A conversation with the New York Times columnist and author of “Too Big to Fail.”
Question: In March of 2008, Hank Paulson refused to think about bailouts. Where did this visceral rejection originate?
Andrew Ross Sorkin: I think with Hank Paulson the concept of a bailout was anathema to him from day one. He was a Republican, he's a free marketeer, he believes in capitalism, and part of capitalism is believing in failure. And so the idea of bailing out an institution, I think, went against every part of him. And I think that was, for him, the biggest struggle to overcome, both in terms of his own ideals and then politically what it meant for the Bush administration.
Question: How did Paulson go from being anti-bailout to champion of it?
Andrew Ross Sorkin: Well, as someone who was so against bailouts, he was somebody who was also a pragmatist, and I think he recognized that as much as he didn't want to bail out many of these institutions, and they didn't necessarily deserve to be bailed out, that he needed to do so for the sake of the system. So when you look at the Bear Stearns bailout, for example, I think he had a realization, a recognition, that if he didn't do that, he was worried, frankly, at that time about a run then on Lehman Brothers and the rest of the system. Obviously, when he finally got to Lehman Brothers in September, he didn't bail them out. But once you got to AIG and once you started thinking about Morgan Stanley and Goldman Sachs, at that point I think he really saw the abyss on the other side and thought if we don't bail these firms out, if we don't find a solution to reinstall confidence in the system, the game is over.
Question: Some say Paulson’s failure to bail out Lehman was the policymaking error of the crisis. What do you think?
Andrew Ross Sorkin: There are two issues here. One is the consistency question, which is that throughout this period there was an inconsistency to Paulson and the administration's views on bailouts. You saw them save Bear Stearns, you saw them put Fannie and Freddie into conservatorship, and that created an expectation in the marketplace about how they would treat and handle Lehman Brothers. So the fact that they were then inconsistent on Lehman Brothers is in part what shook the confidence in the markets. So that is a piece of it. Should have they saved Lehman Brothers? Not necessarily because they deserved to be saved, but because the system needed them to be saved in part because of that consistency question. So the Lehman Brothers failure became a grand mistake because of those issues.
Question: Will the government be able to extricate itself from being a bailout machine?
Andrew Ross Sorkin: I'm afraid to say that over the next decade or longer it is going to be very hard for the government to really extricate itself from this, from Wall Street. And there's always going to be, in the back of investors' minds and in the back of the minds of people in the marketplace and the public, that the government could and may step in. And it's going to raise that whole consistency question all over again the next time a big institution gets into trouble, and what the role of government will be and how it will play going forward.
Question: During the crisis, why were there mixed messages coming from Paulson, Geithner and Bernanke?
Andrew Ross Sorkin: You know, that question raises a very interesting point, which is you had this troika of people -- Hank Paulson, Tim Geithner and Ben Bernanke -- and each of them was coming at this from a different place and perspective. Hank Paulson, obviously, had spent his career on Wall Street, had a deep knowledge of the Street, and also was a very forceful personality, had a very good relationship with the President, and was in a very different place, for example, than Ben Bernanke, who is an academic, quiet guy; spent most of his time thinking about monetary policy. And then you have this other guy in the middle, Tim Geithner, who at the time was the president of the Federal Reserve in New York, who was playing both to Ben Bernanke, as his almost understudy in that role, but also playing to Paulson, and also playing to Wall Street in that he literally sits -- his office sits blocks away from Wall Street -- and spends time with many of the Wall Street leaders trying to understand their issues. And each of them came to this crisis from a very different place, and so it's not surprising that they all had different perspectives and views as the crisis unfolded.
Question: Why was this not resolved earlier?
Andrew Ross Sorkin: I think Paulson would tell you that he made it clear after Bear Stearns that he was not in the business of bailouts. I think he went on television and said that repeatedly. And yet of course then he goes and puts Fannie and Freddie into conservatorship, and so it goes back to this issue of the inconsistencies. I think he did have a worldview that he didn't want to be in the business of bailouts; he had tried to make that clear. I think Ben Bernanke and Tim Geithner shared the view that they shouldn't be in the business of bailouts, but you know, you're not in the business of bailouts until you frankly think you need to be. And unfortunately, the situation became, or got to a point where they felt, for Fannie and Freddie, at least, and then later with AIG and the others, that they needed to be, that there was no choice that they didn't have another card to play.
Question: How did Paulson’s baking career prepare him for Treasury?
Andrew Ross Sorkin: Paulson was a get-it-done kind of guy. Some people would say that he shot first and asked questions later. I'm not sure that's the answer. I would say actually, like a true sort of Wall Street deal guy, he was talking to a lot of people, asking lots of questions. I mean, this guy was fielding phone calls, hundreds sometimes in a day, just sort of feeding the sort of information flow. And that's what Wall Street is often about; it's about this sort of massive information trade. And he would be taking little bits and trying to analyze and synthesize and figure out what to do; and as someone who was on Wall Street was also an executor. It was a get it done, we need to do this. But at the same time that meant that everything was a deal. He saw the world in terms of deals, as a transaction, if you will. And that is probably a different perspective than someone like a Ben Bernanke brings to the table.
Question: How did Paulson’s career experience lead him astray?
Andrew Ross Sorkin: It'll be interesting to see how history ultimately judges Hank Paulson. There will be those that will suggest that he was led astray, that he made mistakes. And there was no question that he did. But I also suspect that history may look more fondly upon him in certain respects than he's given credit for today. We can argue the points about the mistakes that were made up and until and through the crisis --- the failure of Lehman Brothers, how to deal AIG, et cetera, et cetera -- but the bailout and the response to the crisis I think was actually probably done and executed better than many of us imagined, in that I think the economy would have really been in much worse shape than we've ever wanted to acknowledge. And as a result, we didn't fall off the cliff, and we will live with the unintended consequences of that for 10 or 20 or 30 years as we pay off this $700 billion of TARP money and trillions of dollars that have been pumped into the system through the Federal Reserve and otherwise. And as a result, I'm not sure that history is going to say that he made the mistake that the question suggests.
Question: In chronicling M&A over the past decade, what are your observations?
Andrew Ross Sorkin: Most of these deals, for better or worse -- and probably worse -- don't work out. You know, the academics will tell you it's 50 percent or 60 percent. It's probably closer to 80 or 90 percent, and you can see it in the cycle. When a deal gets done at the height of the market, when everybody is chasing each other and each other's tails, the deals are disasters. And the only deals that actually tend to work are the ones that are done after the bloom has come off the rose. When everybody is in absolute panic mode that the world is going to end, that is typically when the best deals take place. So if you actually did a deal in the fall of 2008 or maybe the spring of 2009, I imagine those deals may in fact work out. In fact, some of the deals that are happening now in the fall of 2009 may also work out. But as things get better, to the extent that things stabilize and get better, I imagine those deals probably won't. It's very, very difficult to make these things work out. Bad deals -- how much time do you have? I could start making lists. A very bad deal was one where a company called Symantec merged with Veritas. I remember that was not a great situation. Hewlett-Packard bought Comcast -- not Comcast, but bought Compaq in 2001, maybe? I can't remember that doing very well. Credit Suisse bought a little firm called DLJ. I don't think any banking mergers -- anyone would argue that the investment banking mergers worked out. Some of the pharmaceutical deals were disasters. The telecom stuff -- I mean, need I say more?
Question: Prior to the crisis regulators were more concerned with hedge funds than with banks. What accounts for the fact that banks required bailouts, while hedge funds did not? (Arnold Kling, Econlog)
Andrew Ross Sorkin: The question's a very smart question, because for many years all we did -- even as journalists, not just the regulators -- we said, ah, the hedge funds, they're going to blow up; or ah, the private equity firms, they're going to blow up. And what nobody seemed to do was tie it back to where do they get their money from, which was the banks. And so everyone said, regulate, regulate, regulate the hedge funds, and yet the banks, which frankly were regulated, but nobody was minding the store, clearly were the ones to blow up. What I would not take away from this is that somehow we don't need to regulate the hedge funds, the private equity firms, the insurance companies or otherwise. What I would take away from this is, usually when you're looking in one place, (a) that may not necessarily be the problem place, but that you've got to get deeper, and you've got to follow the money and really try to appreciate the full picture, because that was the biggest problem. We compartmentalized everything; we said, ah, the problem's over here; ah, the problem's over here. But we didn't look at it holistically. And this crisis was a systemic one. This crisis was a result of the fact that everybody was as interconnected as they were.
Question: Is there too much emphasis on going public in the United States? Should more firms be privately held? (Arnold Kling, Econlog)
Andrew Ross Sorkin: There's a good argument to be made that companies that are private, where they're run by partnerships, where everybody has true stake in them and they're not playing with other people's money, that by default it's a safer system, because you really have skin in the game. You really own the company. And this is not skin in the game like owning stock options or restricted stock. This is your company. And there's probably a good argument to be made for that. Having said that, when you think about creating a large, scalable, global company, it's very difficult to do that in a private environment because you just don't have the capital. And so the real reason, or the proper and right reason, go to public is to tap the capital markets, those public markets. And that offers a benefit, but it also creates enormous risk.
Question: Do you favor abandoning the too-big-to-fail policy, or should we break up large financial institutions? (Scott Sumner, The Money Illusion)
Andrew Ross Sorkin: I'm probably a believer in abandoning too-big-to-fail firms or breaking them up in some way so that the system can try to take care of itself. I imagine you're not going to get there, and therefore I suspect regulation is what's going to be required. But I have my own hesitation there, because throughout this book recording process I would spend time in Washington, and to the extent that you think the bankers on Wall Street don't know what they're doing, it's hard to have a lot of confidence in many of the lawmakers either. And so you can say, okay, we need financial reform. I can't promise you that's going to be executed properly either.
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.
Question: How do you develop Wall Street sources? (Dan Indiviglio, Atlantic Business Channel)
Andrew Ross Sorkin: When I started doing this about 10 years ago in London, and when I first started this job, I used to literally make lists of people on Wall Street that I wanted to try to meet every given month. So I would sit and make a list of 30 people. And I would cold call, literally, and introduce myself as a reporter who planned to be on the beat for a very long time and thought it was important that we get to know each other in some way. And I think hopefully over the years people have taken those calls and occasionally those meetings, and a trust level has developed. And I think that's probably true of any reporter. It's really about hard work, shoe-leather reporting, getting on the telephone, running around, in my cases, to meetings or events to see different people, and whispering in their ear, and hopefully they're going to whisper back and tell you the information. You know, as a child I always enjoyed -- my parents used to have these little cocktail parties -- and I always loved trying to get the adults to tell me things they weren't supposed to say. And in many ways that's what my job is today; it's getting people to tell me things that they probably are otherwise not supposed to say. And I think you do that by developing some semblance of trust that you're going to be fair and that you get it. I think that's part of it. I've tried to study the industry. I've spent enormous amounts of time. I can, unfortunately, do a model, a DCF model, with the best of them. I wouldn't say I enjoy it, but -- and I also think that when you've studied it up, when you've come to the table with the right questions, when it's clear to the other side, the interviewee, that you know what you're talking about, you can get a lot more.
Question: What’s the biggest challenge for financial journalism going forward? (Dan Indiviglio, Atlantic Business Channel)
Andrew Ross Sorkin: The hardest part for a financial journalist going forward is actually going to be to get a straight take. It's very hard to truly get close to the action any more. I think there was a sense in the '80s and maybe even part of the '90s, and earlier, when you could really get the CEO on the phone any day. You could really get inside the story. But today most of these companies are pretty lawyered up. They have a PR apparatus. It's very hard in real time to actually get a story that hasn't come pre-spun. And while the government is requiring more and more disclosures, as we've seen, some of these disclosures are worthless. And so it makes it an enormous challenge to be able to really be able to spot the problems.
Question: Do you try to warn readers when you present the views of someone who is out to lunch in their assessment of the economy? (Dean Baker, Beat the Press)
Andrew Ross Sorkin: When I'm aware that they're out to lunch, my goal is usually to tell you that they're out to lunch. I can't promise I've gotten it right every time.
Question: How bad would someone’s understanding of the economy have to be before you decided the person was no longer a good source for assessments on the economy and financial markets? (Dean Baker, Beat the Press)
Andrew Ross Sorkin: That's a terrific question, because unfortunately, in the world of sort of Wall Street prognosticators, they only happen to be right once or twice. So right now Nouriel Roubini, for example, who called the crisis, seems to be the guy that you'd want to hear from. Or Meredith Whitney, who told you that Citigroup was in trouble, would be somebody you'd want to spend time to and listen to and perhaps quote in an article. But other people would suggest to you that they were making these arguments for six or seven or eight years, and had you been quoting them then, most people would have told you they were absolutely and wildly wrong. So it's actually a complicated issue because some of these people will look right and be right for the moment, and then won't be right for a very long time again.
Question: How did financial television do during the crisis?
Andrew Ross Sorkin: Financial television played a remarkably large role as the medium with which people were receiving their information during this crisis. This was probably the first televised financial crisis that existed. And some people have blamed TV for the crisis, or for speeding up the crisis. And there might be some truth to that in that as journalists who are trying to reflect what's happening in the market, it gets reflected back, and this sort of mirror gets mirrored back and forth and back and forth. And there's a personalization to it. TV as a medium is so different than reading a headline that's saying there's a problem. But when you're sitting in your office, especially when it's about yourself or about a firm that you're trading with, and you're hearing and seeing another individual tell you these folks are in trouble, it really can exacerbate the situation. That's not to say that I think all of these people were doing -- reporting irresponsibly. There were some reports that were wrong here and there. But for the most part I must say, even having finished this book, I watched a lot of TV tapes during this period, and most of the stuff actually stood up quite well, much better than I suspect many people would want to acknowledge.
Question: How is your reporting different for your column versus your book?
Andrew Ross Sorkin: Well, with the column you're supposed to have a perspective, a viewpoint, and you're letting the readers in on that perspective. With the book I was trying to do something very, very different. I wanted to bring the reader behind the scenes, hopefully in a very objective way, and my goal was to actually let the reader decide. I thought that the public, and even as a reporter, didn't really know and appreciate what had happened throughout this period behind closed doors. And so when I went into the project -- actually, I remember watching an interview with Quentin Tarantino on Charlie Rose, and he asked Quentin Tarantino what his goal was when he made a picture. And he said that his goal was that when the audience left the film, that they all felt as if they had seen their own picture, that you know, one person sitting next to another person could take something completely different away from the film. And so in the same way that was really my goal. You know, if you told me that you walked away from this book and loved Hank Paulson, that'd be fine by me, because I've also met people who said they've hated Hank Paulson. I've had people come up to me and say Dick Fuld is the villain of this book. And I had a woman come up to me physically on the street, who said, when I read that scene where he was crying with his wife, I cried too, and I think I actually love Dick Fuld. And as a writer, that's actually the perfect outcome.
Question: Who are your heroes?
Andrew Ross Sorkin: Who are my heroes? That's such a good question. I have different types of heroes. Some are other journalists. I think what Bob Woodward has done during his career is extraordinary, obviously. I go back and read books like Den of Thieves and would tell you that Jim Stewart is an extraordinary journalist; or Brian Burroughs, who did Barbarians at the Gate, and really almost invented a genre, are heroes of mine. Entrepreneurially, I've seen, or think about, someone like a Jann Wenner, who started Rolling Stone, as somewhat heroic. I'm very impressed by some of the people in Silicon Valley who created things like Google and Yahoo! and created sort of enormous, really interesting, life-changing businesses. Steve Jobs has done something that's incredibly extraordinary. I don't know if I'd tell you that these business people are my heroes, but I definitely find myself impressed by them. From a purely heroic standpoint -- you'll probably laugh at me -- I'd probably tell you my parents or my grandparents are probably my heroes in terms of how I got to do what I do, and whatever success I've had is probably more their doing than mine. But I don't know if that's what you were looking for.
Question: What’s the worst career advice you’ve ever received?
Andrew Ross Sorkin: I don't know if this is worst career advice, but I think that if we could go find my seventh and probably eighth grade English teachers, they would be relatively shocked, as am I, that I am a professional writer, only because I think they thought that I was going to be a miserable failure. And I probably thought that too.
I don't think that writing -- you know, people always say that writing doesn't come naturally to anybody. But as a child, I didn't love newspapers. I actually thought that newspapers -- I used to remember my father read newspapers on the weekends, and I actually think I disliked newspapers because I thought of that as sort of time away from me. I wanted to go out and play baseball, and he was reading the newspaper. And so I actually think I had a very hard time with newspapers and reading and even writing for a long time. And writing for me was never a natural act. You know, I have certain colleagues and people I know who I feel like when they sit down at the computer, they -- you know, they type at the keyboard, they're playing the piano. It's just flowing out of them. It just comes naturally. I'm much more of sort of a hunter and a pecker, and I'm if I write a sentence I'll go back and forth over the sentence a million times before I write the next sentence. If you had asked me in high school whether I enjoyed writing, or the act of writing, I would probably tell you no, because I think I struggled with it, as I think I do now, though I'll tell you I say that to other journalists and other writers and other people who I think are terrific and wonderful writers, who I imagine play the keyboard like a piano, and they claim that they struggle with it too. So maybe I'm just being difficult; I don't know.
Question: What keeps you up at night?
Andrew Ross Sorkin: Everything. I don't sleep well. I'm a very nervous -- by my nature -- anxious, almost paranoid person and reporter. What keeps me up at night? Waking up to a scoop at another newspaper or on TV. I'm probably competitive, almost too much so. I will stay up till the Web sites at night roll over. And if they don't roll over, I'll stay up until it's done. I'll wake up at the crack of dawn, or in the middle of the night even, just to go and check and see. You know, that's mostly what keeps me up.
Recorded on December 3, 2009