evils arising during the period between August 2008 to October 3, 2008. These problems eventually lead to the massive Wall Street bail out (at the tax payers’ expense of course) known as TARP. The TARP bailout gave one of my personal heroes, Sen. Elizabeth Warren, the opportunity to cross-examine Treasury Secretary Tim Geithner about where our 700 billion dollars went. Her cross-examination was so effective that it caused Geithner to practically have an aneurysm in the hallways of Congress with some profanity to boot (you can see it on YouTube).
Anyways back to the film. The first problem we see is Dick Fuld (James Woods), the CEO of Lehman Brothers, one of the oldest and established investment banks in the world, is desperately looking fresh capital, but he has no takers because Lehman is over exposed to “toxic” housing assets while the Treasury is opposed to offering any sort of bailout as they recently did for Bear Stearns. As rumors of Lehman’s financial problems grow, Paulson attempts to arrange a private sector solution with both Bank of America and Barclay’s Bank of England looking at Lehman’s “good” assets. Bank of America pulls back from the deal and instead chooses to purchase Merrill Lynch. Barclay’s is prepared to accept the terms of the merger, but British banking regulators refuse to approve the deal. Paulson directs the head of the Securities and Exchange Commission to tell Fuld to declare bankruptcy before the market opens in Asia the next day. With that, many of the other banks stopped giving out loans to other banks fearing that they would not be able to pay them back. This froze the credit markets. No one was able to get capital for the fear of the economy collapsing. The Lehman bankruptcy had more blowback than expected.
Paulson had a bigger problem that he was not aware of, AIG, the world’s largest insurer was going to run out of cash and begins to collapse.
Paulson’s team realizes that if AIG is allowed to fail, its entire insurance portfolio will default and the entire financial industry will suffer massive losses. The Treasury takes over AIG. Ben Bernanke (Paul Giamatti), Chairman of the Federal Reserve System, argues that the status quo is unsustainable and that the Congress must pass legislation to authorize any continued intervention by the Fed or the Treasury.
Paulson’s plan is to buy the “toxic” assets from the banks. Direct capital injection is considered and rejected. Timothy Geithner (Billy Crudup), President of the Federal Reserve Bank of New York, realizes that the market cannot wait for Congressional action and attempts to arrange mergers between consumer banks and investment banks, but this proves flawed. Paulson receives a call from Jeffrey Immelt (Tom Tammi) of General Electric who tells him that GE is unable to finance its daily operations. Paulson then realizes the crisis has now spread to Main Street. In real life, AIG had been struggling since the middle of 2007. Paulson and Geithner of course had some inkling of the problems at the world’s largest insurer but they didn’t prepare for it.
Bernanke and Paulson lobby Congress, with Bernanke emphasizing that a lack of credit turned the Wall Street Crash of 1929 into the Great Depression, and that if Congress fails to act that the fallout will be far worse. A stunned room full of elected officials begins to ask how this could happen. Paulson’s response is that we can rewind the tape later, but we need this legislation now or there will be no economy to fix. The legislation looks likely to pass, but is thwarted when John McCain suspends his campaign for president to join the negotiations.
Paulson, after being told by one of his staff several times, finally decides that the only way to get credit flowing again is direct capital injections into the banks. Paulson gathers the CEO’s of the 9 largest banks into a room without telling them why. He lays out the plan for the capital injections into the banks, but when he is met with resistance, Paulson brings in Federal Deposit Insurance Corporation chair Sheila Bair and in no uncertain terms says that if they don’t agree “they will find out that they are not as well capitalized” as they thought they were clearly threatening FDIC audits. Paulson informs the participating banks that they will be receiving mandatory capital injections and they must use this money to get credit moving again. The banks agree, but Paulson balks at putting additional restrictions on how the funds are to be used. Paulson’s Treasury deputy for public affairs (Cynthia Nixon) sums things up nicely when she states that the we can’t put more restrictions on the money we are giving to the very people who caused the crisis because then they may not take it. Bernanke and Paulson grimly state that they hope the banks will use the funds as intended.
An epilogue reveals that although markets did stabilize and the banks repaid their Troubled Asset Relief Program funds, credit standards continued to tighten resulting in rising unemployment and foreclosures. As bank mergers continued in the wake of the crisis, these banks became even larger and at the time of the film, 10 financial institutions held 77% of all U.S. banking assets and have been declared too big to fail.
Of course, this rings true because the government drove awful bargains. In the aftermath of the greatest credit bubble in history, it protected creditors at almost every turn. The government gave the banks money but didn’t get voting rights and didn’t prevent the banks from using the money to pay dividends or bonuses. They wrote what was essentially a blank check. In real life, Warren Buffett got much better terms when he invested in Goldman Sachs.
The cast of this film was filled with familiar faces, William Hurt, Matthew Modine, Cynthia Nixon, Tony Shalhoub, Bill Pullman and James Woods as well as others. Hurt does an excellent job playing the Secretary of the Treasury. Hurt embodied the theme of the movie; that is, the duality of being heroes and incompetent at the same time. On the surface they seem to be showered with glorious accolades, but upon closer look you clearly see that they are getting credit for solving a crisis they helped create. Anyone interest at all in finance or economics should take a look at this HBO film. I know it is no Game of Thrones, but you will just have to deal with it.