Author Andrew Ross Sorkin Knows There’s Too Much Debt

HBO: The film ends with Secretary Paulson hoping that the banks will lend out the “‘cash infusions” they received from TARP and jump-start the economy. Is that what happened?

ANDREW ROSS SORKIN: No, not at all. One of the reasons there’s been such furor and anger in the country is that, in the immediate aftermath, the exact opposite seemed to happen. It was harder to get a loan, the economy continued to falter, the markets clearly kept tumbling, and there was a continued sense of panic in many ways. Some people believe that Hank Paulson, Ben Bernanke and Tim Geithner oversold the program to the public as a way to quickly lift the economy. In truth, it was a way to keep the patient from flat-lining. People were expecting a jolt and that’s not what happened.

HBO: What would have happened if it didn’t pass?

ANDREW ROSS SORKIN: I think we would’ve had a complete and utter panic like nothing you’ve ever seen in your life. We would’ve had 25 percent unemployment, banks going down left and right, companies that relied on those banks going out of business. I don’t know if there’d be breadlines, but there’d be lines around ATM machines, for sure.

HBO: Is it possible that we’ll see that scenario if the debt ceiling isn’t raised?

ANDREW ROSS SORKIN: If the debt ceiling issue is not resolved, it is very possible we could see a panic similar to before – that’s the fear that I constantly hear from people in the markets.

HBO: What did the banks do with the money from TARP if they weren’t lending it out?

ANDREW ROSS SORKIN: Many of the banks used the money to shore up their own balance sheets. They were effectively hoarding cash because their deposits had been so depleted. They were trying to hold on to the cash to help keep an adequate capital ratio. That frustrated a lot people because they thought it was going to be lent out. And the bankers were making huge bonuses again so the anger was understandable.

HBO: How did the economy respond?

ANDREW ROSS SORKIN: For several months, the economy and the markets continued to spiral downward. The banks had a legitimate worry about lending, because they didn’t know if the people they were lending to would be able to pay them back. But there also wasn’t as much demand for loans. Companies and people weren’t asking for loans in the same way they had been because the economy was so depressed. That’s not to suggest that there were not people who couldn’t get loans that deserved them; that was a problem too.

HBO: Was it surprising how quickly the banks paid back the money from TARP?

ANDREW ROSS SORKIN: Yes. I think if you were to ask someone like Hank Paulson or someone else from the administration about this, their hope was the banks would be holding onto this money for three to five years. There was a real sense of surprise about how fast they paid it back. TARP became so politicized that having money from it was almost like a scarlet letter. There were debates over compensation, worry that the rules were going to get changed. All the banks were desperately rushing to get that money back as soon as possible—in part, so they could pay themselves bonuses without any government restrictions. Of course, that made the public even more upset.

HBO: What have we learned about the causes of the financial crisis in the years since that we didn’t know before?

ANDREW ROSS SORKIN: We all understood the cause of the crisis at the time, and it all came down to one thing: debt. There’s too much debt in the system. Some people want to blame the bankers, some people want to blame the regulators or the rating agencies. All of these people are at fault, but it still feels like a blameless crisis because we haven’t discovered a single poster boy for it. Ultimately, it’s about a society and a culture that allowed all this debt to form.

HBO: Is there someone who is criminally at fault?

ANDREW ROSS SORKIN: You can’t win answering this question either way. People who are angry want someone to blame, and people who think it’s blameless would say you’re calling out the wrong person. Ultimately, it’s unsatisfying. Does it feel like the financial crisis was a grand crime against the global economy? Sure. But was the risk-taking at the heart of the crisis about stupidity or was it about fraud? That’s an essential question. If people were just taking on too much risk, that in and of itself is not a crime. Was there likely some fraud involved around the edges? It’s hard to believe that there was none.

HBO: Can the regulators still be relied upon? What about the rating agencies?

ANDREW ROSS SORKIN: The rating agencies historically actually did a pretty good job rating regular bonds. It was when they started rating all this new-fangled stuff that they had a problem. So are they all completely derelict? I don’t know. It’s popular to say so. Are the regulators completely derelict? There is clearly room to add more regulation to the system to avoid another problem like this, that’s for sure.

HBO: Did the government miss an opportunity to pass new regulations for the banks along with the TARP funding, or would that have been impossible to achieve?

ANDREW ROSS SORKIN: When they were giving them the funding it would’ve been impossible. I won’t win points for saying that, but I think it’s true. Afterwards, it would’ve created a fury on Wall Street, but that’s when the best opportunity existed because of the fury on Main Street.

HBO: And now?

ANDREW ROSS SORKIN: That the farther we get away from the crisis, the harder it will be.

HBO: Was the populist angst directed at Wall Street — notably in the Goldman Sachs hearings before Congress and the outrage over compensation — deserved or misplaced?

ANDREW ROSS SORKIN: People rightly felt angry and frustrated because the taxpayer had just bailed out an industry, and when most of the country was still hurting and unemployment was going up, these folks were paying themselves more money than ever. But some of the anger seems too reductive. It’s more complicated than just saying, ‘These guys took on too much risk, got paid too much and therefore are all criminals.’

HBO: What is the main reasoning for the disconnect between Main Street and Wall Street?

ANDREW ROSS SORKIN: I don’t think those at the top appreciate what middle class America is dealing with, or how their actions are perceived by the rest of the country. Wall Street’s explanation would be that there were market forces at play and banks had to pay their people these sky-high bonuses to remain competitive because if they didn’t someone would go across the street and work somewhere else. It’s not a completely untrue statement, but it is horribly unsatisfying.

HBO: What steps have been taken to address the underlying causes of the financial crisis?

ANDREW ROSS SORKIN: The good news is that we have much higher capital requirements, so the banks have to keep a lot more money on hand for a rainy day. Hopefully, banking will get a little bit more boring. There’s something called, “resolution authority,” which gives the government the power to takeover a failing bank—something they didn’t have pre-Lehman Brothers. We have a Consumer Protection Bureau, which will hopefully avoid the fraud that exacerbated the crisis. We have a systemic risk council, which will hopefully be able to spot things a little bit earlier.

HBO: Is the financial system still plagued by the issue of banks being “Too Big to Fail?”

ANDREW ROSS SORKIN: Absolutely, 100 percent. We still have banks that are too big to fail and we have to decide what it is we want to do about it. If it’s not acceptable, what is? Nobody wants to take a real position on that issue.

HBO: How can that issue be addressed?

ANDREW ROSS SORKIN: You can start deciding what size a bank should be—how much risk they can take on, how much capital they need to have. You could split banks up. The issue is that on one side, you want safety and soundness, so you’d chop the banks up and make them tiny. On the other, there’s this global competition going on, where there are other banks in Europe and Asia that are large and will become multiples of that size in the future. So part of me says, we should have miniature-sized banks because that’d be safer, but part of me also says, if in five years China has banks that are five times the size of JP Morgan, where will that leave us?

HBO: With the knowledge we now have, is a repeat of the financial crisis still a possibility?

ANDREW ROSS SORKIN: I don’t believe we’ll see a repeat of this crisis, because a lot of steps have been taken to prevent another banking debt-driven crisis in the near term. I think the next crisis, or the sequel, will be the debt-fueled crisis that our government is now facing, and the kind of thing we’ve seen around Europe in Spain, Greece and Ireland. You have to apply the phrase “too big to fail” not just to financial institutions, but to countries and municipalities. That’s where the story goes next. The lesson of 2008 is that ultimately our markets are driven by confidence. My worry is that the current way of thinking is that there’s always one more card to play. Like Lehman Brothers always thinking there was one more trade to make. But really, confidence doesn’t erode in years and months; it erodes in hours and minutes. At some point, we may have a problem.