Near the end of the HBO movie “Too Big to Fail,” Federal Reserve Chairman Ben Bernanke is shown stating his rationale for the government’s bailout of Wall Street firms despite their greed and their reckless borrowing to make risky investments such as sub-prime mortgages, junk bonds, credit default swaps and private equity deals.
Bernanke, testifying before Congress in 2008, tells the lawmakers that they can either do what he and Treasury Secretary Henry Paulson are telling them to do or they can trigger the next depression. After a lifetime of study, Bernanke had concluded that the 1929 stock market crash ultimately morphed into the Great Depression because the federal government failed to provide liquidity for the commercial banks. This meant that banks could not in turn provide the loans necessary for Main Street to function.
Bernanke warned Congress that we were facing a similar crisis. He said the consequence of Lehman Brothers’ collapse was a freezing of the global credit markets. Bernanke subsequently headed up a team of the world’s leading central bankers working to pump more than $3 trillion into the financial system to unfreeze credit.
The HBO movie was adapted from Andrew Ross Sorkin’s book of the same name. It covered the collapse of Bear Stearns in the spring of 2008 until the passage of the Troubled Asset Recovery Program that fall. In 98 minutes of archival video and staged re-enactments, the film highlights the extremes of those times. In one scene, bankers are gulping down champagne and devouring caviar. In another, a bleary-eyed Treasury Secretary Henry Paulson, played by William Hurt, rushes into a bathroom to vomit.
The phrase “too big to fail” refers to the critical role of a handful of companies in our capitalistic system. The federal government finds itself forced to keep these private companies functioning because they provide critical services, employ thousands of people and owe billions of dollars.
The movie would lead us to believe that the fate of the entire world was at stake.
A handful of men led by Paulson, Tim Geithner and Bernanke, as the financial system teetered on the brink of ruin, came up with the Troubled Asset Recovery Program. On the second try, Congress approved the $700 billion bailout. TARP gave the Treasury and the Fed essentially a blank check to inject money into the system. Within days of passage, Paulson and Bernanke forced key banks to accept $125 billion of TARP’s funds to restore public confidence in our banks.
The movie ends with the banks’ resentful acceptance of the government’s capital injections. Surprisingly, the government received no guarantees from Wall Street that they would actually lend out most of the $125 billion, and in fact banks subsequently lent less than they did before they received the money. Joe Nocera, in a New York Times article entitled “The Good Banker,” reported the somber assessment of Robert Wilmers, CEO of M&T bank, a premier regional bank.
Wilmers worried that the banks are relying on trading profits at the expense of the prudent extension of credit that furthers commerce and employment. “The six largest holding companies, which made a combined $75 billion in 2010, had $56 billion in trading revenues,” Wilmers said.
The film concludes by acknowledging that the remaining Wall Street institutions are bigger than ever because the Fed encouraged them to purchase weaker rivals. We have provided steroids to the survivors.
“Too Big to Fail” has become “Too Big to Fail Squared.” The top 10 bank holding companies now control 77 percent of all U.S. banking deposits. And the excesses have resumed too: Wall Street paid out record bonuses of $135 billion in 2010.
Sorkin, in an interview on his thoughts about the movie, summed up today’s dilemma: “I don’t want to write another sequel, but I think there will be one.”
Originally published in the Sarasota Herald-Tribune
