CHARLIE ROSE: It has now been more than a year and a half since the economic crisis broke out with the collapse of Bear Stearns. While financial markets have stabilized in recent months, the inside story about the worst recession since the Great Depression has yet to be told. There’s a new book which offers a compelling look into the drama on Wall Street and in Washington as the crisis nearly spiraled out of control. It is called "Too Big to Fail" by Andrew Ross Sorkin. He is the chief mergers and acquisition reporter for "The New York Times." He’s editor of Deal Book, the online financial report. He writes in this is this book, "In tend, this drama is a human one, a tale about the fallibility of people who thought themselves were too big to fail." I am pleased to have a friend of this broadcast back, Andrew Ross Sorkin, to talk about an extraordinary book. And everybody that I know who were players in this book that I’ve had a chance to talk to say one thing - - he’s got the story. Now, whether you have the complete story, I doubt. There’s got to be something people are holding back for their own book, but welcome and congratulations. ANDREW SORKIN: I can only hope not. But thank you, Charlie. CHARLIE ROSE: Tell me about putting a book like this together. It has a kind of Bob Woodward feel, inside the room, who said what, what they thought and when they left where did they go? ANDREW SORKIN: Well, that was my goal. And when I started the project, the entire goal from the beginning was how you get inside the room. How do you get to hear what the players were talking about so you the reader -- and we could make up our own minds about what really happened, because to me this was a great mystery. We saw Lehman fail. We woke up in September and thought the world was on fire. And it all seemed like a grand surprise. But as you start peeling back the layers, you start realizing that this train was going down the tracks and people saw it coming and were doing all sorts of things behind the scenes secretly that we never knew about trying to avert this crisis. And you can argue that they failed at some level. You can argue that they have succeeded now the economy is coming back. It’s multilayered. But the goal was to get inside the room and get all of these people to recount the stories, to reconstruct the record. And that was, I have to say for me as a reporter, a, the most fascinating thing you can do, but, b, the most challenging in that you’re dealing with people and their memories, fallible memories. You’re dealing with trying to get them give you documents and this sort of Rashomon-like nature where you get five, ten different versions of what happened and you’re trying to piece it together. And I would sit there with transcripts and note, and I’d get people to give me their e-mails and Outlook files, and we would sit there for hours looking for phone records and trying to match up the quotes, who said what. And then you’re doing this journalistic shuttle diplomacy almost when you’re going back to each person saying, "Did they say it that way? Are you sure?" And they’d say, "Yes, no." And you keep going back and forth. For me it was an amazing ride. CHARLIE ROSE: But you’re pretty wired into certainly the New York end of the story. You know Wall Street. You’re the mergers and acquisitions guy. You’re assistant editor of the business... ANDREW SORKIN: I was, but I wouldn’t say it was easy. I would say early there were several -- a dozen, two dozen people who were key in helping me understand the meetings, where I needed to go, what were the things we didn’t know about. And once I could get there, then it was really a matter of calling people I do not know. And for some period there were certain people who didn’t want to play. But there became a point, there was this an inflection point, this fabulous moment where once you knew enough, once you almost become too dangerous. Once I could tell you that you were at so and so’s house at 10:30 in the morning and you talk a call from your son about his lacrosse game, even if you didn’t want to play... CHARLIE ROSE: The game’s up. ANDREW SORKIN: ... you might want to play now. And so that’s what happened. And in an odd way for some people it was cathartic, for some people it was nerve-wracking, but it was extraordinarily interesting. CHARLIE ROSE: I’ll come back to that and we’ll talk a lot about the book and the players that were there. Today, how is the economic recovery doing? How is -- where do you think we are? ANDREW SORKIN: Well, I’ve been very -- I had been bearish. So I called this completely wrong, I do want to say, which is that I thought this was the grand head fake. It looked like the economy was getting better, people were talking about green shoots, and there I was saying "I’m not so sure. I’m a journalist, I’m a professional skeptic." But I did miss it. And I think that now I’m a little more confident things are getting better. I worry a lot about how sustainable this recovery is in part because of the paradox of this job -- the increasing job losses, or at least the existing job losses, and how the consumer is going to help us get back. So things are getting better. It looks better. The question to me is 12 months out, 18 months out, can this work, and obviously lots of issues about regulation, the banks, how they’re operating today as opposed to a year ago and how they’re going to operate in the future. CHARLIE ROSE: Speaking of that, administration spokespeople were out on Sunday talk shows, Axelrod, Emanuel, Val Jarrett saying "How dare they try to block regulation after taxpayers kept this system from collapsing?" And they’re now wading in now that they’re profitable trying to stop better regulations. ANDREW SORKIN: There is a tin ear element. And as I worked on this book, I found the tin ear element over and over. CHARLIE ROSE: Tin ear? ANDREW SORKIN: Tin ear, tin ear on Wall Street about really the way the public thinks and really what their responsibility is to the public. And as we move into this next year, these bonuses are going to come out, I think that there’s still a lack of appreciation that the taxpayer did really help save their bacon, and what those responsibilities are. Now, it’s complicated... CHARLIE ROSE: Now why is that true? I mean, they understood and they waded through the crisis, even though they may not have wanted the TARP money. ANDREW SORKIN: I’ll tell you something funny which is the companies that still exist and the executives are that are in place that were there at the time today think of themselves as survivors. They use the word "survivor," like a cancer survivor. And to me, I don’t mean to say these people are bad people, but I think there’s a tin ear to not recognizing that they’re survivors only to the extent that the taxpayer really did step in. And I know Goldman Sachs will tell you they didn’t need the money and didn’t want the money and that Ken Lewis at Bank of America will tell you it was a big mistake to accept the money. But when you really think about when this crisis was averted, it was averted in part because that money did flow into these banks and they were able to stabilize them. And I’m not sure that the banks and the bankers really want to accept that. CHARLIE ROSE: And there were market forces at work and a psychology at work that was having an overwhelming impact on their stock prices. ANDREW SORKIN: Confidence. I mean, this book is as much as you said and the book says about the institutions as it is about people. And really when you talk about people, it is about confidence, it’s about market confidence, it’s about whether you actually believe these folks are going to be in business tomorrow and whether you want to trade with them. And there was that moment. You remember, we all remember, there was a moment where the confidence was sucked out of the business completely. I really felt, I cannot even believe it now, that we were about to go over a cliff. CHARLIE ROSE: Paul Krugman had a column today in your paper in which he said, look, the banking sector -- there’s the banking sector and there’s the banking sector. You have Goldman Sachs and J.P. Morgan doing very well and reporting wonderful profits. Not so true for Citicorp and not so true for Bank of America and not so true for a lot of banks around the country who are not lending to small businesses and are not witnessing the flow of funds. ANDREW SORKIN: And that is the real problem and the real perception problem in America, which is to say I think Americans would probably be a bit happier that banks are quote/unquote "healthy" today if they were lending. But they’re not lending, and they’re not lending because some of them aren’t as healthy as he should be. Others I think are continuing to worry about the economy. And when you start looking at these profits, when you start looking at where the folks that are going to get the bonuses are coming from, it’s not because they’re making money lending to the average consumer. It’s because they’re trading their own book. And that has become a big part of the business, and that, by the way, trading your own book, is how we got here the first time around. CHARLIE ROSE: Trading your own book means what? ANDREW SORKIN: Trading your own book means you’re trading the bank’s money, shareholder money that you’re putting at risk. And I think they talk about too big to fail. There’s still a worry these institutions are too big to fail. Some of them because of the various mergers that happened a year ago, too too big to fail. They’ve become giant sized, supersized. And so we do have a number of issues we need to confront from a regulatory perspective about how we’re going to deal with these firms in the future. CHARLIE ROSE: But they’re lobbying against them. ANDREW SORKIN: Yes, they are. Yes, they are. And that’s in part the travesty about all of this and why there’s the outrage, and it is understandable outrage. CHARLIE ROSE: Do you believe and do the people you talk to believe we need a new stimulus program? ANDREW SORKIN: I think at the moment there’s been a pause, but some of these folks that I talked to have hit the pause button on the stimulus program. I think there’s a worry we might need it later so let’s pause now and maybe come back to it. CHARLIE ROSE: And how do they measure its effectiveness, both the administration and the people who know about the application of this money? ANDREW SORKIN: I talked to a CEO last week who said when you look at to the extent the economy has recovered, you can’t a ascribe any of it to the stimulus program. You really should describe it to inventories which were low which people now had to replenish, the economy coming back on its own. CHARLIE ROSE: So the stimulus program has not been a genius creation to create jobs for the American people? ANDREW SORKIN: Not at the moment. And there’s a counterfactual portion of this, which is, you know, Obama said that we’re going to give the stimulus money in the hopes of not just creating jobs but saving jobs. So the thing we don’t know and will never know is how many jobs were quote/unquote "saved." CHARLIE ROSE: Krugman quotes Larry Summers from the White House saying, "There is no financial institution that exists today that is not the direct or indirect beneficiary of trillions of dollars of taxpayer support for the financial administration -- for the financial system." You’d agree with that? ANDREW SORKIN: Yes, 100 percent. It’s impossible. And the hard part is there are a number of institutions that we discussed who said they didn’t need the money, or J.P. Morgan which didn’t need the money -- reasonably didn’t need the money, but they have been a beneficiary just as everyone sells by the cheap credit made available not just through TARP and other things like that, but the Federal Reserve, the FDIC has made lending -- it’s a great business when you can gate dollar and lend it out at three. It’s not so bad. CHARLIE ROSE: What’s the impact of this hedge fund investigation and these indictments in that community of people who have been making billions of dollars? ANDREW SORKIN: I think -- you know, I remember on Friday when the story first broke thinking it was going to be a small story, and it’s really blown up into something else because it sent shivers through the system. CHARLIE ROSE: Because they think they may be doing things that would be characterized... ANDREW SORKIN: As similar. CHARLIE ROSE: Because they have a lot of information... ANDREW SORKIN: As someone who covers deals, I hate to say that I come in contact with people who have information that they shouldn’t more often than not I’d like or you’d like. And this is in that community. I hate to say that, but that is the case. And they’re in the business -- it’s an information trading business. And they are all trying to sniff out, like a reporter would, various pieces of information. The only distinction is I don’t trade. So, you know, if I get this information, I’m going to go put it in the paper. They’re going to try to make money. CHARLIE ROSE: And in some cases that’s illegal. ANDREW SORKIN: In some cases that’s illegal, and I think this case is going to be an intriguing one because there’s a number of elements about what is going to constitute insider information and what doesn’t. CHARLIE ROSE: What’s the merger and acquisition activity like today? ANDREW SORKIN: I’m out of business, Charlie, at the moment. (LAUGHTER) CHARLIE ROSE: Well, there’s one bill, there’s Comcast and NBC, which is where I’m going. ANDREW SORKIN: There’s Comcast and NBC. There’s Kraft and Cadbury in England. There are a number of transactions, and we’ve seen some of it come back. I do think that CEOs and board members are a bit more confident than they have been and we will see progressively more transactions. But I’ve always thought that actually M&A -- mergers and acquisitions -- is one of the greatest indicators of where the economy is really going, because you can see the market do lots of things, but when you see a company and a CEO and a board decide to pursue a deal or not pursue a deal, it really represents how much confidence they have in their own business, because if they really feel great about their own business, they may go out and do something. If they feel really bad about their own business or they are going to have to lay off people and they know that, they’re not going to go out and buy something. CHARLIE ROSE: Is there a feeling the NBC/Comcast deal will work and that they will come up with this... ANDREW SORKIN: I think there’s an expectation that the transaction takes place. I think it raises lots of questions about General Electric their decision to get rid of NBC, what it means for television. In a way, GE is suggesting maybe we don’t want to be in the TV business anymore. What does that mean? That’s a serious question. General Electric could buy out Vivendi, which is the one trying to sell this piece ... CHARLIE ROSE: It’s what, 18 percent, 20 percent, they own? ANDREW SORKIN: ... of NBC. And they could buy that for $6 billion if they wanted to. But they decided that strategically that they don’t want to be in this business in part because it doesn’t fit with the rest of their business. CHARLIE ROSE: And probably because they’re performing as the rest of the industrial businesses are like aircraft engines. ANDREW SORKIN: Exactly. But it will be a transformational deal in the media space. CHARLIE ROSE: OK, a couple things, and then we’ll move to the book. The dollar -- I know this is not your field of expertise, but it’s going down. ANDREW SORKIN: It is, and it’s going down faster than I think we imagined in that there was an -- you know people have been talking for years about when -- what’s going to happen to the dollar, when’s China going to stop buying our bonds? And I think there was an expectation that this could go on for much longer than we expected. But I think there’s some early signs just looking at the dollar now that we may be in more trouble and this problem that we’re going to face, which is the Euro and China and everybody else, it’s going to come sooner than we expect. CHARLIE ROSE: The only nice thing about it, some say, is that it will increase American exports if the dollar declines. ANDREW SORKIN: Absolutely, except for the fact that unfortunately we’ve become a society that’s built on financial engineering and we don’t export enough product these days. And so it’s great if we built something. CHARLIE ROSE: "This book is dedicated to my parents Joan and Larry and my loving wife Pilar." This is a big book. You start by quoting Louis Brandeis, a great judge, who said "Size we are told is not a crime, but size may at least become noxious by reason of the means through which it was attained or the uses to which it is put." Is that a perfect description of what happened? ANDREW SORKIN: I have to tell you, when I came across the quote... (LAUGHTER) It was like a light bulb went off in my head. As a writer you’re looking for the quote you’re going to put on that page. CHARLIE ROSE: Thank you, Louie. ANDREW SORKIN: Exactly. And it really hit exactly what this story is all about. CHARLIE ROSE: The cast of characters, I just want to talk about them in a broad way. We cannot go through them all. We’ll go through highlights, but just go through the characters now, starting with the Secretary of the Treasury hank Paulson, formerly the CEO of Goldman Sachs. He went to the Bush administration because George Bush needed someone not to deal with this coming crisis but because the economy was not doing well. They wanted somebody that had credibility and authority, and he got more authority than any treasury secretary for a while had. ANDREW SORKIN: Hank is one of the most complicated -- much more complicated characters than I had expected going into this. I thought -- not to say he was going to be two-dimensional, but I didn’t realize how layered he was, how self-aware he was at certain points during this crisis and the actions that he was taking throughout. We’d see him on television doing an interview here or there, making a comment here or there, giving a speech. But he becomes the central actor in this. You know, today we look at -- a lot of people looked at Bernanke or Geithner as the central characters, but to me hank Paulson really was... CHARLIE ROSE: He is a central character in this book. ANDREW SORKIN: Hank Paulson and perhaps Dick Folds, the CEO of Lehman Brothers, are the central characters in this book. CHARLIE ROSE: Is one a hero and one a villain? ANDREW SORKIN: More complicated than that. I wouldn’t want to put a black hat or white hat on either, because it really is a complex and hopefully nuanced story. CHARLIE ROSE: OK, talk about Paulson and the man you got to know through not only interviews but other people talking about him in the room. ANDREW SORKIN: You know, the fascinating part about Hank Paulson was that he did see this coming. And, you know, the book starts the day after Bear Stearns is sold to J.P. Morgan for $2 a share. I was on your program and we talked about it. And it becomes an inflection point for the rest of the story. And there’s a very important meeting that happens about two weeks after that transaction takes place where Hank is having his morning meeting with his staff at 8:30 in the morning, everybody’s arrayed around the room, and he says "Lehman Brothers may be insolvent, too." And that is really a moment where you realize, OK, you can start to see how the dominos are going to play out. And that’s really how the book is structured. You’re just watching the dominos go. And he spends the next six months to his credit to some degree trying to save Lehman Brothers in ways that we as the public at least never appreciated. CHARLIE ROSE: For example? ANDREW SORKIN: He is -- for example, behind the scenes he is calling his friend Warren Buffett and saying, "Warren, you should think about making an investment in Lehman Brothers." In fact, there’s a whole sequence over a weekend in March -- this is March of 2008. This isn’t over the summer, this isn’t a month or a week before they went under. This is in March where they’re trying to get this deal done. He ends up directing one of his colleagues, Bob Steele, who later leaves treasury to go to Wachovia, Bob Steele... CHARLIE ROSE: He was formally with Goldman Sachs. ANDREW SORKIN: Formerly of Goldman Sachs as well, and we can talk about the Goldman Sachs in connection in a second. But Bob Steele was making calls to Bob Diamond, the CEO of Barclays, to try to buy Lehman Brothers not in September of 2008, but in April. And so as the story progresses, you’re really following Paulson trying in his own way to save them, at the same time, by the way, that Dick Fold is trying to save himself. You’ll see a series of meetings where they’re off to Korea, a series of meetings in Hong Kong. You’ll go off and watch Fold under pressure from Paulson try to make a deal with Morgan Stanley, with Bank of America -- and, again, not in September. All of these secret meetings were happening in June, July, and August. CHARLIE ROSE: So you are praising this effort by Hank Paulson to try to save Lehman before September of 2008 six months ahead by trying to help them find somebody that can rescue them? ANDREW SORKIN: Yes. I give him credit for seeing the problem. And, by the way, one of the other interesting things that did happen during this period which I don’t think -- at least I didn’t appreciate and I don’t think most people did, the TARP program. You know, the TARP program, which came out in September, was actually written in April. On April 15 there is a memo, a document. It’s in the books, probably going to put it on the web site so you can read the whole thing. It’s called the "Break the Glass" memo, and it is, in case of emergency break the glass, and this is the plan, voila. And the plan, I have to tell you is very, eerily similar to the TARP plan. CHARLIE ROSE: Who wrote the memo? ANDREW SORKIN: Another guest of your broadcast, Neel Kashkari wrote the memo. CHARLIE ROSE: OK. And he was TARP master later. ANDREW SORKIN: He became the TARP master later. CHARLIE ROSE: As far as I know he’s only done one interview. There’s Dick Fold who’s running Lehman. How much blame does he get for not selling? ANDREW SORKIN: So, Dick is also complicated in that for a very many months he tried valiantly and desperately to save the firm. And you see him going hat in hand to anybody who would listen. At the same time, there’s two issues that confronted him. One is he may have been to too late to begin with, which is to say by the time March rolled around there were no buyers for this company, at least at a price he thought was reasonable. CHARLIE ROSE: That’s a crucial point. ANDREW SORKIN: And that’s a crucial point, which is he’s confronting a situation where he’s probably too late to sell the company to begin with, and now the only offers that are coming in are not great offers, and it’s unclear whether any of these offers were real to begin with. And so you can criticize him for not trying to taken a earlier offer, but it’s very unclear whether any of these offers were real or reasonable, which is... CHARLIE ROSE: Including the South Koreans? ANDREW SORKIN: Including the South Koreans, and I’ll explain why -- because at the time you have a stock price at $20, let’s say. There was a period at which it was $20 and he was getting bids for $10! If he had announced -- it’s a real conundrum for him. If he announced to the world he was selling the company for $10 less than it was worth because he sort of knew the writing was on the wall, what would people have said? Maybe he would have been praised in the long run, I don’t know. But it was a struggle and it was a struggle for all of them, and they did try, and there were lots of issues within the firm that he was confronting. His friendship with Joe Gregory, who was his best friend and the president of the firm, who he eventually -- eventually exist it is story and the stage in this case. CHARLIE ROSE: So his strength is he had been a very tough manager and CEO of Lehman Brothers. His weakness is he’s throng the wrong people? ANDREW SORKIN: Listening to the wrong people. CHARLIE ROSE: Sycophants? ANDREW SORKIN: Sycophants. Some say there’s a quote from someone talking to him directly about that. A loyalty -- and that’s what’s so interesting about him. There is this sense of loyalty that he has that seems so redeemable and redeeming. But at the same time he seems to be loyal to the wrong people. And so you could call it this blind loyal they did him in, and a love affair, oddly, with the firm, an obsession with the firm. And I don’t think.... CHARLIE ROSE: A genuine test of stewardship about the firm? ANDREW SORKIN: I truly think he thought he was trying to save the firm and save the people. He believed that. I just think towards the end he became blinded by everything that was around him, and in some sense became unwound. CHARLIE ROSE: And so what was the attitude of Paulson and Geithner and Bernanke over his inability to sell the firm or unwillingness to sell? Did that make it easier to make a decision to let him go? ANDREW SORKIN: I do. I think there became a frustration throughout this period during the story where they watched him over and over go from place to place. They didn’t see him making progress. And by the time we finally got to September, I think -- I don’t want to say they threw up their hands, because they tried valiantly that final week. It’s a fascinating story and so many fascinating things that took place during that time. CHARLIE ROSE: So what’s the most fascinating? ANDREW SORKIN: That on Tuesday of that week Hank Paulson calls up Ken Lewis at Bank of America and tries to reengage him, bring him back in the story. And Ken says "I don’t really want to do this and I don’t really want to deal with Dick. And by the way..." CHARLIE ROSE: By the way, I like Merrill Lynch. ANDREW SORKIN: He actually doesn’t say that at that point, at that moment. But the most interesting part was Paulson said "You don’t have to worry about Dick," meaning we’re the government. We will take care of this. So there was a moment where they had -- they themselves had cast Dick aside. You know that Friday night at the famous fed meeting where all the CEOs get together, it’s almost sad to hear, but Hank says to the group, because Dick is not invited and someone asks "Where is he?" And he says, "He’s in no condition to be here. He’s delusional," I think was one of the quotes. And it becomes a part... CHARLIE ROSE: This is the human drama we’re talking about. ANDREW SORKIN: It is a human drama, and really it’s a difficult one. CHARLIE ROSE: Hank Paulson said on this program and elsewhere that he did not have the authority. ANDREW SORKIN: I think that’s true, with a caveat. CHARLIE ROSE: To save Lehman? ANDREW SORKIN: To save Lehman Brothers. CHARLIE ROSE: He could make a deal, but he didn’t have the authority to save them, and he later saved others. ANDREW SORKIN: Exactly. And the issue is this. When you look at the deal they struck with Bear Stearns when the government, the Federal Reserve gave money effectively through J.P. Morgan -- J.P. Morgan was the vessel through which Bear Sterns was saved. The government technically need a vessel to lend money through, and you had Bank of America that Sunday morning go off with Merrill Lynch. And, by the way, that’s a fascinating story in itself. CHARLIE ROSE: We’ll get to that next. ANDREW SORKIN: And Barclay’s was the last man standing. And there was a real question as to whether Hank Paulson and the government and Treasury and the Fed were going to give money to Barclay’s. And there was a series of phone calls that are pivotal to understanding what truly took place that morning between Hank Paulson, Alistair Darling who is the equivalent in the U.K., the regulators in the U.K., whether they wanted to do this deal, whether they didn’t. Some preexisting relationship issues -- the fellow running the FSA happened to not be, I would argue, in love with Bob Diamond who ran Barclay’s, so it wasn’t so clear -- there were people at Barclay’s who didn’t want to do the deal. There are lots of things going on. CHARLIE ROSE: What makes this fascinating is most of these people knew each other through one kind of reason or another. ANDREW SORKIN: You can look at your hands, and it’s ten, 12, 20 people who ran the world when it came to this stuff. And that to me is the most remarkable part about it, too. CHARLIE ROSE: One quick point about Hank Paulson -- he allegedly said according to your book that when the price had agreed to be $2 with the Federal Reserve guarantee for J.P. Morgan to buy, they later decided to raise the price of the merger. ANDREW SORKIN: Yes, to $10. CHARLIE ROSE: And he said what? ANDREW SORKIN: "I want to vomit." (LAUGHTER) ANDREW SORKIN: He was at his home. Wendy Paulson was trying to get them to go out and go bicycle riding. CHARLIE ROSE: The only one person could know this. Two people, Wendy or... ANDREW SORKIN: Well, Jamie Dimon was on the other side of the phone, too. Jamie had called to say, "I’m raising the price." And he knew the price was likely to go up. He thought it would maybe go up to $8. I think he at that point in the game was thinking about moral hazard and really felt that... CHARLIE ROSE: Explain moral hazard. ANDREW SORKIN: Moral hazard -- the idea that the government is providing a safety net. The fact that we are, that are the government would save a company would only increase the likelihood that another bank would go out and take even more risks to shoot the moon. CHARLIE ROSE: If you think the government will rescue you, then you’ll take more risk that you shouldn’t take. ANDREW SORKIN: Exactly. And I think moral hazard meant a lot to him. And so when he heard that it was going to go from $2 to $10 and the government had just given $30 billion over to make this happen, I think there was a... CHARLIE ROSE: The government guaranteed $30 billion. ANDREW SORKIN: Yes. There was a level of frustration. CHARLIE ROSE: If people know that if Lehman Brothers failed it would have the catastrophic impact it did? ANDREW SORKIN: Yes and no, but more no than yes. CHARLIE ROSE: Who knew and said "If you do this..." ANDREW SORKIN: Well, there’s a fascinating meeting... CHARLIE ROSE: "... we’re on the road to an economic crisis we have never seen before." ANDREW SORKIN: So here’s the interesting part. There was a series of meetings between the SEC, the Fed and Treasury over the summer, a secret task force, if you will, that was put together to look at what happened happen if Lehman Brothers failed. And there was one meeting where a fellow named David Nassen (ph), who worked at Treasury, raised these issues and said this would be a catastrophe. But as you got closer and closer to that fateful weekend, many Wall Street bank CEOs were telling Paulson and telling Geithner "We’ve cleared our positions. We saw this train coming down the track and we tried to protect ourselves. And maybe it wouldn’t be the worst thing if they were let go." A lot of them were probably saying that selfishly, but I don’t think they appreciated what was going to happen next. And so I don’t believe that they understood really what was happening, but I will tell you there are people at Lehman Brothers who will tell you until the day they die they were telling Paulson throughout this and up to the last final hours... CHARLIE ROSE: Don’t let this go down because it will have huge consequences. ANDREW SORKIN: And the most interesting part though, just one second, was this idea that not only did they let the company go down, right, but they actually forced the company at some level to go down. There’s a remarkable meeting which I will never be able to get out of my mind which is the final board meeting at Lehman Brothers that Sunday night. Christopher Cox is directed by Paulson to call the board and instruct them... CHARLIE ROSE: At that time head of the SEC. ANDREW SORKIN: The SEC -- and instructs them to file for bankruptcy. And there are board members arrayed around the table saying "I can’t believe the government is telling us to do that." CHARLIE ROSE: Before we leave, Jamie Diamond, J.P. Morgan -- personality, character, intelligence, who comes out of this with a very, very strong institution. ANDREW SORKIN: He’s clearly the winner throughout this period and throughout the story. Having said that, there’s some very interesting issues and rolls he played. He’s actually the glue between a lot of the storylines because J.P. Morgan is involved in AIG, J.P. Morgan is involved in Lehman Brothers. He has what’s arguably... CHARLIE ROSE: And J.P. Morgan did not have as much exposure and vulnerabilities as the others? ANDREW SORKIN: They made very good decisions early on, and to his credit, not to get involved in the subprime business the way many others had. But he also had what I would argue is the closest thing to perfect information, perfect real-time information throughout this process. He cleared all the trades for Lehman Brothers. He cleared all the trades for Merrill Lynch. He was the advisor to AIG. So while the rest of the world didn’t always have the best vantage point to understand what was about to happen, he was -- he saw it. That Tuesday you there’s a scene where he’s calling Dick Fold and saying "You need to give us collateral because we think bad stuff is about to happen to you." That Friday they do the same thing, by the way, to Merrill lynch. Meanwhile they’re the advisor to AIG... CHARLIE ROSE: OK. Is there something wrong here? ANDREW SORKIN: No, there’s nothing wrong here. CHARLIE ROSE: They’re not taking action because they got information. You’re just saying that happen to have the information and the actually just used it to warn people and admonish them? ANDREW SORKIN: They were positioned perfectly to see the storm coming and it’s to their credit to see the storm coming and get out of the way. CHARLIE ROSE: And that’s what they do? ANDREW SORKIN: They got out of the way. Now others, folks at Lehman Brothers and others, would suggest to you not only did they get out of the way, they pushed Lehman Brothers down in part because -- J.P. Morgan and Jamie would say they’re trying to save themselves. But at the same time, when you start pulling collateral from the bank, you put them in harm’s way as well. So it’s a mixed picture. CHARLIE ROSE: Personalities -- Tim Geithner, he’s been -- during this time he’s head of the New York Federal Reserve. He’s now the secretary of the treasury. ANDREW SORKIN: He’s one of the harder characters to read in this book because he comes across a little bit as a technocrat. I think he’s much more layered than that. He almost wanted -- I think there was an element of him that wanted to become the CEO of Citigroup. In fact Sandy Weill, and the book talks about this, had tried to see whether he actually wanted to take the job. CHARLIE ROSE: While he was head of the New York Fed? ANDREW SORKIN: While he was head of the New York fed. He’s somebody who also was ringing the bell and trying to ring it loudly. You can give him credit for seeing the problem and talking about the problem. But, again -- and maybe actions speak louder than words -- the actions were not taken. It’s unclear, by the way, whether the actions could have been taken. When you really start thinking about what happened in September, the only thing that you could have done is announce in July or August that the world was about to be on fire. And I’m not sure how many people would have listened. I’m not sure whether Congress would have listened. I still find it remarkable to this day considering everything that happened that it took two times, if you remember, two votes for Congress to actually pass TARP. The first time around wasn’t good enough. CHARLIE ROSE: And they were worried and people -- that’s the time that Warren Buffett came on the show and said "We’re looking at a Pearl Harbor." ANDREW SORKIN: And so I’m not sure you could get the public behind you at that point. And that was the challenge that Paulson faced and the challenge that Geithner faced, which was if they would have taken action in advance, how they would have done that, how they could have gotten people on board to agree that that was the right course. CHARLIE ROSE: OK, Ben Bernanke. ANDREW SORKIN: Ben’s been given a lot of credit for doing a lot of things right. CHARLIE ROSE: The chairman of the Federal Reserve. ANDREW SORKIN: Chairman of the Federal Reserve. However, I would say, when it came to this deal making, he was actually much less of an actor than people have historically given him credit for. When you really think of the chief dealmakers in government at the time, it really was Hank and Tim. And I think that for Ben he was someone who didn’t want to go near that stuff nearly as much. CHARLIE ROSE: So if there are three people in the room -- Paulson, Geithner, Bernanke -- who’s the strongest voice? ANDREW SORKIN: Paulson by miles. CHARLIE ROSE: By miles? ANDREW SORKIN: By miles. Ben would have a quiet power. There were moments where he could very thoughtfully press Hank to do certain things. But there’s no question that the person that people were paying attention to is Hank. CHARLIE ROSE: So if there’s a meeting today with Bernanke, Geithner, and Larry Summers, who’s the strongest voice in the room? ANDREW SORKIN: Well, it’s hard not to be the strongest voice in the room with Larry, right? So Larry probably takes the cake. CHARLIE ROSE: Move towards climactic moment in which we thought Morgan Stanley and Goldman Sachs were in deep trouble. ANDREW SORKIN: Well, this was the part that I will never forget as a reporter, because I remember we wrote all of these stories after Lehman fell, and we went into the weekend, and people thought Morgan Stanley was a little rocky but not that rocky. And on Monday all of a sudden the government announced they were going to become bank holding companies of Goldman Sachs and Morgan Stanley, and the world continued on its way, and Warren Buffett invested money, and everybody said they were fine. But as I continued to do the reporting, it all of a sudden became clear that there was a much bigger problem. I will always remember one of the sources for the book said to me "Do you know about the waiver?" And I said with the "What waiver? What are you talking about?" He said, "The Paulson waiver on Wednesday." I said, "What kind of Paulson waiver on Wednesday." "The Goldman- Paulson waiver on Wednesday." On Wednesday that week things were so bad that Paulson decided and saw the handwriting on the wall. He said if Morgan’s going to go, Goldman’s going to go next, and if Goldman goes, we’re talking about General Electric next, and we’re talking a real iconic American company. CHARLIE ROSE: Because they had a huge financial component in their... ANDREW SORKIN: When Paulson joined the administration, he signed an ethics waiver that says -- not an ethics waiver, an ethics letter that said he was not going to participate in any really meaningful discussions around Goldman Sachs that would impact Goldman Sachs, having been the CEO of the company. And I think he really thought that Goldman was next in line. And for him as someone who was a former Goldman man-- and I don’t mean this as a conspiracy theory at all-- but I think if he saw -- he sees the world in some respects through sort of the prism of his life at Goldman and Goldman represented the last domino to him, the sort of complete and total destruction of the system. And so I think there was a real effort and a reason for him in his mind to go seek that waiver secretly at the time so that he could actually get involved with all of this. And then as the weekend progresses... CHARLIE ROSE: He did it because he thought the crisis was at that point or he did it because he realized if it got to Goldman it was the end of the game? ANDREW SORKIN: I think it was both. I think he saw the handwriting on the wall and thought "I’ve got to get involved." Tim Geithner was pressing him to get involved and wanted him to get involved, because someone was going to have to deal do a deal with Goldman. And then as the week progresses you see Morgan Stanley talk to Wachovia, CIC, the Chinese, and then finally the Japanese. J.P. Morgan at one point, they’re pressing John Mack to do a deal with Jamie Diamond to sell him the firm for a dollar a share. And meanwhile Goldman Sachs is being pressed to merge with Citigroup. Can you think about that today, if they were together, at one point with Wachovia? There’s a fabulous phone call in the middle of all this. The board of Wachovia, half of them had shown up at Goldman Sachs secretly on that Sunday ready to do a deal with Wachovia. They were going to merge. And Hank Paulson calls one of the board members and says, "You need to think about this very, very seriously." CHARLIE ROSE: Who’s running Wachovia at this time? ANDREW SORKIN: Bob Steele. CHARLIE ROSE: The deputy... ANDREW SORKIN: The undersecretary at Treasury. So it was a very fraught situation, and that’s to put it politely. CHARLIE ROSE: What comes up many people in terms of making a populist argument about all of this, if they have lost their job or they have a mortgage that’s been foreclosed on, they’re saying all these people were taking care of each other. And I lost my job, I lost my mortgage and... ANDREW SORKIN: I would not dissuade you from that argument. You know, when you look at the subtitle talks about trying to save the financial system, and then it says "-- and themselves." And this was as much really about saving themselves as anybody else. This was this close-knit fraternity, and you really do see it. You see these interlocking relationships. And there are moments when you will cringe and wince and not believe this has really happened. CHARLIE ROSE: But are you saying that they made decisions that were not in the best interest? ANDREW SORKIN: I think that they were trying to make decisions that were in the f best interest of the country, and I do think that in the end history will look back and say that they... that that administration did help bring us from the brink. However -- and this is the point -- there was an element of group think among all of these people. CHARLIE ROSE: That’s the point, too. ANDREW SORKIN: And that was... CHARLIE ROSE: They see the world through the same prism. ANDREW SORKIN: That was the point and the problem, which is to say because everybody was thinking about hit in the same way, there was no -- arguably they were creative, but not creative in a way where you could look at it with some distance and say "You know what? We need to rethink this entire business." CHARLIE ROSE: Is Warren Buffett different because he had sort of been burned on Wall Street in terms of owning a firm and lives out in Omaha and was frequently consulted by everybody. ANDREW SORKIN: By everybody. And I would give him an enormous amount of credit, and I don’t know if it is the fact that he lives in Omaha away from this madness, but he really did have a unique perspective and insight to be able to tell these people "No." And the example of the Wachovia-Goldman situation, he says "This makes no sense. The government can be backing a Goldman Sachs deal with a guy who’s running Wachovia who used to work at Goldman Sachs. It doesn’t look right, it isn’t right, there’s nothing right about it." And so there’s all of these pieces... CHARLIE ROSE: It’s just common senses he’s bringing to the table, and a sense of history. ANDREW SORKIN: And you need that outsider perspective the. And that’s one thing that was lacking through this process. You really did have... CHARLIE ROSE: But everybody was reaching out to him, weren’t they? ANDREW SORKIN: Yes, but he was one voice in the wilderness. And you’re talking about a hundred people who all used to work together. CHARLIE ROSE: John Mack becomes a hero because he says with great emphasis to Tim Geithner -- what did he say? ANDREW SORKIN: I can’t use the language on this television broadcast, Charlie. CHARLIE ROSE: But basically he said when they were trying to reach him by telephone and they were trying to make a deal in Japan... ANDREW SORKIN: Tell him go... CHARLIE ROSE: Tell them to whatever. And it’s in the book. ANDREW SORKIN: Yes, it is. (LAUGHTER) CHARLIE ROSE: And so is John Mack a hero? Is somebody you’d send a book to and say "You’re the hero of this book"? ANDREW SORKIN: He’s somebody who I went into the process of writing this book not thinking not necessarily much of, but I didn’t think he was going to come out of this heroic in any sense, because he was vulnerable, he had made very bad decisions about risk, and had made a number of mistakes. But will tell you there is a scene towards tend of the book where he is getting pressured by the government to make a deal with Jamie Diamond. He is getting all of this pressure. Hank, Tim, Ben, they’re all on the phone and they’re telling him "You’ve got to do this." And he does stand up for his company. CHARLIE ROSE: For his company’s employees. ANDREW SORKIN: For his employees, and he makes it clear to them. And that is a remarkable scene and a remarkable moment. And I will say this. It is plausible had he not done that today Morgan Stanley would not exist. And so to that you have to give him an enormous amount of credit. CHARLIE ROSE: And their stock is now what? ANDREW SORKIN: It’s a lot better. Nonetheless, they’re still struggling, especially compared to some other firms. So there’s an element of mixed record but for that alone... CHARLIE ROSE: So where is Lloyd Blankfein in all this? The firm that Hank Paulson came from and a lot of other people who because they have flooded Washington with people who’ve worked for them, and because they make a lot of money, want to do public service. ANDREW SORKIN: He’s a fascinating character too. He’s somewhat neurotic, somewhat paranoid. (LAUGHTER) CHARLIE ROSE: Neurotic and paranoid. ANDREW SORKIN: His resting state is very different than a lot of people. He’s really... He’s somebody... CHARLIE ROSE: If those are CEO traits, a lot of people need them when you look at their track record. ANDREW SORKIN: Listen, he’s done a good job. He looks probably a little bit more level headed than some of the others, in part also because he wasn’t necessarily in the same position as everybody else who was around. And part of the thing that’s so interesting about them is they really were thinking ahead. It’s remarkable, at least to me, a board meeting in Moscow in June -- not in September, in June -- where they are talking... CHARLIE ROSE: Goldman Sachs. ANDREW SORKIN: A Goldman Sachs board meeting where they were talking about whether they need to become a bank holding company. Do they need deposits? At one point they talk about whether they should buy -- are you ready for this -- AIG for the deposits, because they’re thinking if the future keeps going this direction where you need deposits and you need to be the equivalent of a bank holding company, maybe we should buy a company like that. Obviously it doesn’t go anywhere. CHARLIE ROSE: Is there anything wrong with the fact that when AIG got all that TARP money they had to -- they paid out about $12, $13 billion to Goldman Sachs as a counterpart. ANDREW SORKIN: I’ve spent an inordinate amount of time asking that question and tracing those two days. And I hope when you read it you really get to feel like you’re there and understand and appreciate what was going on. And just to give it a little perspective, it really had happened now 24 hours after Lehman and Merrill had gone down, or Merrill had been sold to Bank of America. The decision to give AIG $85 billion happened in the course of -- the first meeting was 8:00 a.m. Tuesday morning and by noon they decided to do it. CHARLIE ROSE: Why did they do it? ANDREW SORKIN: I think they saw the world was about to fall off of its axis. And, in fact, probably -- we were really quite close. And that would have been a very difficult decision. Now, what they didn’t do was sit around the table, the conversation that we’ve had since then and say "Do you really need to pay out the full amounts to these banks? Could we give them a hair cut?" CHARLIE ROSE: It was, what, $40, $50 million? ANDREW SORKIN: An extraordinary amount of money to banks throughout the world. And what if we’d gone into restructuring and said we’re not going to give you all this money? They didn’t have time to do that. They never really thought through that process. That never came up. I mean, the funny and sad part about this entire book is many of the conversations -- the time, the amount of time that they are talking and thinking about these issues are much shorter than the amount of time we’ve been sitting and talking around this table now. CHARLIE ROSE: How do you explain? Because they didn’t have time? ANDREW SORKIN: There was no time. They were moving from meeting to meeting. They were running. They were racing. It really is -- it’s not a marathon, it’s a sprint. And they’re running out of their minds. CHARLIE ROSE: I think -- I don’t want to put words in anybody’s mouth, but a whole number of people you have mentioned in this conversation, those who are on Wall Street and those who live somewhere else have said, "I think under the circumstances in which there were no rules, there was no road map, there was no guidebook, under those circumstances, these people probably made most of the right decisions." How would you phrase that? ANDREW SORKIN: I think that a that’s not an unfair think to say as long as... CHARLIE ROSE: Except? ANDREW SORKIN: ... as long as you’re willing to accept that for all the problems they saved themselves from, they created. CHARLIE ROSE: OK. ANDREW SORKIN: And that’s the other element of think that I think is. CHARLIE ROSE: Explain that. ANDREW SORKIN: And that’s why the American public is so frustrated. CHARLIE ROSE: So Hank Paulson created the problem, Tim Geithner created the problem, Ben Bernanke created the problems, Jamie Diamond created the problems, Ken Lewis created the problems? ANDREW SORKIN: The decisions made over the past decades sewed the seeds of this on Wall Street and in Washington. The regulators weren’t minding the store, the CEOs were taking on ungodly risks that they could not afford to take, and that’s what brought us to this moment. You can spread the blame around, but you have to recognize that there is some blame to begin with. So did they save us? Absolutely. But they may have brought us to the brink, but they brought us back. CHARLIE ROSE: But basically you’re saying the people who were running the system, some of them are still in power, were taking risks as traders and in other capacities that was unwarranted? ANDREW SORKIN: Unwarranted. CHARLIE ROSE: They learned nothing? Nothing? ANDREW SORKIN: I’m afraid to say that the lessons learned is -- it’s not a long list. I do believe when you look at the type of lobbying efforts going on in Washington today, their preferences, as you would imagine, is less regulation rather than more. CHARLIE ROSE: Leave us alone? ANDREW SORKIN: Please leave us alone. And there’s an element -- in fact, because of the populist backlash that happened over the past year, they put their own backs up against the wall as well. CHARLIE ROSE: What should be happening in Washington, and what should the people who lived this experience have learned, and what decisions should they be making now so that it doesn’t happen again? ANDREW SORKIN: First, financial regulation. It’s now a year and a half later and there is no one iota on the books. CHARLIE ROSE: The administration has proposed financial regulation? ANDREW SORKIN: There are proposals. But as the economy gets better, as we start thinking again about health care and these other issues, it is very plausible this falls off the radar screen again. But do we need a systemic regulator? Probably. When you think about what happened last time, the regulators weren’t talking to each other, they didn’t see problems coming. You need somebody watching the store, minding the store, A. B, you probably need something called resolution authority. That’s what could have saved Lehman Brothers, the idea that the government could have decided that an investment bank, that they could take them over and resolve them a very different way than bankruptcy, which is what put us into this situation in some respects. CHARLIE ROSE: OK, so what... ANDREW SORKIN: The consumer protection agency, by the way, not a bad idea. It depends on how it’s implemented. But you really do need all of these things to happen, and you need an appreciation by Wall Street to recognize what they did, what happened, and how to fix it, and how to fix it for everybody. You know, one of the hardest parts for all of these guys is the person they’re answering to is the shareholder. They’re not answering to the community. And that’s a big issue. And it’s a huge challenge for them because a lot of them have reasonable conversation... CHARLIE ROSE: Shareholders and employees both. ANDREW SORKIN: And they have reasonable conversations about what’s right for the community. But what’s right for the community hay not always be good for the shareholder. And that is the paradox and the challenge that they face. CHARLIE ROSE: You say, "Wall Street rumbles on in a search of new profits and risk is being reintroduced." ANDREW SORKIN: It is. It is. When you look at profits being made, it’s from trading. It’s not from lending. It’s the old traditional banking that people have talked about for years, that’s not what’s going on today. It is risk. Now, the good news is much less leverage in the system. For every dollar there’s no longer $30 of borrowed money. But there is still risk in the system. Zoom in. CHARLIE ROSE: OK, it used to be 30 or 40 to one. Now it’s... ANDREW SORKIN: It’s 10, 12. CHARLIE ROSE: It’s restricted to what now? ANDREW SORKIN: People are doing it voluntarily now. CHARLIE ROSE: Exactly. ANDREW SORKIN: And the question is, how long will that last? On Wall Street, memories, as you know, can often be quite short. CHARLIE ROSE: Has Washington lost the opportunity? Was there a golden moment coming out of this -- famously, Rahm Emanuel said in crisis there’s opportunity -- to change the system for better? ANDREW SORKIN: I think there was a moment and I don’t know if we will get it back. You know, when you think about what happened in March, you remember, just look at a stock chart. The markets almost fell off a cliff all over again. And I think there was a moment to truly, fundamentally change the undergirding of Wall Street. And it was not taken, and I think, as I said, as the economy gets better, it’s going to be harder and harder to press for changes because people are going to say, "Why do we need them?" CHARLIE ROSE: OK, back to the question about who was making the decisions here. George Bush was just uninvolved or was he simply rubber stamping whatever those guys recommended? ANDREW SORKIN: I was surprised. He had a great and frequent dialogue with Hank Paulson, but I was surprised in that he really did give Hank Paulson free rein to run the show. CHARLIE ROSE: Even though it was a massive intervention in the American economy that politically he might have identified with? ANDREW SORKIN: Absolutely. But I think at some level, and there’s a great scene, I’m not sure he fundamentally understood the problem. And so you might -- you might give him credit for... CHARLIE ROSE: What’s the great scene? ANDREW SORKIN: There’s a great scene where Hank Paulson and Ben Bernanke go over to the White House, and I think they’re sitting either at the Oval Office or right outside there, and they are talking about saving AIG. And at the end of the meeting he said "you know, at some point you’re really going to have to tell me how this happened." This is President Bush. "How did this happen? How did we get here?" CHARLIE ROSE: Well, he’s asking for this. This is what he wants to know. He wants them to give him the kind of things you spent a long time putting together. ANDREW SORKIN: We can only hope. CHARLIE ROSE: Would it have been really different if a different bunch of people without Wall Street experience and being big players and big games had been in charge, people without that kind of experience? Would they have made very dramatically different decisions, and what might they have been? ANDREW SORKIN: You know, if you look back at the other treasury secretaries... CHARLIE ROSE: The alternative scenario? ANDREW SORKIN: If you look back at other treasury secretaries, some of them might have frozen. They might not have known to what to do. CHARLIE ROSE: That’s bad. ANDREW SORKIN: That’s bad. You could argue there would have been an outside perspective and maybe that would have been good. I would argue that when you look at the timeline, by the time that Hank Paulson and this administration got into the job and was sitting at that desk, sadly, a lot of this is probably too late. I’m not sure what -- the seeds have been sewn. We had gotten to this point. Maybe it could have been mitigated somewhat better. But I do think we were headed for trouble, and this train was coming down the tracks and there was no way to stop it. CHARLIE ROSE: What about the toxic assets? ANDREW SORKIN: What happens to the toxic assets? CHARLIE ROSE: Yes. ANDREW SORKIN: Well, a lot of these toxic assets we have been talking about are now still sitting on a lot of these balance sheets. Some are now getting written up, which is to say the values, people are now assigning a higher value to them. It may very well be in five or ten years... CHARLIE ROSE: They may hold on to them so they can sell them later. ANDREW SORKIN: They may hold onto to for many years and sell them later. We’ll have to see. CHARLIE ROSE: It says at the end of the book, page 539, there you go -- "When the post-bailout debate was at the highest pitch, Jamie Diamond sent Hank Paulson a quote with a speech that the president Theodore Roosevelt had delivered at the Sorbonne in April, 1910 entitled "Citizenship and Republic." It reads "It is not the critic who counts, nor the man who points out how the strong man stumbles or where the doer of deeds could have been done better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood, who strives valiantly, who errs and comes up short again and again, because there’s no effort without error or shortcoming, but who greets the next great enthusiasm, the great devotions, who spins himself for a worthy cause, who knows at the best know in the end the triumph of high achievement, and who at the worst, if he fails, at least he fails while daring greatly so this place shall never be with those cold and timid souls who knew neither victory nor defeat." And you end by saying, "It was a remarkable quote for Diamond to have chosen. While Roosevelt’s words described a hero, they were deeply ambiguous about whether the hero succeeded or failed. And so it is with Paulson, Geithner, Bernanke, and the dozens of public and private sector figures who populate this drama. It will be left to history to judge how they fared during their own time in the arena." Thanks for coming. ANDREW SORKIN: Thank you for having me, Charlie. CHARLIE ROSE: Andrew Ross Sorkin. The book is called "Too big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System -- and Themselves." Thank you for joining us. We’ll see you next time. END