Andrew Ross Sorkin

Too Big To Jail, Part II

VTR Date: July 6, 2013

Guest: Journalist Andrew Ross Sorkin


GUEST: Andrew Ross Sorkin
AIR DATE: 07/06/2013
VTR: 05/02/13

I’m Richard Heffner, your host on The Open Mind. And as he was last time, my guest today again is journalist … Andrew Ross Sorkin, a financial columnist for the New York Times, its chief mergers and acquisitions reporter, and the founding editor of DealBook, an online daily financial report published by the Times, for which he also writes a weekly column of the same name.

Now Mr. Sorkin’s expertise also has him appearing quite frequently on our television screens … particularly as he co-anchors CNBC’s morning’s Squawk Box and his now updated Penguin Book about this nation’s near-catastrophic banking crisis at the end of the Bush Administration – Too Big To Fail – has become an American classic.

With its subtitle, The Inside Story of How Wall Street and Washington Fought to Save the Financial System – and Themselves, Too Big To Fail has, of course, been parodied over and over again as “Too Big To Jail”.

But last time our initial focus was on whether many giant American corporations – not just our banks and other financial institutions – might not be considered themselves too big to fail or to jail, given the damage their failing/jailing might do to our economy generally. And I’d like to carry on today from where we stopped last time.

SORKIN: Thank you for having me back.

HEFFNER: Andrew it’s good to have you here because I want to keep pressing you. What about Dodd-Frank?

SORKIN: Dodd-Frank … Dodd-Frank has done … let’s say this … Dodd-Frank is … is, is … has been very helpful around the edges, but it doesn’t solve the ultimate problem that we were describing and discussing in the last program which is, do we want banks that are too big to fail. And have we solved the problem.

You know, Barney Frank would tell you and Tim Geithner would tell you and Chris Dodd would tell you that the regulation that was put into place ends too big to fail forever. There is a provision in, in that legislation that effectively allows the government to take over a failing institution … much like the way the FDIC would and shareholders are on the hook, everybody gets thrown out … that the top management gets thrown out and the idea is that, that they’re able to put into a form of conservatorship such that it doesn’t create the kind of domino effect that the failure of Lehman Brothers created …it’s called “financial resolution” … “resolution authority” rather.

And that provision’s there … resolution authority exists, in the legislation. My worry is that if and when we have a problem, we’re not going to have the guts to use it.

Let me explain. The next time we have a true financial crisis, the next time we think one of our big banks and again you can name the bank … Bank of America … or JP Morgan or Morgan Stanley … or whomever is on the precipice and there’s going to be a public outcry, the markets are going to be falling like crazy, the Wall Street lobbyists and everybody else is going to be on the phones to Washington saying “You know, what are you going to do about this?”

And there’s going to be some people who are going to say, “Well, we have this provision. We’re, we’re just going to enact what we said we were going to do, we’re not going to bail them out, we’re going to let them go”.

What I worry is going to happen is that people are going to say, “You know what, we’ve never done this before. We’ve never tried this, we don’t know if this is actually going to work in practice.” And then what?

And by the way, resolution authority works if we’re talking about one bank. Maybe, like two. But if we’re really in trouble … the reason these banks are probably going to be in trouble in the first place is because all of them are in trouble. And that’s when it’s going to become very difficult.

HEFFNER: But isn’t Dodd-Frank designed to prevent the things … prevent the things that make for ultimately … failure.

SORKIN: Yes. And, and, and that’s where I think ultimately it helps, but again helps around the margins. The Volcker Rule helps, but it isn’t Glass/Steagall … it isn’t. It helps around the margins.

We still haven’t figured out what we’re dong with derivatives in a meaningful way. Again, helps around the margins, we haven’t got there yet.

Compensation … helps around the margins, we haven’t got there yet.

An issue, by the way, that’s complicated and that is a very popular issue to talk about … but I’m never … I’m not sure, by the way, on comp … just a complete side note … that we’re ever going to truly figure out how to regulate that …

HEFFNER: Compensation.

SORKIN: Ah, regulate compensation to make sure the people are incentivized … ahem, not just incentivized properly, but that therefore they may make the right decision.

And the reason I say that is … every time I think about compensation … I think about, I actually think about Dick Fuld former CEO of Lehman Brothers.

The reason I think about Dick Fuld is that Dick Fuld had a billion dollars of stock in his company … a billion dollars. He had … quote/unquote … more skin in the game than just about anybody else. This is what we say we want all of our executives to have … “skin in the game”.

He rode his billion dollars of stock all the way down to $56,000 … a billion dollars of skin in the game, rode it down to $56,000. What does that say about our ability to regulate and therefore incentivize and motivate people to make the right decisions?

My view, frankly, is that the, the people at the very top of these institutions … who, by the way, traditionally made a lot of money already … they’re not motivated. They’re motivated by money, but the … it’s not really about the money. The money is a scorecard. It’s about pride. It’s about power, it’s about all sorts of other things that are much more complicated than simply saying “We’re going to take away the money”.

The other thing that, that makes this even more complicated on, on the compensation … I’m sorry to go on a tangent … is when I think about Dick Fuld, the objective journalist in me wants to tell you there’s another side to the story … which as I said, he’s taken a lot of money out of the company. Over his 39 year career, he took probably almost $200 million dollars out of the company.

So, on one side you could say he had a billion dollars of skin in the game. On the other side you could say “You know what … he had $200 million dollars, that’s a great cushion. That cushion allows you to take remarkable risk. That billion dollar stock wasn’t skin in the game it was the cherry on the top.”

Now if that’s true, we have another problem. Because most of the leaders of … not just financial institutions in the United States, but the CEO’s of most major companies have made a good amount of money that they’ve been able to take off the table over the years. Which therefore, then, would allow them to take remarkable risk.

So, you know, again, I think there’s lots of things we’ve done on the regulatory side to help. The Consumer Financial Protection Bureau, for example. I think that should actually simplify a lot of things. A lot of the horrible robo-signing things that went on in the mortgage market … that gets cleaned up. So all of that’s good.

But when you think about the financial crisis and what really got us here, it’s ultimately about leverage and debt in the system. And ultimately Dodd-Frank doesn’t, doesn’t regulate how much … you know what the leverage ratio is that, that a bank can manage. That’s something that the Federal Reserve is trying to deal with by increasing capital requirements and the like.

HEFFNER: But if Dodd-Frank becomes effective and by the way, my understanding from reading The New York Times …

SORKIN: Right.

HEFFNER: … is that so many things have happened to prevent it from becoming …

SORKIN: Oh, and that, that’s the other problem. I mean Dodd-Frank, in truth … we, we haven’t really been able to study or even ascertain what the impact of Dodd-Frank is because we in a … we’re coming up on five years after the crisis … Dodd-Frank is not really in motion … I mean it’s in motion, but it’s not … it’s not there.

And by the way, there is going to be a two or three or four year period when everything finally is, is implemented and even during that period there’s going to be tweaking and changing and all sorts of things. And so there’s going to be a decade where … you know to the extent that, that, that Wall Street’s frustrated by regulation and what’s going on … this is going to go on for another decade because even once we have implemented Dodd-Frank then they’re going to come back and decide, you know what, this works …and by the way, maybe this doesn’t work. And by way that also happened after, after the Great Depression as well. There were all sorts of rules that we put in place, but it took us a good ten years to figure out what was good and what wasn’t.

HEFFNER: You talk about putting it in place …

SORKIN: Right.

HEFFNER: … it would seem to be many efforts being made now to prevent …

SORKIN: Right.

HEFFNER: … at least the essence of Dodd-Frank from ever, ever, ever going into play.

SORKIN: Well, I think the, the … there are two big components of Dodd-Frank which have not been implemented yet. The biggest thing the Volcker Rule. You could argue that in practice many of the banks are already operating in some ways …

HEFFNER: Under …

SORKIN: … with the intention or expectation the Volcker Rule was coming. And what I mean by that is if you go look at a Goldman Sachs, for example, you know, they had an arbitrage desk. That arbitrage desk doesn’t exist any more. They’ve all moved over …and by the way, worry about this for next time … that desk … they’re not at Goldman Sachs anymore, so maybe you think that’s the good news.

They just went up town to 57th Street. They’re up at KKR now … Kohlberg Kravis Roberts, so, you know, the other thing that’s happened in light of all of this regulation is frankly the fact that we’ve moved to what they call a shadow banking system. So to the extent that there are risks in the system, they’re not actually at the big regulated banks, they’re now off, off in the corners. And I’m not saying that’s better or worse, it may be better in, in regard to the fact they’re now at smaller institutions … we go talk about big versus small and what, what that means. But there’s a lot going on here.

HEFFNER: You’re talking about poison … you’re talking about poisonous attitudes, poisonous institutions, you’re talking about, I think, near fatal poisons …


HEFFNER: What do we do?

SORKIN: What did we do? Or what do we do?

HEFFNER: No, what do we do? Number one, do you think we’re aware as a, as a people of the things that you’re talking about?

SORKIN: No. I think … I, I think the, the financial literacy in this country and, and some of these concepts and I have tried, given, given that I’m hoping to try to be able to communicate to this audience what’s, what’s going on … you know, if you talk, if you talk to most people about Dodd-Frank they wouldn’t really be able to tell you what is in Dodd-Frank.

If you asked them what the Volcker Rule is en masse most people … sadly, wouldn’t even be able to tell you who Paul Volcker is, even though they probably should.

I think that we need to figure out a way to get the banking system, and I think I said this in the last broadcast, we need to get the banking system to be the back room engine for the economy. We need to get the, the banking business to really feel that their job is truly to service the client, whether it’s … you walk in off the street or a big company … not about servicing themselves.

It became a business about fees, it became a competition among each other about how much money they could make and part of that is a function, frankly, of the short term nature of the stock market and the short term nature of investors and the short term nature of this country.

You know, for all of the blame, we’ve, we’ve had a big conversation about the banks and, and I think we’ve blamed the banks … for a lot of this.

And by the way, pick your poison and you pick your villain, you could decide obviously the credit rating agencies or, or, or Fannie and Freddie or housing policy or Alan Greenspan, or whomever is your, your villain. The banks obviously get a, a lot of it.

One of the things that I worry about is we never sit around and say, “Maybe we were at fault”.

HEFFNER: Tell me what you mean. “We” the …


HEFFNER: … the capitalist system, the capitalist mentality?

SORKIN: Ahem, I would say “we” … I don’t know if it’s capitalism per se as it is “short-termism”. You know we often talk today about how we … how, how the financial crisis was a function of short term thinking. It was about CEOs and Boards and managements who were trying to jack up their stock as quickly as humanly possible, they were trying to take as much profits off the table, so that they could show their shareholders that they were doing the right thing.

And that wasn’t the right thing. And we often say, “By the way …” increasingly we say we want more shareholder democracy … which is actually quite interesting because we say we want the shareholders, want to have a seat at the table because we think that we’re long-term thinkers.

Are we really long term thinkers? Are shareholders really long term thinkers? When you look at the volume at the end of the day at the New York Stock Exchange … you turn CNBC on or your local TV … 70% of that volume on the New York Stock Exchange, that’s a computer that’s done that. That’s not a person.

The average investment portfolio …the professional investment portfolio you might have your money at Vanguard or a 401(k) plan or … they turn over their portfolio every 12 months. If you’re a CEO, who is your shareholder? They’re a shareholder for, for less than 12 months. So, you know, I would argue at some level … we’re getting exactly what we’re paying for … which is …

HEFFNER: I thought you were going to say we’re getting exactly what we deserve.

SORKIN: May … maybe … I … ahem …

HEFFNER: What else could it be?

SORKIN: Well, I think …

HEFFNER: You’re talking about our national attitudes.

SORKIN: I think … and by the way, you could … I, I would go so far as to suggest that our attitude about … I’m talking about on the corporate financial sphere is true of the way we think about Washington and the way we think about so many things. We want results.

We’re a very result oriented country. And, and that leads in some cases to great results. But it also leads to poor results. And when I think about what’s happened in the banking system, I can’t, I can’t help but think … a little bit … and this isn’t about blaming, you know, the person who, who borrowed too much for a house they shouldn’t have bought and the bank allowed.

HEFFNER: Why isn’t it?

SORKIN: No, no … it is … I mean at some level it is, that’s part of it. But I think to the extent we got ourselves in this position and we think culturally about the way the banking system and corporations writ large … work. It’s about meeting that quarterly profit number. It’s about are we beating the number … the expectation is “x” … we need to get there. Are we going to make an investment for … that, that’s going to cost us now … that’s going to reap benefits five years from now. It’s very hard for companies to make those decisions. Because they then feel the wrath of the, the, the shareholders who call up and say, “You know what we’re kicking you out of your job.”

You know this isn’t … again, not to sympathize with the CEO who, who’s by the way making, you know, a lot of money, but when you really try to understand the incentive structure around this system that we’ve created … it creates in some cases some really wonderful innovations and amazing things happen in this country. But it also has some perverse incentives as well.

HEFFNER: You mention the ratings …

SORKIN: Agencies.

HEFFNER: … before … the agencies …

SORKIN: … most conflicted business in the world. Most conflicted business in the world. What business do you know where you rate me and I pay you? Look, I go into the courtroom down town on Pearl Street, I pay the judge money and I’d say … make a ruling. Does that make any sense?


SORKIN: To anybody?

HEFFNER: You think it’s not unknown, but it’s a pattern that we’ve followed for a long time, isn’t it?

SORKIN: Well, I will tell you … so, you know, I can sit here and tell you this makes no sense. On its face it makes no sense. Underneath it makes … where … you could look everywhere … it doesn’t make any sense. However, you could also sit around and have real conversations with very thoughtful smart people in the business world, in academia … in government … and say, “Okay, how do we fix it? What’s the best way to do it? Should the users pay?”

You’d think, by the way the investors should pay for the rating because what’s happening here, ultimately is we’re rating a company’s debt, for example, and the people who should care about the rating are the investors … they should pay.

Well, if I told you that investor A has a lot of money and he can afford to pay to find out what Moody’s is charging … what, what Moody’s rating is … but investor B doesn’t get, doesn’t get the same access to that information, it creates a whole other series of problems.

So it’s not … the problem is it’s not very, very simple. And there’s not a simple fix. There have been some very interesting progressive proposals put forward that, that I found interesting.

The most interesting one is the idea of, of creating an agency that’s either related to or part of the SEC that effectively contracts out to the rating agencies. So, if you’re Ford and you want your debt rated, you call up the SEC, you say, I need to get my debt rated … you’re going to pay a flat fee effectively to the SEC and then they will outsource it to four or five of these firms.

HEFFNER: Are you concerned that it’s a government agency?

SORKIN: I don’t know. I’m a little, I’m a little concerned about that.


SORKIN: Hmm, traditionally I think … traditionally I’ve been led to believe that, that money seems to do better in private hands than, than, than public hands. Maybe that’s just a, a … my, my leaning on my bias.

I don’t know if it would work. I don’t what happens to the rating and then I really don’t know what happens if something really bad happens. Meaning if the ratings are all wrong again, and the ratings are done effectively this time by the government, then we have a whole other problem on our hands.

And, and … so again … you know, we’re having a great nuanced conversation, but these issues are so complicated, they’re never black and white … as, as much as I wish they were … it would, it would make for easier writing.

HEFFNER: Yeah, but I’m not asking you …

SORKIN: Right.

HEFFNER: … questions that require black and white answers. In a sense you must have a … you must have a picture of where we are, who we are and what we’ve got to do. Or …


HEFFNER: … what we’ve got not to do.

SORKIN: No. Look … look you had asked, I think, in the last broadcast, you know, if you were King for the day, or the President for the day … when it comes to short-termism … the thing that I would do is try to, try to restructure the incentives … not … you know we talked about the compensation incentives for executive. I’d restructure the incentives for investors.

I might have a transaction tax, for example. You know if 70% of the … if 70% of, of the stock movement every day is being done by computers and we don’t think that that’s very helpful, I might say, “If you want to buy stock today because you think Coca Cola’s earnings are going to be great tomorrow and you plan on selling, you know, at 9, you know, 33 after the, the bell opens, after the announcement … maybe you should pay a 50% tax”. Now by the way if you truly believe that the stock’s going to go up that much, that’s a good deal.

If you want to hold the stock for a year, maybe we, maybe charge you less. If you want to hold the stock for two or three or four years, maybe we charge you less than that. If you want to hold the stock of 10 years, maybe I’ll give you a rebate. But I think one of the things we need to think about is how do we incentivize investors to think long term. Because if we can, if we can incentivize investors to think long term, we can then really shift the paradigm to make CEOs and Board members and managements think long because everybody will be then thinking, thinking that way.

HEFFNER: Andrew, is anyone in Washington, to your knowledge, thinking in those terms?

SORKIN: There are some, there are some Congressmen, there are some Senators out there who, who are thinking of these issues. They’re not popular and, you know, I would also …

HEFFNER: The Senators or Congressmen …

SORKIN: No, no … the view … this view is not popular. In part because I will also tell you there are people who would say, you know, objective journalists tell you two sides of the story. The other side of the story is that if you are … if you were to tax for … first of all, there are some people obviously who think taxes …


SORKIN: … unto themselves is, is a horrible thing. And, and I understand that view. I get it. But beyond that they’d say, you know, you’re going to tax all these different transactions have some kind of progressive tax. It’s going to have all sorts of implications for what they call “liquidity” in the market.

And “liquidity” has really helped the market because, you know, now if you want to sell you stock at 9:33 you actually can. In this new world that I might be creating you might not be able to find somebody on the other side of that trade, who wants, who wants your baseball card … if you know what I mean … at 9:33. You might have to wait a day or two, or a couple of hours or not be able to sell $100 worth or 100 shares at one time, or whatever.

There are real implications and, and given that we’ve created a structure around our financial system, how things work, there are obviously powers that be that would obviously fight back against that because there are incentives that have already been built into the marketplace to do exactly what we’re doing. So every time you want to change any of this, even when you think you’re fair-minded and trying to, trying to do the right thing in good faith … you know, there’s always going to be somebody else on the other side who going to say, “You know that might be a good idea, but by the way, that’s going to screw up everything right now.”

HEFFNER: The fair-mindedness … does that ever get in your way as a journalist?

SORKIN: I hope not. I try, I try to come to the table with a fair mind, as I can, every day. So (sigh) you know hopefully, hopefully, hopefully it doesn’t … there are people who agree with me. I, you know, I’ll write a column and some, some mornings I wake up and I’ll get an email to say, you’re crazy, you’ve lost your mind. And then other people will say, “You know, I love it, I’m thrilled, thrilled you’re writing these things.”

And usually if you actually get … I would say if you get emails on both sides or letters from people who are happy and complaining … you’re probably doing something right. So …

HEFFNER: You’re glad you’re doing this?

SORKIN: I can’t think of anything better.

HEFFNER: Really?

SORKIN: I, I, I like … I always say I don’t think I’ve worked a day in my life. This is … you know, this is one of the great jobs in the world. I think finance is … finance has become in many ways the new politics and it, it … you know, I always say “follow the money” and when you really think about where the money is and what it does to incentivize and motivate and, and all of the decisions that are going on in our world today … you know to be, to be in the middle of it is a lot of fun.

HEFFNER: It’s interesting, you say, you, you contrast, you point out the parallels between finance and politics …

SORKIN: Right.

HEFFNER: … maybe that’s our problem. Think of the big problems today.

SORKIN: Oh, oh …

HEFFNER: Finance and politics.

SORKIN: … all related.

HEFFNER: Related how … the human spirit … profit seeking, ego …

SORKIN: Everything you just said and more. You know … look, it’s not just about lobbyists in Washington, that’s part of it. But when you really try to understand what motivates people in life … everybody wants to have a … I don’t know if everybody … I don’t want to generalize, but … a good life … they want a house and this and this … you know there’s things going on. And so whether they’re in Washington doing it … you know they’re trying to figure out, “How am I going to get re-elected because I need the job, or I need this or I need that”. There’s a lot going on. I mean the, the sort of behind the scenes of how all this happens, and then, by the way, the other thing on top of it … which you may not … which I think people don’t always appreciate … now that I’ve spend all this time reporting and covering people who have a lot of money … it’s not just that people want to have a good life. They want to be loved.

And I think that people want support and so, you know, right now, in a very bifurcated, politically polarized country, it’s very difficult for politicians to make decisions, not only because they want to get voted on, but they want to be liked. People want to be liked whether they have a billion dollars in, in their bank account or, or zero. And, and that’s a huge, a huge component, I think of …

HEFFNER: The world of finance.

SORKIN: I think it’s about the world of finance … I think it’s the world of politics.

HEFFNER: At that point, we bring our program to an end. Just know what motivates human beings and I want to thank you so much for joining me again today, Andrew Sorkin.

SORKIN: Thank you, appreciate it.

HEFFNER: And thanks, too, to you in the audience. I hope you join us again next time. Meanwhile, as an old friend used to say, “Good night and good luck.”

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