A Fighting Chance

Done. I took a deep breath.

And then Jon Stewart pointed at me and said, “That is the first time in six months to a year that I felt better.… For a second, that was like financial chicken soup for me. Thank you. That actually put things in perspective and made sense for me.”





Too Big to Fail

I may have frozen up over what P-PIP stood for, but there was another acronym that was burned into my brain: TBTF.

The idea behind TBTF—Too Big to Fail—had been around for a long time. But when the government stepped in during the spring of 2008 as financial giant Bear Stearns was failing, the idea had taken on new urgency. In the fall of 2008, a few weeks before Harry Reid called, I had taught the concept to my class at Harvard.

I began the session by making a few quick notes on the blackboard—I still like good old-fashioned chalk—while we talked about the bundles of bad mortgages that were scattered throughout the economy. And then I put a question to the class: The economy is obviously headed for rough sledding, and some companies may not survive. So if you ran a very large financial company right now, what would you do to make sure that you’d still be around in ten years?

Hands shot up. I called on one student who said something along the lines of “Hoard cash. Lots of it. Sell off the bad stuff fast, hang on to the cash, and try to ride out the storm.”

I said something like “Hmmm … Anyone else?”

All the hands went down. The student who’d answered had provided the textbook response. Why would I be looking for any other answer?

In the long silence, one student jumped, just a little. His hand went up.

I waited and let the silence stretch.

Another hand popped up and then another and another. Ultimately, about a third of the students had their hands up, and nearly all of them were smiling at the genius of the alternative, while the others looked on with puzzled expressions.

Finally, I let one of the students explain. The less obvious answer was to grow your bank as big as you possibly can, as fast as you possibly can. Even if it means taking on big risks. Even if it means overpaying to acquire smaller companies. Even if it means entering shaky or unprofitable markets. Do it anyway, so you can grow, grow, grow. And then—here’s the important part—borrow from everyone else to finance all that growth.

Why? Because a financial company that was truly gigantic and owed lots of money to lots of other big companies would be so important to the economy as a whole that the government would not let it fail. Throw in a few billion dollars of FDIC-insured checking accounts, and the government would always make sure that this megabank stayed in business.

Of course, reality was a lot more complex than a few words on a chalkboard. But the basic concept wasn’t rocket science, and we were hardly the first to figure it out. It took my students about two minutes to see how to build a bank that would be Too Big to Fail.

By the time TARP came along, pretty much everyone had grown to hate TBTF—except for the bankers who benefited.

Yes, our economy was crashing and the government needed to step in to stop the downward spiral. But the major banks didn’t need to be so big and interconnected—that part wasn’t inevitable. And the government made a huge mistake in how they handled the bailout.

I’d taught classes about business failure for nearly thirty years, so that’s my prism for looking at a company that’s in trouble. Typically, when a company is on the brink of bankruptcy, any rescue effort comes with lots of strings attached. CEOs get fired, shareholders get wiped out, creditors take a big haircut, and new business plans are drawn up—or there’s no new money.

A similar approach should have applied during the 2008 crash. And in the case of the insurance giant AIG, it almost did—until Treasury stepped in with nostrings TARP money.

As troubles mounted for AIG in August and September 2008, the process was under way. The company had gone to its creditors and asked them to write down the debts, and creditors were starting to fall in line for partial payment. No one would get 100 percent of what they were owed, but no one would get shut out, either.

But then the government bailed AIG out, and—shazam!—every creditor got 100 percent of what they were owed. In other words, the US taxpayers gave AIG’s creditors a better deal than they had already agreed to take. Goldman Sachs, for example, was one of AIG’s largest creditors, and they walked away with $12.9 billion. It must have seemed like Christmas in October—free money!