Oct. 21, 2010

Columnist Sorkin takes students inside financial debacle

As a New York Times journalist, Andrew Ross Sorkin '99 had extraordinary access to key players in Washington and on Wall Street as the U.S. economy imploded in 2008, and he wrote the book "Too Big to Fail" to tell about it. He shared some of his insights in a wide-ranging panel discussion at the Johnson School Oct. 20.

"The whole book -- it's a lot of pages [640] -- redounds to one word, which is debt," Sorkin said. "It's about leverage, and every financial crisis that we've lived through is ultimately about that. The question is how do you control debt?"

Sorkin and three faculty members -- Robert Swieringa, Sharon Tennyson and Eswar Prasad -- focused on the implications of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, Sorkin's 2009 best-selling book, the forces that led to the crash of 2008 and economic prospects for the future.

Sorkin said the key provision of the Dodd-Frank bill, is its "resolution authority" that the government now has. "It's the only actual new tool that the government now has at its disposal to actually prevent 'too big to fail' -- the concept that if certain giant financial institutions were to go bankrupt, they would take the entire U.S. economy down with them."

He added: "There was a moment at which [investment bank] Morgan Stanley was on the precipice. I mean, hours potentially, from going bankrupt. The view was that 48 hours after, Morgan, Goldman [Sachs] would be the next domino. The domino after that was this idea that General Electric would go bankrupt."

If the government had had the resolution authority, Sorkin mused, would it have taken over these banks and corporations to forestall economic freefall? "They might have said, OK, …we're at the precipice. We need to take over these institutions." Sorkin said he believes the resolution authority is "crucial" and that it "can work" but "it has less to do with what's on paper and more how ultimately these things are executed."

Dodd-Frank also established a consumer protection bureau that Sorkin said will be "helpful." The new bureau comes in response to the perception of widespread predatory lending.

Former Johnson School Dean Swieringa, a professor of accounting and a member of the General Electric board of directors, addressed corporate governance provisions in Dodd-Frank but questioned why they were included in the bill when their effects are secondary to financial recovery. Sorkin noted that the bill was stuffed with tangential items in an "underhanded" process.

Tennyson, associate professor of policy analysis and management and an expert on consumer protection, addressed the bill's consumer protection bureau, which Sorkin feels is not significant. Tennyson disagreed. "For the first time, we have a consolidated consumer protection authority overlooking retail financial markets," she said. "It has very strong authority for investigations and enforcement actions on a par with the [Securities Exchange Commission] or the Federal Trade Commission."

The panel noted that whatever regulations are put in place in the United States, banks around the world play by different rules. International economics expert Prasad, the Tolani Senior Professor of International Trade Policy at Cornell's Dyson School of Applied Economics and Management, discussed ways financial systems differ abroad.

"What this crisis taught us, if anything, is that we need to think about capital in a more systemwide context," Prasad said. "Once you do have individual institutions falling ... there is this very rapid domino effect, and we need to have enough capital in the system as a whole to protect against that." Prasad noted that as an International Monetary Fund official in 2005-06, "Yes, I should have seen [the financial crisis] coming. I didn't."

Sorkin said there is a strong human component to how financial markets function and that entire economies are based on a tenuous sense of confidence "that can disappear like that."

The panel toyed with the idea that the economy fails every seven years with almost Biblical regularity. But Sorkin predicted otherwise:

"I actually don't think we're going to have another financial crisis in the next five to 10 years, in the context of a Wall Street or financial banking crisis. And the reason is because I think that the global economy is going to be lousy. Really, really lousy."

Sorkin was on campus for a full day of events that included a book signing, lunch with students from the Dyson School of Applied Economics and Management, the Department of Communication, the Johnson School and the Department of Policy Analysis and Management, and delivering a public lecture.