03/18/2010 05:12 am ET | Updated May 25, 2011

Sorkin On What Happened After Lehman

The excerpt from Andrew Ross Sorkin's Too Big to Fail is now on the newsstands in the new issue of Vanity Fair. Because it's an excerpt, it's a little hard to tell how much it reflects the book. Like James Stewart's detailed chronology of the Lehman Brothers Holdings Inc. failure that ran in the New Yorker, Sorkin's excerpt microscopically examines the actions of some key regulatory and Wall Street players, in this case during the period immediately after Lehman failed, Bank of America Corp. (NYSE:BAC) swept in to grab Merrill Lynch & Co. and the government bailed out American International Group Inc. (NYSE:AIG). While all this is mentioned quickly, the context here is very sketchy, particularly the fact that the TARP talks with Congress were occurring offstage. This is one stripped-down, action-oriented narrative, full of stressed-out Wall Streeters that "march" and "race" and utter dramatic, occasionally vulgar, declarations: "That's a shit sandwich I can't get my big mouth around," says a Morgan Stanley (NYSE:MS) executive about Wachovia Corp.'s mortgage exposure. "Nobody gives a shit about loyalty," mutters John Mack.

There are strengths and weaknesses to this genre, which reporters, channeling Tom Wolfe and Barbarians at the Gate, seem to love: David Wessel's In Fed We Trust and Stewart's New Yorker piece both featured endless rounds of meetings and conference calls, as did Kurt Eichenwald's 700-plus-page chronology of the Enron implosion, Conspiracy of Fools, which may hold the record for the largest number of meetings in any single book. This genre does offer the possibility of real drama, what the blurbs routinely describe as a "cinematic narrative style." And, if enough of these are written, you may actually be able to deduce who said what as these decisions, or nondecisions, rushed past. On the other hand, you've got all the classic journalistic problems to cope with: How accurate is the depiction or the dialogue? Was there more going on here, outside the frame of the narrative or within the heads of the characters that we're not aware of? And, perhaps most importantly, what does it all mean? Do participants even have the ability to step back and tell us something more than that events were overwhelming, decisions were made intuitively, and passions erupted?

Sorkin's slice of history moves quickly, though an entire book like this might exhaust the doughtiest meeting freak. Sorkin has seemingly done a ton of reporting and there are some fine dramatic moments. The situation centers on the fears, post-Lehman, that Morgan Stanley and Goldman, Sachs & Co. (NYSE:GS) would fail. Regulators, notably New York Fed chief Timothy Geithner and Treasury's Henry Paulson with various staffers (Ben Bernanke makes only a brief appearance), are deeply fearful and pushing both investment banks to find big bank merger partners. Nearly any combination will work and are proposed; at one point Geithner makes index cards with all the combinations. Both firms, however, resist those acquisitions, despite continual heat from regulators, particularly Geithner, who finally pushes Morgan Stanley's John Mack to do a deal with J.P. Morgan Chase & Co. (NYSE:JPM), while desperately trying to raise capital from the Chinese and Japanese, and Goldman's Lloyd Blankfein to take on Wachovia in a shotgun marriage.

The news in all this is exactly how far these deals proceeded before they were killed. The Morgan Stanley-J.P. Morgan deal never got very far, with both CEOs resisting it. The Goldman-Wachovia deal did get to early negotiations. Wachovia's Bob Steel, a former Goldman senior executive and a Paulson deputy at Treasury, and Blankfein actually sat down, urged on by Geithner, until, of all people, Warren Buffett spoke up and pointed out the obvious: The conflicts (or "optics") in that deal with Paulson and Goldman were beyond bad, and the regulators pulled back. Meanwhile, Mack finally kept Morgan Stanley intact with an infusion from Japan's largest bank, Mitsubishi UFJ Financial Group -- a deal Geithner thought would never happen because the Japanese were traditionally so slow.

Some of this has been rumored, as fantastic as it seems. Sorkin demonstrates in an extremely graphic way what we sensed: The regulators were nearly out of their minds with panic. Geithner in particular comes across badly here. Paulson is eager to get involved and does make some calls; but he's limited by his conflicts, particularly with Goldman (and he's also busy in Washington with Congress, as is Bernanke). Paulson comes across much as he did in the press: impulsive, weary, eager to jump in, self-important. But his staff tries to restrain him, not always successfully. Geithner, on the other hand, presses these deals that would have made Paulson, Treasury and Goldman completely toxic. Give him this: In Sorkin's telling, he is inexorable in his pressure, though not exactly nuanced in either his approach or his thinking.

Now this may be unfair to Geithner. He was under extraordinary pressure, and for all of Sorkin's interviewing, there's more on the Wall Street side than the regulators. It's unclear whether Sorkin has the full picture from the regulatory side -- we have no real clue whether Geithner was just following orders -- particularly because the context there is thin (the precedent-setting decision turning Goldman and Morgan Stanley into bank holding companies gets mentioned only in passing, for instance). But he certainly looks bad.

If Geithner comes off less than Solomonic, Mack towers. Mack tries to save his firm, Mack gets his troops organized, Mack makes calls he doesn't want to make. But Mack resists. And in the end Mack triumphs: Mitsubishi comes in (it takes a number of very nervous weeks to actually nail down that deal), and Mack saves thousands of jobs. All this may well be true, although Mack's finally explosion at Geithner seems a little too polished and pat. Mack's recent decision to retire passed by without as much fanfare as the man probably deserved.

But, the genre does not allow much in the way of introspection as to how the firm and Wall Street arrived at that ugly crossroads in the first place. Two examples: Mack raging (as did Dick Fuld) had before him about short-selling. The rage is understandable; Mack was trying to save his firm. But the hypocrisy of anyone on Wall Street complaining about shorting remains awe-inspiring. At another point, Mack gets a call from hedge funder Arthur Samberg of Pequot Capital Management saying he's pulling his assets. Mack is outraged, as well he should be. He was an old pal of Samberg, as Sorkin says, but he'd also served briefly as chairman of the fund and gotten into hot water with the Securities and Exchange Commission over charges of insider trading at Pequot. All that would be nice context to know.

On the other hand, Sorkin does not unearth much evidence for a Goldman conspiracy, though many of the characters milling around on the stage insist on interpreting events as if there were one. Paulson's behavior in particular is murky; he seems more confused and panicked than anything else. And the truth is, if Goldman had gone down, we might as well have packed up and moved to the woods. As for Blankfein, as much as he hates the idea of doing a deal with Wachovia (and he's no pal of former colleague Steel either, which is interesting and an argument against a Goldman mind meld), he sucks it up and listens to Geithner -- until Geithner changes his mind.

Sorkin's excerpt provides the grist to ponder more fundamental issues. Since the Panic of 2008, regulators have argued that they need greater tools to seize banks and firms that are failing. What would have happened in this case? Neither Morgan Stanley nor Goldman was, by any measure, insolvent. They were being victimized by a run, as the panic spread, the stock price fell and clients and counterparties yanked their assets. Based on this scrap of history, it seems clear that Geithner and Paulson would have opted to seize one, or both, of these firms, perhaps halting the panic (or perhaps not) and raising all sorts of charges that the government was out of control and that Paulson and Goldman were running the world. As messy, contingent and frightening as that period was, these two firms survived and, thanks to another messy episode, the TARP, the system survived. But all that's beyond the range of this excerpt. We'll await the book.

Robert Teitelman is the editor in chief of The Deal.