Andrew Ross Sorkin

Too Big To Jail, Part I

VTR Date: June 29, 2013

Guest: Journalist Andrew Ross Sorkin


GUEST: Andrew Ross Sorkin
AIR DATE: 06/29/2013
VTR: 05/02/13

I’m Richard Heffner, your host on The Open Mind. And my guest today 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 on-line daily financial report published by the Times, for which he also writes a weekly column of the same name.

Mr. Sorkin’s expertise also has him appearing quite frequently on our television screens…particularly as he co-Anchors CNBC’s Morning Squawk Box.

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 as “Too Big To Jail”, which the other month was the theme of an Andrew Sorkin “Dealbook” column in which my guest wrote, “Putting aside the important matter of whether our banks are too big to fail, there is a more pressing and difficult question that needs to be answered here and now: Do we want to indict corporations? And is it effective?”

This, of course, was all occasioned by something United States Attorney General Eric Holder had just told the Senate Judiciary Committee, and that Andrew Sorkin made read like an Obama Administration secret revealed for the first time.

And so I want to ask my guest just what was that admission?

SORKIN: Well, Eric Holder, who I actually just saw this weekend, as it happens … he …

HEFFNER: Was he happy with you?

SORKIN: I’m not so sure about that. I think that he disagreed quite vehemently with that column, but we had a nice, cordial conversation and we’re actually hoping to talk to each other in a week, so we’ll see.

Ahem, but he revealed for the first time in … I thought a very surprising way … he said it matter-of-factly … and frankly most of the newspapers didn’t pick it up at the time, where he said, “Look, we sometimes can’t go after these big banks, because we believe that they are too big to fail”.

And the implications of what that means for prosecuting individuals on Wall Street and frankly in corporate America on a more broader scale are quite meaningful. And, and the implications that we can or cannot hold people accountable on a criminal basis in the corporate world I think is a huge question and I think it’s a question that, ever since the financial crisis … and before … but has become an acute issue … post financial crisis … you know, wherever I go, people say, “Why have we not put somebody in jail? Why, why is there no Ken Lay … remember Ken Lay from Enron …

HEFFNER: Do, indeed.

SORKIN: … during that period … or, or Dennis Kozlowski from, from Tyco … his famous $6,000 shower curtain. You know there is no poster boy, per se, for this financial crisis in the context that you can say “That guy was held accountable and he went to jail.”

And the degree that there people out there watching this program and, and, and in the broader country who say to themselves, “I can’t trust the system unless I see some form of accountability” … that’s a huge challenge.

HEFFNER: But, of course, you weren’t … in what you wrote or, I gather now, totally unsympathetic with the Attorney General’s …

SORKIN: No, no.

HEFFNER: … position.

SORKIN: I’m, I’m not unsympathetic …

HEFFNER: But you say it was a secret up until now.

SORKIN: Well, because you’ve never … it had never been said aloud. It had been implied in private conversations, off the record and background conversations that government and regulators would have with reporters. You, you would hear … it’s very tough to prosecute … the implications are very difficult.

For example, if we decide that we are going to go after the CEO of so-and-so bank … could we topple the bank? What happens if we topple the bank? If we are actually … it’s not, by the way, going after the CEO … this is the more important part … it’s going after the bank. Are we going to indict the entire institution? Are we going to say that … make it up … Goldman Sachs, Morgan Stanley, JP Morgan, Bank of America, whomever … we’re going to indict the entire bank and effectively, does that mean we therefore put them out of business and if we put them out of business, what happens to the markets. Because everybody says, “We saw what happened when Lehman Brothers went out of business. And it was a domino effect across the board.”

So could the government … could Eric Holder, or whomever is in power and position to do this … indict a bank? That’s the question.

HEFFNER: So, we now appoint you Attorney General. Or we make …

SORKIN: Right.

HEFFNER: … you President of the United States because the buck has to stop there … not with the Attorney General. What would you do?

SORKIN: It’s a very complicated issue. And where I come out in the column and where I come out … and it’s taken me a long time to get there, and it’s not a popular … it’s not a popular view … I should tell you my mother disagrees with me.

HEFFNER: (laughter) Make them pay, she says.

SORKIN: She says make them pay. I say make the individuals pay. I say the concept of indicting an institution, a, a company sounds good in theory. But actually doesn’t mean much except perhaps for the benefit of the headline.

I’m someone who generally believes that we talk about banks and institutions and corporations as these big behemoths, but we don’t realize ultimately … that’s what Too Big to Fail’s about … it’s about people.

Corporations don’t make decisions, people make decisions. Now there are corporations that have lots of bad people in them. There are corporations that potentially have, have an insidious culture and, and that makes this even more complicated. But ultimately, for my money, I would be focusing on looking at individuals and saying “Did you do the right thing? Or did you do the wrong thing?”

If you did the wrong thing we need to hold them accountable. The problem with trying to … quote/unquote … indict an institution, the problem with indicting a Goldman Sachs, or a Citigroup, as an entire company is that Eric Holder, for better or worse is actually right.

If we put the company out of business two things happen. One is … it is possible that we do create a run on the bank. Meaning we create a systemic risk to the system. And that’s a whole larger question about “too big to fail” more generally.

But the other piece of it … you know I mentioned Ken Lay before … when you go back and look at Enron … Enron was indicted. Thousands of people lost their jobs. Now you could say “the company was crooked” and you could say that there were individuals who were responsible for it being crooked.

But I don’t suspect that all … you know, however many thousands of people lost their jobs … tens of thousands in this case with Arthur Anderson, as well. I, I don’t believe all of them were guilty. And therefore I think for the greater good, you have to say to yourself, “Let’s be, let’s be specific … we’ll pick out the people that we think there’s a problem with and on the flip side, we will try to leave whatever … left as intact as we can”. Again, not the most popular view, depending on how you come to is.

HEFFNER: Well, aside from your mother’s point of view and when you do the indictment that you want to have done, or you would choose …. you’re going to indict, not just the chairman, CEO or the Chairman and/or the CEO …


HEFFNER: … and a few others …


HEFFNER: … what happens to the stock price the next day? In all honesty … you’ve, you’ve said you’re not indicting the corporation … just the people we identify as the leadership of the corporation.

SORKIN: Well, look, there’s no question that, that the day and the moment that anybody is indicted related to any criminal activity in a business … the business takes a hit. And there’s no question the stock takes a hit … there’s no question that shareholders wake up in the morning and they’re unhappy, as well.

But on the flip side you could argue that the shareholders were beneficiaries when the people at the top were committing whatever potential crime they might have been committing.

So, it’s, it’s a two way street. My view is shareholders are along for the ride, either way. I’m, I’m not in business for the shareholder, I, I’m ultimately … and not to say that I’m not in business for the shareholder … I, I do believe that shareholders and investors matter a lot.

But at the same time, I think there’s other constituencies at play … including the employees, including the business itself. And all of the tentacles, and relationships … suppliers, clients, everything else that these businesses are involved in.

And when you think about banks … and look, this goes back to the “too big to fail issue” … the tentacles of banks are in so many different places … and the banking system is so integral to our economy, as much as there are people who dislike knowing that … the banking system is, is the veins, in some ways of the business.

Now, the banks … when, when the economy’s working, should be the back room engine of our economy. Of course, it became the front room and that became part of the problem.

But when things are working, the banks do play an integral role, and so the idea of hiving one off simply for the headline, I think doesn’t necessarily create, create real values.

HEFFNER: Okay, not for the headline. What do we do? What do you want us to do as society with this, with these banks, and as you say … most importantly, you don’t leave it with the banks, you say “Let’s consider major, major, major corporations, which also might be considered too big to fail …

SORKIN: Well, no …

HEFFNER: … whether General Motors or …

SORKIN: We decided as, as a country that General Motors was too big to fail. We decided to save General Motors, at some level we decided to save Chrysler.

You could argue that Wal-Mart, given the number of employees it, it has is too big to fail.

HEFFNER: So where do we go?

SORKIN: Microsoft, what have you. What’s unfair about that is that there are going to be businesses, small business … if we started a business together and, and it was just us … nobody would have a problem indicting our little company if we were doing something crooked.

Again, I would go back though to, to the idea that we what we need to do is, to the extent that there was criminal activity that took place, you indict the person. You indict the individuals. Now, one of the problems and I think one, one of the reasons that it has felt so unsatisfying for those people out there who are still frustrated by not only the crisis, but by the fact that nobody has gone to jail … is that it’s not clear that true crimes were committed.

Now it feels like … the financial crisis feels like a crime and I see the page you’re about to go to …

HEFFNER: Ah, ha.

SORKIN: … I know where you’re going. And boy, boy does the crisis … it felt like a crime. There is a distinction between criminal behavior and civil, and, and civil, civil behavior and civil misconduct.

What I’m surprised by, is not that we haven’t … I’m surprised we haven’t found criminal behavior, frankly. But what I’m really surprised by is that we have not gone after individuals on a civil basis because I would think that given that the bar is lower, that there would be and could have been more cases that, that have not been brought and frankly at this point … I don’t imagine will be brought.

HEFFNER: Well, I, I’m not so sure that you were so right when you talked about my going to the page … I’m going to the page in which you start your book by quoting …


HEFFNER: … Louis Brandeis …


HEFFNER: … “Size we are told is not a crime, but size may at least become noxious by reason of the means through which it was obtained or the uses to which it is put.” Now by noxious, you mean criminal?

SORKIN: Well …

HEFFNER: Did he mean criminal?

SORKIN: (Sigh) I, I don’t know. I think that we have … I think that, that the, the word criminal has many different … there, there’s a very strict definition of what criminal means in the legal context. And there’s another context, which is how we feel … it’s a, it’s a, it’s a …

HEFFNER: It’s a crime.

SORKIN: It’s a crime. And, and I think I would put noxious in the, in the context that “it’s a crime”. You know it’s a crime against humanity. It, it … that’s very different, that’s very different than ultimately what gets people into the pokey.

HEFFNER: But isn’t, isn’t this where, isn’t Brandeis, Wilson, that whole period when we began to think in terms of things being too big and anti-trust …


HEFFNER: … .wasn’t that where we went on the right track and we got off that track … in time … or would you … in terms of acquisition …

SORKIN: Right.

HEFFNER: … and in terms of all the mergers that you’ve seen and reported on in your …

SORKIN: Right.

HEFFNER: … life time of reporting … isn’t that the nature of America? Was it Brandeis’ vision … or another …

SORKIN: I have a very complicated view. So, full disclosure … my … I’m the son of a lawyer, who is an anti-trust litigator. So I have spent many a dinner table discussion talking about the world of anti-trust and what it means and whether we should allow companies to come together and what it means to go from three to two and what a monopoly is and what a duopoly is. And, and concentration issues. There is no question in this country, both on the corporate side and specifically in the banking world, that we have consolidated. And by the way, I would argue that it didn’t just happen in this country, it’s happened all over the world.

HEFFNER: To the extent that it has in the US …

SORKIN: It is happening all over the world. And we are, we are a leader, we are a leader of this, this version of capitalism, if you will. And, and the question I think a lot of this raises though is on a global basis, what do we do about it?

And, the reason, the reason I say “global” … you know, one of the things people say constantly to me is … “Well, let’s break up the banks”. And I … my, my common sense knee jerk reaction is “Sure”. That sounds like a great idea, I think we should break up the banks, if the banks were smaller, if any of them went out of business, it wouldn’t have the same type of ripple effect … that seems to be like a, a great idea.”

However, I then sometimes think to myself … and we just got back, we, we were on a trip to Asia recently … I thought to myself … there are banks in China already that are four times the size of JP Morgan.

And what does that mean? And what does that mean to our ability as a nation to become competitive, we look at all of these different companies and businesses and jobs that have gone overseas and the implications of being a … a leader in a particular industry, whether it be “tech” or healthcare or finance, or what have you.

And so it’s not so clear to me that simply breaking up the banks solves all your problems because in some ways it may create some other ones.

And, and the other piece to that is, you might say to yourself “Well, what do you need the big bank for … you know, we just go to the bank to cash our checks and to maybe go to the ATM machine now or you can do it on your iPhone.

But what we’re really talking about is not about, about us and our relationship in getting a mortgage. What we’re talking about is, is big companies, big businesses and how they relate as clients in the same way that we do as individuals to another bank.

So, you may use Chase or Bank of America … I don’t know who your bank is, but you’ve decided you want to have a relationship with them for whatever reason.

General Electric says to themselves, or AT&T says to itself, “I want to have a relationship with a bank” and what do I want from that bank? Well, I want a bank that I can call up at a moment’s notice and they’ll write me a check for $20 billion dollars. I mean in this new global age that we live in with companies as big as they are on the corporate side, they’re then looking for banks that are just as ginormous who can write that one check. They don’t want to have to go to, to 20 different smaller banks and say, “Here’s my cup, please, please write me a check for a billion dollars” then they collect 20.

HEFFNER: Well, but doesn’t that …

SORKIN: I don’t know if that’s right or wrong, but, but that’s, that’s the, that’s the subtext of what’s happening here and it’s part of the nuance that I think often gets lost in the discussion.

HEFFNER: But doesn’t that point in the direction of embracing Mr. Volker and the Volker rule, which you don’t seem to do.

SORKIN: No, it’s not that I don’t embrace the Volker rule. I’ve written a couple of columns that have been critical of the Volker rule, and in fact, I’m actually doing an interview myself with Paul Volker on Monday. My, my sense on the Volker rule is slightly different.

What I have tried to say in my columns is two things. One is the idea that Glass-Steagall and, and the idea that that was removed and that that somehow was … is the reason we’re here today and we have the crisis, is a misnomer.

It’s a remarkable oversimplification of the multitude of problems that got us here. And this is not to apologize for Wall Street or anything else … it’s just to say, you know, wherever I go … not wherever I go … a lot of places I go people say, “Glass-Steagall … if we just had Glass Steagall this wouldn’t have happened”.

HEFFNER: That’s right.

SORKIN: And I say, and I will talk to you about it … there’s a hundred reasons why, why we, we might have still gotten there. And why Glass Steagall is not the issue. And similarly, as Volk… as the Volker rule has been proposed, there has been a sense, among some people, and a view that this is, you know, manna from heaven, it’s come down and it’s going to fix everything.

And again I think we just need to recognize what the Volker rule does and what it doesn’t due. It is helpful, I don’t want to tell you it is not, but there are … everything in life has two sides to it and all of these things and maneuvers and regulations … many of which I am for … can be double edged swords and I think that we have to have a discussion in this country which seems to be missing about what our true objective is right now.

Let me explain … right now in this country, there’s two things going on. On one side, we’re having a conversation about how we can regulate the banks. That’s one conversation … let’s make sure we never have another financial crisis. Important conversation that we need to have, pivotal conversation.

But there’s another conversation going on in this country, too. I would actually argue that this other conversation may be more important right this moment. Which is a conversation about where we are in the economy. The horrible unemployment that we’re living in this country. The sense that you can’t get the mortgage you want in the sense that the banks aren’t lending corporations the money they think they need, and the sense that people are not offering jobs to the people that need them, too.

HEFFNER: Why are they two different? Why can’t we walk down the street and chew gum at the same time? Deal with both problems?

SORKIN: I think we can deal with both problems, it’s just not clear to me that we can deal with them at the exact same time. And let me explain.

If we decide that we want to break up the banks tomorrow, that may be all well and good and avoid the next financial crisis when and if we have one, and we will, at some point. I’m not so clear or sure, by the way, that we’re going to have a financial crisis led by the banks anytime soon. And the reason I say that is that traditionally every banking crisis … every, every economic crisis we’ve really had has been a function of debt and leverage in the system. And as long as the economy remains lousy, frankly the banks are not lending enough money to get themselves into trouble that, that …

HEFFNER: Which is part of the problem.

SORKIN: … that would put us in this place. Right. Okay. But if you announce tomorrow that we’re breaking up all the banks, I can promise you … if you think the banks aren’t lending today, they … for the next two years, they really won’t be lending.

If you announce tomorrow that we want much higher capital requirements, something I pushed for very strongly early on, right after the financial crisis, with the double edged sword being that I actually think during that sort of two, two and a half years post-crisis, things were slower in the economy than they might otherwise have been, but you know what, that was a trade off I was willing to take. Is it a trade off we still want to take … I think we’ve actually increased the capital to a point where things are much safer now.

We’re not finished, but if we want to keep going down that road, it’s a road we can go down to, but I would much prefer that I get that 7.7 percent number on the unemployment side down to 6.5 before I start going on the other end.

This is more about timing, in my mind. I would love to get the banks to be as, as uncomplicated as humanly possible … I would want to make sure they never have a financial crisis. But I’m also aware that there are realities which is that if you decide that you want these guys to keep more money in the bank, these guys over here can’t have it.

HEFFNER: Okay, then, putting those … all those thoughts together. What would you have us do as a nation?

SORKIN: Well, nobody elected me President …but I think there’s a couple things …

HEFFNER: I just did.

SORKIN: Well, thank you … my, my mother will like that. My sense is, is … there are a couple of opportunities here. The first is that we really need to figure out how to fix the employment picture. Until we get that number fixed, get that 7.7 number down to 6.5, even 6.0 … look, it’s never going to be 4 … 4.6 was where we were before the financial crisis. But that was Alice in Wonderland … and my great worry, by the way is that because we’ll never get back to that number, we’re never going to feel like we returned. And I don’t know if people appreciate … sort of how artificial the sort of 2006/7 period was. Nonetheless, I think the focus strictly has to be on job.

I would be … I, I’m a Keynesian at some level, I would be spending money, I would be creating an infrastructure bank. I would be trying to do public and private partnerships. I would really be trying to put as much money into the system as humanly possible so that we could try to get this economy moving again. That’s what I think has to happen. I think that’s what the role of government is … when we, when we are in a tough, in a tough spot …and I think, frankly, it’s the role of business and I think there’s opportunities for them to come together and work together.

There’s a lot we can do on the tax front to try not to lower taxes per se, but to try to simplify the code and I think that would make a lot of sense both on the corporate side and on the individual side. Because I think it’s created an enormous amount of inefficiency. And ultimately we’re going to have to deal with the long, hard and, and very difficult issues that have to deal with entitlements. And there is some, some argument to be made that if we deal with those issues or at least we have a plan to deal with those issues, that businesses will feel more comfortable investing.

You know there’s, there’s over a trillion dollars in cash sitting along the side lines because people say they feel uncertain. I’m someone … you know … Warren Buffet has said a million times, “We always are living in uncertainty”. And we maybe just have to push through it.

But I, I think it is paralyzing some and so the question is how can we make those people feel a little less paralyzed. Hmmm, having said that, by the way, you know, you come up with a great entitlement program or, or, or a great plan to deal with entitlements, which effectively means, ultimately on the long term lowering entitlements … that can take hit to the economy, too, you see.

We just have the sequester. You decide you want to cut stuff, it, it can hurt the economy.

HEFFNER: There where we are … that’s where we are.

SORKIN: It’s real. My, my sense is that … and look, I don’t think Washington is prepared to have a grand bargain at all. I mean I don’t think this is a …

HEFFNER: 30 seconds for your solution.

SORKIN: I have 30 more seconds? You know … anyway … what I would do is I would try to get a grand bargain, but the grant bargain would not start in, in a meaningful way for three or four years … again, until we can get that unemployment number down and the grand bargain is going to hit people on both sides. It’s going to be higher taxes, or at least higher revenue and is always going to be a pull back on some entitlements and, and that unto itself would be tough for … on all sides.

HEFFNER: Now we’ve got to put some flesh on that skeleton. Our time is up … you’ll come back …

SORKIN: Of course …

HEFFNER: … or at least stay where you are …

SORKIN: Absolutely.

HEFFNER: … and we’ll continue. Andrew Ross Sorkin, thank you so much for joining me today.

SORKIN: Thank you.

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

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