Too Big to Reform?

LONDON – The best journalism, it is said, is the first draft of history. Too Big to Fail by Andrew Ross Sorkin is certainly worthy of that designation. As a bit player in the dramatic events that Sorkin describes (I am an independent director of Morgan Stanley in my spare time), I can confirm that he accurately captures the atmosphere of chaos and uncertainty that reigned in New York in the autumn of 2008.

It was a time when the tectonic plates of the financial system seemed to be shifting beneath us. Institutions that had been seen as Rocks of Gibraltar were revealed to be smoking volcanoes, at risk of imminent dissolution into lava and ash. Even Goldman Sachs continued to exist only thanks to the kind attentions of the United States Federal Reserve. On the other side of the Atlantic, the British government found itself to be the proud owner of over 80% of Royal Bank of Scotland, which, according to some measures, had for a while been the world’s largest bank.

The experience was a lesson for banks, regulators, central banks, and treasuries, which, not surprisingly, were unprepared to handle a comprehensive crisis. Their tools and powers were lacking.

The overriding conclusion that emerges from any analysis of these unhappy events is that nothing will ever be the same again: the relationship between the state and the markets needs to be rethought. A new “social contract” between finance and the people, through their governments, is required.